Banks Classification

Scheduled Banks

Commercial Banks

Public Sector banks

Private sector banks

Foreign banks

Regional Rural Banks RRB

Cooperative Banks

Urban

Rural

State Cooperative banks

District Cooperative banks

State Cooperative Agriculture and Rural Development Banks (SCARDS)

Primary Cooperative Agriculture and Rural Development Banks (PCARDBS)

Primary Agriculture Cooperative Society PACS

Non Scheduled Banks

Payment Banks,

Small Finance Banks,

Local Area Banks,

Wholesale and Long-term finance (WLTF) banks etc.

Differentiated Banks

can be classified as

Regional Rural Banks,

Payment Banks,

Small Finance Banks,

Local Area Banks,

Wholesale and Long-term finance (WLTF) banks etc.

Domestic- Systematically Important Banks (DSIBs)

Banks that are too big to fail are being termed as DSIBs by RBI and If these banks fail, they can have a disruptive effect on the economy
There are two types of SIBs:

Global SIBs; the identification is done by BASEL committee on banking supervision.
Domestic SIBs; by central Bank of the country.

Criteria -Banks whose assets cross 2% of the GDP are considered DSIBs
SBI, ICICI, HDFC are declared as D-SIBS by RBI
SIBS are

Subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them
forced to have additional capital/backup against financial emergency, so that taxpayer money not wasted in rescuing them during crisis

D-SIBs are mandated under special provisions and are closely monitored by RBI to ensure their better functioning and prevent the indulgence of such banks in any grey areas such as money laundering
D-SIBs are categorised under five buckets.

According to these buckets the banks have to keep aside the Additional Common Equity Tier 1 as a percentage of Risk Weighted Assets (RWAs).
SBI Bucket 3 - additional 0.45% of RWAs
HDFC and ICICI - additional 0.15% of RWAs

Global - Systematically Important Banks (GSIBs)

G-Sib is bank whose systemic risk profile is deemed to be of such importance that the bank’s fa lure would trigger a wider financial crisis and threaten the global economy
Currently there is no G-sibs in India.

Disadvantages for a Non-Scheduled Bank

Central/State PSU/institutes cannot open account
Credit Guarantee Scheme for MSME not applicable to Non Scheduled banks
Interest Subvention scheme for farm loans not applicable to Non Scheduled banks
Nonscheduled banks cannot get loans from RBI at Bank rate
Ex: Small Finance Banks, Local Area Banks, Payment Banks

Evolution of banking industry in India

1949 RBI Nationalized (RBI(Transfer to Public Ownership) 1948 Act)
1955 Emergence of SBI - SBI Act 1955
1959 Emergence of SBI associates(8) - SBI(Associates) Act 1959
1969 Nationalization of Banks(20) - Banking Nationalisation Act 1969
1975 Emergence of RRBs
1993-94 Allow of Private banks and Disinvestment of Public Sector Banks
1994-95 Bank license round 1 - 10 licenses [Narasimhan Committee 1]
2003-04 Bank license round 2 - 2 licenses [Narasimhan Committee 2]
2014 Bank License round 3 - 2 licenses [Bimal Jalan Committee]
New Public Sector Banks - India Post and Bharat Mahila Bank
Urjit Patel Committee [Monetary Policy Committee]
Nochiket Mor committee
Small and Payment banks
Consolidation of Public Sector Banks is going on

Cooperative Banks

A cooperative bank is an institution which is owned by its members. They are the culmination of efforts of people of same professional or other community which have common and shared interests, problems and aspirations.
Regulated by the RBI under the Banking Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act, 1965
Only members of cooperative can withdraw money
Structure

Urban Cooperatives Banks

Scheduled and Non-scheduled
Single state

Banking activities are monitored by RBI
Registration and Management activities are managed by state Registrar of Cooperative Societies (RCS).
Each State will have a state RCS

Multi State

Banking activities are monitored by RBI
Registration and Management activities are managed by Registrar of Cooperative Societies (RCS).
Central RCS

Rural Cooperatives Banks

Short term

State Cooperatives Banks
District Cooperative Banks
Primary Agricultural Credit Societies - not regulated by RBI

Long term

State Cooperative Agriculture and Rural Development Banks (SCARDS) - State level
Primary Cooperative Agriculture and Rural Development Banks (PCARDBS) - District/block level

All banking activities are regulated by a shared arrangement between RBI and NABARD.
All management and registration activities are managed by RCS.

Central Cooperative Banks

Cooperative banks park their surplus funds into bonds of state Govt.
State Govts are net debtors to cooperative banks
As of now, cooperative banks are not adopted to core banking solution. NABARD is delegated to adopt cooperatives to core banking system within 3 years
CRR, SLR, DICGC applicable while LAF (repo), PCA, MSF, PSL is not applicable

However SLR, DICGC is not applicable to Primary Agriculture Credit Society PACS

However, Under Supervisory Action Framework (SAF) of RBI for Urban Cooperative Banks, they are subjected to measures similar to PCA

June 2018, Reserve Bank of India (RBI) allowed voluntary transition of the Urban Co-Operative Banks (UCB) into Small Finance Banks (SFB)
Primary Agriculture Cooperative Society PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India. While other cooperatives regulated by RBI, NABARD, RCS

Local Area Banks

Setup in India in 1996
To enable to mobilisation of rural savings and cater to rural credit needs
Strengthening institutional credit mechanisms in local areas
Features

Local Area Banks are Established under Companies Act 1956
Licensed under Banking Regulation Act 1949
Non Scheduled bank - Not listed in the 2nd schedule of RBI act 1934
Jurisdiction of maximum 3 districts

RBI's CRR,SLR, PSL applies
Ex: Capital Local Area Bank in Punjab

Small and Payment Banks

Both small and payment banks are niche and differentiated banks
Objective to achieve financial inclusion

Guidelines to setup small and payment banks are

Minimum capital requirement would be 100 crores
Promoter contribution

In the first five years, atleast 40%
By the end of 5th year, promoter/max shareholding brought to 40%
By the end of 10th year, promoter/max shareholding brought to 30%
By the end of 12th year, promoter/max shareholding brought to 26%

Foreign shareholding as per FDI Policy
Max shareholding that an entity other than promoters is 10%
Voting rights and corporate governance same as others
Operations should be fully networked and technology driven from the beginning

Small Finance Banks and Payment Banks also offer Atal Pension Yojana

Small Banks	Payment Banks
Recommended by Nachiket Mor committee	Recommended by Nachiket Mor committee
License evaluation by Usha Thorat committee	License evaluation by Nachiket Mor committee
Purpose
All types of deposits like a commercial bank CASA, FDRD etc	Take deposits only on CASA. No FD. No credit lending. Debit cards OK, Credit cards NOK. No NRI accounts/deposits . No cross border remittances
Lending ok but smaller area of operation To keep branch operations profitable, they are allowed to sell MF, insurance and pension products, foreign exchange business	Can't give loans. Can invest capital only in Govt securities (mandatory 75%<year securities) To keep branch operations profitable, they are allowed to sell MF, insurance and pension products, accept Utility Bill Payments
Will be opened under Companies Act 2013
Focus: Deposits and lending	Focus: Payments and Remittances
Target customers: MSME, small and marginal farmers, Unorganised sector	Target customers: poor, migrants, unorganized workers
Who can apply? MFI, NBFC, LAB Local Area Banks can convert their organization into small banks Even individual with 10 years’ experience in bank/cooperative sector can apply for licen e. Large companies can’t apply.	Who can apply? Indian Post Corporate houses Telecom companies Retail chains. Even Banks can take equity in Payment banks
Conditions: 25% branches in rural area 50% of the loans be given to MSME sector. Area of operation normally be contiguous districts in a homogeneous cluster of states/UTs to have local feel and culture	Condition: Maximum balance per customer: Rs.1 lakh Minimum Leverage ratio 3% i.e. liabilities should not exceed 33 times of its net worth. Name of the bank should end with "Payments" 25% of Access points in rural areas
Cannot setup subsidiaries to undertake NBFC business	Payment banks cannot setup subsidiaries to undertake NBFC business
CRR, SLR compliance	CRR, SLR compliance
LAF(Repo market accessible)	LAF(Repo market accessible)
MSF not applicable since non scheduled	MSF not applicable since non scheduled
PSL applicable and 75%	PSL not applicable
FDI automatic route 49%, approval route 74%	FDI automatic route 49%, approval route 74%
On 17 September 2015, The Reserve Bank of India (RBI) announced that it had given provisional licenses to 10 entities Ujjivan Janalakshmi Equitas AU Financiers Capital LAB Disha ESAF RGVN Suryoday Utkarsh	On 19 August 2015, the Reserve Bank of India gave "in-principle" licenses to eleven entities to launch payments banks: Aditya Birla Nuvo Airtel M Commerce Services Cholamandalam Distribution Services Department of Posts FINO PayTech National Securities Depository Reliance Industries Sun Pharmaceuticals Paytm Tech Mahindra Vodafone M-Pesa Out of these, three have surrendered their licenses. First one being "Chalo mandalam Distribution Services", then "Sun Pharmaceuticals" and the latest, "Tech Mahindra". Airtel first started live operations and later Paytm India Post Payment Bank (IPPB) approved and go live in Mar 2017
	Can function as Business Correspondent (BC) of another bank Permitted to handle cross border remittance transactions in the nature of personal payments or remittances on the current account

NOTE: Now, RBI accepts on-tap licensing (license throughout year) for small finance banks

Payment Bank

Paytm Payment Bank.

Airtel Payment Bank.

India Post Payment Bank.

Fino Payment Bank.

India Post Payment Bank

India Post Payments Bank has been incorporated as a public sector company under the department of posts, with 100% government equity and is governed by the RBI
It will focus on providing banking and financial services to people in rural areas, by linking all the 1.55 lakh post office branches with India Post Payments Bank services by the end of 2018 which will create the country’s l rgest banking network with a direct presence at the village level.
1.5 lakh post offices in India set to become banking points
Offers

savings and current accounts,
money transfer,
direct benefit transfer,
bill and utility payments,
enterprise and merchant payments

Access to third-party financial services such as insurance, mutual funds, pension, credit products and forex

It will not offer any ATM debit card. Instead, it will provide its customers a QR Code-based biometric card. The card will have the customer’s account numb embedded and the customer does not have to remember his/her account number to access the account

NOTE: Local Area Banks and Small Finance Banks are setup under Companies Act

Other types of Banks - In proposal

Wholesale and long term finance bank

Deposits

No savings account
Only current account
Fixed/Term deposits > 5/10 years
Bonds
Ban borrowing

Lending

Infra projects
Small, medium, corporate business

Custodian Banks

Safekeeping of securities, derivatives, mutual funds, commodities, foreign currency
Clients be kept informed about returns, AGM etc
Execute deals for client

National Bank for Agriculture and Rural Development (NABARD)

Statutory under National Bank for Agriculture and Rural Development (NABARD) Act, 1981
It was established on the recommendations of Shivaraman Committee.
It is envisaged as a Development Bank of the Nation for Fostering Rural Prosperity.
Promote sustainable and equitable agriculture and rural development , industrial development in rural areas
Functions

It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas.
It promotes rural industries, small scale and cottage industries including tiny sectors by providing loans to commercial and co-operative banks.
The bank provides funds to State governments for undertaking developmental and promotional activities in rural areas.
It also supports the Self-help Group (SHG)
It also supports works for the restructuring of credit institutions, and training and development of staff
Provides refinancing facilities to banks
Inspection work of Co-operative banks and Regional Rural banks, PACS

NABARD (Amendment) Act, 2017

Increase in capital of NABARD

From Rs. 5000 crore to Rs 30,000 crore.
Further, it allows Union Government to increase the capital more than Rs 30,000 crore in consultation with the RBI , if necessary.

Transfer of the RBI s share to the central government:

The act transfers the share capital held by the RBI and valued at Rs 20 crore to the central government
Currently RBI holds 0.4% of paid-up capital of NABARD and remaining 99.6% is held by Union government and this causes conflict in RBI’s role as banking regu ator and shareholder in NABARD
Also, the act provides that Union Government alone must hold at least 51% capital share of NABARD.

MSME

Replaces terms ‘sm ll-scale industry’ and ‘industry in tiny and decentralised sector’ terms ‘micro enterprise’, ‘small enterprise’ and ‘mediu ise’ defined in MSME Development Act, 2006.
Further, it allows NABARD to provide financial assistance to banks if they provide loans to the MSMEs.

Consistency with Companies Act 2013

substitutes references to provisions of the Companies Act, 1956 with references to the Companies Act, 2013.
It includes provisions dealing with definition of a government company and qualifications of auditors.

Extra functions of NABARD

It is the National Designated Authority (NDA) for Green Climate Fund (UNFCCC) activities in our country
NABARD has been appointed as National Implementing Entity (NIE) responsible for implementation of adaptation projects under the NAFCC National Adaptation Fund on Cli matic Change NAFCC

Deposit Insurance and Credit Guarantee Corporation of India DICGC

Statutory body under DICGC Act 1961.
Wholly owned by RBI [Note: owned by RBI and not any insurance PSU]
How it works

When a bank covered by Deposit insurance scheme of DICGC fails, or undergoes liquidation or is merged with another bank;
the DICGC pays the amount due to depositors via the officially appointed liquidator in a time bound manner.
All claims are settled by DICGC within two months from the receipt of the claim from the liquidator.

How much

The insurance cost is borne by the bank which is insured.
The DGCIC charges 10 paise per Rs. 100 as insurance premium
Maximum amount insured per depositor is 5 Lakh or deposit value whichever is lower (Increased to 5 lakh in Budget 2020-21)

Risk against

Bank shutdown
Bank liquidated
Bank merger

How

If a bank goes into liquidation

DICGC is liable to pay to each depositor through the liquidator, the amount of his deposit upto Rupees one lakh (5 lakh now) within two months from the date of receipt of claim list from the liquidator. (Directly won't pay)

If a bank is reconstructed or amalgamated / merged with another bank

DICGC pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction / amalgamation scheme within two months from the date of receipt of claim list from the transferee bank

DICGC insurance applicable to

All types of deposits (CASA, FDRD) in all commercial (including LAB, RRB) & cooperative Banks (state district and Urban cooperative banks) are insured by DICGC
Exceptions

Primary Agricultural Credit Societies (PACS)
Cooperative banks from Meghalaya
Cooperative Banks from Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli.
NBFC
Deposits of foreign governments, deposits of central/state governments and inter-bank deposits

Credit guarantee is extended to Small Scale industries and private sector advances [Housing loans excluded]

Necessity

To protect depositors, to make financial stability, to instill confidence in the banking system and mobilise deposits

Criticism

Cover of 1 lakh insurance is not sufficient as the limit is setup in 1993

15 lakh insurance is recommended as it cover 90% of accounts completely

Flat 0.1% insurance premium on deposits from all banks. However 94% of claims settled from cooperative banks. Hence differential premium rates depending on the risk on type of bank is recommended

Para Banking

Most well-known banks today have subsidiaries, which offer numerous financial services such as asset management, mutual funds business, insurance business, merchant banking activities, factoring services, venture capital, card business, equity participation in venture funds and leasing. These services are known as Para-Banking services.
Para banking services are those non-traditional banking activities which are being done by banks apart from its normal day to day activities

Banking Ombudsman

It is a quasi-judicial authority under India's Banking Ombudsman Scheme 2006
Mandate: To enable resolution of complaints of customers of banks relating to certain services rendered by the banks
Applicable to All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.

Does not applicable to NBFCs
Mobile banking and Electronic banking is under its purview.
Banks will be responsible for deficiencies arising out of sale of insurance, mutual fund other third party investment products that banks sell

Ombudsman Scheme for NBFC

It would provide a cost-free and expeditious complaint redressal mechanism relating to deficiency in the services by NBFCs
To begin with, the Scheme will cover all deposit-taking NBFCs. Based on the experience gained, the RBI would extend the scheme to cover NBFCs having asset size of Rs. 1 Billion & above with customer interface.

Banks Board Bureau

Autonomous

As suggested by P J Nayak committee constituted by RBI
Appointing Chairman and Managing Directors of PSBs
Advising banks on restructuring and raising capital
Structure

Chairman
3 nominated members
3 ex-officio members

Secretary, Department of Financial Services, FM
Deputy Governor RBI
Secretary, Ministry of Public Enterprises

Search committee

RBI governor
Secretary, Department of Financial Services, FM
Secretary, DoPT

Banks - Classification