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Commercial Banks & SFBs: Nationalization & Payment Banks

Commercial banking in India is governed by the Banking Regulation Act, 1949, where Section 5(b) defines banking as accepting public deposits for lending or investment, repayable on demand and withdrawable by cheque, draft, or order. Lenders satisfying Section 42(6)(a) of the Reserve Bank of India Act, 1934, are listed as Scheduled Commercial Banks in the Second Schedule. State intervention structured the modern sector: the Imperial Bank of India was reconstituted as the State Bank of India in 1955 following the All India Rural Credit Survey Committee report, while the nationalization of fourteen major commercial banks in 1969 and six in 1980 aligned private capital with state developmental planning.

Differentiated banking emerged from the 2014 recommendations of the Nachiket Mor Committee on Thorough Financial Services for Small Businesses and Low-Income Households. Payments Banks were instituted to provide remittance facilities and basic savings mechanisms. These institutions can accept demand deposits up to a statutory limit of two lakh rupees per customer across current and savings accounts. However, they are legally barred from extending loans, issuing credit cards, or accepting term deposits. To preserve capital safety, Payments Banks must invest at least seventy-five percent of demand deposits in Statutory Liquidity Ratio eligible government securities, maintaining the remaining twenty-five percent in operational accounts with other scheduled commercial banks.

Small Finance Banks, framed under recommendations from the Usha Thorat Committee, deliver formal credit to unserved micro-enterprises, small farmers, and informal entities. Unlike Payments Banks, they operate as full financial intermediaries, accepting both demand and time deposits while extending loans. To preserve their targeted focus, Small Finance Banks must direct seventy-five percent of Adjusted Net Bank Credit to priority sectors, exceeding the forty percent benchmark for universal commercial banks. In addition, at least fifty percent of their loan portfolio must consist of advances up to twenty-five lakh rupees. In UPSC CSE and SSC CGL examinations, recurring topics evaluate differentiated banking norms, Payments Bank statutory prohibitions, Small Finance Bank priority lending thresholds, and historic bank nationalization acts.
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Key Concepts & Self-Assessment15 Key Facts

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  1. #1
    Fourteen major commercial banks were nationalized on July 19, 1969, followed by six more banks on April 15, 1980.
  2. #2
    The Imperial Bank of India was reconstituted as the State Bank of India (SBI) on July 1, 1955 following the All India Rural Credit Survey Committee report.
  3. #3
    Payments Banks were established on the recommendations of the Nachiket Mor Committee; Airtel Payments Bank was India’s first operational Payments Bank.
  4. #4
    Payments Banks are prohibited from lending or issuing credit cards and can accept demand deposits up to a statutory ceiling of ₹2,00,000 per customer.
  5. #5
    Small Finance Banks must allocate at least 75% of their Adjusted Net Bank Credit (ANBC) to Priority Sector Lending (PSL).
  6. #6
    Small Finance Banks were established following the recommendations of the Usha Thorat Committee to advance financial inclusion to unserved micro-enterprises and small farmers.
  7. #7
    Small Finance Banks are mandated to extend at least 50% of their total loan portfolio to micro-loans of up to ₹25 lakh.
  8. #8
    Scheduled Commercial Banks are listed in the Second Schedule of the Reserve Bank of India Act, 1934, satisfying capital adequacy and depositor protection requirements under Section 42(6).
  9. #9
    The Banking Regulation Act, 1949 governs licensing, board management, lending standards, and reserve requirements for all commercial banking institutions in India.
  10. #10
    The minimum paid-up voting equity capital required for setting up a new Small Finance Bank is ₹200 crore under revised Reserve Bank of India operational guidelines.
  11. #11
    Regional Rural Banks were established on October 2, 1975 under the RRB Ordinance (later RRB Act, 1976), following recommendations of the Narasimham Working Group.
  12. #12
    Prathama Bank, sponsored by Syndicate Bank in Moradabad, Uttar Pradesh, was India's first Regional Rural Bank established in October 1975.
  13. #13
    The equity shareholding in Regional Rural Banks is held jointly: 50% by the Central Government, 15% by the State Government, and 35% by the Sponsor Bank.
  14. #14
    The Deposit Insurance and Credit Guarantee Corporation, a wholly owned subsidiary of the RBI, insures bank deposits up to ₹5 lakh per depositor across commercial banks.
  15. #15
    The Basel III capital framework mandates commercial banks in India to maintain a minimum Capital to Risk-Weighted Assets Ratio of 9% alongside statutory conservation buffers.

Subject Specialist Commentary

Analytical perspective & practical exam advice from the Master10 academic board

Educator's Insight
India's banking architecture comprises commercial banks, differentiated banks, and regional lenders operating under the Banking Regulation Act of 1949 and the RBI Act of 1934. Commercial banking underwent major structural expansion through the nationalization of 14 banks in 1969 and six more in 1980. To advance financial inclusion, the RBI subsequently introduced differentiated banking licences, leading to the creation of Payments Banks and Small Finance Banks.
Banking and economic awareness tests frequently question regulatory limits for differentiated banks. A major exam trap involves business activities: Payments Banks can accept demand deposits up to ₹2,00,000 per customer, but they cannot lend money or issue credit cards. In contrast, Small Finance Banks can provide loans and must allocate 75 percent of their adjusted net bank credit to priority sector lending. Remember the Nachiket Mor Committee recommended Payments Banks, while the Usha Thorat Committee recommended Small Finance Banks.

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