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Banking System In India: A Brief Understanding

These days you can sit back and relax knowing that your hard earned money is safe at the bank. This trust definitely does not develop overnight, it has taken years of assurance and mutual understanding to get to this position. The banking system in India today has matured and evolved over a long period with plenty of iterations and innovations along the way. Not only do banks provide financial support to citizens but are also a major contributor to the sustenance of the economy. Let’s understand more about the banking system in India with this blog. 

Functionalities Of A Bank

Banks have a vital function in the operation of a country, each citizen directly or indirectly relies on banks. Therefore they have a set of fixed functionalities that are put in place to efficiently help the people and also themselves. Let’s take a look at them below:

Primary Functions

– To take accept deposits from the public.

– To provide loans and advances to organizations and the general public.

Secondary Functions

– The bank acts as an agent for its customers handling transfers, collections, etc.

– Banks provide utilities to their customers like safety lockers, Demat accounts, issue of drafts, etc.

Different Banking Systems

A bank to the layman might be very transactional but to the country, it brings about development by aiding businesses and innovations. The culmination of years of growth and improvement is what has cemented the banking system in India today.  The banking system is still evolving on a daily basis and now they are established as huge systems that run nations. The Indian banking system is split into various divisions and each has its functionality and operations. 

Central Bank: Also called The Reserve Bank of India, is purely meant to function for the government of the country and doesn’t associate with the general public. This is the main bank of India which is involved in governing and regulating the other banks in the country. The central bank of India at its crux is the core banking system of India and is involved in regulating of currency.  It also provides funds and guidance to other banks whenever in need.

– Commercial Banks: These banks deal with the general public and provide facilities like loans, advances, and deposits. As the name suggests they are mostly profit-oriented. They do tend to the people of the state, however, their interest rates are fixed and only change with RBI instructions. Commercial banks come under three categories:

  • Public sector banks: The government of India holds a large stake in these banks, eg: SBI, Canara Bank, and Bank of India.
  • Private sector banks: Here as the name suggests, most of the stake is owned by a non-government related entity, eg: HDFC Bank, or Kotak Bank.
  • Foreign banks: These banks have their main headquarters in another country but branches in India, eg: HSBC (Hong Kong and Shangai Banking Corporation).

– Cooperative Banks: These banks are formed by a society or group of people and therefore most of the owners will be the general public members.  These banks are state-based and are generally established to help the welfare of the state with subsidized loans for important sectors. They also prioritise mutual aid and derive very minimal profit, eg: Saraswat Co-operative Bank, Abhyudaya Co-operative Bank Ltd.

How Does The Banking System Support A Country’s Economy?

Banks these days are undervalued as they seem like a monotonous task that one must take part in, but behind the curtains there is so much that a bank does to build a nation. Banks are primarily financial institutions in any country. People approach banks to acquire loans to power their businesses or start new businesses. When a new business grows and reaches new horizons, the company pays taxes to the government which in turn is used to better the country which empowers more ideas. This loop is vital for the development of a country and the banking system is an integral part of it.


Q1. What is the banking system in India?

Ans: A banking system is a collection of financial institutes that aid people with their monetary activities. Each set of banks has specific roles that they perform and all of them have a direct connection to the development of the nation.

Q2. What are the types of banking system in India?

Ans: The banking system is divided as per rank, The Central Bank or The Reserve Bank of India, Cooperative Banks, and Commercial Banks

Q3. What is the importance of the banking system in India?

Ans: Banks are the underlying foundation for economic growth and people rely on banks for their every need. The banking system in India provides stability and security to its population and gives a sense of hope to budding Indians. 

Q4. How was the banking system in India established?

Ans: The first bank established in India was in the Pre-Independence Phase during 1770 called The Bank of Hindustan. After 1949 or the Post-Independence Phase India started to nationalize its banks and after 1991, India also introduced private banks. 

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Banking System In India: A Brief Understanding