Bank
What is 'Bank'
A bank is an institution that accepts deposits of money from the public for the purpose of lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. In India, the institution of a bank is defined and regulated primarily under the Banking Regulation Act, 1949, and supervised by the Reserve Bank of India (RBI), the country's central banking authority established under the Reserve Bank of India Act, 1934.
Banks occupy a foundational position in the financial architecture of any modern economy. They intermediate between savers and borrowers, facilitate payments and settlement, transmit monetary policy, and serve as custodians of public savings. In India, this dual character, mobilising public deposits and deploying them as credit, is what distinguishes a "bank" from other financial entities such as Non-Banking Financial Companies (NBFCs), which may lend but are not permitted to accept demand deposits withdrawable by cheque.
The word "bank" itself is a term of legal significance in India. Under Section 7 of the Banking Regulation Act, 1949, no company other than a banking company may use the words "bank", "banker" or "banking" as part of its name or in connection with its business, and no individual, firm or group of individuals may use those words for carrying on any business. This protective reservation underscores the public trust dimension of banking.
Official Definition of 'Bank'
'Bank' / 'Banking' as defined in Legislations
The primary statutory definition of "banking" in India is found in Section 5(b) of the Banking Regulation Act, 1949, which defines "banking" as: the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
"Banking company" is separately defined in Section 5(c) as any company that transacts the business of banking in India. The Act does not supply a single freestanding definition of "bank" as such; the term is instead understood by reference to this definition of "banking" and to the ancillary categories set out in the Act.
The Reserve Bank of India Act, 1934 uses the concept of a "scheduled bank" (Section 2(e)), defined as a banking company or cooperative society included in the Second Schedule to the Act, a schedule maintained and updated by the RBI. Scheduled status carries significant regulatory significance, including eligibility for borrowing from the RBI at the bank rate and automatic membership in the clearing house system.
The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and its 1980 counterpart govern nationalised banks, defining "corresponding new bank" as the entities constituted under those Acts following the nationalisation of major private sector banks.
Section 7 of the Banking Regulation Act further provides that no company, firm, individual, or group of individuals may use the words "bank", "banking", or "banking company" for carrying on any business unless it is a licensed banking company under the Act or falls within specified exemptions, such as cooperative land mortgage banks, subsidiaries of banking companies, or associations of banks formed for mutual protection.
'Bank' defined by Regulatory and Institutional Bodies
The RBI, as the primary regulator, has elaborated the concept of "bank" through its Master Directions and circulars. For the purposes of foreign exchange regulation under FEMA, 1999, the RBI classifies Authorised Dealer banks into Category I (which may handle all current and capital account transactions), Category II (certain specified non-trade transactions), and Category III (basic money-changing operations), reflecting a regulatory understanding of banks as entities with varying degrees of foreign exchange capacity.
The Ministry of Finance, Department of Financial Services, in its official characterisation, treats scheduled commercial banks as the core of the banking system, distinguishing them from NBFCs on the ground that banks form part of the payment and settlement system, can issue cheques drawn on themselves, and have access to Deposit Insurance from the Deposit Insurance and Credit Guarantee Corporation (DICGC) which are institutional features that no NBFC enjoys.
Types of Banks
The Reserve Bank of India
The Reserve Bank of India is the apex banking institution of India, established on 1 April 1935 under the Reserve Bank of India Act, 1934 and nationalised in 1949. It sits at the top of the entire banking structure and is the central bank of the country, owned by the Union Ministry of Finance. The RBI does not deal with ordinary customers; instead, it manages the money supply, regulates and supervises all other banks, issues currency notes, controls inflation and credit, and acts as banker to the Government of India. The RBI Act "is the basis for constitution, powers, and functions of RBI" and covers central banking functions, monetary policy, regulation of non-banking institutions receiving deposits, and prohibition of acceptance of deposits by unincorporated bodies. The RBI derives its regulatory power over banks from both the RBI Act, 1934 and the Banking Regulation Act, 1949, the former dealing with monetary policy and the RBI's own management, while the latter confers powers to issue directions on deposit accounts, interest rates, advances, foreign exchange, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR).
Non-Banking Financial Companies (NBFCs)
Non-Banking Financial Companies (NBFCs) are companies registered under the Companies Act, 2013 that engage in financial activities such as providing loans and advances, acquiring shares and securities, leasing, hire-purchase, and insurance, but do not hold a full banking licence. They are regulated by the RBI under the RBI Act, 1934, though some categories (like merchant banking companies) are also regulated by SEBI, and insurance companies by IRDAI. An NBFC's financial assets must constitute more than 50% of its total assets, and income from financial assets must constitute more than 50% of its gross income.
NBFCs differ from banks in several key respects: they cannot accept demand deposits withdrawable by cheque, they do not form part of the payment and settlement system, and their depositors do not have access to deposit insurance from the Deposit Insurance and Credit Guarantee Corporation (DICGC). To have a better activity-based regulation, the RBI has harmonised the classification of NBFCs, broadly into Investment and Credit Companies, Infrastructure Finance Companies, Microfinance Institutions, Housing Finance Companies, and others. While NBFCs and banks both perform lending and investment functions, it is the power to accept demand deposits and the associated public trust obligations that distinguish a bank from an NBFC.
Scheduled Banks
Scheduled Banks are those banks included in the Second Schedule of the Reserve Bank of India Act, 1934. To qualify, a bank must have a paid-up capital and reserves of at least ₹5 lakh and must satisfy the RBI that its operations are not conducted in a manner detrimental to depositors' interests. Scheduled status carries two principal benefits: eligibility for borrowing from the RBI at the bank rate, and automatic membership of the clearing house. If a scheduled bank fails to maintain these standards, it may be de-listed. Scheduled banks are divided into Scheduled Commercial Banks (which include public sector banks, private sector banks, foreign banks, regional rural banks, small finance banks, and payments banks) and Scheduled Cooperative Banks (which include scheduled state cooperative banks and scheduled urban cooperative banks).
Non-Scheduled Banks
Non-Scheduled Banks are financial institutions not listed in the Second Schedule of the RBI Act, 1934. They generally do not meet the capital or prudential requirements for scheduled status, are fewer in number, and are typically small and localised. They cannot normally access RBI refinancing facilities and must maintain their own cash reserves rather than depositing them with the RBI. Certain local area banks and small cooperative banks fall into this category.
Commercial Banks
Commercial Banks are regulated under the Banking Regulation Act, 1949 and operate on a profit-making business model. They are broadly sub-classified into public sector banks, where the Government of India holds a majority stake, most of which were constituted following bank nationalisation under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and private sector banks, where private individuals or corporations hold majority equity. Foreign banks, which have their headquarters outside India but operate branches or wholly owned subsidiaries in India under RBI regulation, also form part of the commercial banking category.
Cooperative Banks
Cooperative Banks are member-owned institutions registered under the Cooperative Societies Act, 1912 or corresponding state laws. They operate on a no-profit, no-loss basis and primarily serve entrepreneurs, small businesses, agricultural borrowers, and community members. They are subject to dual regulation by the RBI and the Registrar of Cooperative Societies. The Banking Regulation (Amendment) Act, 2020 brought approximately 1,482 urban and 58 multi-state cooperative banks under enhanced RBI oversight. Rural cooperative banks follow a three-tier structure: State Cooperative Banks at the apex, District Central Cooperative Banks in the middle, and Primary Agricultural Credit Societies at the base.
Regional Rural Banks (RRBs)
Regional Rural Banks are scheduled commercial banks established under the Regional Rural Banks Act, 1976 with the objective of providing credit and other banking facilities to rural and semi-urban populations, particularly small and marginal farmers, agricultural labourers, and artisans. They have a distinctive three-way ownership structure, 50% held by the Central Government, 15% by the State Government, and 35% by a sponsor public sector bank. RRBs are supervised by the National Bank for Agriculture and Rural Development (NABARD) in addition to the RBI.
Small Finance Banks
Small Finance Banks are a niche category introduced by the RBI to advance financial inclusion for segments not adequately served by mainstream banks — including small business units, micro and small industries, small and marginal farmers, and the unorganised sector. They are licensed under Section 22 of the Banking Regulation Act, 1949 and may carry out all basic banking activities, including accepting deposits and extending credit. At least 75% of their net credits must go to priority-sector borrowers, and a minimum of 25% of their branches must be located in unbanked areas.
Payments Banks
Payments Banks are a relatively new category introduced by the RBI in 2015, conceptualised on the basis of the Nachiket Mor Committee Report (2013) to promote financial inclusion through low-cost digital banking. They are licensed as public limited companies under the Banking Regulation Act, 1949, but their activities are restricted: they may accept demand deposits (up to ₹2 lakh per customer) and provide payments and remittance services, but cannot extend loans or issue credit cards. They are required to invest most of their funds in government securities. Examples include Airtel Payments Bank and India Post Payments Bank.
Development Banks
Development Banks, also referred to as Development Finance Institutions (DFIs), are specialised financial institutions that provide long-term lending and refinancing facilities to different sectors of the economy. The history of development banking in India traces to the establishment of the Industrial Finance Corporation of India (IFCI) in 1948, followed by several State Financial Corporations under the State Financial Corporations Act, 1951. There are more than 60 development banking institutions at both the central and state level. Major institutions in this category include NABARD (agriculture and rural development), SIDBI (small industries), NHB (housing), and EXIM Bank (export-import finance).
Local Area Banks (LABs)
Local Area Banks are small, private, non-scheduled banks licensed to operate and open branches within a maximum of three geographically contiguous districts. They were established with the objective of providing an institutional mechanism for promoting rural and semi-urban savings and channelling credit to viable local economic activities. The Raghuram Rajan Committee envisaged them as "private, well-governed, deposit-taking small-finance banks" with higher capital adequacy norms and strict prohibitions on related-party transactions. Only a handful of LABs were granted licences and remain operational; they are governed by the RBI Act, 1934, the Banking Regulation Act, 1949, and other relevant statutes.
Regulatory Framework and Compliances
The two principal statutes are the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The RBI Act provides the constitutional basis for the RBI itself and its monetary control functions, most notably the Cash Reserve Ratio (CRR) under Section 42, while the Banking Regulation Act confers the broader powers of banking supervision, including the Statutory Liquidity Ratio (SLR) under Section 24, selective credit controls under Sections 21 and 35A, branch licensing, capital adequacy requirements, and the power to issue binding directions to banks on deposits, advances, and interest rates.
Beyond these two statutes, banks are also required to comply with the Prevention of Money Laundering Act, 2002 (PMLA) and the Know Your Customer (KYC) norms issued by the RBI, which together govern the identification and verification of customers and the reporting of suspicious transactions. Banks must adhere to the Foreign Exchange Management Act, 1999 (FEMA) for all foreign exchange transactions, and to the guidelines of the Securities and Exchange Board of India (SEBI) where their activities touch capital markets. Compliance with these overlapping frameworks, and the maintenance of CRR, SLR, and capital adequacy ratios as prescribed by the RBI from time to time, forms a core part of the day-to-day compliance obligations of every bank in India. Company Secretaries in banking companies bear particular responsibility for ensuring adherence to these regulatory requirements as Principal Officers of their organisations.
Banking-Related Laws
Indian banking is governed not merely by the RBI Act and the Banking Regulation Act, but by a web of intersecting statutes, each addressing a distinct dimension of banking activity. As per ICSI, the principal banking-related laws are:
The Negotiable Instruments Act, 1881 governs the payment and collection of cheques, bills of exchange, and promissory notes, including the liability of paying and collecting banks, the consequences of forged instruments, and the criminal liability for dishonoured cheques under Section 138.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) enables banks and financial institutions to enforce security interests and recover dues from non-performing assets (NPAs) without court intervention, and has become one of the most important tools for NPA management.
The Recovery of Debts and Bankruptcy Act, 1993 (RDBA) established Debt Recovery Tribunals (DRTs) for the speedy adjudication of recovery claims by banks and financial institutions above a specified threshold.
The Insolvency and Bankruptcy Code, 2016 (IBC) further strengthened the framework for resolution of stressed assets by providing a time-bound insolvency resolution process applicable to corporate debtors.
The Prevention of Money Laundering Act, 2002 (PMLA), read alongside the Foreign Exchange Management Act, 1999 (FEMA), governs the obligations of banks to detect, report, and prevent money laundering and illicit cross-border financial flows.
The Consumer Protection Act, 2019 and the Reserve Bank – Integrated Ombudsman Scheme, 2021 together provide the framework for redress of customer grievances against deficiency in banking services. Internationally, the Basel Accords (Basel I, II, and III), though not statutes, are implemented by the RBI through its master circulars and directions, and set the global benchmarks for capital adequacy, liquidity, and risk management that Indian banks are required to meet.
Corporate Governance and Ethics in Banks
Corporate governance in banks occupies a distinct and heightened position compared to other industries because banks accept public liabilities (deposits) and their failure carries systemic risk for the wider economy. The relationship between a bank and its depositors is fiduciary in character, carrying an enhanced responsibility to protect the interests of all stakeholders. The governance framework for banks is accordingly more prescriptive than for ordinary companies, combining the requirements of the Companies Act, 2013 with the additional governance directions issued by the RBI.
At the board level, the Banking Regulation Act, 1949 prescribes requirements for the composition, qualification, and tenure of directors of banking companies, and empowers the RBI to appoint additional directors where governance deficiencies are found. Banks listed on stock exchanges are additionally governed by SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, which mandate audit committees, remuneration committees, and vigil mechanisms, among other requirements.
Risk management is integral to both governance and ethics. Banks are expected to develop internal systems for credit management, investment strategy, and NPA monitoring, and to report risk in accordance with Basel III norms. The RBI's fit-and-proper criteria for directors and senior management, its guidelines on related-party transactions, and its framework for prompt corrective action (PCA) against banks with deteriorating financials all reinforce the governance architecture. ICSI further identifies the formulation of a Code of Conduct for directors and senior management, adherence to internal control systems, and the role of the Audit Committee and the Fraud Monitoring Committee as key elements of a bank's internal governance framework. Ultimately, as per ICSI, "enforcement of corporate governance practices by rules or legislative measures only may not yield a desired result unless there is a key man behind the scene in achieving this task", a role the Company Secretary is positioned to fulfil.