The banking system of India is one of the largest, most diverse, and well-regulated financial networks in the world. It serves as the backbone of the nation’s economy by mobilising savings, providing credit, enabling financial inclusion, and supporting economic development. Over the decades, Indian banking has transformed significantly—from traditional branch-based banking to digital, tech-driven financial services.
NDA & CDS 1 2026 Exam GK – Economics – Class 4
1. Evolution of the Banking System in India
The history of banking in India can be divided into key phases:
a) Early Phase (Pre-Independence)
- The establishment of the Bank of Hindustan (1770) and Presidency Banks in Bombay, Madras, and Calcutta.
- Formation of Imperial Bank of India (1921), which later became the State Bank of India (SBI) in 1955.
- The Reserve Bank of India (RBI) was established in 1935 to act as the central bank.
b) Post-Independence Phase
- Nationalisation of major banks in 1969 and 1980, which increased government control and expanded rural credit.
- Introduction of Regional Rural Banks (RRBs) in 1975 to boost rural banking.
c) Reforms Era (1991 onwards)
- Entry of private banks like HDFC Bank, ICICI Bank, and Axis Bank.
- Deregulation, modernisation, and competition increased efficiency.
d) Digital Banking Era
- The rise of UPI, mobile banking, digital wallets, and fintech startups.
- Government initiatives like Jan Dhan Yojana and DBT strengthened financial inclusion.
2. Structure of the Indian Banking System
The banking system in India is divided into several categories:
A. Central Bank – Reserve Bank of India (RBI)
RBI is the apex monetary authority responsible for:
- Regulating banks
- Managing inflation and monetary policy
- Issuing currency
- Maintaining financial stability
- Acting as banker to the government
B. Scheduled Banks
These banks are listed under the Second Schedule of the RBI Act, 1934.
1. Commercial Banks
Commercial banks operate on a profit-oriented basis and include:
- Public Sector Banks (PSBs): SBI, PNB, Bank of Baroda, etc.
- Private Sector Banks: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank.
- Foreign Banks: Citibank, HSBC, Standard Chartered.
- Regional Rural Banks (RRBs): Provide credit to rural and semi-rural areas.
2. Cooperative Banks
These banks are community-based and serve specific groups like farmers, small traders, and rural populations.
- Urban Cooperative Banks (UCBs)
- State Cooperative Banks
- District Central Cooperative Banks (DCCBs)
C. Non-Scheduled Banks
Small banks not listed under the Second Schedule of RBI Act. They operate on a smaller scale.
D. Development Financial Institutions (DFIs)
These institutions provide long-term finance for industrial and infrastructure projects.
Examples:
- NABARD
- SIDBI
- EXIM Bank
- NHB
3. Key Functions of the Indian Banking System
1. Accepting Deposits
Banks accept savings and deposits from the public through:
- Savings accounts
- Current accounts
- Fixed deposits (FDs)
- Recurring deposits (RDs)
2. Providing Loans & Advances
Banks support economic activities by offering:
- Personal loans
- Home and vehicle loans
- Agricultural loans
- Business and industrial credit
3. Agency & Utility Services
- Fund transfers (NEFT, RTGS, UPI)
- Debit/credit card services
- Online payments
- Safe deposit lockers
4. Promoting Financial Inclusion
Initiatives include:
- Jan Dhan Yojana accounts
- PM Mudra Yojana loans
- Small Finance Banks (SFBs)
- Payments Banks
4. Digital Transformation in Indian Banking
India is one of the world leaders in digital payments, driven by:
- UPI (Unified Payments Interface)
- IMPS
- Mobile wallets
- Net banking
- Aadhaar-enabled Payment System (AePS)
Fintech companies and neobanks are collaborating with traditional banks to offer seamless, customer-centric services.
5. Challenges Faced by Indian Banking System
Despite progress, the banking sector faces key challenges:
- Non-Performing Assets (NPAs)
- Cybersecurity threats
- Customers’ trust and data privacy issues
- Need for deeper financial literacy
6. Importance of Banking in the Indian Economy
The banking system is vital for India because it:
- Mobilises national savings
- Facilitates trade and commerce
- Provides credit for development
- Enables government welfare schemes
- Ensures financial stability
Conclusion
The banking system of India has evolved from colonial-era institutions to a modern, technology-driven financial network. With strong regulation from the RBI and continuous digital innovation, it plays a pivotal role in supporting India’s economic growth, infrastructure development, and inclusive financial access.
