Structure & Evolution of Indian Banking

The Indian banking system is a tiered structure with the RBI at the apex. Below it sit Scheduled and Non-Scheduled Banks. Scheduled Banks (listed in the 2nd Schedule of the RBI Act, 1934) include Commercial Banks and Co-operative Banks. Commercial Banks split into Public Sector Banks (PSBs), Private Sector Banks, Foreign Banks, Regional Rural Banks (RRBs) and Small Finance Banks/Payments Banks. To be 'scheduled', a bank needs paid-up capital + reserves of at least Rs 5 lakh and must satisfy RBI that its affairs are not detrimental to depositors. Co-operative banks are split into urban (UCBs) and rural (StCB > DCCB > PACS) layers. After the 2019-20 mergers, there are 12 PSBs. Memory aid: 'RBI commands SCHEDULED soldiers — Commercial & Co-operative'.

Imperial Bank of India (1921) became State Bank of India in 1955 after the Gorewala Committee — SBI is the only bank nationalised under a special SBI Act. The big nationalisation happened on 19 July 1969 when 14 banks (deposits > Rs 50 crore) were nationalised, followed by 6 more on 15 April 1980 (deposits > Rs 200 crore), making 20. The Narasimham Committee I (1991) and II (1998) drove liberalisation, introduced CRAR/Basel norms, asset classification and prudential norms. RBI was nationalised on 1 Jan 1949. Memory hook: '14 in 69, 6 in 80' and 'Narasimham = New-era reforms'.

Bank PO papers rarely ask "what is a universal bank?" in those words. Instead, they hand you four bank names and ask which category each belongs to — and a wrong classification chains into three more wrong answers in the caselet. This worked example builds the fast, decision-tree method that toppers use to classify any Indian bank in under fifteen seconds.

Question: Classify each of the following — Bandhan Bank, AU Small Finance Bank, Paytm Payments Bank, and Bank of Baroda — into the correct category of the Indian banking system.

The categories you must already know

Definition: A Universal Bank (also called a Scheduled Commercial Bank — Public or Private) holds a full banking licence from the RBI and may accept deposits, lend, issue credit cards, undertake foreign-exchange business, sell third-party products and offer almost every financial service permitted to a bank.

Definition: A Small Finance Bank (SFB) is a differentiated bank licensed under RBI's 2014 framework to take deposits and to lend — but with a mandate that at least 75% of its Adjusted Net Bank Credit must go to the priority sector and at least 50% of loans must be below Rs 25 lakh. SFBs focus on the unserved and underserved.

Definition: A Payments Bank is another 2014-framework category that cannot lend and cannot issue credit cards. It may take demand deposits up to a per-customer cap (raised from Rs 1 lakh to Rs 2 lakh in April 2021), issue debit cards, and offer payments and remittance services. It is essentially a settlement-grade deposit institution.

Definition: A Public Sector Bank (PSB) is a Scheduled Commercial Bank in which the Government of India holds the majority stake. After the 2019–2020 mega-mergers, India has 12 PSBs, with SBI and Bank of Baroda among the largest.

Solution

Step 1: Bandhan Bank. Bandhan was the only microfinance institution to receive an "in-principle" universal banking licence in April 2014 (alongside IDFC). It began operations as a full-service bank on 23 August 2015. Despite its microfinance origin, the RBI placed it firmly in the universal-bank category, so it can lend, issue credit cards, do trade finance — anything a private commercial bank can. Classification: Universal Private Sector Bank.

Step 2: AU Small Finance Bank. AU started life in 1996 as an NBFC (AU Financiers India Ltd) lending to small commercial-vehicle buyers. It received an SFB licence in 2017 and converted from NBFC to bank. As an SFB, it must keep most of its loan book in the priority sector and below Rs 25 lakh per loan. Classification: Small Finance Bank.

Step 3: Paytm Payments Bank. The "Payments Bank" in its name is the giveaway. Paytm Payments Bank can take deposits (up to the Rs 2 lakh cap per customer) and run wallets and UPI, but it cannot lend and cannot issue credit cards. It also cannot accept NRI deposits. Classification: Payments Bank.

Step 4: Bank of Baroda. BoB has been a nationalised bank since 1969 (the first big wave of nationalisation under Indira Gandhi). The Government of India remains the majority shareholder. In 2019, Vijaya Bank and Dena Bank merged into BoB, making it one of the country's largest PSBs. Classification: Public Sector Bank.

Conclusion: Bandhan is universal private; AU is SFB; Paytm is a Payments Bank; Bank of Baroda is PSB. The trick that makes this easy is that the bank's full legal name almost always carries the category.

The 15-second decision tree

When a bank name appears in an MCQ, ask three questions in order.

1. Does the name carry the words "Small Finance" or "Payments"? If yes, it is an SFB or a Payments Bank respectively — and you are done. If it says "Payments Bank," remember the cannot-lend rule.
2. Is the Government of India a majority shareholder? Names like SBI, PNB, Canara, BoB, Union, Indian, Bank of India, Bank of Maharashtra, Central, IOB, UCO, Punjab & Sind are PSBs. Everything else with a clean "Bank" suffix is private universal.
3. Is the bank cooperative or regional? Co-operative banks, RRBs, Local Area Banks have their own categories — usually obvious from the name (e.g. "Saraswat Co-op Bank," "Aryavart Bank" is an RRB).

Why it matters: At least one Bank Awareness question every IBPS/SBI exam tests bank classification, and the same idea reappears in interview rounds when the panel asks "what kind of bank is your sponsor bank?" RBI Grade B and NABARD also weave the categories into directed-lending and priority-sector questions.

Real-world example: In January 2024, the RBI restricted Paytm Payments Bank from accepting fresh deposits and credits in its accounts and wallets after persistent supervisory concerns. The case made headlines, but more importantly it reminded every aspirant why Payments Banks exist as a distinct category — they take only short-term, capped deposits and cannot create credit, so disciplinary action is contained. A similar problem in a universal bank would ripple far wider.

Common misconception: Students often think Payments Banks "lend a little." They do not lend at all — the RBI prohibits Payments Banks from undertaking lending activities or issuing credit cards. Any retail credit you see on a fintech platform with "Payments Bank" branding is actually routed through a partner NBFC or universal bank. Similarly, Small Finance Banks are sometimes confused with NBFCs; an SFB is a full deposit-taking bank under the Banking Regulation Act, while an NBFC cannot accept demand deposits.

The General/Banking Awareness section carries ~40 marks in IBPS PO Mains, and banking history is a durable, high-yield chunk (static GK that never dates). Structure & evolution questions test dates of nationalisation, the family tree of Indian banks, and how the system is classified today — pure recall you can bank if you memorise the timeline.

Evolution timeline (memorise cold)

Year	Event
1770	Bank of Hindustan — first bank in India (Calcutta)
1806	Bank of Calcutta → 1809 renamed Bank of Bengal
1921	Three Presidency Banks merge → Imperial Bank of India
1935	RBI established (RBI Act 1934)
1949	Banking Regulation Act; RBI nationalised (Jan 1)
1955	Imperial Bank → State Bank of India (SBI Act 1955)
1969	14 banks nationalised (deposits ≥ ₹50 cr)
1975	Regional Rural Banks created (RRB Act 1976)
1980	6 more banks nationalised (deposits ≥ ₹200 cr)
1991	Narasimham Committee → liberalisation, new private banks

Structure of Indian banking today

• Scheduled banks (2nd Schedule of RBI Act 1934) vs non-scheduled.
• Scheduled Commercial Banks: Public Sector (SBI + nationalised), Private, Foreign, RRBs, Small Finance Banks, Payments Banks (cannot lend).
• Cooperative banks: urban (UCBs) + rural (StCB → DCCB → PACS).

Exam Tricks & Tips

• 🎯 Nationalisation-wave mnemonic "69-14, 80-6" — 1969 took 14 banks, 1980 took 6.
• 🎯 Presidency banks order B-B-M: Bengal (1806/09), Bombay (1840), Madras (1843).
• 🎯 Payments Banks: "deposit but don't lend" — no loans/credit cards; deposit cap per customer.
• 🎯 RRBs' capital rests on three legs — Central Govt, sponsor bank and State Govt.
• 🎯 SBI is the ONLY bank created by its own Act; nationalised banks came via ordinances/Acts (1969, 1980).
• ❌ Common mistake: calling Bank of Hindustan the oldest surviving bank — it failed; SBI's 1806 lineage survives.

Expected exam pattern

1–3 direct static questions: year of an event, count of banks nationalised, which committee recommended RRBs (M. Narasimham, 1975), or classify a bank type. Occasionally a match-the-following on bank-type features.

Quick recap

Bank of Hindustan (1770) → Presidency banks → Imperial Bank (1921) → SBI (1955). RBI 1935. Nationalisation 1969 (14) and 1980 (6). RRBs 1975. Today: scheduled/non-scheduled; SCBs split into PSB/private/foreign/RRB/SFB/payments; cooperatives separate.

Cover the answer, recall, then check. 12 cards on Indian banking history & structure.

Q1. Which was the first bank established in India, and in which year?
A1. Bank of Hindustan, 1770 (in Calcutta); it later failed.

Q2. How many banks were nationalised in 1969 and what was the deposit cut-off?
A2. 14 banks, those with deposits ≥ ₹50 crore (on 19 July 1969).

Q3. How many banks were nationalised in the second wave and when?
A3. 6 banks in 1980 (deposits ≥ ₹200 crore).

Q4. What became of the three Presidency Banks?
A4. They merged in 1921 to form the Imperial Bank of India, which became SBI in 1955.

Q5. Under which Act and year was the State Bank of India created?
A5. State Bank of India Act, 1955.

Q6. When were Regional Rural Banks established and on whose recommendation?
A6. 1975 (RRB Act 1976), on the Narasimham Committee (1975) recommendation.

Q7. What is a "scheduled bank"?
A7. A bank listed in the Second Schedule of the RBI Act, 1934 (meeting capital/reserve norms).

Q8. What is the key restriction on a Payments Bank?
A8. It cannot lend or issue credit cards, and has a deposit cap per customer; it only takes deposits and offers payments.

Q9. Name the three tiers of the rural cooperative credit structure.
A9. State Cooperative Bank (StCB) → District Central Cooperative Bank (DCCB) → Primary Agricultural Credit Society (PACS).

Q10. Which are the two "differentiated banks" introduced after the 2013–14 Nachiket Mor/RBI framework?
A10. Small Finance Banks and Payments Banks.

Q11. Which committee's report (1991) triggered liberalisation and new private banks?
A11. The Narasimham Committee on the Financial System (1991).

Q12. Bank of Calcutta (1806) was later renamed what?
A12. Bank of Bengal (1809) — the oldest lineage surviving today through SBI.