1.1 What are the two main layers of India’s banking system?

The top layer is the Reserve Bank of India (RBI). It is the regulator, not a commercial lender. It sets rules, issues licenses, and supervises every other institution below it.

The second layer is everything the RBI regulates: commercial banks, cooperative banks, and non-bank lenders called NBFCs. Each type plays a different role in reaching different borrowers.

1.2 What are the categories of commercial banks in India?

Commercial banks split into several categories. Public sector banks, like SBI, are majority government-owned. Private sector banks, like HDFC Bank, are privately owned but RBI-licensed.

Foreign banks operate branches in India but are headquartered abroad. Regional Rural Banks and Small Finance Banks focus on rural and small borrowers. Payments banks can take deposits, but cannot lend at all.

1.3 What are cooperative banks, and how do they differ from commercial banks?

Cooperative banks are owned by their own members, not by shareholders or the government. They mainly serve a specific community, town, or district.

They fall into two broad kinds: urban cooperative banks, serving towns and cities, and rural cooperative banks, serving farmers through state, district, and village-level credit societies.

Unlike commercial banks, a cooperative bank answers to two regulators at once: the RBI for banking rules, and the state’s Registrar of Cooperative Societies for its cooperative structure.

1.4 What sits on a bank’s assets side, and what sits on its liabilities side?

A commercial bank’s assets are what it owns, or what is owed to it. Advances, meaning loans, count as assets. Investments, like government securities, also count. So does money at call and short notice.

Deposits work differently. They are money the bank owes back to its depositors. That puts them on the liabilities side of the balance sheet, not the assets side.

Here is why that makes sense. A bank lends out and invests the money it takes in as deposits. That is exactly why deposits are a liability it must repay, not an asset it simply holds.

1.5 What are Regional Rural Banks, and how are they owned?

Regional Rural Banks (RRBs) were set up starting 2 October 1975. Their job was to extend banking into rural areas that commercial banks often left underserved.

Each RRB is jointly owned by three parties. The Central Government holds 50%. A sponsor bank holds 35%. The State Government holds the remaining 15%.

The sponsor bank is usually a large public sector bank. It provides capital, technology, and managerial support to the RRB it sponsors.

1.6 What is the Lead Bank Scheme, and the Service Area Approach?

The RBI introduced the Lead Bank Scheme in December 1969. It assigned one bank the job of coordinating banking development in each district.

The Service Area Approach was added later, in April 1989. It sharpened the same idea further. Each rural bank branch got a specific cluster of villages, for coordinated credit planning.

Exam trap: the Service Area Approach is not its own separate scheme. It is a later refinement, added inside the existing Lead Bank Scheme.

2.1 Where did Indian banking begin?

Banking in India goes back to three colonial Presidency Banks. The Bank of Calcutta opened in 1806. The Bank of Bombay followed in 1840. The Bank of Madras opened in 1843.

In 1921, these three banks merged into one. The merged bank was called the Imperial Bank of India.

The Reserve Bank of India was set up separately, in 1935, as the country’s central bank. It did not grow out of the Presidency Banks.

In 1955, the government nationalised the Imperial Bank of India. It was renamed the State Bank of India. That is why SBI is India’s oldest large commercial bank, even though its current name is newer.

2.2 Why did the government nationalise banks in 1969 and 1980?

In 1969, the government nationalised 14 major private banks. Each had deposits above ₹50 crore at the time.

The goal was called “social control.” Private banks were seen as lending mostly to big industry, and neglecting farmers, small businesses, and rural areas.

Nationalisation let the government direct credit toward priority sectors instead: agriculture, small industry, and export businesses.

A second wave followed in 1980. The government nationalised 6 more banks. This brought the total count of nationalised banks to 20, alongside SBI.

2.3 How did banking open up again after 1991, and consolidate after 2017?

India’s 1991 economic reforms ended decades of licensing new private banks. Starting 1994, the RBI began licensing new private banks again. ICICI Bank and HDFC Bank both trace their start to this reopening.

From 2017 onward, the government reversed course on bank count. It began consolidating public sector banks instead of keeping many small ones.

In 2017, SBI merged with its five associate banks and with Bharatiya Mahila Bank. A second, bigger round of mergers followed in 2019, effective 1 April 2020. Ten public sector banks were merged into four larger ones.

Together, these mergers cut the number of public sector banks from 27 in 2017 down to 12 today.

2.4 What are Small Finance Banks, NBFCs, and MUDRA?

Small Finance Banks (SFBs) were set up to widen financial inclusion. They supply credit to small business units, small and marginal farmers, and rural entrepreneurs.

A Non-Banking Financial Company (NBFC) cannot accept demand deposits. That is a key difference from a full-fledged bank. Every NBFC must still register with the RBI, though.

MUDRA is not itself a bank. It is a SIDBI subsidiary that refinances lending institutions. Those institutions then give collateral-free credit to small, non-farm enterprises.

2.5 How has the RRB network been consolidated?

RRBs grew fast at first. There were 5 in 1975. That number grew to 196 by the mid-1980s. Then the network was consolidated down to just 43 by 2020-21.

A “One State, One RRB” policy is pushing further consolidation. The goal is stronger, better-capitalised rural banks, rather than many small, weak ones.

3.1 Why did so many small RRBs get merged?

Early RRBs multiplied fast. Many states set up one per district, until nearly 200 existed by the mid-1980s.

Many of these stayed small and thinly capitalised. On their own, they were too weak to absorb loan losses, or to invest in modern banking technology.

Merging RRBs within a state pools their capital and back-office costs together. It echoes the same logic behind the 2017-2020 public sector bank mergers.

The PSB health review, July 2026

28 Jul 2026

On 28 July 2026, Parliament reviewed Public Sector Banks’ financial health. Their Gross NPA ratio fell to a historic low of 1.9% in FY2025-26, down from 7.3% in FY2021-22.

PSBs posted their highest-ever net profit too: ₹1.98 lakh crore, on ₹283.3 lakh crore of aggregate business.

Credit growth accelerated as well. MSME loans grew 19.6% year-on-year, and retail loans grew 19.8%.

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.

Source: PIB, PSB financial health review, July 2026.