Banking in India: Public Sector Banks & Private Sector Banks

Banking sector has a crucial role to play in the economic development of India. The banking industry is responsible to regulate the finances of India including cash and credit. The banks are recognized as the institutional bodies which conduct the activity of borrowing and lending money to maintain the economic stature of a country. Reserve Bank of India (RBI) is the central body which is the apex banking institution that is responsible to regulate overall monetary policy of the country by providing guidelines to the institutional banks. Banks are classified in India among two different sectors i.e. Public Sector Banks and Private Sector Banks.

Banking Sector in India and its Functions

Banking sector in India facilitates the flow of money and boosts the economic activities of the country. Banks in India offer a wide range of banking services to the customers such as savings; loans, credit cards, investment services, and electronic banking options. Here are the major functions of the banking sector in India:

Provide Loans

Individuals or businesses are eligible to take loans for various purposes like home mortgages, business expansion or personal loans by paying an amount of interest.

Accept Deposits

Banks offer a secured place for individuals or businesses to deposit their money. They can withdraw the money as per their choice and the banks are required to pay an amount of interest against the deposit.

Investments

Banks also provide the services of investment to enhance the wealth of an individual through investment products like mutual funds, stocks, and bonds.

Currency Exchange

Many banks offer services of foreign currency exchange which allow customers to buy, sell or exchange the foreign currencies.

How does the Banking Sector impact the Stock Market?

There are various ways in which the banking sector impacts the working of the stock market in India. 

Interest Rates

Banks play a crucial role in determining the interest rates which impacts the overall economy of the country. A change in the interest rate might boost or disrupt the stock market affecting the pressure of buying or selling in the market.

Credit Availability

The lending policies of banks impact the availability of credit to the business and consumers. The stock prices are affected negatively when lending standards are restricted by the banks and vice versa.

Investment Activities

Banks also offer investing services to the consumers as they invest in various securities like stocks and bonds which have a potential impact on the market movements.

Regulatory Environment

Any kind of changes in the rules and regulations of the banking sector affect the market movements. When their ability to lend is restricted, it might affect the stock prices negatively.

Commercial Banks in India

The main functions of commercial banks are lending and borrowing. They are responsible to operate smooth flow of funds and offer banking products which further contributes towards overall economic growth. Commercial banks are categorized as public banks and private banks.

Public Sector Banks

Public sector banks or the financial institutions are the ones which are controlled by the government or government entities. The central bank owns more than 50% holding of these banks. As of now, in India, currently there are 34 nationalized banks wherein 12 are the government banks and 22 are the private sector banks.

Public sector banks follow an organized structure with a large customer base. Public sector banks are beneficial for employees as they offer job security and are less competitive than the private sector banks. Some of the public sector banks in India include:

• State Bank of India
• Punjab National Bank
• UCO Bank
• Canara Bank
• Indian Bank
• Bank of Maharashtra
• Bank of Baroda

In the stock market, PSU banks performed really well in the last few years which was recommended by GTF. The PSU sector was in the trough phase and started to pick a rally and is now moving towards achieving the peak.

Also Read: Healthcare Sector

Pros of Public Sector Banks in India

The customer base of the public bank sector is very large as the majority population of India is dependent on these banks to raise fundings. Let us look at some of the advantages of public sector bank:

Accessibility

Public sector banks are located in each and every region of the country as well as in remote areas which increases the reach of people to avail the banking services easily.

Security

The majority holdings of public sector banks are backed by the government; thereby increasing the security of money and investments.

Social Responsibility

PSU Banks fulfill social responsibilities by actively involving in social welfare activities or lending money towards agriculture or MSME sectors to contribute towards overall growth of the economy.

Enhanced Banking Services

Public sector banks ensure that high quality banking services are delivered by offering loans at competitive rates and making credit more accessible.

Private Sector Banks

The majority shares of private sector banks are held by private companies or individuals. Private Banks are also required to adhere to the rules and regulations set by the central bank.

Some of the examples of private sector banks in India include:

• Axis Bank
• HDFC Bank
• Kotak Mahindra Bank
• IndusInd Bank
• Bandhan Bank
• ICICI Bank

Pros of Private Sector Banks in India

Private sector banks in India holds a small customer base as compared to public sector banks and the benefits offered by private sectors banks are mentioned below:

Personalized Services

Private Banks offer fast banking services to the customers where regular operations are never delayed and also meet specific financial needs of an individual by offering personalized solutions related to banking.

Efficient Management System

Private Banks ensure a smooth management banking system by providing high quality fast services to the customers with enhanced decision making process.

Technology and Innovation

Private banks are flexible in adopting new technologies which is why they are able to provide enhanced banking services like mobile banking, internet banking and ATMs.

Public Sector Banks Vs Private Sector Banks

Parameters	Public Sector Banks	Private Sector Banks
Motive	Generate profits by fulfilling social responsibilities	Aims to maximize profits
Authority	Government	Private companies or individuals
Customer Base	Large	Large
Additional Advantage	Pensions Schemes to employees.	No pension schemes to employees.
Job Security	Offers job security to the employees	No job security for employees
Interest rates	Loan interest rates are higher while savings interest rates are lower.	Higher interest rates on savings and lower interest rates on loans.

Wrap It Up…

Banking sector plays a crucial role to run the overall Indian economy. The banks or financial institutions perform the functions of borrowing or lending to the customers. Public sector banks and private sector banks are the two categories of banking sector in India. For investment purposes, you can enroll in the Trading in the Zone course offered by GTF. 

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