9 types of banks: functions, reforms and acts

9 types of banks: functions, reforms and acts

A bank is a financial institution that accepts deposits from the public while providing lending services to customers. Banks play an important role in the economy  as they help store and create money. There are nine major types of banks in India.

Every type of bank holds different responsibilities and functions, providing unique services, under certain regulations for the customers. The primary functions of bank include accepting deposits, providing loans and advances, facilitating payments and transactions, issuing credit and providing foreign exchange services.

There has been multiple banking reforms and acts since the introduction of the first Banking Regulation Act in 1949 in India including Banking Regulation Act, 1949, The Companies Act, 1956 (Amended 2015), The Deposit Insurance and Credit Guarantee Corporation Act, 1961, The Banking Laws (Application to Co-operative Societies) Act, 1965 and The Regional Rural Banks Act, 1976. Banks operate under various reforms and acts that focus on and aim to ensure the safety, stability, and fairness of the banking system.

There are 9 different types of banks in India that are listed below.

  • Central Bank
  • Cooperative Bank
  • Commercial Bank
  • Local Area Bank
  • Specialized Bank
  • Small Finance Bank
  • Payment Bank
  • Domestic Systematically Important Banks (D-SIB)
  • NEO Bank

1. Central bank

The Reserve Bank of India (RBI) is the central bank in India monitoring other commercial banks established in 1935 under the Reserve Bank of India Act, in 1934. The Reserve Bank of India (RBI) ensures smooth economic functioning, monetary policies, and take care of minting and printing of coins and banknotes in the country. They also control inflation, manage the country’s foreign exchange, and monitor the financial system.

Furthermore, the India’s central bank, RBI is also responsible for governing finances, giving money to other banks and governments, and ensuring financial stability in the country.

On December 01, 2022, Yogesh Dayal, Chief General Manager of the Reserve Bank of India announced the launch of the first pilot for retail digital Rupee (e₹-R) through a press release. This digital rupee e₹-R is offered in the form of a digital token and represents a legal tender and issued in the same denominations as paper currency and coins. The distribution of digital currency is managed through intermediaries, i.e., banks.

2. Co-operative banks

A south Indian man with a co-operative bank employee

Co-operative banks is a financial institution that operates and functions by its members with emphasis and focus on providing affordable financial services to the economically weaker sections of society. The cooperative banks were established to support and free people from high-interest moneylenders with the aim of financial and economic stability.

In India, the operation of cooperative banks is based on a three-tier system that are listed below.

  • State Level (Tier-1): Tier-1 is the highest form of cooperative bank operation, functioning within the state. These are basic institutions, connecting cooperative banks and the Reserve Bank of India (RBI). State Cooperative Banks are responsible for monitoring and regulating District Central Cooperative Banks and Primary Agricultural Credit Societies, ensuring compliance with banking regulations and policies.
  • District Level (Tier-2): These banks function at the district level, working as a middle ladder between the State level and the Village Level. These banks provide financial assistance and credit to Primary Agricultural Credit Societies making sure the effective distribution of funds within the district.
  • Village Level (Tier-3): This is tier-3, grassroots-level institutions located and functioning in rural and urban areas, providing financial assistance to local people by providing loans, and creating bank services like deposits and other banking facilities. Primary Agricultural Credit Societies focus on ensuring the financial needs of its members, which also focuses on small farmers and rural artisans, with an aim of promoting financial inclusion amongst locals.

The types of cooperative banks with their descriptions are given in the table below.

Types of Cooperative BankDescription
State Co-operative BanksState Cooperative Banks raises funds and also assist in proper distribution of the finds to various sectors. The National Federation of State Cooperative Banks which was founded in 1967 in Mumbai regulates all the State Apex Cooperative Banks in India.
Urban Co-operative BanksThe Urban Co-operative Banks are usually located in urban and semi-urban areas to lend money to smaller borrowers, and the businesses done as a community, locality, and more.

As per the report by Reserve Bank of India, the capital position and profitability of Urban Cooperative Banks improved, however, the quality of asset deteriorated for rural co-operatives. Also, the state co-operative banks and district central co-operative banks showed improvement in profitability.

3. Commercial banks

Commercial banks are financial institutions that provide financial assistance and banking services, including deposits, granting loans, and offering investment products to individuals. These banks also lend money to big business and government and operates under the regulations of the Reserve Bank of India (RBI).

There are four types of commercial banks in India that are listed below.

  • Public Sector Banks: These banks are owned and operated by the government. Some of the major examples of such banks are the State Bank of India (SBI) and Punjab National Bank (PNB). These banks are very significant and play an important role in regulating and implementing regulations under the RBI Act.
  • Private Sector Banks: The private sector banks are owned by private entities or individuals, for example; HDFC Bank and ICICI Bank. These banks are known for their efficient services like innovative products, and advanced technology.
  • Foreign Banks: The foreign banks are based in foreign countries but have operations and branches in India; for example Citibank and HSBC. The primary customers of such banks are high net-worth individuals and operate on multinational levels in India.
  • Regional Rural Bank: A Regional Rural Bank (RRB) in India is a government-sponsored financial institution that primarily focus on providing credit services to rural and semi-urban areas. The RRBs are established under the RRB Act of 1987, for supporting agriculture, rural development, and financial inclusion. They operate at the regional level, providing services in one and more districts including savings accounts, loans, government schemes, pensions and wages.

In the report published by Reserve Bank of India on Operations and Performance of Commercial Banks on Dec 27, 2023, “the Indian banking sector’s asset quality improved during 2022-23 and 2023-24, with the gross non-performing assets (GNPA) ratio declining to its lowest in a decade. The combined balance sheet of scheduled commercial banks (SCBs) expanded at an accelerated pace, driven by credit to retail and services sectors, with higher net interest income and lower provisioning requirements boosting profitability.

4. Local area banks

A woman working in a local area bank

Local Area Banks (LAB) cater to the credit and other financial needs of the local people and was first established in August 1996.

A local area bank can be set up by a trust, society, corporate bank, and individual; and are registered under the Companies Act of 1956. In general, the LABs are set up under private sector like a Private Limited Company.

The minimum paid-up capital required for setting up a Local Area Bank (LAB) is INR 5 crores.

The Reserve Bank of India (RBI) regulate and monitors the banking activities of a Local Area Bank. Local Area Banks (LABs) focus on serving the local communities by offering service including savings accounts, loans, and deposits, in order to dismiss the gap between financial institutions and the unbanked population in specific regions.

The four local area banks in India is listed below.

  1. Coastal Local Area Bank Ltd
  2. Capital Local Area Bank Ltd
  3. Krishna Bhima Samruddhi Local Area Bank Ltd
  4. Subhadra Local Area Bank Ltd., Kolhapur

5. Specialized banks

Specialized banks are financial institutions with a primary focus on specific sectors of the economy or particular types of financial services. The establishment of such banks was to address particular financial needs that usually go unnoticed by commercial banks. 

These banks operate with a targeted approach, with their operations in niche markets or sectors, promoting financial needs and economic growth in the market in specific sectors. The types of specialized bank with their functions are listed below.

  • Export-Import Bank of India (EXIM Bank): EXIM Bank facilitates international trade with all the necessary financing and risk management services for exporters and importers.The main aim of Export-Import Bank of India (EXIM Bank) is to support foreign trade and provide help in management of risks associated with global transactions.
  • National Bank for Agriculture and Rural Development (NABARD): NABARD supports rural development and agricultural growth in India by providing financial and technical support for rural development projects and agricultural activities.
  • Small Industries Development Bank of India (SIDBI): SIDBI promotes and supports the growth of small and medium-sized enterprises (SMEs) with their financial products and services. The major functions of Small Industries Development Bank of India (SIDBI) include loans, equity funding, and venture capital emphasizing on modernization of technology in the financial sector.

6. Small finance banks

Small Finance Banks (SFBs) are financial institutions that hold significance in providing banking services to under served and unserved sections. The major focus of Small Finance banks are  micro-enterprises, and low-income households with their wide financial services and products, including savings accounts, fixed deposits, and small loans. 

SFBs are established under the guidelines of the Reserve Bank of India (RBI) and promotes financial inclusion with expanding banking services in rural and semi-urban areas.

7. Payment banks

A picture of Approved payment through mobile

Payment Banks are specialized banking institutions in India established by the Reserve Bank of India (RBI) with an aim of financial inclusion and enhancement. They provide basic banking services such as savings accounts, payments, and remittances but don’t offer loans or credit cards.

Payment Banks can accept deposits up to ₹1 lakh per customer and are focused on serving low-income individuals, small businesses, and rural populations through their digital platforms.

The 6 payment banks in India are listed below.

  1. Airtel Payments Bank
  2. India Post Payments Bank (IPPB)
  3. Fino Payments Bank
  4. Paytm Payments Bank
  5. Jio Payments Bank
  6. NSDL Payments Bank

8. Domestic systemically important banks (D-SIB)

Domestic Systemically Important Banks (D-SIBs) are banks that are designated by the Reserve Bank of India (RBI), which when fails, disturb the domestic financial system and economy. D-SIBs are categorized into different buckets based on their systemic importance scores.

These banks face higher regulatory requirements, including additional Common Equity Tier 1 (CET1) capital buffers, to ensure their resilience and stability.

As per article titled, “RBI releases Domestic Systemically Important Banks (D-SIBs) of 2021: List here” pusblished by Livemint on 2 Jan 2023, the list of D-SIBs as per Additional Common Equity Tier 1 requirement as a percentage of Risk Weighted Assets (RWAs), State Bank of India, ICICI Bank, HDFC Bank with 0.60%, 0.20% and 0.20% respectively were in the D-SIBs list presented by Reserve Bank of India (RBI).

9. NEO banks

Neo banks are digital only banking platform that operates exclusively on online mode and has no physical branch locations. They leverage advanced technology to provide banking services through mobile apps and online platforms. The services offered by NEO banks include money transfers, lending, and payment solutions.

Neo banks typically collaborate with traditional banks to provide financial products but do not hold a banking license themselves, as the Reserve Bank of India (RBI) does not permit 100% digital banking operations.

The types of NEO Banks in India is listed below.

  • Direct Neo Banks: Direct Neo Banks operate independently as standalone entities  with no back or support from traditional bank. They offer a range of banking services such as savings accounts, loans, and payment solutions directly through their digital platforms. The examples direct NEO banks in India are Niyo and Dvara.
  • Partnered Neo Banks: Partnered Neo Banks collaborate with established traditional banks for banking services under their brand. They leverage the banking infrastructure and regulatory framework of their partner banks which helps in offering services like savings accounts, credit cards, and loans. The examples of partnered NEO banks are RazorpayX and Open.
  • Digital-Only Banks: Digital-only banks function as online-only branches of already available banks in the market. They are digital subsidiaries of traditional banks often functioning without any physical branches often backed and supported by existing parent bank’s resources. The examples digital only banks include HDFC’s PayZapp and ICICI’s iMobile.
  • Fintech-Backed Neo Banks: Fintech-Backed Neo Banks are establishment of fintech companies providing banking services through partnerships with licensed banks. These neo banks primarily target on providing special banking services,  and leveraging technology with a focus on enhancing customer experience. Some basic examples of such banks include Cred and Zolve.
  • Specialized Neo Banks: Specialized Neo Banks emphasize niche markets with specific financial services, providing financial management to freelancer or small businesses, with financial needs. They cater to targeted customer segments with customized services. Some of the example of such banks are: Walnut and Kodo.

What are the functions of banks?

A Indian man counting currency notes in India

The functions of banks include accepting deposits, providing loans, payments and settlements, currency exchange, safekeeping of valuables, investment services and internet banking services. These functions are divided into two types of functions that are listed below.

  • Primary functions
  • Secondary functions

What are the primary functions of a bank?

The primary functions of banks include accepting deposits, providing loans and advances. It also includes other functions which is listed below.

  1. Accepting Deposits: Banks provide services to individuals and businesses and are considered as financial institutions, allowing them to deposit their money in various forms. With banks, customers get the facilities of having current, savings, and fixed deposit accounts, facilitating them with the help of money management. Highlighting the features of each account, with a savings account one can earn interest, whereas the current account allows the customers to have smooth transactions. In addition, with fixed deposits customers have the option to have benefits of a higher rate of return,  with certain money benefits for a long-term, and specified time.
  2. Providing Loans and Advances: Another major function of banks is to provide necessary loans for individuals requiring money for personal, commercial, and industrial purposes. There are a few types of loans, which banks offer to customers, which include; home loans, personal loans, auto loans, and business loans. The basic criteria for providing a loan is based on credit score and eligibility of the individual, based on which, the applicant would get the eligible funds as per their needs, ensuring they meet their personal financial needs, and grow their business. 
  3. Facilitating Payments and Transactions: Banks and financial institutions also manage transactions for their customers, ensuring smoothness in their transactions. Certain payment methods, which banks manage are cheques, electronic fund transfers (NEFT, RTGS, IMPS), and bill payments. Besides, through online and mobile banking platforms, customers enjoy transaction ease, with a way to manage their money efficiently.
  4. Issuing Credit: Banks issue credit cards and other forms of credit to facilitate customer purchases and manage expenses. They provide a line of credit for consumers and businesses, which helps manage cash flow and cover short-term financial needs. 
  5. Foreign Exchange Services: Banks offer foreign exchange services for currency exchange, international travel, and foreign trade. They provide foreign currency for travelers, facilitate international money transfers, and assist businesses with import and export transactions. This function supports international economic activities and travel.

What are the secondary functions of a bank?

Secondary functions are additional services provided by banks that support their primary functions and offer extra benefits to customers. The secondary functions enhance the banking experience and are listed below.

  1. Financial Advisory Services: Banks offer financial advisory services to help customers plan their investments, manage assets, and achieve financial goals. They provide guidance on mutual funds, insurance, retirement planning, and wealth management. 
  2. Safe Deposit Lockers: Safe deposit lockers are offered to customers for storing valuable items such as documents, jewellery, and important papers. These lockers are secured with advanced technology and provide a safe storage option for customers’ valuables.
  3. Agency Services: Besides monetary, banks also perform a few agency services for customers. Some of the basic services include collecting payments, paying taxes, and distributing dividends. Banks work on behalf of their customers, and ensure to collect utility bills, manage tax payments, and handle government-related financial services.
  4. Custodial Services: Another major feature of banks is that they provide custodial services for their customers. Banks not only manage finances for customers, but also ensure the management of client’s assets like securing their shares, bonds, and mutual funds.  With the custodial services, customers can have their proper financial portfolio, ensuring security for themselves.
  5. Underwriting Services: There is another kind of service which is often considered as important by banks. This is known as underwriting services, in which banks ensure management and issuing securities, bonds and stock. They hold and manage risk of maintaining securities and assist companies to ensure having capital with public offerings. 

What are the important banking sector reforms and acts?

A picture showing Reform and listing all the banking sector reforms in India

The Banking sectors reforms and acts means the changes and improvements that are made to the banking industry with the aim to enhance efficiency, transparency, and stability. The changes in reforms and acts are done by regulatory authorities and policymakers to improve regulations, introduce new technologies, improve governance practices, and promote financial inclusion.

There important banking sector reforms and acts are listed below.

  1. Banking Regulation Act, 1949: The Banking Regulation Act, 1949  is one of the important acts, which governs the entire banking system in India. The main task of the bank under this act is to ensure smooth management of banks, and ensuring their operation under the guidelines and provided framework. The Act empowers the Reserve Bank of India (RBI) to monitor banks and ensure that customers’ deposits and interests  are secure and maintained in the banks of India.
  2. The Companies Act, 1956 (Amended 2015): The Companies Act, 1956 was framed to regulate and ensure the operation of companies and banks in India. The 2015 Amendment was beneficial for companies, as it allowed companied to have paid-up capital,  as it eased the new rules for companies with a more dynamic corporate environment.
  3. The Deposit Insurance and Credit Guarantee Corporation Act, 1961: Under this Act, the Deposit Insurance and Credit Guarantee Corporation (DICGC) was established making sure to provide insurance for bank deposits with guarantee of credit facilities. Under the basic feature of this bank, depositors benefit from ensuring that their deposits are up to a specified limit despite the bank.
  4. The Banking Laws (Application to Co-operative Societies) Act, 1965: This Act extended the provisions of the Banking Regulation Act, 1949 ensuring cooperation with banks, and making sure that these institutions are subject to similar regulatory standards like commercial banks. It also emphasizes and focuses on the improvement of the governance and operational standards of cooperative banks.
  5. The Regional Rural Banks Act, 1976: The Regional Rural Banks Act, 1976 led to the establishment of Regional Rural Banks (RRBs), which focuses on the financial needs and provide banking services to the rural and local people in regional India. RRBs focus on agricultural and rural development,  providing a connecting bridge between banks and locals in regional remote areas.

What is the difference between scheduled banks and non-scheduled banks?

The basic differences between scheduled and non-scheduled banks are as follows:

FeaturesScheduled BanksNon-Scheduled Banks
DefinitionScheduled banks consists the banks listed in the Second Schedule of the RBI Act, 1934.Non-scheduled banks are those which are not listed in the Second Schedule of the RBI Act, 1934.
RegulationRegulated by the Reserve Bank of India (RBI).Regulated by the RBI but not required to follow the same rules.
EligibilityMust meet certain criteria set by the RBI for financial stability.Do not have to meet RBI’s eligibility criteria for listing.
Deposit InsuranceEligible for deposit insurance under the Deposit Insurance and Credit Guarantee Corporation (DICGC).Not necessarily covered by DICGC deposit insurance.
Access to Central Bank FacilitiesHave access to the RBI’s central banking facilities like refinancing and liquidity support.Do not have access to central bank facilities.
Financial StabilityGenerally considered more financially stable and reliable.May not be as stable or reliable as scheduled banks.
TypesIncludes commercial banks, cooperative banks, and regional rural banks.Includes small private banks, cooperative banks not meeting all criteria.
ExamplesState Bank of India, HDFC Bank, ICICI Bank.Local co-operative banks, certain private banks.

What is a bank?

A bank is a financial institution licensed to accept deposits and lend loans. They also provide services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, personal loans, and safe deposit lockers.

International Monetary Fund defines banks as “Institutions that match up savers and borrowers help ensure that economies function smoothly. They further say that “banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). The amount banks pay for deposits and the income they receive on their loans are both called interest.”

Banks play a very important role, in the financial sector by maintaining economic functioning. It operates under certain acts, following guidelines and regulations, to ensure the protection of customers and their finances.

There are 9 major types of banks, however, the Central bank is the authoritative entity which monitors and regulates all the other commercial banks to maintain a stable financial system.

How many types of banks are there in India?

There are in total 9 types of banks that includes Central Bank, Cooperative Banks, Commercial Banks, Local Banks, Specialized Banks, Small Finance Banks, Payment Banks, Domestic Systemically Important Banks (D-SIB), and NEO Banks.

The commercial bank includes public sector banks, private sector banks, foreign banks and regional rural banks. Each bank is important and has a system of functioning, with a certain kind of rules and regulations, to do their jobs.

How many types of bank accounts are there in India?

There are 12 types of bank accounts there in India that is listed below.

  1. Savings Account 
  2. Current Account 
  3. Fixed Deposit Account 
  4. Recurring Deposit Account 
  5. NRE & NRO Account 
  6. Senior citizen savings account 
  7. Joint Account 
  8. Demat Account 
  9. Salary Account 
  10. Corporate Account 
  11. Student Account 
  12. Minor’s Account

As per Forbes, there are 4 most common types of bank accounts that include certificate of deposit accounts (CDs), checking accounts, savings accounts, and money market accounts (MMAs).