Commercial Banks In India: Types And Functions - Forbes India (2024)

A commercial bank is a financial institution that performs operations related to deposit and withdrawal of money for the public, provides loans for investment, and carries out other similar activities. The two main functions of a commercial bank are lending and borrowing. They play a crucial role in the country's financial system by smoothing the flow of funds, offering banking products and services, and contributing to economic growth.

Evolution of commercial banks in India

The evolution of commercial banks in India spans several centuries, reflecting changes in economic policies, banking regulations, and technological advancements. Let's look at the evolution of commercial banks in India:

Pre-independence era (pre-1947):

The origins of modern banking in India can be traced back to the 18th century when European trading companies established banks for conducting financial transactions.The Bank of Hindustan (1770) and the General Bank of India (1786) were among the earliest banks in the subcontinent.The State Bank of India (SBI) was established as the Bank of Calcutta in 1806. It later merged with the Bank of Bombay and the Bank of Madras in 1921 to form the Imperial Bank of India, eventually becoming the State Bank of India in 1955.

Post-independence and nationalisation (1947-1969):

After gaining independence in 1947, India witnessed a series of banking reforms to foster economic development.The Banking Regulation Act of 1949 provided the regulatory framework for banking operations.In 1969, the Indian government nationalised 14 major banks to achieve social and economic objectives, including increased credit flow to priority sectors like agriculture and small-scale industries.

Liberalisation and technological advancements (1991 onward):

Through the economic liberalisation of 1991, the government initiated financial sector reforms to promote competition and efficiency.The entry of private and foreign banks introduced a new era of competition and innovation in the banking sector.Technological advancements revolutionised banking operations, leading to the establishment of online banking services.

Consolidation and regulatory changes (2000s onward):

In the 2000s, there was a trend of mergers and acquisitions in the banking sector, leading to the consolidation of banks for enhanced efficiency and scale.The Reserve Bank of India (RBI) implemented Basel regulations to strengthen the banking system.

Current landscape (2020s onward):

Digital banking, mobile banking, and fintech collaborations have become prominent features of the commercial banking landscape.The RBI focuses on maintaining financial stability, promoting financial inclusion, and addressing emerging challenges such as cybersecurity risks.

Types of commercial banks in India

There are various commercial banks in India, each serving specific functions and catering to distinct segments of the economy. Here are the types of commercial banks in India:

Public sector banks

Public sector banks are government-owned banks where the majority of the ownership lies with the government. Examples include the State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda. These banks play a crucial role in implementing government policies related to financial inclusion and priority sector lending.

Private sector banks

Private individuals or entities own these banks and operate them. They operate on a profit motive and are known for their efficiency and innovation. Examples include ICICI Bank, HDFC Bank, and Axis Bank.

Foreign banks

Foreign banks are headquartered outside India and operate within the country after obtaining the necessary regulatory approvals. Examples include Standard Chartered, Citibank, and HSBC.

Regional rural banks

Regional Rural Banks are a specialised category of banks created to cater to the banking needs of rural and semi-urban areas.

Cooperative banks

Cooperative banks operate on cooperative principles, primarily focusing on meeting their members' credit and banking needs. They can be classified into Urban Cooperative Banks (UCBs) and Rural Cooperative Banks (RCBs). These banks play a vital role in supporting local economic activities.

Payment banks

Payment banks are a relatively recent addition to the Indian banking sector. They provide a limited set of banking services, primarily focused on payments and remittances. They cannot issue loans or credit cards but can accept deposits and facilitate transactions. Examples include Airtel Payments Bank and Paytm Payments Bank.

Small finance banks

Small finance Banks cater to the banking needs of underserved and unserved sections of the population, including small businesses and low-income individuals. Examples include Equitas Small Finance Bank and Ujjivan Small Finance Bank.

Investment norms and asset structure of commercial banks

Commercial banks in India adhere to specific investment norms and maintain a well-defined asset structure to ensure financial stability and regulatory compliance. These norms are established by the Reserve Bank of India (RBI), the country's central banking authority.

Commercial banks in India allocate a significant portion of their funds to government securities, meeting statutory liquidity requirements. Additionally, they invest in a diverse portfolio of assets, including loans and advances to various sectors such as agriculture, industry, and services. Prudent risk management practices guide their asset structure to maintain a balance between profitability and risk mitigation.

Functions of commercial banks in India

Functions of commercial banks in India are varied and range from accepting deposits to promoting financial inclusion. These aid in the country's economic development. The primary functions of commercial banks are:

• Accepting deposits: Commercial banks provide a safe and secure place for the public to deposit their money. They offer various types of deposit accounts, including savings accounts, current accounts, and fixed deposits.
• Providing loans and advances: Commercial banks extend loans and advances to individuals, businesses, and industries.
• Credit creation: Commercial banks create credit. When they lend money, they create new money in the form of bank deposits, contributing to the overall money supply in the economy.
• Electronic funds transfer: Commercial banks enable electronic funds transfer through channels such as online banking, mobile banking, and electronic payment systems. This facilitates quick and secure money transfers between accounts.
• Providing overdraft facilities: Commercial banks offer overdraft facilities to account holders, allowing them to withdraw more money than is available in their accounts up to a certain limit.
• Investment in securities: Commercial banks invest in a variety of securities, including government bonds, corporate bonds, and other marketable securities.
• Foreign exchange services: Banks in India engage in foreign exchange operations, facilitating international trade and providing services such as currency exchange and outward remittances.
• Financial inclusion: Commercial banks help in financial inclusion by extending banking services to underserved and rural areas.

Top 10 Banks with the highest percentage of deposits

The top ten banks with the highest deposits include seven government banks, holding 75 percent of deposits. Only five commercial banks in India hold 50 percent of deposits. Government banks command a significant share of Rs62 for every Rs100 deposited, compared to private banks with Rs32. Despite small finance banks offering higher interest rates, they hold only 0.8 percent of India's savings, possibly due to safety concerns. Government banks have an extensive branch network, even beyond urban centres. The Public’s trust in them also plays a role in making them the banks with the highest deposits. Here is a list of the top ten banks with the highest deposits, with data (as of October 2023) sourced from The Business Standard.