Types of Banks & Their Functions: The Indian Banking Buffet
Just like a healthcare system has general hospitals, specialized clinics, and local pharmacies, the banking system has different players for different needs. Let's find out which one fits you best.
Key Takeaways
- The RBI is the "Boss" (Regulator) that controls all other banks.
- Commercial Banks (SBI, HDFC) are the "General Hospitals" – they do everything (Savings, Loans, Credit Cards).
- Payments Banks (Paytm, Airtel) are like "Digital Wallets" – great for transactions, but cannot lend money.
- Small Finance Banks (AU, Equitas) focus on the "Unbanked" – offering higher interest rates on deposits to attract customers.
The Big Picture: Structure of Indian Banking
The Indian banking system is a tiered structure. At the very top sits the Reserve Bank of India (RBI) . Below it are the banks that serve you and me.
1. Commercial Banks: The Heavyweights
These are the banks most of us use daily. They operate for profit.
A. Public Sector Banks (PSBs)
Majority Stake:
Government of India (more than 50%).
Examples:
SBI, Punjab National Bank, Canara Bank.
Pros:
High trust (Government backing), vast network in rural areas.
Cons:
Slower service, older technology compared to private peers.
B. Private Sector Banks
Majority Stake:
Private individuals and corporations.
Examples:
HDFC, ICICI, Axis Bank.
Pros:
Excellent technology, fast service, better credit card offers.
Cons:
Higher minimum balance requirements, higher charges.
2. Niche Banks: The Specialists
The RBI introduced these to reach specific people who were ignored by big banks.
💰 Small Finance Banks (SFBs)
Goal: Lend to small businesses and farmers.
Why Choose? They often offer higher interest rates on Savings & FDs (e.g., 7-8%) to attract deposits.
Examples: AU Small Finance, Equitas.
📱 Payments Banks
Goal: Digital transactions and remittances.
Restriction: Cannot lend money (No loans, no credit cards). Max deposit limit ₹2 Lakh.
Examples: Paytm Bank, Airtel Payments Bank.
3. Functions of a Bank
What does a bank actually do? It acts as a bridge between "People with excess money" (Savers) and "People who need money" (Borrowers).
- Primary Functions Accepting Deposits (Savings, FD, RD) and Granting Loans (Home, Car, Personal).
- Secondary Functions Locker facilities, Wealth Management, Insurance sales (Bancassurance), and Currency Exchange.
Which Bank Should You Choose?
Don't put all your eggs in one basket. A smart investor uses a "Hub and Spoke" model.
| Need | Best Choice | Why? |
|---|---|---|
| Primary Salary Account | Private Bank (HDFC/ICICI) | Best app, reliable servers, good service. |
| Long Term FD | Small Finance Bank | 1-2% higher interest rates than big banks. |
| Locker / Security | Public Sector Bank (SBI) | Cheaper locker rates, government trust. |
Is Your Money Safe?
Regardless of the bank type (Public, Private, or Small Finance), your deposits up to ₹5 Lakh are insured by DICGC (an RBI subsidiary).
Learn about Deposit InsuranceFrequently Asked Questions
Is it safe to keep money in a Small Finance Bank? ▼
Yes. SFBs are regulated by the RBI and covered by the same ₹5 Lakh DICGC insurance as SBI or HDFC. However, avoid putting more than ₹5 Lakh in a single SFB if you are risk-averse.
Can a Payments Bank issue a credit card? ▼
No. Payments Banks cannot lend money, so they cannot issue credit cards directly. They often partner with other banks to offer co-branded cards.