February 21, 2024

HPAS/Allied Mains 2022 Answer Writing Challenge Day 190: Model Answer

QUESTION: Differentiate between Commercial Banks and Regional Rural Banks. (4 marks/ 60 words)


Commercial banks – Commercial banks provide a range of financial services, including checking and savings accounts, money market accounts, time deposits, etc. These banks function commercially, with profit being their primary goal. Commercial banks operate under the Banking Regulation Act, 1949. The State bank of India, HDFC Bank, Axis Bank, ICICI Bank, and Canara Bank are some examples of commercial banks.

Commercial banks are owned by the government, private companies, or the state. The banks in which the government holds the majority of stocks are public sector banks. On the other hand, private sector banks are those in which most of the stock is held by a private entity, group of people, or individual.

Commercial banks in India are further divided into scheduled and non-scheduled banks. A scheduled commercial bank is listed in the second schedule of the Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the bank must have at least five lakhs rupees in paid-up capital and raised funds. A scheduled bank is eligible for low-interest loans from the Reserve Bank of India.

On the other hand, a non-scheduled commercial bank does not comply with the RBI’s regulations and have a reserve capital of less than five lakh rupees. Additionally, these institutions are not listed in the Second Schedule of the RBI Act, 1934.

 Regional rural banks (RRBs) – RRBs were founded in 1976 following the recommendations of the Narasimham Working Group (1975). These banks are governed by the Regional Rural Banks Act (1976). Regional rural banks are government-owned scheduled commercial banks that operate at the various regional levels.

RRBs’ main purpose is to provide credit and other services to agricultural workers, artisans, small and marginal farmers, and small entrepreneurs in rural areas to reduce regional imbalances, create rural jobs, and close the credit gap. These banks have a 50:35:15 shareholding pattern amongst the three sponsoring entities: central government, sponsoring bank, and state government, respectively. RRBs were set up to eliminate other unorganized financial institutions like money lenders and supplement the efforts of co-operative banks.


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