What are the Salient Features of Commercial Banking System in India?

Commercial banks in India may broadly be classified on the basis of two criteria: (i) statutory, and (ii) ownership.

On the statutory basis, the banks are of two types; (i) Scheduled banks; and (ii) Non-scheduled banks.

On the ownership basis, the banks may be classified into two groups: (i) Public sector commercial banks, and (ii) Private sector commercial banks.

In the category of scheduled banks, there are private sector banks and public sector banks. In fact, all the public sector banks are scheduled banks, whereas in the private sector it is not so.

Scheduled and Non-Scheduled Banks :

In India the commercial banking system is comprised of scheduled and non-scheduled commercial banks. Scheduled banks are those commercial banks which are included in the Second Schedule of the Reserve Bank of India Act, 1934. Consequently, the banks excluded from this category are called ‘non-scheduled banks’.

The scheduled banks are entitled to enjoy the facilities of borrowings from the Reserve Bank of India. They are also covered by the Deposit Insurance Scheme and the Credit Guarantee Scheme in operation.

Scheduled banks have to abide by all the rules and regulations and directives issued by the Reserve Bank of India from time to time.

Scheduled banks have also to keep minimum stipulated statutory cash reserves with the Reserve Bank of India.

The classification of Indian commercial banks into scheduled banks and non-scheduled banks had some significance prior to the bank nationalisation in 1969, and before the amalgamation of banks over the period.

But, now on account of the weeding out of non-scheduled banks from the scene, it carries little practical meaning, except that of academic interest.

In recent years, however, the non-scheduled banks have almost vanished from the banking scene of our country. By 1981, their number declined to just 3, and their total deposits dropped to around Rs. 8 crores, while their assets and liabilities were in the order of Rs. 9.4 crores.

On the other hand, the number of scheduled banks went on increasing rapidly because of the growing number of regional rural banks in the country.

On March 1987, thus the non-scheduled banks remained just 3 while the number of scheduled banks increased to 273, thereby increasing their percentage share to almost 99 per cent of the total.

Public Sector and Private Sector Banks :

The private sector played a strategic role in the growth of joint stock banks in India. During the first half of the twentieth century, there was a mushroom growth of the private sector commercial banks.

Thus in 1951, there were in all 566 private sector banks of which 474 were non-scheduled and 92 were scheduled. But, there was not a single public sector commercial bank at that time.

The Government of India, however, entered the banking business only in 1955 with the establishment of the State Bank of India as the first public sector commercial bank.

The expansion of public sector in the banking field commenced with the nationalisation of 14 major commercial banks on July 19, 1969.

The role of the public sector banking was further elaborated when six more private sector commercial banks with deposits of over Rs. 200 crores were nationalised on April 15, 1980.

As such, there are 20 nationalised, banks in the public sector since 1980. The nationalised banks undertook a massive branch expansion programme, leading to a country-wide spread of banking facilities.

Further, since 1975, the government has launched a drive to establish Regional Rural Banks (RRBs) in the country. Initially, there were only 5 RRBs. On March 1987, there were 194 RRBs.

The RRBs are sponsored by the public sector commercial banks by subscribing 35 per cent of issued capital. Its remaining 50 per cent is shared by the Central Government and 15 per cent by the concerned State Government of the region where it is located. Thus, RRBs are classified as public sector banks.

With the growth of public sector banks in the Indian economy, the structure of commercial banking has completely changed in the post-nationalisation years. This is evident from the data contained.

On December 1969, there were 22 public sector banks and 67 private sector banks. On June 1993, the number of public sector banks increased to 204, while that of private sector banks declined to 50.

During 1960-1987, thus, the share of public sector in the banking field has progressively increased. The share of public sector banks was around 2 per cent in 1960.

It increased to over 80 per cent in 1987. A reverse trend is observed in respect of private sector banking. The share of private sector banks has declined from ‘ 98 per cent in 1960 to less than 20 per cent in 1987.

The trend implies a reduction in the private sector banks’ concentration of economic power in the hands of a few private individuals.

In short, the present structure of commercial banks in India is characterised by a mix of public sector banks and private sector non-scheduled banks the former, occupying a dominant position and the latter gradually vanishing from the scene.

Structure and Assets Composition of Scheduled Commercial Banks in 1999 :

It represents the assets composition of scheduled commercial banks as on end-March 1999.

It is interesting to note that the public sector banks claimed over 81 per cent of the total banking assets in the country. The share of 34 private sector banks in 1999 was around 11 per cent while that of foreign banks around 8 per cent.

Private Sector Banking :

Indian banking under the liberalisation process has recognised the significance of private sector banking in the market economy.

The current situation is described by the composition of old and new private sector banks on the total assets of private sector banks, the old private sector banks claimed 63 per cent share. New private sector banks claimed 37 per cent share, despite being small in number.

Branch Banking :

A distinguishing feature of Indian commercial banking is that it follows the system of branch banking.

Unlike other countries of the world, branch banking in our country is uniquely distinct. India is the only country with a network of over 53,500 bank branches.

On account of the branch banking system, Indian commercial banks have the following type of organisational structure.