Banking is a system of financial institutions, such as scheduled Commercial banks, Local Area Banks, Regional Rural banks, cooperative Banks, Payment Banks, and small finance banks that provide various financial services to individuals, businesses, and governments. Let us study them here one by one.
Local Area Banks (LABs):
Local area banks are referred to as small private banks with low-cost structures that provide financial services limited by the area of operation. These banks usually function in rural and semi-urban areas LABs are required to have a minimum paid-up capital of Rs. 5 crore, with 25% contributed by the promoter group and the rest by the public. The license of these banks is issued by RBI. Like big commercial banks, these banks offer various products and services such as deposits, loans, remittances, insurance, etc. In 1996, RBI issued guidelines for setting up Local Area Banks, and it approved setting up of 7 LABs in the private sector. LABs will help in mobilizing rural savings and in channeling them into investment in local areas.
Regional Rural Banks
Regional Rural Banks were established under the provisions of an Ordinance passed on 26 September 1975 and the RRB Act 1987 to provide sufficient banking and credit facilities for agriculture and other rural sectors, more so to provide banking facilities to the small, marginal farmers, artisans, etc. The equity shares of each Regional Rural Banks are distributed among the Central Government, the Sponsor Bank, and the State Government in a fixed proportion of the Central Government – 50%, the Sponsor Bank – 35%, and the State Government – 15%.
The area of operation of RRBs is limited to the area as notified by the Government of India covering one or more districts in the State. RRBs provide para-banking facilities such as locker facilities, debit and credit cards, mobile banking, internet banking, and UPI services. The other important function of RRBs is to disburse wages of Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Pradhan Mantri Gram Sadak Yojana (PMGSY) workers and distribute pensions.
Cooperative Banks:
Cooperative banking refers to a small financial institution started by a group of individuals to address the capital needs of their specific community. Such financial institutions are owned and controlled by their members, and the board members are democratically selected to oversee the operations. Cooperative banks can be classified as State Cooperative Banks, District Central Cooperative Banks, Primary Agricultural Credit Societies, and Urban Cooperative banks (UCB).
State Cooperative Banks: State Cooperative Banks are the apex body of cooperative banks in each of the states. They raise funds and assist in their proper distribution among various sectors. Individual borrowers receive funds from state cooperative banks via central cooperative banks and primary credit societies. They are often the primary source of credit for agricultural and allied activities, small-scale industries, & other small businesses. State Cooperative banks act as the intermediary between RBI and NABARD on the one side and Central or District Cooperative Bank and Primary Agricultural Credit Societies on the other side. These banks also provide banking services to cooperatives, including credit unions, dairy cooperatives, and agricultural cooperatives. The working capital of SCB is obtained from deposits, funds, borrowings from RBI, state governments, and other resources. NABARD is entrusted with the responsibility for the conduct of statutory inspections of State Cooperative Banks, District Central Cooperative
District Central Cooperative Banks: District Central Cooperative Banks: DCCBs are registered under the provisions of the State Cooperative Societies Act of the State concerned and are regulated by the Reserve Bank. They are supervised by the State Cooperative Department and are regulated by the Reserve Bank of India. They provide services to customers (their members) such as deposits, loans, and other banking services to their members. The working capital for the central cooperative banks is primarily raised from individual funds, deposits, borrowings, etc. They are supervised by the State Cooperative Department and are regulated by the Reserve Bank of India. The National Bank for Agricultural and Rural Development (NABARD) is authorized to inspect under Sec 35 (6) of the Banking Regulation Act (As Applicable to Cooperative Societies.
Primary Agricultural Credit Societies: These financial cooperatives are typically organized by farmers and other agricultural professionals to provide credit and other services to farmers. They are regulated by the Reserve Bank of India & Registrar of Cooperative Societies under the Co-operative Societies Act. The primary purpose of these societies is to provide loans to members, often at low interest rates, to facilitate the purchase of resources and other necessities required to operate a successful farm. They also offer other services, such as crop insurance, storage services, and help marketing, that help farmers to manage their operations. These societies are funded by their members who contribute both capital and labour for the benefit of the cooperative.
Primary Cooperative Banks (PCBs) or Urban Cooperative Banks (UCBs):
Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas. UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state. The sector is heterogeneous with uneven geographic spread of the banks. While many of them are unit banks without any branch network, some of them are large and operate in more than one state. Till 1996, these banks were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
Payment banks:
Payment Banks are licensed under the Banking Regulation Act, of 1949, with specific licensing conditions restricting their activities mainly to acceptance of demand deposits and provision of payments and remittance services. In simple words, these banks can carry out most banking operations but can’t advance loans or issue credit cards. In April 2021, RBI to further financial inclusion and to expand the ability of payments banks to cater to the growing needs of their customers, permitted payment banks to accept demand deposits up to Rs 2 lakh. These banks also offer remittance services, mobile payments/transfers/purchases, and other banking services like ATM/debit cards, net banking, and third-party fund transfers. The main objective of payments banks is to widen the spread of payment and financial services to small businesses, low-income households, and migrant labour workforce in secure technology-driven environments. According to the Central Bank, Payment banks are expected to increase the penetration level of financial services to remote areas of the country.
Small Finance Banks:
Small Finance Banks (SFB) licensed under section 22 of Banking Regulation Act, 1949 and created with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections including small business units, small and marginal farmers, micro and small enterprises and other underserved sections. Small Finance Banks basically work as savings vehicles as well, as they are engaged in offering credit facilities to small business units, micro and small industries, small and marginal farmers and other unorganised sectors through their advanced technology & low-cost operations. Small Finance Banks offer basic banking services such as Savings Accounts, Current Accounts, Fixed Deposits, Recurring Deposits, Loans, etc. There is no restriction on acceptance of deposits from public. When it comes to the maximum loan size and investment limit exposure to the group borrowers, it is restricted to 15% of capital funds. It is mandatory to constitute at least 50% of the loan portfolio in case the bank is advancing loans of less than or equal to 25 lakhs. The banks can undertake such simple activities with prior approval of the RBI and after complying with the requirements. The activities do not require any commitment of own funds and they can be engaged in the distribution of mutual fund units, pension products, insurance products, etc. The SFBs can even become Authorised Dealer in foreign exchange business as per the requirements of their clients.
As per RBI guidelines, the minimum paid-up capital of Small Finance Banks must be Rs 100 Crore.25% of the branches of any Small Finance Bank must be located in the unbanked region of the country. Small Finance Banks are required to extend at least 75% of their Adjusted Net bank credit to the sections classified by the RBI as priority sector lending. Small Finance Banks can transit to the universal banks after they have a minimum paid-up capital or net worth requirements as specified for the universal banks.
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