Every salary credited, every loan sanctioned and every UPI payment made at a roadside tea stall passes through a vast institutional web. The Indian banking system is that web: a layered network of central bank, commercial lenders, cooperative societies and specialised institutions that together hold the country’s savings and channel them into farms, factories, homes and start-ups.
What makes it distinctive is its mix of ownership and mission. Public sector banks, private banks, foreign banks, rural banks, cooperatives and the newer small finance and payments banks all operate under one regulator, the Reserve Bank of India. This explainer walks through how that structure is organised, how it evolved from colonial-era presidency banks to nationalisation and reform, and how banks actually work. It also looks at the push for financial inclusion and the challenges that remain. Last reviewed: 29 September 2026.
Quick Facts
| Fact | Detail |
|---|---|
| Apex institution | Reserve Bank of India (RBI), central bank and banking regulator |
| RBI established | 1 April 1935 (under the RBI Act, 1934); nationalised in 1949 |
| Main banking law | Banking Regulation Act, 1949 |
| First bank (modern sense) | Bank of Hindustan, set up in Calcutta in 1770 |
| State Bank of India formed | 1955, from the Imperial Bank of India |
| Bank nationalisation | 14 banks on 19 July 1969; 6 more in April 1980 |
| Reforms era | Post-1991, guided by the Narasimham Committee; new private banks licensed from the early 1990s |
| Financial inclusion drive | Pradhan Mantri Jan Dhan Yojana, launched 28 August 2014 |
| Digital payments milestone | Unified Payments Interface (UPI) launched in 2016 by NPCI |
The Structure of the Indian Banking System
The easiest way to understand the Indian banking system is as a pyramid. At the top sits the Reserve Bank of India, which issues currency, manages monetary policy and supervises every bank. Below it are commercial banks, which take deposits from the public and lend to households and businesses. Alongside them run cooperative banks, which are member-owned and rooted in local communities, and a set of development finance institutions that support agriculture, housing, exports and small industry.
Scheduled and non-scheduled banks
The first big division is between scheduled and non-scheduled banks. A bank is “scheduled” when it is listed in the Second Schedule of the Reserve Bank of India Act, 1934. To qualify, it must meet conditions on paid-up capital and reserves and show that its affairs are not conducted to the detriment of depositors. In return, scheduled banks can borrow from the RBI and use its clearing facilities. Non-scheduled banks do not meet, or have not sought, this status, and today they are a very small part of the sector.
Scheduled commercial banks and cooperative banks
Scheduled banks are further divided into scheduled commercial banks and scheduled cooperative banks. The commercial group is the backbone of Indian finance and includes public sector, private sector, foreign, regional rural, small finance and payments banks. The cooperative group is a parallel pillar with its own two-tier or three-tier structure and a mix of regulators.
The Reserve Bank of India: Central Bank and Regulator
The Reserve Bank of India began operations on 1 April 1935, following the recommendations of the Hilton Young Commission and the passage of the RBI Act in 1934. It was originally privately owned but was nationalised on 1 January 1949, soon after Independence. Its headquarters are in Mumbai, and it works through regional offices across the country.
Core functions
- Monetary authority: it sets policy rates, such as the repo rate, to manage inflation and support growth.
- Currency issuer: it issues and manages banknotes, while coins are minted by the government.
- Banker to the government: it manages the public debt and the government’s accounts.
- Banker’s bank: it holds the reserves of commercial banks and acts as lender of last resort.
- Regulator and supervisor: it licenses banks, inspects them and issues prudential norms.
- Regulator of payment systems: it oversees systems such as RTGS, NEFT and, together with NPCI, UPI.
- Foreign exchange manager: it administers the Foreign Exchange Management Act and holds the country’s reserves.
The RBI’s statutory powers over commercial banks come mainly from the Banking Regulation Act, 1949. Under it, the RBI can grant or cancel licences, approve mergers, prescribe capital and liquidity rules, and even supersede a bank’s board in exceptional cases. Its supervisory reach over cooperative banks was strengthened by later amendments.
Types of Banks in India: Public, Private, Foreign, Rural and New Categories
The table below classifies the main categories of banks and what sets each apart.
| Category | Ownership / Character | Key Purpose |
|---|---|---|
| Public Sector Banks (PSBs) | Majority owned by the Government of India; State Bank of India is the largest | Broad retail and corporate banking with a strong social mandate |
| Private Sector Banks | Owned by private shareholders; older banks plus new banks licensed after 1991 | Retail, corporate and technology-led banking |
| Foreign Banks | Incorporated abroad; operate through branches or wholly owned subsidiaries | Trade finance, corporate and treasury services |
| Regional Rural Banks (RRBs) | Jointly owned by the Centre, a state government and a sponsor bank | Credit and savings services in rural areas |
| Small Finance Banks | Private entities licensed from 2015 onwards | Serve small borrowers, micro businesses and the underserved |
| Payments Banks | Licensed from 2015; can accept limited deposits but cannot lend | Payments and remittances, especially for migrants and low-income users |
| Cooperative Banks | Member-owned; urban and rural, with several tiers | Local credit, agriculture and community banking |
Public Sector Banks
Public sector banks (PSBs) are those in which the government holds the majority stake. The group includes State Bank of India (SBI), the country’s biggest lender by network and deposits, along with banks such as Punjab National Bank, Bank of Baroda, Canara Bank and Union Bank of India, among others. Many of these trace their origins to the 1969 and 1980 nationalisations.
PSBs have historically carried the responsibility of extending banking to villages, small farmers and small industries, often in places where a purely commercial case for a branch was weak. Their vast branch networks made them the natural delivery channel for government schemes, from subsidy transfers to the Jan Dhan accounts described later in this article. In recent years the number of PSBs has fallen sharply through mergers, discussed below, and the emphasis has moved to stronger balance sheets, better governance and technology.
Private Sector Banks
Private sector banks fall into two groups. Old private banks, such as several long-standing regional banks, survived the 1969 and 1980 nationalisations because they were smaller. New private banks emerged after the banking reforms of the early 1990s, when the RBI began licensing fresh entrants. These banks helped popularise ATMs, phone banking and net banking and pushed the whole sector towards faster service.
Foreign Banks
Foreign banks have operated in India since the colonial period. Today they are regulated under RBI rules that allow them to operate through branches or through wholly owned subsidiaries. Their presence is modest in retail reach but significant in trade finance, foreign exchange and services to multinational firms.
Regional Rural Banks (RRBs)
Regional Rural Banks (RRBs) were created in 1975 to meet the credit needs of small and marginal farmers, artisans and rural workers, and were given a statutory basis by the Regional Rural Banks Act, 1976. Each RRB is owned jointly by the Central Government, a state government and a sponsor commercial bank. They combine local knowledge with commercial banking discipline, and over time many RRBs have been amalgamated to form larger, stronger units.
Small Finance Banks and Payments Banks
Small finance banks and payments banks are the newest additions to the Indian banking system. Both were conceived after the RBI issued guidelines around 2014, and the first licences followed in 2015. They reflect a policy view that a one-size-fits-all bank cannot reach every citizen.
Small Finance Banks
Small finance banks can accept deposits and lend, but with a focus on segments that larger banks have under-served, such as small business units, micro and small industries, agriculture and unorganised-sector entities. Many began life as microfinance institutions or non-banking finance companies and converted into banks. A substantial share of their loans must go to priority sector borrowers, and they are required to keep their lending small-ticket in nature.
Payments Banks
Payments banks are a lighter form of bank. They can accept limited deposits, provide savings and current accounts, issue debit cards and offer remittance and bill-payment services. They cannot, however, issue loans or credit cards. Mobile network operators, postal networks and technology firms have entered the space, and India Post Payments Bank, launched in 2018, uses the vast post office network to reach households in remote areas.
Cooperative Banks: A Separate Pillar
Cooperative banks are owned and run by their members, and they follow the principle of “one member, one vote”. They serve people who often find commercial banks distant or unfamiliar, particularly small farmers, artisans and urban small traders. Because cooperatives are a state subject as well as a banking matter, they operate under dual control: the state registrar of cooperative societies oversees management and governance, while the RBI regulates banking functions such as licensing, capital and liquidity.
Rural and urban cooperatives
- Short-term rural structure: primary agricultural credit societies at the village level, district central cooperative banks in the middle and state cooperative banks at the top.
- Long-term rural structure: institutions that provide investment credit for land development and farm improvement.
- Urban cooperative banks (UCBs): serve towns and cities, and are primarily engaged in retail lending to small traders and salaried customers.
The National Bank for Agriculture and Rural Development (NABARD), set up in 1982, acts as the apex refinancing and development institution for rural credit and supervises rural cooperative banks and RRBs. Following a series of governance failures in some cooperative banks, the Banking Regulation (Amendment) Act, 2020 extended stronger RBI oversight to cooperative banks, especially in areas such as management and depositor protection.
A Brief History of Banking in India
Indigenous banking is ancient, with moneylenders, shroffs and hundis (bills of exchange) serving trade for centuries. Modern joint-stock banking arrived with the East India Company. The timeline below lists the major landmarks.
| Year | Milestone |
|---|---|
| 1770 | Bank of Hindustan established in Calcutta, one of the earliest European-style banks in India |
| 1806-1843 | The three Presidency Banks are set up: Bank of Bengal (Calcutta), Bank of Bombay (1840) and Bank of Madras (1843) |
| 1921 | The three Presidency Banks merge to form the Imperial Bank of India |
| 1935 | Reserve Bank of India begins operations |
| 1949 | RBI nationalised; Banking Regulation Act enacted |
| 1955 | Imperial Bank becomes the State Bank of India |
| 1969 | Nationalisation of 14 major commercial banks |
| 1980 | Six more banks nationalised |
| 1991 | Economic reforms; Narasimham Committee recommends banking reform |
The Bank of Hindustan, founded in 1770 by a British agency house, eventually failed in the 1830s, but it showed that joint-stock banking could take root. The Presidency Banks then acted as government bankers in their regions. After the 1921 merger, the Imperial Bank of India performed many central banking functions until the RBI was created. In 1955, Parliament passed the State Bank of India Act, and the Imperial Bank was reconstituted as State Bank of India to spread banking into rural India, with the RBI holding the majority stake.
Bank Nationalisation: 1969 and 1980
By the 1960s, critics argued that private commercial banks, many controlled by industrial houses, were concentrating credit in big business and ignoring agriculture, small industry and rural areas. In response, the government under Prime Minister Indira Gandhi issued an ordinance on 19 July 1969 nationalising 14 major commercial banks, each with deposits above a set threshold. Parliament then passed the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 to give the move a firm legal footing.
What changed
- Bank branches multiplied rapidly, especially in rural and semi-urban areas.
- Credit was steered towards agriculture, small industry and other neglected sectors, leading to formal priority sector lending norms.
- Household savings mobilised through banks grew steadily as more families opened accounts.
A second round followed on 15 April 1980, when six more banks were nationalised, bringing the bulk of the banking business under state ownership. Critics later pointed to weak efficiency, political interference and rising bad loans as the price of this model, while supporters credit it with taking banking to the masses. Both views shaped the reforms that followed.
Banking Sector Reforms After 1991
The balance-of-payments crisis of 1991 triggered wide-ranging economic reforms. The government set up the Committee on the Financial System, chaired by M. Narasimham, which submitted its report in 1991, and a second committee under the same chair reviewed progress in 1998. Their ideas transformed the sector.
Key reform themes
- Lower statutory pre-emption: the CRR and SLR were gradually reduced from very high levels so that banks could lend more of their deposits.
- Deregulated interest rates: banks were given greater freedom to set deposit and lending rates.
- Prudential norms: income recognition, asset classification and provisioning rules were introduced, along with capital adequacy standards aligned to international Basel norms.
- Entry of new private banks: the RBI granted licences to new private-sector banks from the early 1990s, increasing competition.
- Partial public ownership: government banks were allowed to raise capital from the market while keeping majority control.
- Stronger recovery laws: laws such as the SARFAESI Act, 2002 helped lenders recover collateral without lengthy court processes.
These changes made the system more competitive and more resilient, and they opened the way for technology adoption across the sector.
How Banks Work: Deposits, Lending, Ratios and Priority Sector Norms
At its simplest, a bank borrows from many depositors and lends to a smaller number of borrowers. It pays interest on deposits and charges a higher rate on loans, and the gap between the two, called the net interest margin or spread, is its core earning. Banks also earn fees from services such as remittances, cards and wealth products.
CASA and the cost of funds
Deposits come in different forms. Current and savings accounts, together called CASA, carry little or no interest and are cheap sources of funds. Term deposits, including fixed and recurring deposits, pay higher interest. A bank with a strong CASA share generally enjoys a lower cost of funds and a healthier margin.
Credit creation
Banks do not lend out the exact same rupees they receive. When a bank grants a loan, the borrower’s funds are typically spent and end up deposited in some bank, which can lend again after keeping the required reserves. This chain multiplies the money supply and is the reason central banks regulate reserves and monitor credit growth closely. Deposits in most banks are also protected up to a stated limit by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI.
Key Regulatory Ratios: CRR and SLR
The RBI uses several tools to keep banks safe and to steer credit. Two of the best known are the CRR and SLR.
- Cash Reserve Ratio (CRR): the share of a bank’s net demand and time liabilities that it must keep as cash with the RBI. It earns no interest, and raising it tightens liquidity in the system.
- Statutory Liquidity Ratio (SLR): the share of liabilities that banks must hold in safe, liquid assets such as government securities, cash and gold, held with themselves rather than the RBI.
- Capital adequacy: banks must hold a minimum amount of capital against their risk-weighted assets, in line with Basel standards, to absorb losses.
- Repo rate: the rate at which the RBI lends short-term funds to banks, which influences the wider cost of credit.
Priority Sector Lending
Priority sector lending (PSL) requires banks to direct a defined proportion of their credit to sectors that need support. These traditionally include agriculture, micro, small and medium enterprises, education, housing for weaker sections, export credit and renewable energy, with sub-targets for small and marginal farmers and weaker sections. The overall target for domestic commercial banks is broadly around 40 percent of adjusted net bank credit, with lower or different norms for some categories such as foreign banks. Banks that fall short may buy PSL certificates or deposit funds in designated development funds.
Financial Inclusion: Jan Dhan, ATMs and the Digital Shift
Despite decades of branch expansion, a large share of Indian households remained outside formal banking well into the 2010s. Financial inclusion therefore became a national mission, combining old and new channels.
Pradhan Mantri Jan Dhan Yojana
Launched on 28 August 2014, the Pradhan Mantri Jan Dhan Yojana (PMJDY) aimed to give every household access to a basic bank account, along with a RuPay debit card and insurance cover. Accounts could be opened with minimal documentation and, in most cases, no minimum balance. Hundreds of millions of accounts were opened in the years after launch, making it one of the largest financial inclusion drives in the world.
ATMs, business correspondents and the JAM trinity
The spread of ATMs, point-of-sale terminals and business correspondents, who act as banking agents in villages, brought services closer to customers. The combination of Jan Dhan accounts, Aadhaar identity and mobile numbers, popularly called the JAM trinity, allowed direct benefit transfers of subsidies and pensions into bank accounts, reducing leakages.
UPI and net banking
The National Payments Corporation of India (NPCI), set up in 2008, built the retail payment rails that changed everyday banking. The Unified Payments Interface, launched in 2016, lets people send money instantly between bank accounts through a mobile phone using a simple virtual address or QR code. Together with net banking, mobile apps, IMPS, NEFT and RTGS, it moved a large volume of everyday transactions from cash to digital, and even small street vendors now accept QR payments.
Challenges: NPAs and Consolidation
A non-performing asset (NPA) is a loan on which interest or principal has remained unpaid for more than 90 days. Rising NPAs squeeze bank profits because lenders must set aside provisions, which reduces the capital available for fresh lending. Indian banks, particularly public sector banks, faced heavy stress from bad loans in the 2010s, especially in sectors such as infrastructure, power, steel and telecom that had seen aggressive lending in the earlier boom.
Responses
- A comprehensive asset quality review by the RBI to force banks to recognise stressed loans honestly.
- The Insolvency and Bankruptcy Code, 2016, which created a time-bound process for resolving distressed companies.
- Recapitalisation of public sector banks by the government to rebuild their capital base.
- Tighter governance, better risk management and closer monitoring of large exposures.
Bank consolidation
To create fewer but stronger banks with greater scale, the government pursued consolidation among public sector banks. In 2017 the associate banks of State Bank of India and Bharatiya Mahila Bank were merged into SBI. Bank of Baroda absorbed Vijaya Bank and Dena Bank in 2019, and further rounds of amalgamation in 2020 reduced the number of PSBs considerably. Supporters argue that larger banks can lend bigger amounts and compete better; observers also stress that integration of systems and staff takes time to deliver benefits.
Conclusion
The Indian banking system has travelled a long way from the Bank of Hindustan and the Presidency Banks to a modern network that spans mobile phones, village correspondents and global trade finance. Its layered structure of the RBI, commercial banks and cooperatives, together with tools like CRR, SLR and priority sector lending, seeks to balance stability with reach. Nationalisation, the reforms of 1991 and the digital revolution each reshaped it, and the twin tasks of clean balance sheets and deeper inclusion continue to define its future.
Frequently Asked Questions
What is the role of the Reserve Bank of India in the banking system?
The RBI is India’s central bank and the apex regulator of banks. It sets monetary policy, issues currency, licenses and supervises banks, acts as banker to the government and to other banks, and oversees payment systems. Its powers over banks come mainly from the RBI Act, 1934 and the Banking Regulation Act, 1949.
What is the difference between scheduled and non-scheduled banks?
Scheduled banks are those included in the Second Schedule of the RBI Act, 1934, after meeting conditions on capital and depositor safety. They can borrow from the RBI and use its clearing facilities. Non-scheduled banks are not on that list and form a very small part of the sector today.
Why were banks nationalised in 1969 and 1980?
The government wanted banking to serve national priorities rather than a few industrial houses. Nationalising 14 major banks in 1969 and 6 more in 1980 aimed to expand branches into rural areas and direct credit to agriculture, small industry and weaker sections. It also made mobilising household savings easier.
What are CRR and SLR?
The Cash Reserve Ratio is the portion of deposits banks must keep as cash with the RBI, while the Statutory Liquidity Ratio is the portion they must hold in liquid assets such as government securities, cash or gold. Both act as safeguards for depositors and as tools to manage liquidity and credit in the economy.
How are small finance banks and payments banks different?
Small finance banks accept deposits and give loans, mainly to small borrowers and underserved groups. Payments banks can accept limited deposits and offer payment and remittance services but cannot lend. Both categories were introduced after RBI guidelines in 2014, with the first licences granted in 2015.
What is an NPA?
A non-performing asset is a loan or advance whose interest or principal remains overdue for more than 90 days. Banks must classify such loans, set aside provisions against them and try to recover the dues through mechanisms such as SARFAESI and the Insolvency and Bankruptcy Code.
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