Banking Notes / Banking Awareness / Chapter 3
Chapter 3 of 17

Indian Banking System – Types of Banks & Financial Institutions

The full landscape of India's banking structure — public, private, foreign, cooperative, small finance, payments, and regional rural banks.

📖 ~9 min read 🏛️ Banking Awareness

Introduction

India's banking system is a two-tier structure: the RBI at the top as regulator, and a diverse set of bank categories beneath it, each serving a different segment of customers and geography.

Types of Banks

TypeKey Feature
Public Sector Banks (PSBs)Majority government-owned (e.g., SBI, Bank of Baroda, PNB) — formed largely via 1969/1980 nationalisation
Private Sector BanksMajority privately owned (e.g., HDFC Bank, ICICI Bank, Axis Bank)
Foreign BanksBanks incorporated outside India with branches in India (e.g., Citibank, HSBC)
Regional Rural Banks (RRBs)Jointly owned by Centre, sponsor bank, and state government; focused on rural credit
Cooperative BanksRegistered under Cooperative Societies laws; serve members within a defined community/area
Small Finance Banks (SFBs)Focus on financial inclusion for small businesses, farmers, and unbanked segments
Payments BanksCan accept deposits (up to a regulatory limit) and offer payments/remittance services, but cannot lend

Recent Structural Reform: One State, One RRB

📌 Current Development: Under the "One State, One RRB" policy, the government amalgamated 26 Regional Rural Banks across 11 states and 1 Union Territory into a single RRB per state, effective May 1, 2025. This reduced the total number of RRBs nationally from 43 to 28, covering roughly 22,000 branches across about 700 districts. This is the fourth major phase of RRB consolidation since 2006 (when there were 196 RRBs).
Q. Which type of bank is permitted to accept deposits but is NOT permitted to lend money or issue credit cards?
A Payments Bank can accept deposits (subject to a per-customer limit) and offer payment/ remittance services, but is prohibited from lending or issuing credit cards.
⚠️ Key Insight: Small Finance Banks CAN lend (their core mandate is lending to underserved segments); Payments Banks CANNOT — this distinction is one of the most frequently tested points in this chapter.
✅ Practice Focus: Distinguishing SFB vs Payments Bank permissions · RRB ownership structure · The "One State, One RRB" consolidation figures · Public vs private vs foreign bank categorisation.

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