Fundamentals of Business Economics and Management · Money and Banking

Banking System and Types of Banks in India

Updated 10 October 2026 · Fact-checked

The Indian banking system is a structure of institutions regulated by the Reserve Bank of India. It includes commercial banks, cooperative banks, development banks, small finance banks and payment banks. To answer MCQs, match each bank to its main purpose, who owns it and what it is allowed to do.

Understand Banking System and Types of Banks

A bank accepts deposits from the public and lends money. It also offers payment and other financial services. The Reserve Bank of India (RBI) sits at the top. It is the central bank and regulates all banks.

The system is best learned as groups. Each group exists for a different purpose.

Commercial banks: accept deposits and give loans for trade, industry and personal needs. They include public sector banks, private sector banks, foreign banks and regional rural banks.
Cooperative banks: owned and run by their members on cooperative principles. They serve mainly farmers, small borrowers and local communities. They are organised as urban cooperative banks, state cooperative banks and district central cooperative banks, plus primary agricultural credit societies at village level.
Development banks: give long-term finance for industry, agriculture, exports and infrastructure. Examples are NABARD, SIDBI and EXIM Bank.
Small finance banks: serve small businesses, small farmers and low-income groups who lack banking access. They accept deposits and lend, but within a limited scope.
Payment banks: accept small deposits and provide payments and remittance services. They cannot give loans or issue credit cards.

Another key split is scheduled vs non-scheduled banks. A scheduled bank is included in the Second Schedule of the RBI Act, 1934. A non-scheduled bank is not included in it. Scheduled banks can borrow from the RBI under its facilities. Remember the pair: scheduled means listed in the Second Schedule.

The main difference between commercial and cooperative banks is ownership and purpose. Commercial banks mostly aim at business and profit, and are owned by government or private shareholders. Cooperative banks are owned by members and focus on service to a local group.

Key formulas to remember

Scheduled bank: Scheduled bank = bank included in the Second Schedule of the RBI Act, 1934; Non-scheduled banks are those not included. Scheduled status gives access to RBI borrowing facilities.
Payment bank rule: Payment bank = deposits + payments + remittances, but no lending; It cannot give loans or issue credit cards. This is the most tested point.
Small finance bank rule: Small finance bank = deposits + small-scale lending to underserved sections; Focus is financial inclusion, unlike payment banks which do not lend.
Development bank rule: Development bank = long-term finance for a specific sector; NABARD for agriculture and rural areas, SIDBI for small industries, EXIM Bank for foreign trade.
Cooperative bank rule: Cooperative bank = member-owned, service motive, local focus; Contrast with commercial banks owned by the government or shareholders.

How to solve Banking System and Types of Banks questions

Most questions ask you to identify a bank type, its feature or the difference between two types. Use this method.

1Read the question and note the key clue: ownership, purpose, borrower group or what the bank cannot do.
2Identify the group the clue points to: commercial, cooperative, development, small finance or payment.
3If the question uses the word scheduled, check whether it refers to the Second Schedule of the RBI Act, 1934.
4For a lending clue, ask whether the bank may lend. If not, it is a payment bank.
5For a long-term finance clue, think of development banks such as NABARD, SIDBI or EXIM Bank.
6For a member-owned or local clue, think cooperative bank.
7Eliminate options that mix features of different bank types, then pick the one that fits every part of the statement.

Quickest way: Clue-to-bank matching

When to use it: Use this for any one-line MCQ asking which bank does what, or which statement is correct.

Link one keyword to each bank: commercial = deposits and loans, cooperative = members, development = long-term finance, small finance = inclusion, payment = no loans.
Spot the keyword in the question stem.
Cross out options that contradict the keyword.
For statements marked correct or incorrect, check the word cannot lend against payment banks first, as it is the most common trap.

Common mistakes in Banking System and Types of Banks

Saying payment banks can give loans.
Students see the word bank and assume all banks lend.
Fix: Remember payment banks only take small deposits and offer payment services. They do not lend.
Treating scheduled banks as only government banks.
Students link scheduled with public sector.
Fix: Scheduled means included in the Second Schedule of the RBI Act, 1934. Private and other banks can also be scheduled.
Confusing small finance banks with payment banks.
Both serve financial inclusion and are newer types.
Fix: Small finance banks lend to small borrowers. Payment banks do not lend.
Calling cooperative banks profit-oriented like commercial banks.
Students focus on the word bank and ignore ownership.
Fix: Cooperative banks are member-owned with a service motive. Commercial banks are owned by government or shareholders.
Mixing up development banks with commercial banks.
Both give loans, so they look the same.
Fix: Development banks give long-term finance for specific sectors and mainly do not work like ordinary deposit-and-loan banks.

Worked examples

Example 1

Which of the following banks cannot give loans to customers? (A) Small finance bank (B) Payment bank (C) Cooperative bank (D) Commercial bank

Show the solution

The clue is cannot give loans.
Small finance banks accept deposits and lend to small borrowers, so A is wrong.
Cooperative banks lend to their members and local borrowers, so C is wrong.
Commercial banks lend as a main activity, so D is wrong.
Payment banks accept small deposits and offer payment services but cannot lend.

Answer: (B) Payment bank

Example 2

A bank is included in the Second Schedule of the RBI Act, 1934. What is such a bank called? (A) Non-scheduled bank (B) Development bank (C) Scheduled bank (D) Payment bank

Show the solution

The clue is inclusion in the Second Schedule of the RBI Act, 1934.
A bank included in that Schedule is defined as a scheduled bank.
Non-scheduled banks are those not included, so A is wrong.
Development and payment banks are classified by function, not by Schedule listing, so B and D do not match the clue.

Answer: (C) Scheduled bank

Exam tips

Learn one keyword per bank type. Most MCQs test a single clue.
Always check the exact wording on payment banks: they cannot lend or issue credit cards.
Know the full forms and roles of NABARD, SIDBI and EXIM Bank.
With no negative marking, attempt every question. Eliminate clearly wrong options first, then guess.

Practice questions from Money and Banking

Banking System and Types of Banks in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Banking System and Types of Banks: frequently asked questions

What are the main types of banks in India?

The main types are commercial, cooperative, development, small finance and payment banks. The RBI regulates all of them. Each type serves a different purpose and customer group.

What is the difference between scheduled and non-scheduled banks?

A scheduled bank is included in the Second Schedule of the RBI Act, 1934. A non-scheduled bank is not. Scheduled banks can use RBI borrowing facilities.

What are small finance banks and payment banks?

Small finance banks accept deposits and lend to small businesses, small farmers and low-income groups. Payment banks accept small deposits and offer payment and remittance services but cannot lend.

How are commercial banks different from cooperative banks?

Commercial banks are owned by government or private shareholders and serve a wide business base. Cooperative banks are owned by their members and mainly serve local, farm and small-borrower needs.