Constituents of the Indian Banking Sector

The RBI is the central regulatory and supervisory authority for the Indian banking sector. The Indian banking sector is comprised of 84 scheduled commercial banks of which 28 are public sector banks, 19 old private banks, eight new private banks, 29 foreign banks as on June 30, 2006. In addition, there are 109 regional rural banks and 1,864 urban cooperative banks.The discussion below presents an overview of the role and activities of the RBI and of participants in the Indian banking sector, with a focus on commercial banks.

Reserve Bank of India
The RBI is the central banking and monitoring agency. It manages the country’s money supply and foreign exchange and also serves as a bank for the Government and for the country’s commercial banks. In addition to these traditional central banking roles, the RBI undertakes certain developmental and promotional activities.

As a regulator, the RBI issues guidelines, notifications and circulars in various areas, including exposure norms, income recognition, asset classification, provisioning for non-performing assets, investment valuation and capital adequacy standards for commercial banks.

Commercial Banks
Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. They may be categorised as Scheduled Commercial Banks (“SCBs”) and non-scheduled commercial banks.

SCBs are banks that are listed in the second schedule to the RBI Act, and may further be classified as public sector banks, private sector banks and foreign banks. SCBs have a presence throughout India, with nearly 66.5 per cent of the bank branches located in rural or semi-urban areas of the country. A large number of these branches belong to the public sector banks.
As on June 30, 2006 there were 109 regional rural banks, 28 public sector banks, 27 private banks, 29 foreign banks and four non-scheduled commercial banks in the country, with a total network of 69,104 branches.

Public Sector Banks
Public sector banks make up the largest category of banks in the Indian banking system. There are 28 public sector banks in India. They include the SBI and its seven associate banks and 19 nationalised banks and one other public sector bank. Nationalised banks are governed by the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980. The banks nationalised under the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980 are referred to as “corresponding new banks”.As on June 30, 2006, public sector banks had 47,950 branches and accounted for 71.4 per cent of the aggregate deposits and 70.2 per cent of the gross bank credit outstanding of the SCBs in India.

Regional Rural Banks
Regional Rural Banks (“RRBs”) were established by the GoI, state governments and sponsoring commercial banks with a view to develop the rural economy. RRBs mainly provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. There were 109 RRBs as on June 30, 2006, with 14,369 branches and they accounted for 3.20 per cent of aggregate deposits and 2.6 per cent of the gross bank credit outstanding of the SCBs in India.

Private Sector Banks
After bank nationalisation was completed in 1969 and 1980, the majority of Indian banks were public sector banks. Some of the existing private sector banks, which showed signs of an eventual default, were merged with state-owned banks. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, the RBI permitted entry by the private sector into the banking system. This resulted in the emergence of nine private sector banks. These banks are collectively known as the “New Private Sector Banks”.
There are eight New Private Sector Banks operating as on June 30, 2006.

In addition, 19 private sector banks existing prior to July 1993 were operating as on June 30, 2006. These are collectively known as the “Old Private Sector Banks”. With 6,543 branches, as on June 30, 2006, these banks accounted for 20.0 per cent of aggregate deposits and 20.3 per cent of the gross bank credit outstanding of the SCBs in India.

Foreign Banks
As on June 30, 2006, there were 29 foreign banks with 242 branches operating in India and these banks accounted for 5.4 per cent of aggregate deposits and 6.90 per cent of the gross bank credit outstanding of the SCBs in India.

The GoI permits foreign banks to operate through (i) branches; (ii) a wholly owned subsidiary; or (iii) a subsidiary with aggregate foreign investment of up to 74 per cent in a private bank. The foreign direct investment limit in private sector banks is 74 per cent under the automatic route, including investment by FIIs.Cooperative Banks

Cooperative banks cater to the financing needs of agriculture, small industry and self-employed businessmen in urban, semi-urban and rural areas of India. The state land development banks and the primary land development banks provide long-term credit for agriculture. The Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004, which came into effect from September 24, 2004, specifies that all multi-state co-operative banks are under the supervision and regulation of the RBI.Accordingly, the RBI is currently responsible for the supervision and regulation of urban co-operative societies, the National Bank for Agriculture and Rural Development (“NABARD”), state co-operative banks and district central co-operative banks.

Source: RHP of Central Bank of India