Banking System

- Scheduled Banks - All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled banks. These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks. These banks are eligible for certain facilities such as financial accommodation from RBI and are required to fulfill certain statutory obligation.
- The RBI is empowered to exclude any bank from the schedule whose:
Aggregate value of paid up capital and reserves fall below Rs 51akh
Affairs are conducted in a manner detrimental to the interests of depositors and
Goes into liquidation and ceases to transact banking business.
- Commercial Banks - Commercial banks may be defined as, any banking organization that deals with the deposits and loans of business organizations. Commercial banks issue bank checks and drafts, as well as accept money on term deposits. Commercial banks also. act as moneylenders, by way of installment loans and overdrafts. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.
- Public Sector Banks - These are banks where majority stake is held by the Government of India. Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.
- Foreign Banks - These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Examples of foreign banks in India are: HSBC, Citibank, Standard Chartered Bank, etc.
- Private Sector Banks - These are banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. Examples of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.
- Regional Rural Banks - Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area as notified by Govt. of India covering one or more districts in the State. RRBs are jointly owned by Govt. of India, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively. Prathama bank is the first Regional Rural Bank in India located in the city Moradabad in Uttar Pradesh.
- Cooperative Banks - A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
- Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts, etc).
- They provide limited banking products and are specialists in agriculture-related products. Cooperative banks are the primary financiers of agricultural activities, some small-scale industries and selfemployed workers.
- Co-operative banks function on the basis of "no-profit no-loss".
- Anyonya Co-operative Bank Limited (ACBL) is the first co-operative bank in India located in the city ofVadodara in Gujarat.
- The Co-operative Credit system consists of -
a. Short-term agricultural credit institutions
b. Long-term agricultural credit institutions
c. Non-agricultural credit institutions
- The short-term agricultural credit institutions are in three categories:
i. Primary Agricultural Credit Societies at the Village level Guidelines
ii. Central Co-operative Banks at the District level
iii. State Co-operative Banks at the State level.
- The Long-term agricultural credit institutions are as under-
1. Primary Land Development Banks [at the base]
2. Central Land Development Banks [at the apex]
- Thus, the apex of the co-operative organization in a state is the State Bank to which Central Banks are affiliated. The Primary societies are mostly affiliated to the Central Banks. Some of them are grouped into local unions for the purposes of supervision. All of them are forbidden to lend to non-members except with the sanction of the Registrar of Co-operative societies.
- Development Banks
Export-Import Bank of India (EXIM BANK)
Export-Import Bank of India is the premier export finance institution of the country, established in 1982 under the Export-Import Bank of India Act 1981.
- Organization
Exim Bank is managed by a Board of Directors, which has representatives from the Government, Reserve Bank of India, Export Credit Guarantee Corporation of India, a financial institution, public sector banks, and the business community.
- Functions of EXIM BANK
The Bank's functions are segmented into several operating groups including:
Corporate Banking Group which handles a variety of financing programmes for Export Oriented Units (EOUs), Importers, and overseas investment by Indian companies.
Project Finance / Trade Finance Group handles the entire range of export credit services such as supplier's credit, pre-shipment Agri Business Group, to spearhead the initiative to promote and support Agri-exports. The Group handles projects and export transactions in the agricultural sector for financing.
Small and Medium Enterprise: The group handles credit proposals from SMEs under various lending programmes of the Bank.
Export Services Group offers variety of advisory and value-added information services aimed at investment promotion.
Export Marketing Services Bank offers assistance to Indian companies, to enable them establish their products in overseas markets. The idea behind this service is to promote Indian export. Export Marketing Services covers wide range of export oriented companies and organizations. EMS group also covers Project exports and Export of Services.
Besides these, the Support Services groups, which include: Research & Planning, Corporate Finance, Loan Recovery, Internal Audit,. Management Information Services, Information Technology, Legal, Human Resources Management and Corporate Affairs.
Industrial Development Bank of India (IDBI)
- The Industrial Development Bank of India (IDBI) was established on 1 July 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India.
- In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged' in financing, promoting and developing industry in the country.
- Although Government shareholding in the Bank came down below 100% following IDBI's public issue in July 1995, the former continues to be the major shareholder.
- IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernisation and diversification purposes.
- In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms.
- IDBI has played a pioneering role, particularly in the pre-reform era (1964-91), in catalyzing broad based industrial development in the country in keeping with its Government-ordained 'development banking' charter.
- Narasimam committee recommends that IDBI should give up its direct financing functions and concentrate only in promotional and refinancing role. But this recommendation was rejected by the government.
- Later RBI constituted a committee under the chairmanship of S.H.Khan to examine the concept of development financing in the changed global challenges. This committee is the first to recommend the concept of universal banking.
- The committee wanted the development financial institution to diversify its activity.
- It recommended harmonising the role of development financing and banking activities by getting away from the conventional distinction between commercial banking and developmental banking.
- In September 2003, IDB! diversified its business domain further by acquiring the entire shareholding of Tata Finance Limited in Tata Home finance Ltd., signaling IDBI's foray into the retail finance sector.
- The fully owned housing finance subsidiary has since been renamed 'IDBI Home finance Limited'. In view of the signal changes in the operating environment, following initiation of reforms since the early 1990s, Government of India has decided to transform IDBI into a commercial bank without eschewing its secular development finance obligations.
- The migration to the new business model of commercial banking, with its gateway to lowcost current, savings bank deposits, would help overcome most of the limitations of the current business model of development finance while simultaneously enabling it to diversify its client / asset base.
- Towards this end, the IDB (Transfer of Undertaking and Repeal) Act 2003 was passed by Parliament in December 2003.
- The Act provides for repeal of IDB! Act, corporatisation of IDBI (with majority Government holding; current share: 58.4 7%) and transformation into a commercial bank.
- The provisions of the Act have come into force from 2 July 2004 in terms of a Government Notification to this effect.
- The Notification facilitated formation, incorporation and registration of Industrial Development Bank of India Ltd. as a company under the Companies Act, 1956 and a deemed Banking Company under the Banking Regulation Act 1949 and helped in obtaining requisite regulatory and statutory clearances, including those from RBI.
- IDBI would commence banking business in accordance with the provisions of the new Act in addition to the business being transacted under IDBI Act, 1964 from 1 October 2004, the 'Appointed Date' notified by the Central Government.
- IDBI Bank, with which the parent IDBI was merged, was a new generation Bank. The Pvt Bank was the fastest growing banking company in India. The bank was pioneer in adapting to policy of first mover in tier 2 cities.
- The Bank has one of the highest productivity per employee in Indian banking industry.
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)
- NABARD is an apex development bank in India having headquarters based in Mumbai (Maharashtra) and other branches are all over the country.
- It was established on 12 July 1982 on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981.
- It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC).
- Its main focus was to uplift rural India by increasing the credit flow for elevation of agriculture & rural non farm sector. NABARD will complete its 31 years on 12 July 2012.
- It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and
other economic activities in rural areas in India".
- RBI sold its stake in NABARD to the Government of India, which now holds 99% stake.
ROLE OF NABARD:- NABARD is the apex institution in the country which looks after the development of the cottage industry, small industry and village industry, and other rural industries. NABARD also reaches out to allied economies and supports and promotes integrated development. And to help NABARD discharge its duty, it has been given certain roles as follows:
Serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas
Takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.
Co-ordinates the rural financing activities of all· institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation
Undertakes monitoring and evaluation of projects refinanced by it.
NABARD refinances the financial institutions which finances the rural sector.
NABARD helps to develop the institutions which help the rural economy.
NABARD also keeps a check on its client institutes.
It regulates the institution which provides financial help to the rural economy.
It provides training facilities to the institutions working the field of rural upliftment.
It regulates the cooperative banks and the RRB's.
NON BANKING FINANCE COMPANIES (NBFCs)
- Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, Le. one that does not hold a banking license.
- These institutions are not allowed to take deposits from the public.
- Nonetheless, all operations of these institutions are still exercised under bank regulation.
- In India a Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stock, bondsire-purchase, insurance business, or chit business: but does not include any institution whose principal business is that includes agriculture or industrial activity; or the sale, purchase or construction of immovable property.
Difference between NBFCs & Banks
- NBFCs perform functions similar to that of banks; however there are a few differences in that an NBFC cannot accept demand deposits; an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.
MICROFINANCE INSTITUTIONS (MFIs)
- Microfinance institutions, also known as MFIs offer financial services to underprivileged and impoverished communities.
- Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.
- More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."
- Those who promote microfinance generally believe that such access will help poor people out of poverty.
- Microfinance is a broad category of services, which includes microcredit.
- Microcredit is provision of credit services to poor clients.
- Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse.
- Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'.
- Due to the broad range of micro finance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.
SELF-HELP GROUPS OR MICROCREDIT
- Self-Help Groups or Micro Credit are defined as a group of individual members who voluntarily come together for a common collective purpose basically for savings and borrowings.
- In practice these groups are comprised of individual members known to each other coming from the same village, community and even neighborhood '(homogenous group) and have certain pre-group social binding factors.
- Micro credit programme, enabling the poor people to be thrifty and in accessing loans and other financial services, was launched in 1992 with a SHG- BANK linkage arrangement.
- The poor are encouraged to voluntarily come together to save small amounts regularly and extent small loans among themselves.
- On attaining maturity to handle their own resources, they are in a position to negotiate with banks for credit facilities.
RESERVEBANK OF INDIA (RBI)
- The Reserve Bank of India (RBI) is the central banking institution of India and controls the monetary policy of the Indian rupee as well as currency reserves.
- The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934.
- The share capital was divided into shares of Rs.100 each fully paid which was entirely owned by private shareholders in the beginning. Reserve Bank of India plays an important part in the development strategy of the government.
- It is a member bank of the Asian Clearing Union. Reserve Bank of India was nationalized in the year 1949.
- The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi.
- Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.
Structure
- Central Board of Directors: The Central Board of Directors is the main committee of the central bank.
- The Government of India appoints the directors for a four-year term.
- The Board consists of a governor, four deputy governors, fifteen directors to represent the regional boards, one from the Ministry of Finance and ten other directors from various fields.
- Governors: The current Governor of RBI is Raghuram Rajan (Previous was Duvvuri Subbarao).
- The RBI extended the period of the present governor up to 2013.
- There are four deputy governors, currently K. C. Chakrabarty, Subir Gokarn, Anand Sinha and H.R.Khan
- Supportive Bodies: The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai.
- The representations are formed by five members, appointed for four years by the central.government and serve-beside the advice of the Central Board of Directors-as a forum for regional banks and to deal with delegated tasks from the central board.
- The institution has 22 regional offices.
- The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems.
- The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility.
- The five-member committee recommended a three-year time frame for complete convertibility by 1999-2000.
- On 1 July 2007, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India created a new customer service department.
Offices and branches
- The Reserve Bank of India has 4 zonal offices. It has 22 regional offices at most state capitals and at a few major cities in India.
- Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, 'Guwahati, Hyderabad, Jaipur, Jammu,Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram.
- Besides it has sub-offices at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar.
- The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune.
- There are also four Zonal Training Centres at Belapur, Chennai, Kolkata and New Delhi.
ROLES/ FUNCTIONS OF RBI
1. Issue of Notes:
- Under Section 22 of the Reserve Bank of India Act, RBI has sole right to issue currency notes of various denominations except one rupee notes.
- The One Rupee note is issued by Ministry of Finance and it bears the signatures of Finance Secretary, while other notes bear the signature of Governor RBI.
- However RBI is the only source of legal tender money because distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government.
- Issue Department: RBI has a separate Issue Department which is responsible for the issue of currency notes.
- Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value.
- The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold.
- The system as it exists today is known as the minimum reserve system.
2. Banker to Government
- The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser.
- The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir.
- The RBI performs all the banking functions of the State & Central Government and tenders advice related to economic and monetary policy.
- The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt.
- The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.
3. Bankers' Bank:
- The Reserve Bank of India acts as the bankers bank.
- As per the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2% of its time liabilities in India.
- However, by an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3% of their aggregate deposit liabilities.
- The minimum cash equirements can be changed by the Reserve Bank of India.
4. Controller of Credit:
- The Reserve Bank of India has the responsibility of the controller of credit i.e. it has the power to influence the volume of credit created by banks in India.
- For this purpose RBI makes extensive use of qualitative and quantitative use of techniques such as changing the Bank rate or through open market operations.
- As per Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities.
- Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.
5. Custodian of Foreign Reserves
- The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
- As per the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000.
- After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I. M. F.
- Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies.
- The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.
6. Monetary authority
- The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments.
- It formulates implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.
- Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors.
- The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s.
- The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions.
- Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
- The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers.
- The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.
7. Supervisory Functions
- In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.
8. Promotional functions
- RBI performs a variety of developmental and promotional functions also such as helping in the
Set up of the IFCI and the SFC (State Financial Corporations)
Set up the Deposit Insurance Corporation in 1962
The Unit Trust of India in 1964,
The Industrial Development Bank of India also in 1964,
The Agricultural Refinance Corporation of India in 1963
Industrial Reconstruction Corporation of India in 1972.
NATIONAL HOUSING BANK (NHB)
- The National Housing Bank (NHB) is a state owned bank and regulation authority in India, created on July 8, 1988 under section 6 of the National Housing Bank Act (1987). The headquarter of NHB is in New Delhi.
- The institution, owned by the Reserve Bank of India, was established to promote private real estate acquisition.
- The NHB is regulating and re-financing social housing programs and other activities like research and IT-initiatives, too.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
- Small Industries Development Bank of India is an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India.
- Set up on April 2, 1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India.
- Current shareholding is widely spread among various state-owned banks, insurance companies and finjincial institutions.
- Beginning as a refinancing agency to banks and state level financial institutions for their credit to small industries, it has expanded its activities, including direct credit to the SME through 100 branches in all major industrial clusters in India.
- Besides, it has been playing the development role in several ways such as support to micro-finance institutions for capacity building and on lending.
- Recently it has opened seven branches christened as Micro Finance branches, aimed especially at dispensing loans up to Rs. 5.00 lakh.
- It is an apex body and nodal agency for formulating, coordination and monitoring the policies and programme for promotion and development of small scale industries.
- SIOBI has also floated several other entities for related activities. Credit Guarantee Fund Trust for Micro and Small Enterprises provides guarantees to banks for collateral-free loans extended to SME. SIDBI Venture Capital Ltd. is a venture capital company focused at SME. SME Rating Agency of India Ltd. (SMERA) provides composite ratings to SME.