India’s banking system evolved through nationalisation, regional expansion, and recent consolidation, building the structure that serves the country today.
Related: IndEco0007 — Money and Banking covers the RBI’s monetary policy and India’s banking system more broadly.
MCQquestion.comIndEco0058 · Indian Economy
Indian Banking’s Arc
From colonial presidency banks to a wave of consolidation
Colonial Roots
SBI traces back to presidency banks
The State Bank of India descends from colonial-era presidency banks, later reorganised under its current name.
1969
14 major banks are nationalised
The government takes over large commercial banks to extend credit to underserved sectors like agriculture.
1975
Regional Rural Banks are established
Jointly owned by the Centre, a sponsor bank, and the State Government, to reach rural India.
Recent Years
Mergers consolidate public sector banks
Many public sector banks combine into fewer, larger, more financially resilient institutions.
Reversing a Trend
Recent consolidation reverses the earlier trend of expansion — from many state-run banks toward fewer, larger, more financially resilient ones.
Must Know
✊ Must Know
Origins and Nationalisation
- Colonial Roots The State Bank of India traces its roots to colonial-era presidency banks. These were later reorganised under its current name.
- 1969 The Government of India first nationalised 14 large commercial banks in 1969.
Rural and District Banking Structures
- RRBs Regional Rural Banks, established in 1975, are jointly owned by the Central Government, a sponsor bank, and the State Government.
- Lead Bank Scheme This scheme assigns a specific bank responsibility for coordinating banking development in each district.
Recent Consolidation
- Mergers Recent bank mergers have consolidated India’s public sector banking into fewer, larger institutions.
A Bank’s Balance Sheet: Assets vs Liabilities
- Assets A commercial bank’s assets are what it owns or is owed. Advances (loans), investments (like government securities), and money at call and short notice all count as assets.
- Liabilities Deposits are money the bank owes back to its depositors. They sit on the liabilities side of the balance sheet, not the assets side.
- Why It Matters A bank lends out and invests the money it takes in as deposits. That is exactly why deposits are a liability the bank must repay, not an asset it holds.
What does “legal tender” actually mean?
- Definition Legal tender money is money a creditor is legally bound to accept, when offered, to settle a debt.
- Not court fees It is not money paid as court fees, and it is not limited to coins or cheques.
- India RBI currency notes are legal tender for any amount. Coins are legal tender only up to fixed limits set by the Coinage Act, 2011.
Good to Know
📘 Good to Know
Newer Categories of Banks
- SFBs Small Finance Banks were set up to extend banking services to underserved and unserved sections of society.
- NBFI A Non-Banking Financial Institution cannot accept demand deposits. This is a key difference from a full-fledged bank.
- MUDRA Bank MUDRA Bank supports small and micro enterprises through targeted credit schemes.
Test Yourself
Great to Know
🌟 Great to Know
Reading the Bigger Pattern
- 1969 Rationale Bank nationalisation in 1969 was a deliberate policy to extend credit to previously underserved sectors like agriculture. It reflected the era’s development priorities.
- Reversal Recent consolidation reverses that earlier trend of expansion. It aims instead for larger, more financially resilient public sector banks.
- Continuity Specialised institutions like RRBs and Small Finance Banks show a continued, evolving effort. Their goal is to extend formal banking to India’s rural and underserved populations.
📝 Previous Year Questions
UPSC CSP 2019 — Service Area Approach and Bank Balance Sheets
- UPSC 2019 UPSC CSP 2019, Q61: The correct answer is (b) Lead Bank Scheme. RBI introduced the Service Area Approach under the Lead Bank Scheme in 1975. It assigned each rural bank branch a specific cluster of villages for coordinated area-wise credit planning. See UPSC CSP 2019 GS Paper I, Q61.
- UPSC 2019 UPSC CSP 2019, Q64: The correct answer is (b) Deposits. A bank’s deposits are money it owes back to depositors. They sit on the liabilities side of its balance sheet, not the assets side. Advances, investments, and money at call and short notice are all assets, since they represent money the bank has lent out or invested. See UPSC CSP 2019 GS Paper I, Q64.
UPSC CSP 2018 — What Counts as Legal Tender
- UPSC 2018 UPSC CSP 2018, Q46: Legal tender money is money a creditor is legally bound to accept, when offered, to settle a debt. It is not money paid as court fees, and it is not limited to coins or cheques. RBI currency notes are legal tender for any amount, while coins are legal tender only up to the limits fixed by the Coinage Act, 2011. See UPSC CSP 2018 GS Paper I, Q46.
Current Affairs
📰 Current Affairs
PSB Health Review, July 2026
- NPA Ratio On 28 July 2026, Parliament reviewed Public Sector Banks’ (PSBs) financial health. Their Gross NPA ratio fell to a historic low of 1.9% in FY2025-26, down from 7.3% in FY2021-22. (Source: PIB)
- Record Profit PSBs also posted their highest-ever net profit: ₹1.98 lakh crore, on a ₹283.3 lakh crore aggregate business. (Source: PIB)
- Credit Growth Credit growth also accelerated. MSME loans grew 19.6% year-on-year, and retail loans grew 19.8%. (Source: PIB)
- ECLGS 5.0 To ease liquidity pressure from the West Asia crisis, the government launched ECLGS 5.0 in May 2026. It offers credit guarantees up to ₹2,55,000 crore, including ₹5,000 crore earmarked for the airline sector. (Source: PIB)
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