The banking which we are witnessing presently  is not very old.  Allahabad bank, the oldest  bank,  was established in 1865. Canara Bank came into existence in 1905. When Allahabad bank, Canara bank and for that matter many other banks were functioning in India, there was no authority to monitor them, no institution to regulate them, because Reserve Bank of India came into existence only in 1935 when Reserve Bank of India Act, 1934 was enacted. Even then, RBI was banker to the government and the sole authority to issue bank notes. RBI got the regulatory powers when banking Regulation Act, 1949 was enacted.

Once RBI got the regulatory powers, it asked all the banks working in the country to get themselves registered under the 2^nd Schedule of RBI Act, 1934. RBI offered that only banks registered under the 2^nd schedule will be able to participate in the Clearing Housing System and also those banks will be eligible  to borrow money from Reserve Bank. Certain conditions were also prescribed that those banks would have to comply with the instructions, directions and directives of RBI. And also they have to share such information as required by RBI from time to time. And also these banks would keep deposited with RBI permanently minimum of Rs 5 crore of their core capital.

Most of the banks at that time agreed to get themselves registered under the 2^nd Schedule of RBI Act, 1934. These banks were called Scheduled Banks. Now it’s clear that a Scheduled Bank is one which is included in the 2^nd Schedule of RBI Act, 1934. A few banks at that time did not agree to come under the regulations of RBI. Those banks were called Non-Scheduled Banks. RBI would have asked those banks to close their business, but it did not opt for this course  because the Financial Inclusion at that time was very meagre, people were not getting banking facilities. Had these Non-Scheduled Banks closed down, more people would have been devoid of banking facilities. But from 1949 onward, when RBI got regulatory powers under Banking Regulation Act – 1949, it was made obligatory for any new entity to start banking business in India only after obtaining  banking licence from RBI. And RBI derives powers to issue banking licence from the 2^nd Schedule of RBI Act. Hence, de-facto all these banks are called Scheduled Banks.

From 1949 onward, Banking in India evolved at the same slow pace without any major change. First big change came in 1969 when Government of India nationalised fourteen private banks and again in 1980 when another batch of six banks were nationalised.

Up to this time, there were two types of banks working in the country. These were – Development Banks and Commercial Banks.

Development Institutions were ICICI, IDBI, IFCI, UTI, IDFC etc. The names of the Commercial Banks were, as we all know, SBI, BOB, PNB, UBI etc. The functioning areas of these two types of banks were clearly practically demarcated. Development Institutions used to give loan for  Infrastructure purposes and also for setting up of big projects. And these loans were given in the shape of Term Loan since these were repayable over a long period of time. Once the project was set up, the promoters of the projects used to approach the Commercial banks for meeting their day-to-day requirements and these banks used to extend them Working Capital Finance.

It is now amply clear that the ticket size of loan given by Development institutions was bigger than that of Working Capital Loan given by Commercial banks. But as per regulatory guidelines, Development Institutions  could take only Fixed Deposits from the public where Commercial Banks could accept Current Deposits, Savings Deposits and Fixed Deposits. The area of resources (deposit) mobilisation with the Commercial banks was more  but the ticket size of loan extended by them was less. If a bank takes deposits but cannot lend, it’s a loss making proposition since deposits are liabilities. To earn interest income, the Commercial banks started giving loan for Infrastructure purposes and also Project Loans. In other words, Commercial banks encroached upon the areas of Development Banks.

The Development Banks approached RBI and Government of India to allow them to set up commercial banking subsidiary so that they could also mobilise savings and current deposits from the general public. Considering their request, for the first time in India, in the year 1994, RBI issued banking licences to private entities. These licences were issued to ICICI Bank, IDBI Bank, HDFC Bank, IndusInd Bank and UTI Bank (subsequently name changed to Axis Bank). Competition in the commercial banking arena started growing – between public sector banks and private banks. All these private banks were hi-tech from the very inception. To compete with them, PSBs were required to adopt technology. Hence the era of technological advancement in the banking sector started its origin.

Next big change came in 2004 when RBI issued  licences for setting up two more private banks viz Kotak Mahendra Bank and Yes Bank. Again in 2015, two more banking licences were issued and these were Bandhan Bank and IDFC Bank.

In 2015 itself, RBI initiated to give new direction to the banking industry in India. Different types of banking licences were issued which were not witnessed in the banking history of India. These were termed as Differentiated Banks. Unlike earlier commercial banks, their areas of working was demarcated and restricted. RBI issued eleven licences for setting up Payments Banks and ten licences for setting up Small Finance Banks.

Before we proceed further, let’s try to understand the broad difference between Payments Banks, Small Finance banks and Commercial banks. Payments Banks can accept deposits but cannot lend. In deposits also these can accept savings and current deposits, but not fixed deposits. The maximum balance in one account cannot be more than one lac rupee at the end of the day. Small finance banks can accept deposits and can also lend. But the ticket size of one borrowal account cannot be more than twenty five lac rupees. Whereas there is no limit on lending by Commercial Bank – of course   subject to availability of deposits with them and also availability of Capital with them.

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