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Financial Management and Business Data Analytics · Financial Institutions

Banking Institutions and Types of Banks in India

Updated 10 October 2026 · Fact-checked

Banks in India are classified by ownership, purpose and the services they may offer: commercial banks (public, private, foreign), cooperative banks, regional rural banks, small finance banks and payment banks. To answer exam questions, name the type, state its purpose, then list its key functions and limits.

Understand Banking Institutions and Types of Banks

A bank accepts deposits from the public and lends or invests that money. It is the main link between savers who have surplus funds and borrowers who need funds. Banks also run the payment system, which is how money moves between people and businesses.

Indian banks are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. The first way to classify them is by ownership and purpose. Commercial banks work for profit and serve all sectors. They include public sector banks (government holds the majority stake), private sector banks and foreign banks operating in India. Cooperative banks are owned by their members and focus on local, agriculture and small-borrower needs. Regional Rural Banks (RRBs) serve rural areas with a focus on small farmers, artisans and small businesses.

The second way is by special purpose or licence. Small finance banks (SFBs) are licensed to provide basic banking to groups that are underserved, such as small farmers, micro and small businesses and low-income households. They accept deposits and lend, mainly to priority sectors. Payment banks are meant for financial inclusion through payments and remittance. They accept limited deposits up to a per-customer cap set by the RBI, and they provide payment services, but they cannot give loans or issue credit cards.

The third way is by schedule. A scheduled bank is one included in the Second Schedule of the RBI Act, 1934. Inclusion requires meeting the conditions in Section 42(6) of the RBI Act, 1934: minimum paid-up capital and reserves of ₹5 lakh, and affairs not conducted to the detriment of depositors. A non-scheduled bank is not included. Scheduled banks can borrow from the RBI at the bank rate and get other RBI facilities. Non-scheduled banks do not enjoy these facilities.

The core functions of commercial banks are of two kinds. Primary functions: accepting deposits (savings, current, fixed, recurring) and lending (loans, cash credit, overdraft, bill discounting). Secondary functions: agency services (collecting cheques, paying bills, standing instructions), and utility services (lockers, letters of credit, guarantees, forex dealing, and similar services). Banks also create credit, because loans lead to fresh deposits in the system.

Key rules to remember

Classification by ownership and purpose
Banks = Commercial (public, private, foreign) + Cooperative + Regional Rural Banks + Small Finance Banks + Payment Banks
Use this as the opening line of any 'types of banks' answer.
Classification by schedule
Scheduled = in Second Schedule of RBI Act, 1934 (meets Section 42(6) conditions); Non-scheduled = not in it
The distinction is about inclusion in the Schedule, not the size of the bank.
Primary functions of a commercial bank
Primary = Accepting deposits + Lending
Everything else (agency and utility services) is secondary.
Payment bank limit
Payment bank: deposits (up to RBI cap per customer) allowed; lending and credit cards not allowed
Learn the restriction, not a fixed rupee figure, because the RBI can revise the cap.

How to solve Banking Institutions and Types of Banks questions

Use this method for any question on banking institutions, whether it is a short note, a difference or a case-based MCQ.

  1. 1Read the question and decide whether it asks for a list, a difference, functions or a matching of a bank to a situation.
  2. 2Identify the basis of classification: ownership, purpose or schedule.
  3. 3Name the bank type and give a one-line definition with its main customer group.
  4. 4State the key functions or features in clear bullet points, separating primary and secondary functions where relevant.
  5. 5State the main restriction or limit (for example, payment banks cannot lend).
  6. 6For a difference question, compare on 4 to 5 points such as purpose, deposits, lending, customers and regulation.
  7. 7Close with one line on the role of the type in financial inclusion or the economy.

Quickest way: Five-second bank-type identifier

When to use it: Use this in MCQs and case questions where you must match a description to a bank type.

  1. If the description says 'members own it' or 'local credit societies', choose cooperative bank.
  2. If it says 'rural' and 'small farmers or artisans', choose regional rural bank.
  3. If it says 'underserved' and 'can lend to small borrowers', choose small finance bank.
  4. If it says 'payments and remittances' and 'no loans', choose payment bank.
  5. If it says 'all-purpose, profit-oriented', choose commercial bank.
  6. If the stem mentions the Second Schedule of the RBI Act, 1934, the answer is about scheduled banks.

Common mistakes in Banking Institutions and Types of Banks

  • Saying payment banks can give loans.

    Students assume every bank both takes deposits and lends.

    Fix: Remember payment banks accept limited deposits and offer payments, but do not lend or issue credit cards.

  • Treating small finance banks and payment banks as the same.

    Both were created for financial inclusion and both are newer categories.

    Fix: Link SFB with 'basic banking and lending to underserved' and payment bank with 'payments and deposits, no lending'.

  • Defining scheduled banks as large banks.

    Most big banks are scheduled, so size looks like the test.

    Fix: The test is inclusion in the Second Schedule of the RBI Act, 1934, which needs the Section 42(6) conditions to be met. Even small banks can be scheduled if they meet them.

  • Mixing primary and secondary functions.

    Students list everything a bank does in one list.

    Fix: Put deposits and lending under primary. Put agency and utility services under secondary.

  • Writing one-line answers to difference questions.

    Students know the idea but do not structure the comparison.

    Fix: Use at least four comparison points, such as purpose, deposits, lending, customers and regulation.

Worked examples

Example 1

Distinguish between a scheduled bank and a non-scheduled bank. (Short answer)

Show the solution
  1. Define each term: a scheduled bank is included in the Second Schedule of the RBI Act, 1934. A non-scheduled bank is not included.
  2. Compare on borrowing: scheduled banks can borrow from the RBI at the bank rate. Non-scheduled banks do not have this facility in the same way.
  3. Compare on RBI facilities: scheduled banks can use RBI facilities such as refinance and clearing house membership. Non-scheduled banks are not entitled to them as a matter of right.
  4. Compare on status: inclusion requires meeting the conditions in Section 42(6) of the RBI Act, 1934, namely minimum paid-up capital and reserves of ₹5 lakh, and affairs not conducted to the detriment of depositors. Non-scheduled banks have no such status.
  5. Conclude: schedule status concerns RBI recognition and facilities, not the size of the bank.

Answer: A scheduled bank is listed in the Second Schedule of the RBI Act, 1934, after meeting the Section 42(6) conditions (paid-up capital and reserves of at least ₹5 lakh, and affairs not conducted to the detriment of depositors). It gets RBI borrowing and related facilities. A non-scheduled bank is not listed and does not enjoy these facilities. The distinction is about RBI recognition, not size.

Example 2

A new bank in a small town accepts deposits and provides remittance and payment services to migrant workers. It does not give loans. Identify the type of bank and explain its main features. (Case question)

Show the solution
  1. Match the facts: deposits, payments, remittances and no lending point to a payment bank.
  2. State the purpose: it promotes financial inclusion by giving low-income households and migrant workers safe deposits and payment services.
  3. State the features: it accepts limited deposits up to the per-customer cap set by the RBI, and offers payments and remittance services.
  4. State the restrictions: it cannot lend and cannot issue credit cards.
  5. Contrast briefly with a small finance bank, which also lends to underserved borrowers.

Answer: The bank is a payment bank. It accepts limited deposits and provides payment and remittance services to the underserved. It cannot lend or issue credit cards, which separates it from a small finance bank.

Exam tips

  • Expect MCQs that describe a bank and ask you to name the type. Learn one keyword for each type.
  • For 'differentiate' questions, write in a two-column style using bullet pairs and at least four points.
  • Do not quote exact deposit caps or capital figures unless the question gives them, since the RBI revises them. The ₹5 lakh figure for scheduled status under Section 42(6) is the one to remember for that topic.
  • Keep functions in order: primary first, then agency, then utility services.
  • Link your answer to financial inclusion when the question is about SFBs, payment banks or RRBs.

Practice questions from Financial Institutions

Banking Institutions 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 Institutions and Types of Banks: frequently asked questions

What is the difference between a small finance bank and a payment bank?

A small finance bank accepts deposits and lends, mainly to small farmers, micro and small businesses and low-income groups. A payment bank accepts limited deposits and offers payment and remittance services, but it cannot lend or issue credit cards.

What are the main functions of commercial banks?

The primary functions are accepting deposits and lending money. Secondary functions include agency services such as collecting cheques and making payments for customers, and utility services such as lockers, guarantees and letters of credit.

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

A scheduled bank is included in the Second Schedule of the RBI Act, 1934. Inclusion needs the Section 42(6) conditions: paid-up capital and reserves of at least ₹5 lakh, and affairs not conducted to the detriment of depositors. Scheduled banks can access RBI facilities such as borrowing at the bank rate. A non-scheduled bank is not included and does not have these facilities.

Who regulates banks in India?

The Reserve Bank of India regulates banks mainly under the Banking Regulation Act, 1949, and the RBI Act, 1934. It licenses banks, sets prudential norms and supervises them.