Types and Functions of Banks Commerce YouTube Lecture Handouts

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Title: Types and Functions of Banks

Definition of Banking

Types of Banks (Developmental, RRB, Nationalized, Private) & Their Functions | Commerce

Section 5 (b) of the Banking Regulation Act 1949, defines Banking as “accepting, for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”

Stages of Banking and It՚s Types

Indigenous Banks

Business of banking has been reported origin in Vedic Period. The records show giving and receiving of credits during this period Mention of Seth՚s, Shahs, Shroffs as indigenous money lenders. Discounting of bill was common.


Unorganized, no distinction between long term and short-term finances, High rate of interest, business conducted only for trade and commerce and work on commission resulted in trade risk.

Opening of Presidency Banks

  • Bank of Hindustan-1770 (M/s Alexander& Co.)
  • 1st-Bank of Calcutta (1806)
  • Renamed as Bank of Bengal (1809) BB
  • 2nd-Bank of Bombay (1840) BM
  • 3rd-Bank of Madras (1843) BC


  • Neglected rural areas, no proper maintenance for the growth of small sectors, growth of agriculture sector was affected. Thus
  • Established Co-Operative Bank (1889) where customers are also its owners.

Imperial BANK & RBI

  • BB + BM + BC = IMPERIAL BANK (1921)
  • Presidency banks and its successors acted as quasi-central banks till RBI was formed.
  • Establishment of apex bank as Central Bank of India – Reserve Bank of India to regulate the working of banking system.
  • After Independence All India Rural Credit Survey (AIRCS) recommended IB to be takeover and merged with former state owned and state associate banks and resultant is SBI (1955) .

Development Banks

  • Industrial Development Bank of India-IDBI (1964) -
  • Meet long term finance needs of industry, agriculture and trade.
  • 1948-late 60՚s: overlook imp. of project, borrower and repayment capacity, misuse of funds, discrimination and control in few hands, failure to follow the aim of 5 yr. Plan due to Pvt. Control led to the Nationalization of banks.

Nationalized Banks

  • The banks which were previously functioning under private sector were transferred to the public sector 14 such banks were Nationalized in 1969.6 more banks were nationalized in 1980.
  • With major segment of banking sector came under the control of government, rural areas and agriculture sector was neglected.

Regional Rural Banks

  • To extend the banking facility to the unbanked rural areas along with commercial and co-operative banks, Regional Rural Banks were established through an Ordinance on 02 ⁄ 10 ⁄ 1975, later replaced by the RRB՚s Act, 1976.
  • Late 60՚s to start 90՚s: Expansion stage
  • Early 80՚s to start 90՚s: Consolidation stage.

Private Banks

  • 1990՚s to enable greater flexibility, accountability to the shareholders, integration of domestic financial system with global system, strengthening the FI, private banks were set up.
  • Consultancy, advisory services, specialized services-retail, housing, personal finance, corporate finance, creation of strong brand image.

Universal Banks

  • A universal bank is a bank that offers retail, wholesale and investment banking services under one roof.
  • Need for banks that can regulate the foreign currency transactions and enhance the market for the same.

Specialised Banks

  • EXIM established on 01 ⁄ 01 ⁄ 1982 as a controller of import and export for short term and long-term finance
  • Gradually different specialized banks like NABARD (1984) and SIDBI (1990) were set up
Stages of Banking and Its Types

Scheduled Banks

  • Covered under 2nd Schedule of RBI Act, 1934 with a paid-up capital of 25 lakhs or more
  • Submit returns periodically
  • Maintained with RBI,
  • Allowed to borrow money from RBI, can be a member of a clearing house.
  • Financially stable

Non-Scheduled Banks

  • Do not comply with RBI rules and regulations.
  • No such provision
  • Maintained with themselves, NOT ALLOWED TO BORROW MONEY.
  • Financially risky.
  • Can՚t avail REPO operation benefits.

Commercial Bank

  • Formed under BRA, 1949
  • Credit creation
  • Provision of loan
  • Lending funds
  • Accepting deposits
  • Transfer of funds
  • Agency functions

Co-Operative Bank

  • Formed under BRA, 1949 + CO-OPT. Societies Act, 1912.
  • Promotes overall development of rural areas Loans to co-operative societies
  • Financial support to small scale industries, agriculture and rural activities
  • Housing financial assistance
  • Personal financial services to small scale industries
  • Basic banking services to its members.

Development Bank

  • Promote and develop small scale and large-scale industries,
  • Finance the development of housing sector
  • Aid in agriculture, infrastructure and rural development
  • Encourages entrepreneurship and balanced growth.

Small Finance Bank

  • A type of NICHE bank with minimum paid-up capital of ₹ 200 CR.
  • Provide financial inclusion to small business units, small and marginal farmers, micro and small industries and unorganized sectors
  • Undertake basic banking activities to unserved sections.

Payments Banks

  • Minimum paid-up capital of ₹ 100 CR + first 5 years of start of business PROMOTER must contribute at least 40 % of paid-up capital.
  • Ensure financial inclusion by providing financial remittance services to migrant labor workforce.
  • Opening up of small saving accounts of small bus. Holders and households.

Foreign Banks

  • Incorporated outside India must maintain paid-up + reserves = 15 Lacs
  • If in Mumbai/Calcutta or both then paid-up capital + reserves = 20 lacs
  • Brings more sophisticated financial services, nurse weak banks back to health, transfer of skill, technology and currency, expand financial intermediaries, reduction in solvency risks, etc.

Local Area Banks

  • Minimum paid-up capital 5 CR
  • Provide loans to local customers for agriculture and its allied activities
  • Strengthen institutional credit function in rural and semi-urban areas.

Q. Business of banking has been reported its origin from ________ period.

Q. which types of bank requires a minimum paid-up capital of ₹ . 25 lacs?

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