Different Types of Commercial Banks and Their Roles in the Economy

None of us know a world without banks. Throughout our entire lives — from school, to office to eventual retirement — banks play an intrinsic role. They are not just a place that stores money. In fact, commercial banks are so much more. They have directly impacted the Indian economy by contributing funds for inter-state infrastructure, helping small and medium-sized businesses, financing real estate deals, and much more.

Before we go any further, here are the four different types of commercial banks in India:

  • Public sector banks
  • Private sector banks
  • Regional rural banks
  • Foreign banks

The above four come with a fascinating history and play an exceptional in our community. They provide job opportunities for many financial and banking hopefuls trying to make their mark in the industry. So let’s investigate the different types of commercial banks and how they have influenced the economy.

Types of commercial banks

  1. Public sector commercial banks

Public banks are a type of commercial banks in India that are known to be safe and reliable. The primary reason is they are co-owned by the government.

To understand how public sector banks came into existence, we need to take a trip back to 1955. After India’s independence, the government created the nationalisation movement, in which they got the majority stake in the bank. The first bank to become public was the Imperial Bank of India. Today, it is more famously known as the State Bank of India, and the RBI has 60 per cent control.

Back in the 1960s, 14 banks were nationalised, which means that they were half-owned by the government of India. Today, 12 public commercial banks offer financial security to their customers and promote economic development.

The role of public sector banks:

  • The main objective of these types of commercial banks is to help people build wealth through savings and interest earned.
  • To offer MSME and SME loans for small businesses and entrepreneurs.
  • To finance agricultural ventures and other small-scale industries.
  • Create credit services that promote uninterrupted economic growth.
  • Encourage capital formation in low economic areas through deposits and loans.

Popular commercial banks in the public sector:

  • SBI
  • The Bank of Baroda
  • Bank of India
  • Central Bank
  • Punjab National Bank
  • Union Bank
  • Bank of Maharashtra
  • Canara Bank

Major contributions by public sector banks:

Public sector banks are a type of commercial banks that offer funding for many infrastructural and commercial projects.

  • A group of public banks under SBI’s leadership have committed to funding a large portion of the Rs 34,000 crore project by the Adani Group.
  • Punjab National Bank worked with the IREDA to offer funds and loans for several renewable energy projects in India.

  1. Private sector commercial banks 

Private sector banks are a type of commercial banks that are different from public sector banks. They are owned by a private board, shareholders, families or individuals. The government has no stake in these types of commercial banks. However, the banks are expected to follow the laws, regulations and standards set by the government.

Private banking is relatively new in India. Back in the 1990s, India went through economic liberalisation. This led to the creation of the UTI Bank, which was the first to operate as a private commercial bank. A further ten banks were permitted to function privately, leading to the dawn of a new age of banking in India. Today, we have 21 banks in the private sector. While this type of commercial bank may be new, it has proven to be very successful.

The role of private sector banks:

  • Offers personalised services to a wide range of customers, investors and companies.
  • Besides deposit schemes and loan options, private banks also provide banking advice, investment opportunities, estate planning, credit card services, etc.
  • To incorporate new technology and better banking methods for the convenience of the customers.
  • The banks have specialised experts to attend to the financial requirements of corporate India.
  • This type of commercial bank in India is known to invest in technological and infrastructural development.

Popular commercial banks in the private sector:

  • UTI Bank
  • ICICI Bank
  • HDFC Bank
  • IndusInd Bank
  • Bank of Punjab
  • IDBI Bank

Major contributions by private sector banks:

As one of the more popular types of commercial banks in India, private banks have financed many large-scale projects.

  • HDFC has made an investment of Rs 1,450 crore in real estate giant Kalpataru. The funds will go towards developing properties in Mumbai and Pune.
  • ICICI bank has granted a loan of Rs 556 billion in pro-environment sectors like electric vehicles, renewable energy and other ecology-centric projects.

Also Read – Breaking Down the Functions of Commercial Banking: An Essential Guide

  1. Regional rural banks 

Rural banks are a different type of commercial banks created by the government of India. Their main objective is to provide financial aid and services to the population living in small towns and villages. The first RRB bank, the Prathama Gramin Bank, was established in 1975. The next year, five more banks opened doors, with a total net worth of Rs 100 crores. Since then, more banks have been established and today the tally stands at 43 regional rural banks.

As farmers make up more than half of our national population, it is only fitting that this type of commercial bank is set up to cater to their specific financial requirements.

The role of regional rural banks:

  • To promote financial inclusion by reaching out to people living in cash-strapped rural areas, such as farmers, craftsmen, small-time traders, etc.
  • Provide bank accounts, deposit schemes, credit cards and loans.
  • Encourage farmers and rural dwellers to open a banking account that saves a part of their income and also generates interest.
  • Offer customised agricultural loans to farmers and farming communities for the purchase of seeds, equipment, transport vehicles and other necessities.

Popular commercial banks in the regional rural sector:

  • Kerala Gramin Bank
  • Dakshin Bihar Gramin Bank
  • Baroda Gujarat Gramin Bank
  • Karnataka Gramin Bank
  • Maharashtra Gramin Bank

Major contributions by regional rural banks:

As they are a different type of commercial bank, RRBs serve a purpose that is distinct from private and public banks.

  • RRBs have distributed salaries under various government schemes such as MGNREGA and PMGSY.
  • They also help give pensions to people based on the different pension programs in India.

  1. Foreign banks 

Did you know that the first foreign bank in India was set up in 1858? Standard Chartered is India’s oldest international commercial bank, established during the British rule. Foreign banks are a type of commercial banks that are based in another country but have set up branches in India. The banks have a wide range of services which include commercial, retail and investment banking. They also introduce updated technology and financial methods to the banking system in India. For instance, did you know HSBC was responsible for setting up India’s first ATM in 1987? The number of foreign banks has grown considerably, and on the last count, 46 international commercial banks have set up offices in India.

The role of foreign banks:

  • To bring capital from other countries into India, which in turn strengthens our economy.
  • Encourage international investments, trading and transactions.
  • Help customers with financial management.
  • Give loans to people, entrepreneurs, businesses and companies.
  • Improve banking standards and set up an internationally approved system of banking.

Popular commercial banks in the foreign banking sector:

  • Standard Chartered
  • HSBC
  • Barclays
  • Citibank
  • DBS
  • Deutsche Bank

Major contributions by foreign banks:

  • HSBC bank granted loans amounting to Rs 16,640 crores to Reliance Jio Infocomm.

Also Read – Key skills for Managers in Commercial Banks

A comparison between the four different types of commercial banks

Criteria

 Public Sector Private Sector Regional Rural Sector

Foreign banking Sector
Ownership The Indian government has a 50% stake in every public commercial bank. Private commercial banks are owned by shareholders, individuals, companies, etc. The central government own 50% of RRBs. The state government owns 15% and the remaining 35% is owned by individuals, families or independent companies. The banks have ownership from their respective countries, but in India, they are regulated by the RBI.
Number of banks 12 public banks. 21 private banks. 43 RRBs in India. 46 foreign owned banks in India.
Customer Base  Highest number of customers in India, comprising of rural and urban dwellers. Customer base is slightly lower than public banks, comprising of more urban than rural dwellers.  RRBs have rural and semi-rural dwellers as their customers. Foreign banks mostly have urban dwellers as their customers.
Services  Public sector banks provide deposit schemes, loan opportunities, credit cards and other services. Private sector banks provide deposit schemes, loan opportunities, investment banking, credit cards and other services. Offer loans and financial assistance to farmers, local traders and other rural entrepreneurs. Foreign banks provide deposit schemes, loan opportunities, investment banking, credit cards and other services.

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FAQs 

  • How do commercial banks help in creating wealth? 

Different commercial banks have various techniques, but all of them use the money they get from deposits to give loans to businesses. This leads to an increase in productivity, creates jobs and helps the company achieve their financial targets faster. By encouraging one section of the population to save their money and offering loans to another section, banks mobilise and multiply wealth.

  • Why are commercial banks so crucial to the economy?

They help small businesses with loans, infuse cash into agricultural sectors and give financial aid to women entrepreneurs and small-sized enterprises.

  • Which organisation regulates commercial banks in India?

According to the Banking Regulation Act of 1949, The Reserve Bank of India is responsible for ensuring that all the different types of commercial banks follow the correct procedures and standards.

Conclusion 

Our economy depends on the four different types of commercial banks in India. These banks are responsible for mobilising wealth, credit creation, building capital and offering many other financial benefits. India’s economic future is directly connected to the efficiency and prosperity of commercial banks. They also offer incredible job opportunities for qualified professionals interested in a banking career.