A payments bank in India cannot lend to anyone, and it can hold only Rs 2 lakh of deposits from each customer, as per a compliance page that states the position as of October 2026. Its work is limited to taking demand deposits and providing payment and remittance services. A customer of a regular private bank never meets such limits.
This is where the different types of banks in India begin to separate from each other. At the counter or on the mobile app, every bank looks similar, but the licence it holds decides what it may do.
The Reserve Bank of India Act 1934 and the Banking Regulation Act 1949 are the base for this system, and the RBI issues most of the rules under them.
How scheduled, private and small finance banks differ
A commercial bank becomes a scheduled bank when it is included in the Second Schedule of the RBI Act 1934, as per the Department of Financial Services, Ministry of Finance. The status comes from this inclusion and not from the size of the bank or the number of its branches.
Domestic private banks hold a licence issued under the Banking Regulation Act 1949. Many borrowers and depositors use such banks every day without knowing which law gives them the permission to operate.
Small finance banks have a different purpose. They exist to widen financial inclusion, mainly by lending to small businesses, small and marginal farmers, and micro and small enterprises, according to the same Department of Financial Services page.
Alongside this, RBI issued digital payment security directions for small finance banks on 31 July 2026. These directions apply to the way such banks handle digital payments for their customers.
Cooperative banks have two regulators
Cooperative banks follow a different path from the commercial banks described above. They are registered under the Cooperative Societies Acts of the states, or under the Multi-State Cooperative Societies Act 2002 for multi-state banks.
For their banking business, these banks are regulated by the RBI and the National Bank for Agriculture and Rural Development (NABARD). The rules come from the BR Act 1949 and the Banking Laws (Application to Cooperative Societies) Act 1965, so a depositor in such a bank deals with a society registered under one law and supervised under others.
On 13 January 2026 the RBI released a discussion paper on resuming licences for urban cooperative banks, and after reviewing the feedback it decided to resume licensing on an on tap basis. The discussion paper was not the final rule, and draft licensing guidelines were still to be issued for comment as of August 2026.
