MODULE -02

CLASSIFICATION OF BANKS

COMMERCIAL BANKS
Meaning
A commercial bank is a financial institution that accepts deposits from the public and provides
loans and other financial services with the aim of earning profit. Commercial banks play a vital
role in the economic development of a country by mobilizing savings and providing credit for
business, trade, and industry.
Role of Commercial Banks
Commercial banks play an important role in the economic development of a country by
providing financial services to individuals, businesses, and governments. Some of the major
roles of commercial banks are:
1. Mobilization of Savings: Commercial banks collect savings from the public in the form of
deposits such as savings accounts, current accounts, and fixed deposits. This helps people
keep their money safe and encourages the habit of saving.
2. Providing Loans and Advances: Banks provide loans to individuals, businesses, and
industries for various purposes like business expansion, education, housing, and agriculture.
This supports economic growth and development.
3. Facilitating Trade and Commerce: Commercial banks provide financial support and
services such as letters of credit, bank guarantees, and trade financing that help domestic
and international trade operate smoothly.
4. Creating Credit: One of the important roles of commercial banks is credit creation. By
lending a part of the deposits they receive, banks increase the supply of money in the
economy.
5. Providing Payment and Settlement Services: Banks offer services like cheque payments,
fund transfers, online banking, and ATM facilities that make financial transactions easy and
convenient.
6. Encouraging Investment: Commercial banks provide funds for investment in industries
and infrastructure projects, which helps in capital formation and economic development.
7. Promoting Economic Development: By financing various sectors such as agriculture,
industry, and small businesses, banks contribute significantly to the overall economic
growth of the country.
8. Implementing Government Policies: Commercial banks help implement monetary and
financial policies introduced by the Reserve Bank of India and the government.
FUNCTIONS OF COMMERCIAL BANKS

1. PRIMARY FUNCTIONS

1. Accepting Deposits: Commercial banks accept deposits from individuals and businesses to
keep their money safe. Depositors earn interest on their savings while banks use these funds for
lending. This function helps mobilize savings in the economy and promotes financial stability.

a) Savings Deposits: Savings accounts are mainly meant for individuals who want to save
money regularly. They provide moderate interest and allow limited withdrawals.

b) Current Deposits: Current accounts are mainly used by business people and firms for
frequent transactions. These accounts usually do not provide interest but allow unlimited
deposits and withdrawals. They help businesses conduct daily financial operations smoothly.

c) Fixed Deposits: Fixed deposits are deposits kept in the bank for a fixed period such as 1 year
or 5 years. They offer higher interest rates compared to savings accounts. Customers cannot
withdraw the money before maturity without penalty.

d) Recurring Deposits: In recurring deposits, customers send in the same amount of money
every month for a period of time that can be anywhere from 12 to 120 months. After the last
payment, you’ll have to pay the whole amount plus interest.

2. Granting Loans and Advances: Commercial banks provide loans and advances to
individuals, businesses, and industries. These loans help people meet their financial needs such
as buying houses, starting businesses, or expanding industries. By lending money, banks
promote investment and economic development.

a) Cash Credit: Cash credit is a short-term loan given mainly to businesses against security like
goods or assets. The borrower can withdraw money up to a certain limit as needed. Interest is
charged only on the amount actually used.

b) Overdraft: Overdraft is a facility that allows customers to withdraw more money than the
balance available in their account. It is usually given to reliable customers for a short period.
Interest is charged on the extra amount withdrawn.

c) Term Loans: Term loans are loans provided for a fixed period such as several years. They are
commonly used for purchasing machinery, vehicles, or property. The loan amount is repaid in
instalments along with interest.

3. Credit Creation

Commercial banks create credit by lending a portion of the deposits they receive. When banks
give loans, they increase the money supply in the economy. This process of expanding credit
helps businesses and industries grow and promotes economic activity.
2. SECONDARY FUNCTIONS

Secondary functions are divided into Agency Functions and General Utility Functions.

A. Agency Functions

Banks act as agents on behalf of their customers in financial matters. They collect cheques,
dividends, interest, and pay bills like insurance premiums and taxes. They also transfer funds
from one place to another safely. This reduces the burden on customers and ensures
convenience.

1. Collection of Cheques and Bills: Banks collect cheques, bills, and other financial instruments
on behalf of customers and credit the amount to their accounts.

2. Payment of Bills: Banks pay utility bills such as electricity, water, and telephone bills for
customers according to their instructions.

3. Collection of Dividends and Interest: Banks collect dividends on shares and interest on
securities for their customers and deposit the amount into their accounts.

4. Purchase and Sale of Securities: Banks help customers buy and sell shares, bonds, and other
securities in financial markets.

5. Acting as Trustee and Executor: Banks may act as trustees, executors of wills, or
administrators of estates on behalf of customers.

B. General Utility Functions

Banks provide additional services like ATM facilities, debit/credit cards, locker services, and
internet banking. They also deal in foreign exchange and issue letters of credit. These services
make banking easy and secure for customers. It improves overall financial efficiency in the
economy.

1. Safe Custody of Valuables: Banks provide safe deposit lockers to store valuables such as
gold, documents, and jewellery safely.

2. Issue of Bank Drafts and Cheques: Banks issue instruments like bank drafts, pay orders, and
cheques that facilitate easy money transfer.

3. Foreign Exchange Services: Banks deal in foreign exchange and help customers in
international trade by converting currencies.

4. ATM and Online Banking Services: Modern banks provide ATM, internet banking, and
mobile banking services that allow customers to perform transactions anytime and anywhere.
5. Providing Credit Cards and Debit Cards: Banks issue debit cards and credit cards that help
customers make payments conveniently without carrying cash.

PRIVATE SECTOR BANK

Meaning
A Private Sector Bank is a bank in which the majority of the ownership and control is held by
private individuals, companies, or institutions rather than the government. These banks are
established and managed by private shareholders with the objective of earning profits while
providing banking services to customers.
Private sector banks accept deposits, provide loans, offer digital banking services, and support
business and trade activities just like other commercial banks. They are known for efficient
customer service, modern technology, and innovative financial products.
Examples of Private Sector Banks in India HDFC Bank, ICICI Bank, Axis Bank, and Kotak
Mahindra Bank.

FEATURES OF PRIVATE SECTOR BANKS

Private sector banks have several distinctive features that make them efficient and customer-
oriented. Some important features are:
1. Private Ownership: Private sector banks are owned and controlled mainly by private
individuals, companies, or institutions. The government holds little or no share in these banks.
Their management decisions are taken by private shareholders and directors.
2. Profit-Oriented: These banks mainly aim to earn profit while providing banking services.
They focus on improving efficiency, reducing costs, and expanding their customer base. Profit
maximization helps them grow and compete in the banking sector.
3. Better Customer Service: Private sector banks are known for providing quick and efficient
services to customers. They focus on customer satisfaction by offering personalized banking
facilities and faster transactions.
4. Use of Advanced Technology: These banks widely use modern technology such as internet
banking, mobile banking, and ATM services. Technology helps customers access banking
services anytime and anywhere conveniently.
5. Innovative Financial Products: Private sector banks introduce new and innovative financial
products like digital payment systems, credit cards, and investment services. These products
attract customers and improve banking convenience.
6. Efficient Management: The management of private sector banks is usually professional and
performance-oriented. Decisions are taken quickly, which helps the bank adapt to market
changes effectively.
7. Wide Range of Services: Private sector banks provide various services such as deposits,
loans, investment services, insurance, and wealth management. These services meet the financial
needs of both individuals and businesses.
8. Strong Competition: Private sector banks operate in a highly competitive environment. To
stay competitive, they continuously improve service quality and adopt new technologies.

PUBLIC SECTOR BANKS

Public Sector Banks (PSBs) in India are commercial banks where the Government of India or
state governments hold a majority stake (at least 51% or more). These banks are managed by the
government and are designed to prioritize public interest, financial inclusion, and economic
development alongside generating profit.
In India, these banks are mainly controlled by the Government of India and operate under the
supervision of the Reserve Bank of India. Examples: in India State Bank of India, Punjab
National Bank, Bank of Baroda, and Canara Bank.

FEATURES OF PUBLIC SECTOR BANKS

1. Government Ownership: Public sector banks are owned and controlled mainly by the
government. The government holds more than 50% of the shares in these banks. This ensures
that the banks operate in the public interest.
2. Focus on Public Welfare: These banks aim not only to earn profits but also to promote social
and economic welfare. They support government schemes and provide financial services to rural
and weaker sections of society.
3. High Level of Trust and Security: Public sector banks enjoy a high level of trust among the
public because they are backed by the government. Customers feel their deposits are safe and
secure in these banks.
4. Wide Branch Network: Public sector banks have a large number of branches across urban,
semi-urban, and rural areas. This helps provide banking services even in remote villages and
promotes financial inclusion.
5. Implementation of Government Policies: These banks play a key role in implementing
government financial policies and development programs. They help in distributing subsidies,
pensions, and other welfare benefits.
6. Priority Sector Lending: Public sector banks are required to provide loans to priority sectors
such as agriculture, small-scale industries, and education. This helps support economic growth
and rural development.
7. Stable Operations: Since these banks are supported by the government, they generally
maintain stable operations even during economic difficulties. Government support increases
their reliability.
8. Large Customer Base: Public sector banks serve a large number of customers across the
country. Their long history and extensive network help them attract customers from different
sectors of the economy.

FOREIGN BANK
Meaning
A Foreign Bank is a bank that is established and headquartered in another country but operates
branches or offices in a different country to provide banking services. These banks conduct
financial activities such as accepting deposits, providing loans, and facilitating international
trade in the host country.
Foreign banks mainly focus on international banking services, foreign exchange transactions,
and financing global trade and investment. They help businesses and individuals carry out cross-
border financial activities smoothly.
In India, foreign banks operate under the rules and regulations of the Reserve Bank of India,
which ensures that they follow the country’s banking laws and financial regulations.
Examples of Foreign Banks Operating in India HSBC, Citibank, Standard Chartered, and
Deutsche Bank.

FEATURES OF FOREIGN BANKS

1. Foreign Ownership: Foreign banks are owned and headquartered in another country but
operate branches in different countries. Their main office is located outside the host country
where they provide banking services.
2. International Banking Services: These banks mainly focus on international banking
activities such as foreign exchange transactions, international payments, and trade finance. They
help businesses conduct cross-border financial transactions smoothly.
3. Limited Branch Network: Foreign banks usually have fewer branches in the host country
compared to domestic banks. They mainly operate in major cities and business centres.
4. Advanced Technology: Foreign banks use modern banking technologies and advanced
financial systems. This helps them provide efficient services such as online banking, digital
payments, and international fund transfers.
5. Focus on Corporate Clients: Many foreign banks focus more on large companies,
multinational corporations, and high-net-worth individuals. They provide specialized financial
services such as investment banking and global trade financing.
6. Expertise in Foreign Exchange: Foreign banks have strong expertise in handling foreign
currency transactions. They play an important role in facilitating international trade and foreign
investments.
7. Professional Management: These banks usually follow international banking standards and
professional management practices. This helps them maintain high efficiency and service
quality.
8. Operate Under Host Country Regulations: Foreign banks must follow the banking rules
and regulations of the country where they operate. In India, foreign banks function under the
supervision of the Reserve Bank of India.

NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development financial
institution in India that focuses on promoting agriculture, rural development, and rural
industries. It was established to provide financial support and guidance for improving the rural
economy and strengthening agricultural activities.
NABARD provides credit facilities, financial assistance, and policy support to institutions like
cooperative banks, regional rural banks, and other rural financial organizations.
NABARD was established in 1982 based on the recommendations of the Reserve Bank of India
committee and operates under the supervision of the Government of India.

ROLE AND IMPORTANCE NABARD

1. Promoting Agricultural Development: NABARD provides financial support for agriculture
and allied activities such as irrigation, dairy farming, fisheries, and horticulture. These initiatives
help increase agricultural productivity and farmers’ income. It contributes significantly to
sustainable agricultural growth.
2. Providing Refinance to Banks: NABARD offers refinance facilities to cooperative banks
and regional rural banks. This enables these institutions to provide loans to farmers and rural
entrepreneurs. As a result, credit availability in rural areas improves.
3. Development of Rural Infrastructure: NABARD supports the development of rural
infrastructure such as roads, irrigation systems, warehouses, and market yards. Improved
infrastructure helps farmers transport and sell their produce easily. It also promotes rural
economic development.
4. Strengthening Rural Financial Institutions: NABARD supervises and supports cooperative
banks and regional rural banks to improve their efficiency and financial stability. It also provides
training and guidance to these institutions. This strengthens the rural banking system.
5. Promotion of Self-Help Groups (SHGs): NABARD encourages the formation of Self-Help
Groups, especially among rural women. These groups help members save money and access
small loans for business activities. This improves financial inclusion and empowerment.
6. Supporting Rural and Cottage Industries: NABARD promotes rural industries, cottage
industries, and small-scale enterprises by providing financial and technical support. These
industries create employment opportunities in rural areas and reduce poverty.
7. Implementation of Government Development Programs: NABARD assists in
implementing various government schemes related to agriculture, rural development, and
poverty alleviation. It acts as a link between the government and rural financial institutions.
8. Encouraging Sustainable Development: NABARD promotes environmentally sustainable
farming practices and rural development programs. It supports projects related to water
conservation, soil management, and renewable energy.
9. Research and Development Activities: NABARD conducts research studies and training
programs to improve agricultural techniques and rural development strategies. This helps
farmers adopt modern and efficient farming methods.
10. Promoting Financial Inclusion: NABARD works to provide banking and financial services
to rural and underserved populations. It ensures that people in remote areas have access to credit
and savings facilities.
11. Improving Rural Livelihood: Through financial assistance and development programs,
NABARD improves the income and living standards of rural people. It supports farmers,
artisans, and small entrepreneurs.
12. Supporting Rural Credit Planning: NABARD prepares and monitors credit plans for rural
areas to ensure adequate financial support for agriculture and rural development. It works closely
with the Reserve Bank of India and the government to strengthen rural finance.

REGIONAL RURAL BANK (RRB)

A Regional Rural Bank (RRB) is a special type of bank established to provide banking and
financial services to people living in rural and semi-urban areas. These banks mainly focus on
supporting farmers, agricultural labourers, small entrepreneurs, and rural artisans by providing
affordable credit and banking facilities.
Regional Rural Banks were established in 1975 under the Regional Rural Banks Act, 1976 to
strengthen the rural economy and promote financial inclusion. They work under the supervision
of the Reserve Bank of India and are regulated and supported by National Bank for Agriculture
and Rural Development (NABARD).
RRBs are jointly owned by three parties:
• Government of India – 50% share
• Concerned State Government – 15% share
• Sponsor Bank (usually a public sector bank) – 35% share
 • Examples: Karnataka Gramin Bank, Prathama Bank, and Baroda Rajasthan Kshatriya
Gramin Bank.

FUNCTIONS & ROLES OF REGIONAL RURAL BANKS (RRBS)

1. Providing Agricultural Credit: RRBs provide loans to farmers for agricultural activities
such as purchasing seeds, fertilizers, tractors, and irrigation facilities. These loans help improve
agricultural productivity and support farmers’ livelihoods.
2. Accepting Deposits: RRBs accept deposits from rural people in the form of savings accounts,
current accounts, and fixed deposits. This encourages the habit of saving among rural
households and ensures the safe keeping of money.
3. Providing Loans to Rural Entrepreneurs: RRBs provide financial assistance to small
entrepreneurs, artisans, traders, and small-scale industries in rural areas. This promotes the
development of rural businesses and creates employment opportunities.
4. Supporting Small and Marginal Farmers: One of the main functions of RRBs is to provide
affordable credit to small and marginal farmers. This helps them meet their agricultural and
personal financial needs.
5. Promoting Self-Help Groups (SHGs): RRBs encourage the formation and development of
Self-Help Groups in rural areas. They provide financial support and credit to these groups, which
helps rural women and small entrepreneurs start income-generating activities.
6. Implementation of Government Schemes: RRBs help in implementing various government
schemes related to rural development, agriculture, and poverty alleviation. They assist in
distributing subsidies, pensions, and financial benefits.
7. Providing Banking Facilities in Rural Areas: RRBs offer basic banking services such as
money transfer, ATM services, and remittance facilities. This helps improve financial
accessibility in remote and rural regions.
8. Promoting Financial Inclusion: RRBs work to include rural populations in the formal
banking system. By providing easy access to credit and savings facilities, they reduce
dependence on moneylenders.
9. Supporting Rural Infrastructure Development: RRBs provide financial support for rural
infrastructure projects such as irrigation systems, rural roads, and storage facilities. This helps
improve agricultural and rural economic activities.
10. Encouraging Rural Savings and Investment: RRBs encourage rural people to save and
invest their money in productive activities. This helps strengthen the rural economy and
improves living standards.
CO-OPERATIVE BANKS
Meaning
Co-operative Banks are financial institutions that are owned, managed, and operated by their
members based on the principle of cooperation. The members of the bank are both owners and
customers, and they work together to promote mutual financial support and economic welfare.
The main objective of co-operative banks is to provide affordable credit and banking services to
their members, especially farmers, small businesses, traders, and people with limited financial
resources. These banks focus more on service and community development rather than profit
maximization.
In India, co-operative banks operate under the regulations of the Reserve Bank of India and play
an important role in rural credit with support from National Bank for Agriculture and Rural
Development (NABARD).

FEATURES OF CO-OPERATIVE BANKS

1. Member Ownership: Co-operative banks are owned and controlled by their members. The
members are both the customers and the owners of the bank. They participate in decision-
making and management activities.
2. Principle of Cooperation: These banks operate based on the principle of mutual help and
cooperation. The main objective is to provide financial support to members rather than
maximizing profit.
3. Democratic Management: Co-operative banks follow democratic principles in management.
Each member has equal voting rights, usually following the rule of “one member, one vote”
regardless of the number of shares held.
4. Service-Oriented Objective: The main aim of co-operative banks is to provide banking
services to members at reasonable rates. They focus more on welfare and community
development than profit-making.
5. Limited Area of Operation: Co-operative banks generally operate within a limited
geographical area such as a village, district, or city. This helps them understand and serve the
local community better.
6. Easy and Affordable Credit: These banks provide loans at relatively lower interest rates
compared to other financial institutions. This helps farmers, small traders, and low-income
groups meet their financial needs.
7. Focus on Rural and Small Borrowers: Co-operative banks mainly support farmers, small
businesses, artisans, and rural communities. They play an important role in agricultural and rural
development.
8. Government Regulation and Support: Co-operative banks operate under the supervision of
the Reserve Bank of India and receive financial and developmental support for rural credit from
National Bank for Agriculture and Rural Development (NABARD).

STATE CO-OPERATIVE BANKS (SCBS)

State Co-operative Banks are the highest-level co-operative banks at the state level. They act as a
link between the Reserve Bank of India and lower-level co-operative banks. They supervise and
guide co-operative banking activities in the state.
SCBs are part of a three-tier structure consisting of State Co-operative Banks, District Central
Co-operative Banks, and Primary Agricultural Credit Societies. They operate at the top of this
structure. This system ensures smooth flow of credit in rural areas.
Functions:
• State Co-operative Banks provide financial support to district central co-operative banks
and primary agricultural credit societies.
• They help in providing credit to farmers and rural communities.
• They play an important role in agricultural financing and rural development.
• They also assist in implementing government agricultural and rural development
programs.

2. URBAN CO-OPERATIVE BANKS (UCBS)

Urban Co-operative Banks operate mainly in urban and semi-urban areas. They provide banking
services to small traders, entrepreneurs, salaried employees, and local businesses. UCBs are
generally single-tier institutions operating independently in cities. They are registered under co-
operative societies laws of the state. They function under the supervision of the Reserve Bank of
India.
Functions:
• Urban Co-operative Banks accept deposits and provide loans to individuals and small
businesses.
• They promote small-scale industries and self-employment in cities and towns.
• These banks operate on co-operative principles where members have voting rights.
• They help improve financial inclusion in urban and semi-urban areas.
SCHEDULED BANKS
Meaning
Scheduled Banks are banks that are included in the Second Schedule of the Reserve Bank of
India Act, 1934. These banks satisfy certain conditions laid down by the Reserve Bank of India
(RBI), such as maintaining a minimum level of paid-up capital and reserves. These banks also
play an important role in implementing the country’s monetary and banking policies.
Scheduled Banks are broadly classified into Scheduled Commercial Banks and Scheduled Co-
operative Banks. Commercial banks include public, private, and foreign banks. Co-operative
banks include urban and state co-operative banks.
Examples: State Bank of India, HDFC Bank, ICICI Bank, and Punjab National Bank.

FEATURES OF SCHEDULED BANKS

1. Listed in the Second Schedule of RBI Act: Scheduled banks are those banks that are
included in the Second Schedule of the Reserve Bank of India Act, 1934. Only banks that meet
certain financial requirements are included in this list. This recognition shows that the bank is
financially stable.
2. Minimum Capital and Reserves: Scheduled banks must maintain a minimum paid-up
capital and reserves as prescribed by the Reserve Bank of India. This requirement ensures the
financial strength and reliability of the bank.
3. Eligible for RBI Financial Assistance: Scheduled banks can borrow money from the
Reserve Bank of India during financial emergencies. This facility helps them maintain liquidity
and stability in their operations.
4. Subject to RBI Supervision: Scheduled banks operate under strict supervision and regulation
of the Reserve Bank of India. RBI monitors their financial activities to ensure safety and proper
functioning of the banking system.
5. Required to Maintain Cash Reserve Ratio (CRR): Scheduled banks must maintain a
certain percentage of their deposits as Cash Reserve Ratio with the Reserve Bank of India. This
helps control the money supply and maintain financial stability.
6. High Public Confidence: Since scheduled banks follow strict rules and regulations of the
RBI, they enjoy a high level of trust among the public. Customers feel their deposits are safe in
these banks.
7. Important Role in the Banking System: Scheduled banks play a major role in implementing
monetary policies and supporting economic development. They provide loans, accept deposits,
and facilitate financial transactions.
8. Provide Wide Banking Services: These banks provide various services such as deposits,
loans, remittances, ATM facilities, internet banking, and investment services to individuals and
businesses.
ADVANTAGES OF SCHEDULED BANKS
1. Financial Stability: Scheduled banks are financially strong because they must maintain
minimum capital and reserves as prescribed by the Reserve Bank of India. This requirement
ensures that the bank operates safely and responsibly.
2. Access to RBI Assistance: Scheduled banks can borrow funds from the Reserve Bank of
India during financial emergencies. This support helps them maintain liquidity and continue their
banking operations smoothly.
3. High Public Confidence: Because scheduled banks follow strict regulations and supervision
by the central bank, people trust them more. Customers feel their deposits are secure and
protected.
4. Wide Range of Banking Services: Scheduled banks offer many banking services such as
accepting deposits, providing loans, money transfers, ATM services, and online banking. These
services help meet the financial needs of individuals and businesses.
5. Role in Economic Development: Scheduled banks provide financial support to industries,
agriculture, and businesses. By offering credit and financial services, they contribute to
economic growth and development.
6. Implementation of Monetary Policy: Scheduled banks help implement the monetary
policies of the Reserve Bank of India. Through their lending and deposit activities, they help
regulate the money supply in the economy.
7. Large Branch Network: Most scheduled banks have a wide network of branches across
urban and rural areas. This allows people in different regions to access banking services easily.
8. Safe and Regulated Banking System: Scheduled banks operate under strict rules and
regulations. This ensures transparency, proper management, and safety of customers’ funds.

NON-SCHEDULED BANKS
Meaning
Non-scheduled banks in India are financial institutions not listed in the Second Schedule of the
Reserve Bank of India (RBI) Act, 1934. They generally have a paid-up capital of less than ₹5
lakh, smaller operations, and limited access to RBI refinancing or clearinghouse facilities. These
banks primarily include local area banks and certain cooperative banks.
Non-scheduled banks are usually smaller banks with limited operations and resources. They
operate independently but must still follow certain regulations of the Reserve Bank of India.
FEATURES OF NON-SCHEDULED BANKS
1. Not Listed in the Second Schedule: Non-scheduled banks are not included in the Second
Schedule of the Reserve Bank of India Act, 1934. This means they do not meet the requirements
needed to be classified as scheduled banks.
2. Smaller Financial Size: These banks generally have smaller capital, reserves, and limited
financial resources. Because of this, their operations are usually smaller compared to scheduled
banks.
3. Limited Banking Operations: Non-scheduled banks usually operate in a limited
geographical area. Their services and branch networks are smaller and mainly serve local
customers.
4. No Access to RBI Borrowing Facilities: Unlike scheduled banks, non-scheduled banks
cannot easily borrow funds from the Reserve Bank of India for financial assistance. This reduces
their financial support during emergencies.
5. Lower Public Confidence: Since these banks are smaller and not listed in the Second
Schedule, people may have relatively lower confidence in them compared to scheduled banks.
6. Subject to RBI Regulations: Even though they are not scheduled banks, they still operate
under certain rules and supervision of the Reserve Bank of India.
7. Limited Branch Network: Non-scheduled banks generally have fewer branches and provide
services mainly in local or regional areas.
8. Lesser Role in the Banking System: Compared to scheduled banks, non-scheduled banks
play a smaller role in the overall banking system and economic development.

Disadvantages of Non-Scheduled Banks

1. Limited Financial Resources: Non-scheduled banks usually have smaller capital and
reserves. Because of limited financial resources, they cannot provide large loans or expand their
banking operations effectively.
2. No Access to RBI Financial Assistance: These banks do not enjoy the borrowing facilities
from the Reserve Bank of India that scheduled banks receive. During financial difficulties, they
may face problems in maintaining liquidity.
3. Limited Branch Network: Non-scheduled banks generally operate in a small geographical
area with fewer branches. This restricts their ability to provide banking services to a wider
population.
4. Lower Public Confidence: People may have less trust in non-scheduled banks because they
are not included in the Second Schedule of the Reserve Bank of India Act, 1934. This can affect
their ability to attract deposits.
5. Limited Banking Services: These banks often provide fewer services compared to scheduled
banks. They may not offer advanced facilities like extensive digital banking or large-scale
financial products.
6. Smaller Role in Economic Development: Non-scheduled banks contribute less to the overall
banking system and economic growth due to their limited size and resources.
7. Higher Risk of Financial Instability: Because of weaker financial strength, non-scheduled
banks may face greater risk during economic crises or financial problems.
8. Difficulty in Expansion: Due to strict requirements and limited capital, non-scheduled banks
may find it difficult to expand their operations or become large banking institutions.

PAYMENT BANKS
Meaning
Payment Banks are a type of specialized bank in India that are mainly established to provide
basic banking and payment services to the public, especially to people in rural and unbanked
areas. These banks focus on accepting small deposits and facilitating digital payments and
money transfers.
Payment banks can accept deposits up to a limited amount (currently up to ₹2 lakh per customer)
but they cannot provide loans or issue credit cards. Their main aim is to promote financial
inclusion and digital transactions in the economy.
Payment banks operate under the regulation and supervision of the Reserve Bank of India, which
introduced this banking model in 2015.
Examples: Airtel Payments Bank, India Post Payments Bank, Paytm Payments Bank, and Fino
Payments Bank.

FUNCTIONS / ROLES OF PAYMENT BANKS

1. Accepting Small Deposits: Payment banks accept deposits from individuals and small
businesses. The deposit limit is up to ₹2 lakh per customer. This helps people safely store their
money and encourages saving habits.
2. Facilitating Digital Payments: Payment banks provide digital payment services through
mobile banking, internet banking, and UPI platforms. These services make transactions faster,
easier, and promote a cashless economy.
3. Providing Remittance Services: Payment banks allow customers to send and receive money
within the country. This is especially helpful for migrant workers who send money to their
families in rural areas.
4. Issuing ATM and Debit Cards: Payment banks can issue ATM cards and debit cards to their
customers. These cards allow customers to withdraw cash and make payments conveniently.
5. Promoting Financial Inclusion: Payment banks provide basic banking services to people
who do not have access to traditional banks. This helps include rural and low-income
populations in the formal banking system.
6. Utility Bill Payments: Customers can pay electricity bills, water bills, mobile recharges, and
other utility payments through payment banks. This makes bill payment simple and convenient.
7. Distributing Government Benefits: Payment banks help in transferring government
subsidies, pensions, and welfare benefits directly to beneficiaries' accounts. This ensures
transparency and quick payments.
8. Offering Third-Party Financial Products: Payment banks can distribute products such as
insurance, mutual funds, and pension schemes in partnership with other financial institutions.
9. Partnership with Other Banks: Payment banks often partner with commercial banks to offer
additional services such as insurance, mutual funds, and other financial products.

SMALL FINANCE BANKS

Meaning
Small Finance Banks (SFBs) in India are niche banking institutions, regulated by the RBI, aimed
at enhancing financial inclusion by providing basic banking services savings and loans to
underserved segments, such as small farmers, MSMEs, and small business units. They are
required to hold 75% of their credit as priority sector lending and offer higher interest rates on
deposits.
Small Finance Banks can accept deposits, provide loans, and offer other basic banking services
similar to commercial banks. However, they mainly focus on serving small borrowers and
underserved sections of society.
In India, Small Finance Banks operate under the regulation and supervision of the Reserve Bank
of India, which introduced this banking category in 2015.
Examples: Ujjivan Small Finance Bank, Equitas Small Finance Bank, and Jana Small Finance
Bank.

FUNCTIONS / ROLES OF SMALL FINANCE BANKS

1. Providing Loans to Small Borrowers: Small Finance Banks mainly provide loans to small
farmers, micro and small enterprises, and small traders. These loans help them expand their
activities and improve their income.
2. Accepting Deposits: SFBs accept different types of deposits such as savings accounts, current
accounts, and fixed deposits. This encourages people to save money safely and earn interest on
their deposits.
3. Promoting Financial Inclusion: One of the major roles of Small Finance Banks is to bring
unbanked and underserved people into the formal banking system. They provide banking
services to rural and low-income populations.
4. Supporting Micro and Small Enterprises: Small Finance Banks provide financial assistance
to micro and small enterprises. This helps promote entrepreneurship and supports the growth of
small businesses.
5. Priority Sector Lending: A large portion of the loans given by SFBs must be directed to
priority sectors such as agriculture, small industries, and weaker sections. This contributes to
balanced economic development.
6. Providing Basic Banking Services: SFBs provide various services such as ATM facilities,
money transfer services, internet banking, and debit cards. These services help customers carry
out financial transactions easily.
7. Encouraging Rural Development: Small Finance Banks help improve the rural economy by
providing credit to farmers, rural businesses, and local entrepreneurs. This promotes economic
development in rural areas.
8. Creating Employment Opportunities: By supporting small businesses and entrepreneurs
through loans and financial services, Small Finance Banks help generate employment and
improve living standards.

DEVELOPMENT BANKS
Meaning
Development Banks are financial institutions that provide long-term financial assistance for the
development of industries, agriculture, infrastructure, and other important sectors of the
economy. Their main objective is to promote economic growth and development rather than
earning profits.
Development banks mainly support large projects, industrial expansion, and infrastructure
development. In India, development banks work under the supervision of the Reserve Bank of
India and support government economic policies.
Examples: National Bank for Agriculture and Rural Development (NABARD), Industrial
Development Bank of India, Small Industries Development Bank of India, and Export-Import
Bank of India.

OBJECTIVES & FUNCTIONS OF DEVELOPMENT BANKS

1. Promoting Industrial Development: Development banks aim to encourage the growth of

industries by providing financial assistance for establishing new industries and expanding
existing ones. This helps increase production and supports economic growth.
2. Providing Long-Term Finance: They provide long-term loans and financial support for
large development projects. Such financing is essential for industries and infrastructure projects
that require huge capital investment.

3. Supporting Small and Medium Enterprises (SMEs): Development banks help small and
medium enterprises by providing financial assistance and guidance. Institutions like Small
Industries Development Bank of India promote the growth of small-scale industries.

4. Promoting Agricultural Development: Development banks support agricultural activities by

providing funds for irrigation, farm equipment, and rural infrastructure. For example, National
Bank for Agriculture and Rural Development (NABARD) plays a key role in rural development.

5. Encouraging Export and International Trade: They provide financial assistance to

businesses involved in export activities. The Export-Import Bank of India helps promote
international trade and foreign exchange earnings.

6. Balanced Regional Development: Development banks aim to reduce regional imbalances by

supporting industrial and economic projects in backward and underdeveloped regions.

7. Financing Infrastructure Projects: They provide financial support for infrastructure

development such as roads, power plants, irrigation systems, and transportation networks. This
infrastructure is essential for economic growth.

8. Providing Technical and Managerial Guidance: Apart from financial support, development
banks offer technical advice, project evaluation, and managerial guidance to entrepreneurs and
industries.

9. Encouraging Entrepreneurship: Development banks promote entrepreneurship by

providing financial assistance and support to new entrepreneurs. This helps create employment
opportunities.

10. Mobilizing Resources for Development: They mobilize financial resources from various
sources and channel them into productive sectors of the economy.

11. Supporting Government Development Policies: Development banks work in coordination

with the Reserve Bank of India and the government to implement economic development
policies and programs.

12. Improving Economic Growth: By supporting industries, agriculture, and infrastructure

projects, development banks contribute significantly to the overall economic development of the
country.