Commercial Banks
Subject: Economy | Unit: Money & Banking | Topic: Commercial Banks
Exam: AP Group 2 (APPSC)
Introduction
Commercial banks form the backbone of India's financial system, mobilizing savings from the public and channeling them as loans to productive sectors. The Indian banking system has undergone significant consolidation — from 27 public sector banks in 2017 to 12 after mergers in 2019-20. This chapter covers the classification of banks, their functions, the critical concept of credit creation (money multiplier), priority sector lending norms, NPA management, and financial inclusion initiatives. The money multiplier formula and credit creation process are among the most frequently tested concepts in competitive exams.
Economic Context
India's banking history dates to the establishment of the Bank of Hindustan (1770) and later the presidency banks, which eventually merged to form the Imperial Bank of India (1921), nationalized as the State Bank of India in 1955. The major nationalization waves of 1969 (14 banks) and 1980 (6 banks) expanded banking reach dramatically. Today, SBI is India's largest bank by assets and branch network. The banking sector has achieved a remarkable turnaround in asset quality, with gross NPA ratio declining from 11.2% (2018) to approximately 2.5% (2025).
Core Content
Classification of Commercial Banks
| Type | Key Feature | Examples |
|---|
| Public Sector Banks (PSBs) | Government holds 51%+ stake | SBI, PNB, Bank of Baroda |
| Private Sector Banks | Majority stake with private entities | HDFC Bank, ICICI Bank, Axis Bank |
| Foreign Banks | Headquartered abroad; branches in India | Citibank, Standard Chartered, HSBC |
| Regional Rural Banks (RRBs) | Rural focus; shareholding: Centre 50%, State 15%, Sponsor Bank 35% | Andhra Pradesh Grameena Vikas Bank |
| Small Finance Banks | Financial inclusion; 75% lending to priority sector | AU Small Finance Bank, Equitas |
| Payments Banks | Deposits up to Rs 2 lakh only; CANNOT lend | Paytm Payments Bank, India Post Payments Bank |
Scheduled vs Non-Scheduled Banks
| Feature | Scheduled Banks | Non-Scheduled Banks |
|---|
| Listed in | Second Schedule of RBI Act | Not listed |
| Paid-up capital | Rs 5 lakh minimum | Lower requirements |
| Regulatory oversight | Full RBI supervision | Fewer requirements |
Bank Consolidation (2019-20)
10 PSBs merged into 4 large banks. After consolidation, 12 PSBs remain (down from 27 in 2017). SBI continues as India's largest bank.
Functions of Commercial Banks
| Category | Functions |
|---|
| Primary | Accepting deposits (savings, current, fixed, recurring) and granting loans/advances |
| Secondary — Agency | Bill payments, tax collection, share transactions on behalf of customers |
| Secondary — Utility | Safe deposit lockers, forex services, merchant banking |
Deposit Types
| Type | Interest | Withdrawal | Key Feature |
|---|
| Savings Account | Moderate | Limited | Most common retail account |
| Current Account | None | Unlimited | For businesses; demand deposit |
| Fixed Deposit (FD) | Higher | After maturity | Time deposit; penalty for early withdrawal |
| Recurring Deposit (RD) | Moderate-High | After maturity | Monthly fixed installments |
Demand deposits (current, savings) are part of M1 (narrow money). Time deposits (FD, RD) are added to get M3 (broad money).
Credit Creation — The Money Multiplier
Banks create money through the deposit-lending cycle:
- A customer deposits Rs 1,000 in a bank
- Bank keeps CRR (say 10% = Rs 100) with RBI and lends Rs 900
- The Rs 900 loan eventually returns as a new deposit in the banking system
- The process repeats, each time creating new deposits
Money Multiplier = 1 / CRR (simplified)
| CRR | Money Multiplier | Rs 1,000 deposit creates |
|---|
| 10% | 10 | Rs 10,000 total money supply |
| 5% | 20 | Rs 20,000 total money supply |
| 3% (current) | 33.3 | Rs 33,333 total money supply |
Key Formulas:
- Money Multiplier = 1 / CRR
- High-Powered Money (H) = Currency with public + Reserves of banks with RBI
- Money Supply (M) = Money Multiplier x High-Powered Money
The actual multiplier is lower than the simplified formula because of the currency drain ratio (people holding cash outside banks).
Types of Loans
| Type | Description |
|---|
| Term Loans | Fixed amount for fixed period (housing, education, vehicle) |
| Cash Credit | Borrowing up to pre-approved limit against security |
| Overdraft | Withdraw more than balance in current account |
| Discounting of Bills | Bank purchases bills of exchange at discount before maturity |
Priority Sector Lending (PSL) Norms
| Category | Target (% of ANBC) |
|---|
| Total PSL | 40% |
| Agriculture | 18% |
| Micro Enterprises | 7.5% |
| Weaker Sections | 12% |
| Foreign banks (20+ branches) | Same norms as domestic banks |
| Shortfall penalty | Must deposit in RIDF with NABARD |
ANBC = Adjusted Net Bank Credit
| Classification | Period Overdue |
|---|
| Sub-standard | Up to 12 months |
| Doubtful | 12+ months |
| Loss assets | Identified by bank/auditor/RBI as uncollectable |
- NPA: loan where interest/installment overdue for more than 90 days
- Gross NPA ratio declined from 11.2% (2018) to ~2.5% (2025)
- SARFAESI Act 2002: allows banks to recover NPAs without court intervention
Financial Inclusion Initiatives
| Scheme | Details |
|---|
| PM Jan Dhan Yojana (2014) | Zero-balance accounts with RuPay debit card; 52+ crore accounts by 2025 |
| JAM Trinity | Jan Dhan + Aadhaar + Mobile — backbone of DBT |
| Business Correspondents | Extend banking services to unbanked villages |
| MUDRA Loans | Shishu (up to Rs 50K), Kishore (up to Rs 5L), Tarun (up to Rs 10L) |
| DICGC Insurance | All deposits insured up to Rs 5 lakh per depositor per bank |
| KYC norms | Aadhaar, PAN, address proof mandatory for account opening |
| Basel III norms | Minimum CRAR 9%; Tier-I capital minimum 7% |
AP Connection
- AP has extensive banking coverage through PSBs, private banks, RRBs, and cooperative banks
- Andhra Pradesh Grameena Vikas Bank serves rural AP as a Regional Rural Bank
- Jan Dhan accounts in AP facilitate Direct Benefit Transfer for NTR Bharosa Pension (Rs 27,719 crore), Annadata Sukhibhava (Rs 6,600 crore), and Talliki Vandanam (Rs 9,407 crore)
- AP agriculture credit is supported by NABARD refinancing and KCC (Kisan Credit Cards)
- MUDRA loans support AP's MSME sector and self-employment initiatives
- PSL norms ensure credit flow to AP's agricultural and micro-enterprise sectors
Key Points Summary
- Commercial banks accept deposits and lend money; the interest spread is their profit
- Scheduled banks are listed in the Second Schedule of RBI Act with Rs 5 lakh minimum paid-up capital
- After 2019-20 consolidation, 12 PSBs remain (down from 27 in 2017)
- SBI is India's largest bank by assets and branch network
- Payments banks accept deposits up to Rs 2 lakh only and CANNOT lend
- RRB shareholding: Centre 50%, State 15%, Sponsor Bank 35%
- Small Finance Banks must lend 75% to priority sectors
- Money Multiplier = 1 / CRR (simplified formula)
- Money Supply (M) = Money Multiplier x High-Powered Money (H)
- NPA definition: loan where interest/installment overdue for more than 90 days
- Gross NPA ratio declined from 11.2% (2018) to ~2.5% (2025)
- PSL target: 40% of ANBC to priority sectors; agriculture 18%, micro enterprises 7.5%
- SARFAESI Act 2002 allows NPA recovery without court intervention
- PMJDY: 52+ crore zero-balance accounts opened by 2025
- JAM Trinity (Jan Dhan + Aadhaar + Mobile) enables Direct Benefit Transfer
- DICGC insures deposits up to Rs 5 lakh per depositor per bank
- Basel III requires minimum CRAR of 9% for Indian banks (global: 8%)
Exam Strategy
| Question Pattern | Frequency | Focus Area |
|---|
| Money Multiplier formula | Very High | 1/CRR; numerical problems |
| Credit creation process | Very High | Deposit-lending cycle explanation |
| Bank types and features | High | Payments banks (can't lend), RRB shareholding, Small Finance (75% PSL) |
| PSL norms and sub-targets | High | 40% total, 18% agriculture, 7.5% micro, 12% weaker |
| NPA definition and classification | High | >90 days; sub-standard, doubtful, loss |
| PMJDY features | Medium | Zero-balance, RuPay card, JAM Trinity |
| SARFAESI Act | Medium | NPA recovery without court |
| MUDRA loan categories | Medium | Shishu/Kishore/Tarun — amounts |
Key Terms Glossary
| Term | Meaning | Telugu |
|---|
| Commercial Bank | Institution accepting deposits and lending money | వాణిజ్య బ్యాంకు |
| Credit Creation | Process by which banks multiply deposits through lending | రుణ సృష్టి |
| Money Multiplier | 1/CRR — factor by which deposits multiply | ద్రవ్య గుణకం |
| High-Powered Money | Currency with public + bank reserves with RBI | అధిక శక్తి ద్రవ్యం |
| NPA | Non-Performing Asset — loan overdue >90 days | నిరర్ధక ఆస్తి |
| PSL | Priority Sector Lending — directed credit to key sectors | ప్రాధాన్య రంగ రుణాలు |
| ANBC | Adjusted Net Bank Credit — base for PSL calculation | సవరించిన నికర బ్యాంకు రుణం |
| PMJDY | Pradhan Mantri Jan Dhan Yojana — financial inclusion | జన్ ధన్ యోజన |
| JAM Trinity | Jan Dhan + Aadhaar + Mobile | జామ్ త్రయం |
| SARFAESI | Securitisation Act for NPA recovery | సార్ఫేసీ చట్టం |
| Demand Deposit | Withdrawable anytime (current/savings) | డిమాండ్ డిపాజిట్ |
| Time Deposit | Fixed period deposit (FD/RD) | కాల డిపాజిట్ |
| MUDRA | Micro Units Development and Refinance Agency | ముద్ర |
| RRB | Regional Rural Bank | ప్రాంతీయ గ్రామీణ బ్యాంకు |
| CRAR | Capital to Risk-weighted Assets Ratio | మూలధన సమర్ధత నిష్పత్తి |