Banking in India : Functions, Types, Regulation & Importance

Banking is the network of financial institutions, including different groups of commercial banks, credit unions, and other financial services firms. The banking sector is an important part of nation-building and also requires proper frameworks and regulations to ensure the stability of the national economy. Banking is the backbone for personal and commercial financial activity, as it helps fuel spending, investment, business operations, and economic growth. Banking innovations, like online and mobile banking, and now UPI have helped not only the urban population but also the suburban and rural populations. Banking has connected the rural sector with the national market and has spread financial literacy among the rural and suburban areas as well. The most important purpose of banking is to facilitate the cash flow in the economy and integrate businesses with stakeholders. The banking sector has its offerings to cater to individuals, firms, and governments.

Geeky Takeaways

• Banking is one of the fundamental parts of personal and commercial financial activities, driving economic functions.
• Banking has helped in the management of finances for individuals, organizations, and governments.
• The most important purpose of a banking system is to facilitate the smooth flow of cash within the economy.
• Apart from basic functions like accepting deposits and issuing loans, banking has a role in integrating a nation with the global financial system.

Functions of Bank

The bank has an important role in the economic development of a nation. Without establishing a proper banking system, no country can have a healthy and integrated economy. The following are the major functions of a bank:

1. Addressing the Lack of Capital Formation: Banks advance loans to business houses. This, in turn, caters to the need for capital formation in an economy. Whereas in any developing economy, advancing loans to business houses helps remove the problem of capital deficiency. The banks also help to convert the dormant money present in an economy into active capital by giving interest to investors.

2. Helps in Generating Employment Opportunities: The banks provide funds to start-ups and entrepreneurs and help them finance their expenses. This helps to get these startups established easily and also helps in the generation of employment. The loans provided by these banks also help them scale up their firms. The banking sector itself creates thousands of jobs and helps in employment generation.

3. Helps in Implementing Monetary Policy: Banks are very crucial in the implementation of monetary policy. By regulating the interest rate, banks decide the amount of liquid cash flowing into the economy. Monetary policy also helps in combating inflation.

4. Promote Saving Habits of the People: The banks attract the money of the public by giving attractive interest payments and other schemes. This helps promote saving habits among people and the financial inclusion of rural and semi-urban populations.

5. Banks as Safe Custody: This is considered one of the most essential functions of banking system from the perspective of the general public. Banks help provide safe custody services by providing a secure place for customers to store valuable items that are not used by them frequently, and their safety is of the utmost importance to customers. 

6. Interest on Deposits: The banks also help to convert the dormant money present in an economy into active capital by giving interest to investors. Even the banks need funds to cater to their lending activities. To attract more customers to deposit their savings, banks offer attractive interest rates to increase the funds at the banks. And then the bank can use these deposits to fund other activities. 

Types of Banks in India

1. Central Bank:

The central bank acts as a central processing unit for all types of financial organizations. The Central Bank is given exclusive authority over the generation and establishment of the distribution channels of money and credit in an economy. It is important to note that central banks are non-market and anti-competitive units. In India, the Reserve Bank of India is the central bank, which has been vested with extensive authority over all financial entities. The RBI not only controls all the currency injections but also the credit policies for the country and acts as a government bank. The RBI also has the role of controlling and guiding all the commercial banks in India and implementing monetary policies under the supervision of the Ministry of Finance.

2. Commercial Bank:

Commercial banks are those financial institutions that accept deposits from customers and also provide them with short-term loans and advances. Commercial banks also solve the medium-term and long-term loan requirements for businesses in addition to short-term loans. These banks also provide long-term house loans to customers. Commercial banks serve the public interest by charging them interest and granting them funds. Commercial banks can also be seen as profit-seeking ventures. Commercial banks in India include the SBI, Bank of Baroda, PNB, ICICI Bank, HDFC Bank, etc.

3. Co-operative Bank:

Co-operative banks in India are established under the State Co-operative Societies Act. Their main aim is to solve the simple loan requirements of their members. The primary duty of cooperative banks is to facilitate the financial inclusion of rural people by providing financial resources to them, which can help them establish small businesses, shops, etc. Co-operative banks are owned by their members. A Board of Directors is elected by the members, and the board is responsible for supervising the functioning of the bank. Co-operative banks provide agricultural loans to farmers at low interest rates. The yearly earned profit is used to fund financial reserves and maintain important resources, and a portion of the earned profits are also distributed to cooperative members within the specified limits.

4. Specialized Bank:

Those banks that are formed to cater to the specific needs of a section of society, country, or people are called specialized banks. For example, financial institutions like SIDBI, EXIM, NABARD, etc. are examples of banks that specifically cater to the needs and development of specific industries in India. Specialized banks provide financial aid by providing them with modern technology and modern means of input. They also guide industries regarding investments, policies, etc. that small industries or entrepreneurs cannot afford on their own. Apart from this, they also help industries with heavy projects and facilitate foreign trade.

Types of Bank Accounts in India

1. Savings Account:

Savings accounts are the most popular types of bank accounts among the general public. These accounts are primarily used for investing savings with the bank. Savings accounts offer a safe and secure place to deposit the funds available to the public, and they also provide easy accessibility. Banks give interest on deposited amounts, helping account holders grow their savings over time and generating almost risk-free interest income. Every bank has its own set of instructions for operating savings accounts, which range from maintaining minimum balance requirements to maintaining charges, etc. Savings accounts are maintained for general-purpose savings.

2. Current Account:

A current account also referred to as a transactional account, is mainly used by businesses and individuals engaged in frequent financial transactions. Current accounts usually allow unlimited transactions, including end dates for deposits, withdrawals, and transfers. Current accounts provide services like providing checkbooks, debit cards, overdrafts, and net banking facilities, which help the business in the easy management of day-to-day financial activities. Current accounts do not earn interest on deposits. The basic idea behind current accounts is to make banking easy for businessmen.

3. Recurring Deposit Account:

A recurring deposit, widely called an RD account, is a service provided by banks to the general public who want to save a fixed amount of savings regularly over a defined period. Recurring deposit accounts allow investors to deposit a fixed sum of money, generally every month, for a tenure that is already predetermined. These accounts often provide interest rates higher than savings accounts, which attracts investors. Once the tenure ends, the accumulated amount, along with the interest proceeds, is returned to the investors. RD accounts can be seen as SIPs, and RD account holders are also provided with an RD passbook, which contains all the details relating to the financial transactions of the RD.

4. Fixed Deposit Account:

A fixed deposit referred to as an FD account, is a very popular investment scheme that allows individual customers and even corporations to deposit a lump sum amount for a predetermined fixed period. FD accounts offer higher interest rates than traditional savings accounts and provide a guaranteed return on the principal investment. The interest rate is fixed for the entire selected tenure, ensuring predictable growth in principal. FD accounts are widely popular, and they are seen as trustworthy investments by the general public.

5. Salary Account:

A salary account is a bank account for employees in which they receive their salaries. Banks work in collaboration with employers, who deposit the employees’ salaries directly into these salary accounts. Salary accounts provide numerous benefits to employees, as they come with zero maintenance fees. Banks offer several other offers, like low-interest loan availability, etc. Salary accounts offer an easy way for employees to manage their salary funds. 

6. DEMAT Account:

A DEMAT stands for a Dematerialized Account; it is specifically meant for holding and trading securities electronically. DEMAT eliminates the requirement for holding physical share certificates, as DEMAT has converted them into electronic records. DEMAT accounts facilitate the convenient buying and selling of stocks, mutual funds, bonds, and other securities. DEMAT accounts are linked to the individual’s bank account and provide integration for transactions related to investments in the stock market. Nowadays, banks have designed their broking applications that integrate DEMAT accounts and provide a one-stop solution to all stock market needs. 

7. NRI Account:

NRI, which stands for Non-Residential Indian, is designed for those individuals who reside outside India but who wish to maintain financial connections and conduct banking activities in India. NRI accounts can be of various types, such as NRE (non-residential external) accounts, NRO (non-residential ordinary) accounts, and FCNR (foreign currency non-resident) accounts. These accounts work in integration within the rules as specified under the Income Tax Act and FEMA.

How are Indian Banks Regulated?

The Banking Regulation Act of 1949 regulates and oversees the banks that have been working in India. India’s Banking Regulation Act, of 1949, has established laws regarding the working and legal requirements relating to banking companies in India. Banking Regulation Act, of 1949 is in charge of regulating and managing the operations of all banking corporations in India while also ensuring that all banking activities are done within the applicable regulatory and reporting framework established by the act. In addition to this act, the Reserve Bank of India is the governing body that regulates and supervises the banks as entrusted by the Finance Ministry. Section 56 gave the Reserve Bank of India the authority to regulate its operations in the same way other banks in the country are functioning. This Act also gives the RBI the authority to provide licenses to banks, regulate shareholder voting and shareholding, oversee board and management appointments, and set the required auditing instructions for banking companies. The RBI is also entrusted with the duty to get involved in mergers and liquidations of banks.

Importance of Banking

1. Financial Inclusion: Banking in any country is very important as it helps in the financial inclusion of not only the urban population but also the rural and semi-urban population. Banking gives access to a variety of banking services and connects the population to the mainstream banking chain. This ensures that every citizen, irrespective of their financial group, can get access to basic financial frameworks like getting loans, opening savings accounts, and using payment services.

2. Wealth Accumulation: The banking system is trusted well by individuals, and the general public can build wealth over time with the help of the banking system. Customers can get recurring income, save for the future, and manage their finances in order with savings accounts, fixed deposits, recurring deposits, and investment goods.

3. Payment Services: An efficient banking system helps in establishing a payment system, which helps the public get access to services like checking accounts, debit cards, and Internet banking. Banking infrastructure makes sure that transactions are processed smoothly in the economy while also ensuring a secure payment gateway for the public, which helps people and companies with their daily financial tasks with proper security.

4. Customer Relationship: The banking system builds and maintains close ties with individual customers. They have the trust of the general public. Even in today’s times, people choose security over returns and still opt for FDs in a bank over anything. The banking system must figure out what the actual needs of customers are, what the needs of the section are, and how to cater to those needs.

5. Economic Growth: Banking helps promote economic growth throughout the nation by inculcating financial habits and improving people’s ability to spend money, trade, and start their businesses. Banks help the general public start companies or start their education with the help of services like personal loans, mortgages, and credit cards. This will ultimately help the economy grow in the long run.

6. Housing Finance: Mortgage services offered by banks are a very big reason for making housing for citizens possible. Banks help people get access to funds so that they can reach their goal of having a home. Providing easy access to home loans helps promote stability and wealth creation in the nation.

List of Top Indian Banks

Name	Established	Headquarter	Branches	Total Assets (US$ Billions)	Revenue (US$ Billions)
State Bank of India	1955	Mumbai, Maharashtra	22,219	$760.77	$37.15
Bank of Baroda	1908	Vadodara, Gujarat	9,693	$191.69	$8.16
Bank of Maharashtra	1935	Pune, Maharashtra	2,022	$32.92	$1.41
Bank of India	1906	Mumbai, Maharashtra	5,152	$104.01	$3.39
ICICI Bank Ltd.	1994	Mumbai, Maharashtra	5,266	$255.89	$18.11
HDFC Bank Ltd	1994	Mumbai, Maharashtra	7,860	$313.23	$14.89
YES Bank Ltd.	2004	Mumbai, Maharashtra	1,070	$44.05	$1.54
Axis Bank Ltd.	1993	Mumbai, Maharashtra	4,594	$165.40	$8.58
Kotak Mahindra Bank	2003	Mumbai, Maharashtra	1,604	$81.65	$7.56
IDBI Bank	1964	Mumbai, Maharashtra	1,937	$40.37	$2.12

Foreign Banks in India

Foreign banks are financial institutions that establish their branch offices in a country other than their registered home country. Their registered office is located only in one country. These international financial institutions establish their branches in foreign nations to take market share in the financial market. Establishing banks in foreign countries is also part of general diplomatic relations, which signifies healthy relations with the allies. The purpose of establishing branches in foreign nations is also to provide multinational clients with enhanced convenience and services. Many of the time, foreign banks also work in collaboration with the MNCs of their native country. Foreign banks usually invest in low-tax countries. However, the constitution of foreign banks is done according to the applicable legal requirements of the foreign country. American Express, Bank of America, Citibank, Barclays, Deutsche Bank, HSBC, etc. are among the major foreign banks established in India to facilitate international banking.

List of Top Foreign Banks in India

Name	Established	Main Headquarters	Indian Headquarters	Total Assets (₹)
Citi Bank	1902	New York, USA	Mumbai, Maharashtra	₹2.2 lakh crore
HSBC India Limited	1983	London, UK	Mumbai, Maharashtra	₹2.4 lakh crore
The Deutsche Bank	1980	Frankfurt, Germany	Mumbai, Maharashtra	₹784,240.018 mn
Barclays Bank	1990	London, United Kingdom	Mumbai, Maharashtra	₹8,300 crore
Bank of America	1964	Charlotte, North Carolina, United States	Mumbai, Maharashtra	₹380,988.414 mn

Frequently Asked Questions (FAQs)

What is interest and how does it work?

Interest is the cost of borrowing money or the reward for saving money. When you deposit money into a savings account, the bank pays you interest based on the account balance. When you borrow money, you pay interest to the lender.

What are the different types of loans offered by banks?

Banks offer various types of loans, including personal loans, auto loans, mortgages, and student loans. Each type of loan has its own terms, interest rates, and repayment schedules.

How can I protect myself from fraud and identity theft?

To protect yourself from fraud and identity theft, it’s essential to safeguard your personal and financial information, such as your Social Security number, bank account numbers, and passwords.

What are the fees associated with banking?

Banking fees can include monthly maintenance fees, overdraft fees, ATM fees, and fees for using out-of-network ATMs or making international transactions.

How do I choose the right bank for my needs?

When choosing a bank, consider factors such as the bank’s location, ATM network, fees, interest rates, online banking features, customer service reputation, and any specific services or products you require, such as mortgage or investment options.