Banking Law-Study Material (1)

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BANKING LAW

Master in Business Laws

Banking Law

Course No: IIModule No: I - IX

Distance Education Department

National Law School of India University(Sponsored by the Bar Council of India and Established

by Karnataka Act 22 of 1986)Nagarbhavi, Bangalore - 560 072

Phone: 3211010 Fax: 080-3217858E-mail: [email protected]

2(Sys 4) - D:\shinu\lawschool\books\module\contract law

CONTENTS

TOPICS

1. Structure and Functions of Commercial Bankers

and Financial Institutions (Module No. I) ................................................................... 3

2. Reserve Bank of India

Structure and Functions (Module No. II) .................................................................... 34

3. Law of Banking Regulations (Module No. III) ............................................................ 65

4. Negotiable Instruments:

Law and Procedure (Module No. IV & V) ................................................................... 119

5. Banker - Customer Relation (Module No. VI) ............................................................ 191

6. Advances, Loans and Securities (Module No.VII & VIII) ......................................... 228

7. Procedural Aspects of Banking Law (Module No. IX) ............................................... 271


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Master in Business Laws

Banking Law

Course No: IIModule No: I

Structure & Functions

Of

Commercial Banks & Financial Institutions


National Law School of India University(Sponsored by the Bar Council of India and Established

by Karnataka Act 22 of 1986)Nagarbhavi, Bangalore - 560 072

Phone: 3211010 Fax: 080-3217858E-mail: [email protected]


MATERIALS PREPARED BY:

1. MR.T.V. MOHANDAS PAI, F.C.A.

2. Prof. N.L. MITRA M.Com., LL.M., Ph.D.

MATERIALS CHECKED BY:

1. MS. ARCHANA KAUL LL.M.

2. Mr. SUPRIO DASGUPTA B.Sc.,LL.B.

MATERIALS EDITED BY;

1. MR. HARIHARA AIYAR LL.M., Former General Manager, SBI

2. Prof. P.C. BEDWA LL.M., Ph.D.

National Law School of India University

Published By:


National Law School of India University,

Post Bag No: 7201

Nagarbhavi, Bangalore, 560 072.

Printed At

Sri Vidya Printers, Bangalore Ph. 23445594


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INSTRUCTIONS

Basic Readings

The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topicsincluded in the course. Experts in the area have collected the basic information and thoroughly analysed the samein topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislativeprovisions are also included. Care has been taken to communicate basic information required for decision makingin problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first readinginformation provided are to be selected by making marginal notes using markers. The first reading, therefore,necessarily has to be very slow and extremely systematic. While so reading the reader has to understand theimplications of those informations. In the second reading the reader has to critically analyse the material suppliedand jot down in a separate note book points stated in the material as well as the critical comments on the same. Athird reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solvingproblems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sectionsat every stage.)

Supplementary Reading

Several supplementary readings are suggested in the materials. It is suggested that the reader should register witha nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, theNational Library, any University Library where externals are registered for the purpose of library reading, anycommercial library or any other public library run by Government or any private institution. Readers in Metropolitanand other big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary,and kept in the course file. Supplementary readings are also required to be read more than once and marginalnotes, marking notes, analytical notes and check lists prepared. Any reader requiring any extra readings notavailable in his/ her place may request the Course Coordinator to photocopy the material and send it by post forwhich charges at the rate of .50 paise per page for photocopying and the postage charge shall be sent either byM.O. or by Draft in advance. The Course Coordinator shall take prompt action on receiving the request and thepayment.

Case Law

The course material includes some case materials generally based upon decided cases. These cases are to bestudied several times for,(a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified

It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysisof the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to lawand practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counterarguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are doneone has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessaryoften to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up thedecision given in the case by the judge and compare his/her own exercise with the judgment delivered. A fewexercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence.Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. Onreceiving such request the Course Coordinator shall get the exercises evaluated by the experts and send theexperts comment to the students. Through these exercises one can build up an effective dialogue with theexperts of the Distance Education Department (DED).

Problems and Responses

After reading the whole module which is divided into several topics and sub-topics the reader has to solve theproblems specified at the end of the module. The module is designed in such a manner that a reader can takeabout a weeks time for completing one module in each of the four courses. It is expected that after finishing themodule over a period of a week the student solves these problems from all possible dimensions to the issue. Notime limit is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limitfor solving the problem - which may be half an hour per problem - and maintain self discipline. While solving theproblems the candidate is advised to use the check list, the notes and the judicial decisions - which he/she hasalready prepared. After completing the exercise the student is directed to send the same to Course Coordinatorfor evaluation. Though there is no time stipulation for sending these responses a student is required to completethese exercises before he/she can be given the certificate of completion to appear for final examination.


STRUCTURE AND FUNCTIONS OF COMMERCIAL

BANKS & FINANCIAL INSTITUTIONS

TOPICS

1. The Evolution in Banking Services & its History in India. ........................................ 7

2. Role & functions of Banking Institutions. ................................................................... 11

3. Structure of Banking Institutions. ................................................................................ 18

4. Financial Institutions & their Functions. ..................................................................... 20

5. Industrial Development Bank. ...................................................................................... 24

6. National Bank for Agricultural & Rural Development. ............................................. 26

7. Unit Trust of India. ........................................................................................................ 27

8. Case Law. ........................................................................................................................ 29

9. List of Statutes. ............................................................................................................... 31

10. Problems.......................................................................................................................... 32

11. Supplementary Reading ................................................................................................ 33


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SUB-TOPICS1.1. Introductory Note.

1.2. History of Banking in India

1.3. Bank Nationalisation

1.4. Various types of Banking Services

1.5. Social control measures on bank

1.6. Narasimham Committee Report

1.7. Concluding Remark

1.1. INTRODUCTORY NOTE

In early societies functions of a Bank were done by thecorresponding institutions dealing with loans and advances. Themodern banking and its networking are the products of modernwestern civilization which rapidly developed with the adventof industrialization. Britishers brought with them this modernconcept of banking in India. The Bank of England was startedin 1694, when the Britishers were carrying on a long war withFrance. In 1708, the monopoly and the right to issue notes wasgiven to Bank of England through an Act. Several joint stockbanking companies started operating early in the nineteenthcentury. These banks primarily carried on functions which arepresently known as commercial functions like receiving moneyon deposits, lending money, transferring money from place toplace and bill discounting. Banking has now presently becomea globally mobile service and it facilitates the capital movementfrom one part of the country to another, one part of the globefrom another.

Obviously it is now difficult to understand the banking systemof a nation in isolation. The present Indian banking system isrequired to be studied, viewed and reviewed in the context ofglobal banking trends.

1.2. HISTORY OF BANKING IN INDIA

Early History

Banking in India has a very hoary origin. The Vedic period hasliterature which records the giving of loans to others. Bankingwas synonymous with money lending. The Manusmrithi speaksof deposits, pledges, loans and interest rate. Interest could belegally charged at between two and five per cent per month inorder of class. The maximum amount of interest collectable onthe principal was laid down by the State. Usury was not allowed.Payment of debt was made a pious obligation on the heir of adead person. With the growth of trade and commerce, thetrading community soon evolved a system of money transferthroughout the country.

The main instrument through which banking and transfer offunds was carried out was through the inland bills of exchangeor the Hundi. Indian bankers lent money, financed the rulersand trade, acted as treasurers of the State and also as insurers ofgoods. They also acted as money changers due to the differing

coins circulating all over India. Business developed so wellthat certain castes or communities traditionally came to regardbanking as their family business. The power and prestige ofthese banks rose and fell with the growth and decline of empires.Jagirs were granted to select banks and some acted as revenuecollectors for local rulers. However, tenets of modern bankingwere not practised as acceptance of deposits was not a regularpart of the business.

Modern History

Modern banking in India began with the rise to power of theBritish. The British consolidated their power and became themost powerful force in India after vanquishing Tipu Sultan inthe battle of Srirangapattanam in 1799. The quest for powerby Lord Mornington (Later Marquess of Wellesly). GovernorGeneral of Fort William in Bengal at that time led to a seriousdepletion of the resources of the East India Company. This ledto the Company promoting the Bank of Calcutta in 1806 toraise resources.

The situation prevailing at that time could be known by thewriting of some Britishers, C.N. Cooke, Deputy Secretary andTreasurer of the Bank of Bengal, writing in his book Bankingin India, has stated that usury prevailed in India more than inany other country in the nineteenth century. The native moneylender lent to the farmers at 40, 50 and 60 per cent interest.The European community was relatively better off. Heattributed the very high rates to the riskiness of many of thelendings and the difficulties in realising them.

Indian businessmen very often acted as lender to the Europeanbusinessmen with a rate of interest lower than the market rate.Till the advent of the three Presidency Banks, the EuropeanAgency Houses acted as bankers. They accepted deposits fromBritish Officers serving in India and Europeans who had servedin India and had returned to Europe. They financed trade withsuch funds and at certain times even helped the Government.There was a very effective credit network for flow of fundsfrom one part of India to the other provided by the Indianbanking firms.

As the Agency Houses had prospered they also sought to operateBanks. Alexander & Company a leading Agency House startedmanaging the Bank of Hindustan from 1770s. The exact dateof the founding of that bank is not known. The Bengal Bankand the General Bank of India, too, were started by the otherAgency Houses in Bengal in the eighteenth century. In 1819the Commercial Bank and in 1824 the Calcutta Bank werefloated by the Agency Houses. None of these banks enjoyedlimited liability nor were they proper joint stock banks. Theywere partnership firms with unlimited liability.

The concept of limited liability was not put on the statute bookstill the 1860 Companies Act. Till that date Banks had to eitherobtain a special Charter from the Crown to operate or had tooperate under unlimited liability.

1. THE EVOLUTION OF BANKING SERVICES ANDITS HISTORY IN INDIA


The Bank of Calcutta started in 1806 was the precursor of theBank of Bengal. In 1862 the right of note issue was takenaway from the Presidency Banks. The Government alsowithdrew their nominees as Directors on their Board. However,they were given the privilege of managing the Governmenttreasury at the Presidency Towns and at their branches.

The Bank of Bombay collapsed in 1867 and was put intovoluntary liquidation in early 1868. It was finally wound up in1872, but the bank was able to meet its liability in full to thegeneral public.

Subsequently a new bank, aptly called the New Bank ofBombay, was started in 1867 to commence banking operations.The Presidency Banks Act of 1876 was passed in order to havea common law for all the three Banks in order to enable thegovernment to regulate the working of these Banks. TheGovernment had earlier withdrawn its shareholding from thesethree banks.

The Swadeshi Movement which prompted Indians to start manynew institutions also provided an impetus for starting new banks.The number of joint stock banks increased remarkably duringthe boom of 1906-13. The Peoples Bank of India Ltd., TheBank of India, The Central Bank of India, Indian Bank Ltd.and the Bank of Baroda were started during this period. Thisboom continued till it was overtaken by the crash of 1913-17,the first crisis that the Indian joint stock banks experienced.

In 1921 the three Presidency Banks at Calcutta, Bombay andMadras were merged into the Imperial Bank by the passing ofthe Imperial Bank of India Act 1920. This bank did not havethe power of issuing bank notes,but was permitted to managethe clearing house and hold government balances. With thepassing of the Reserve Bank of India Act of 1934, the ReserveBank of India came into being to act as the Central Bank. Itacquired the right to issue notes and acted as the banker to theGovernment in place of the Imperial Bank. However, theImperial Bank was given the right to act as the agent of theReserve Bank of India in places where the Reserve Bank hadno branches.

By the passing of the State Bank of India Act 1955, the ImperialBank was taken over and the assets vested in a new bank, theState Bank of India.

The Reserve Bank was originally a shareholders bank. It wasnationalised by the Reserve Bank Amendment Act 1948,consequent to the nationalisation of the Bank of England in1946.

1.3. BANK NATIONALISATION

The major historical event in the history of banking in Indiaafter independence is undoubtedly the nationalisation of 14major banks on 19th July 1969. The imposition of social controlon the banks in early 1969 was deemed unsuccessful as thegovernment felt that the Indian commercial banks did notincrease their lending to the priority sectors like agriculture,small scale industry etc., Nationalisation was deemed as a majorstep in achieving the socialistic pattern of society.

The nationalised banks were to increase lending to areas ofimportance to the government and to use their resources forsubserving the common good. A detailed scheme of objectives,regulations, management, etc. was drawn up for these banks.

In 1980 six more private sector banks were nationalisedextending the public domain further over the banking sector.

Nationalisation was a recognition of the potential of the bankingsystem to promote broader economic objectives. The bankshad to reach out and expand their network so that the conceptof mass banking was given importance over class banking.Development of credit in the rural area was a prime objective.

The benefits of nationalisation has indeed been impressive. Thebranch network of these banks have spread practically all overthe country especially in the rural and previously unbankedareas. The branch network which was 8262 in June 1969expanded to over 60000 by 1992 with a major expansion (80%)in rural areas. The average number of people served by a branchcame down from over 60000 to 11000. The deployment ofcredit is more widely spread all over the country as againstonly in the advanced states. In 1969 deposits amounted to 13%of G.D.P and advances to 10%. By 1990 deposits grew to 30%and advances 25% of G.D.P. Rural deposits as a percentage ofdeposits grew from 3% to 15% making for increasedmobilisation of resources from the rural areas. Deposits grewfrom a figure of Rs.4669 crores in July 1969 to Rs. 2,75,000crores on 31.3.1993. 40% of the total credit was directed to thepriority sector. More than 45% of the total deposits was usedby the government to fund its five year plans.

However, this growth did not come without its costs. Thebanking system has grown too large and unmanageable.Customer service has suffered due to increasing costs and lowerproductivity. The directed credit program has led to largeoverdues affecting the very viability of the banking system.

1.4 VARIOUS TYPES OF BANKING SERVICES

The flow chart given below shows the following types ofbanking services.

1. Central Banking Services

2. Commercial Banking Services

3. Specialized Banking Services

4. Non-banking financial services.

1. Central Banking Services : The Central Bank of anycountry (i) issues currency & bank notes; (ii) discharges thetreasury functions of the Government, (iii) manages the moneyaffairs of the nation & regulates the internal and external valueof money, (iv) acts as the bank of the Government and last butnot the least, acts as the bankers bank.

2. Commercial banking services: Commercial bankingservices include (i) receiving various types of deposits; (ii)giving various types of loans, (iii) extending some non-bankingcustomer services like facilities of locker, rendering services inpaying directly house rent, electricity bill, share-calls, money


9

or insurance premium and the like. Commercial bank alsoadvises on investment re-investment, allotment or transfer offunds.

3. Specialized banking services : Special banking institutionsare established for definite specialized banking services likeindustrial banks to supply industrial long term credit andworking capital; land mortgage bank for granting loans onequitable mortgage; Rural Credit Banks for generating fundsfor extending rural credit; developmental banks to support anydevelopmental activities. These types of banks accept all typesof deposits but mobilises the amount in its specially focussedarea.

4. Non-Banking Financial Services: Many institutions areestablished for carrying on non-banking financial services.Mutual funds are institutions accepting finances from itsmembers and investing in long term capital of companies bothdirectly in the primary market as well as indirectly in the capitalmarket. Financial institutions acting as portfolio managersreceive funds from the public and manage the funds for or onbehalf of its depositors. This port-folio managers undertakethe responsibility of managing the funds of the principal so asto generate maximum return.

1.5. SOCIAL CONTROL MEASURES ON BANK

The Indian economy in the 1960s passed though a stressfulphase due to drought and wars. Political uncertainty and populardiscontent too caused concern. The Government veered aroundtowards ensuring a socialistic pattern of society. The BankingRegulation Act was amended in 1968 to provide for socialcontrol over the banks. Under these measures the Board ofDirectors of the banks were reconstituted so that 51% of theirnumber was made of persons having special knowledge orexperience in accountancy, agriculture, rural economy, smallscale industry, co-operation, banking, economic laws etc. Aquota was specified for certain categories. The Reserve Bankof India (RBI) was given powers to reconstitute the Board. Afull time Chairman was to be appointed who was a professionalbanker, with prior approval of the RBI. The Government alsoacquired power to acquire any bank in case it failed to complywith any direction issued to it under the Banking RegulationAct, as regards banking policy.

1.6 THE NARASIMHAM COMMITTEE REPORT:

The 1980s were the decade of private enterprise all over theworld. The collapse of the USSR at the end of the 1980s is theend of one experiment of socialism. In India the country wentthrough traumatic moments in 1990, after the heady economicgrowth in the 1980s, due to a foreign exchange crisis on accountof large scale external borrowings in the 1980s, that hadweakened the countrys ability to service its debts.

The government felt that there was a need to initiate reform inthe financial system and banks, as the system had developedweaknesses. A great part of the savings of the community waspre-empted by the Government in the form of the Cash ReserveRatio (CRR) and the Statutory Liquidity Ratio(SLR). Bankswere burdened by a large percentage of non- performing loans.Customer service had suffered, and out-moded practices werein vogue. Internal weakness due to bad house-keeping practiceshad increased. The Narasimham Committee was set up torecommend changes in the financial system.

The Narasimham Committee made revolutionaryrecommendation emphasising the need for de-regulation and

Commercial Specialised Institutional Non-BankingBanks Banks Banks Financial Institutions

Land Mortgage

Rural Credit

Industrial Development

Co-operative

Housing Finance

Export Import

Bank of India

Mutual Funds UTI

Other MF

and LIC,GIC

Bank &

Can Bank

Private Sector

Non-Banking

Financial Com.

Various Types of Banks and Banking Functions

Central Bank

IFCI

SFCs

IDBI

ICICI

IRBI

NABARD

HDFC

Nationalised State BankBanks (20) LIC Of India &

AssociateBank

Private Banks

Indian Foreign

10


liberalisation. Banks were to be allowed to raise capital fromthe public. Also no further nationalisation of banks were to bemade. New private sector banks were to be allowed and nodistinction was to be made between private and public sectorbanks. Foreign banks were to be allowed freedom to openbranches. The pattern of banking structure should be broadenedwith 3-4 large banks on a international level 8-9 large banks ona national level and the other as local banks. Control over thebanking system should be centralised with the RBI and not splitbetween the RBI and the department of banking of thegovernment. A separate body, quasi autonomous, operatingunder the aegis of the RBI is to be formed to supervise thefunctioning of the banks. The SLR and the CRR should bereduced to prudent levels. Concessional lending should bephased out. Deposit interest rates should be raised along withthe reduction of SLR. The capital base of banks should meetwith international norms of capital adequacy; provision was tobe made for bad debts with special tribunals to be formed forrealising bank debts. The appointment of Chief Executive of

banks needs to be de-politicised and banks should be free tomake their own recruitment of employees and officers.

Some of the recommendations made have already been acceptedand put into practice by the government while others are beingconsidered.

The wheel appears to have come full circle. Whilenationalisation has given immense benefits to the country, ithas also exposed the defects in an excess of State control. Atthis present point, the future appears to be towards an opensystem based on increased private ownership.

1.7. CONCLUDING REMARKS

The banking system in India is likely to undergo a major change.Restrictions imposed upon foreign banks to establish Indianbranches are going to be gradually withdrawn. The GATTmultilateral treaty emphasised the role of free operations in theservices sector like banking and insurance. As a result, it isexpected that there shall be more openings in the banking sector.


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SUB-TOPICS

2.1. Role and functions of Central Bank

2.2. Advances to priority sectors and the credit guaranteeschemes

2.3. Role & functions of Commercial Banks

2.4. Role & functions of Specialised and Institutional Banks

2.5. Role & functions of non-banking financial institutions

2.1. ROLE AND FUNCTIONS OF CENTRAL BANKS

Central Bank:

Central Bantral Bank is an apex financial authority. Theessential feature of a Central Bank is its discretionary controlover the monetary system of the country. It occupies a pivotalposition in the monetary and banking structure of the country.Thus it acts as the leader of the money market and in thatcapacity, it controls, regulates and supervises the activities ofthe Commercial banks. It is recognised as the highest financialauthority and is a symbol of financial sovereignty and stabilityof the country. It holds the ultimate resources of the nationcontrols the flow of purchasing power and acts as the banker tothe State.

The principles on which a Central Bank operates are differentfrom the ordinary banking principles to the extent that :

a. The Central Bank unlike an ordinary Bank does not operatewith the motive or objective of making a profit but isprimarily meant to shoulder the responsibility of safe-guarding the financial and economic stability of the country.

b. The Central Bank being the reservoir of Credit and lenderof last resort cannot look to or rely on other bankinginstitutions to come to its aid in case of need and has totherefore keep its assets as liquid as possible so that otherbanks and financial institutions can approach it foraccommodation.

c. The credit machinery of the country needs to be stabilisedquite often. This is done by the Central Bank bymanipulating the bank rate and open market operations.This power is vested only in the Central Bank.

Functions of Central Bank:

The functions of the Central Bank are briefly discussed below.

A Central Bank acts in the following capacities.

(i) As a currency issuing agency;

(ii) As a banker to the State;

(iii) As a bankers bank;

(iv) As the lender of last resort;

(v) As the guardian of the money market through credit control;(vi) It undertakes exchange control operations and maintains

the external value of the domestic currency and ensuresthe stability of the internal value of currency;

(vii)Ensures economic stability and promotes economicdevelopment; and

(viii) Currency printing and management of mints.

[Details of the functions of the Central Bank in India i.e. theReserve Bank of India are discussed in the module on RBI.]

2.2 ADVANCES TO PRIORITY SECTORS ANDCREDIT GUARANTEE SCHEMES

One of the major deficiencies in the banking system in the 60srelated to granting of advances. Bulk of the advances werebeing directed to the large and medium scale industries and bigand established business houses while agriculture, small scaleindustries and exports were not receiving adequate attention, ifnot being neglected. The Reserve Banks credit policy of 1967-68 sought to set right this anomaly in the system by channelisingthe flow of credit to the emerging priority sectors of the economy

in the larger interests of the country. Though the emphasis ofthe 1967 credit policy was on overall restraint certainliberalisation was allowed on a selective basis with a view toenlarge the flow of credit to the areas of agriculture, exportsand small scale industries. The banks were encouraged toincrease their involvement in lending to the priority sectors bythe extension of various relaxations and incentives in the formof refinance from the RBI at a concessional rate of interest oron other special terms not available for other bank lendings.

In order to provide an incentive to lending to small borrowersthe RBI set up the Credit Guarantee Corporation of India Ltd.in 1971. This institution is now named as the Deposit Insuranceand Credit Guarantee Corporation. The main objective of thisCorporation is to administer a comprehensive credit guaranteescheme for loans by banks to small individual borrowers in thepriority and other neglected sectors. There are various schemesin operation which provide cover for direct lendings to smallborrowers who without such support would find institutionalcredit highly inaccessible.

The recommendations of the Tandon committee, which wentinto the working of the special credit schemes of CommercialBanks with special reference to their employment potential ledthe RBI to issue a set of guidelines which emphasised on need-based assistance to different categories of self-employedpersons. Banks were asked to make efforts to arrange integratedfinancial and management assistance to borrowers, taking intoaccount the totality of their requirements and the viability ofthe proposition being financed.

Since 1977-78, export credit has been excluded for the purposesof computation of the total priority sector advances of banks,but it has continued to receive preferential treatment in matters,such as, refinance facilities from the Reserve Bank, concessionalrates of interest on pre-shipment and post-shipment credit toexporters etc.

2. ROLE AND FUNCTIONS OF BANKING INSTITUTIONS

12


The flow of credit to the neglected sectors were boosted by thedirective of the Government of India in November 1974 topublic sector banks whereby, priority sector lending was to reacha level of not less than one-third of their outstanding credit byMarch 1979.

In March 1980, the Government of India took two majordecisions :-

1) To raise the proportion of advances to the priority sectorsby public sector banks from 33 1/3% to 40% by 1985; and

2) The implementation of the 20 point programme to beactively promoted by banks.

The Reserve Bank also set up a working committee on prioritysector lending and 20 point economic programme to work outthe modalities of implementation of the above decisions of thegovernment. Based on the recommendations of the workinggroup, the RBI issued instructions for implementation. Someof the important instructions were :-

a) Priority sector advances should constitute 40% of aggregatebank advances by 1985.

b) 40% of priority sector advances to be earmarked foragriculture and allied activities.

c) Direct advances to weaker sections in agriculture and alliedactivities should reach a level of at least 50% of the totaldirect lending to agriculture.

d) Advances to rural artisans, village craftsmen and cottageindustries should constitute 12.5% of the total advances tosmall scale industries by 1985.

A series of measures taken with the aim of encouraging thecommercial banks to cater to the credit requirements of theneglected sectors, particularly the weaker sections of the societyled to the formation of the Credit Guarantee Corporation ofIndia Ltd.

This is a public limited company floated by the Reserve Bankof India on 14th January 1971.

The Corporation was visualised as an agency to provide a simplebut wide-ranging system of guarantees for loans granted by theCredit institutions to small and needy borrowers.

The Corporation has introduced several schemes to cater to thesmall borrowers in the non-industrial sector like the Small LoansGuarantee Scheme 1971; the Small Loans (FinancialCorporations) Guarantee Scheme 1971 and the Small Loans(Service Co-operative Societies) Guarantee Scheme 1971.

After the take over by the Deposit Insurance Corporation inJuly 1978 a fourth scheme was introduced by the DepositInsurance and Credit Guarantee Corporation of India Ltd.,known as the Small Loans (Small Scale Industries) Guaranteescheme 1981. DICGC is the new name given to DepositInsurance Corporation after its take over of the Credit GuaranteeCorporation.

In addition to the above, various other schemes were introducedfor the benefit of the priority sectors like the :-

a) National Rural Employment Programme (NREP) whichbasically dealt with the problem of unemployment andunderemployment in the rural areas.

b) Rural Landless Employment Guarantee Programme(RLEGP) more specifically to tackle the problem ofunemployment among the landless and to create durableassets for strengthening the rural infrastructure.

c) Crop Insurance Scheme - to provide a measure of financialsupport to farmers in the event of crop failure as a result ofnatural calamities, to support and stimulate production ofcereals, pulses, oilseeds, etc.

d) Self-employment Scheme for Educated Unemployed Youth(SEEUY)- to encourage educated unemployed youth toundertake self-employment ventures in industry, servicesetc; and

e) Self-employment Programme for Urban Poor (SEPUP) toprovide self employment to the urban poor.

2.3. ROLE AND FUNCTIONS OF COMMERCIAL BANKS

The following chart shows the Commercial banking system inIndia

Scheduled

Representative Offices

State Bankof India

Associates ofState Bank ofIndia

OtherNationalisedBanks

Private SectorPublic Sector

Scheduled

Non scheduled

Foreign Banks Indian Banks

Commercial Banking system in India


13

A Scheduled Bank is one which is included in the secondschedule of the RBI Act. A non scheduled Bank is one which isnot included in that schedule.

Utility of Banking Institutions

Banks are extremely useful and indispensable institutions for amodern community. They are the custodians and distributorsof liquid capital the essential ingredient for commercial andindustrial activities. The utility of banks can be summarised asfollows :-

a) The banks create purchasing power, in the form of banknotes, cheques, bill, drafts, etc. and economise the use ofmetallic money which is very expensive and cumbersome.

b) Banks transfer funds, by bringing lenders and borrowerstogether, and by helping funds to move from place to placeand from person to person in a convenient and inexpensivemanner, through the use of cheques, bills and drafts. Inthis way, they help trade and industry.

c) The banks encourage the habit of saving among the peopleand enable small savings, which otherwise would have beenscattered ineffectively, to be accumulated into large fundsand thus made available for investments of various kinds.In this way, they promote economic development throughcapital formation.

d) By encouraging savings and investment, the banks increasethe productivity of the resources of the country and thuscontribute to general prosperity and welfare by promotingeconomic development.

e) The banks agency functions are very useful to the customersof the bank. They undertake to make payments of variouskinds on behalf of their customers and also make severaltypes of collections on their behalf.

Thus, banks are useful to both the community in general andthe individual customer in particular.

Role of Banks in the Socio-economic development

Banks play a vital role in the economic development of thecountry as explained hereunder :

i) Banks promote capital formation :

In any plan of economic development capital occupies a positionof crucial and strategic importance. Unless there is an adequatedegree of capital formation, economic development is notpossible. Deficiency of capital is a result of inadequate savingsmade by the community. The serious handicaps in economicdevelopment arise from capital deficiency. This is where thebanks can play an useful role in making up the deficiency.

The role of banks in economic development is to remove thedeficiency of capital by stimulating savings and investment. Asound banking system mobilises the small and scattered savingsof the people and makes them available for investment inproductive enterprises. In this connection, the banks performtwo important functions.

a) they attract deposits by offering attractive rates of interest,thus converting savings which would have remained idle,into active capital; and

b) they distribute these savings through loans amongenterprises which are connected with economicdevelopment.

ii) Optimum Utilisation of Resources :

In the absence of banks, it would have been very difficult tomobilise the small savings of the people and distribute thesesaving among entrepreneurs. It is through the agency of thebanks that the communitys savings automatically flow intochannels which are productive. The banks exercise a degree ofdiscrimination which not only ensures their own safety but alsomakes for optimum utilisation of the financial resources of thecommunity.

iii) Financing the priority sectors :

In order to meet additional demands arising out of economicdevelopment, the banking system has undergone changes in itsstructure and organisation. The banks and financial institutionsoperate in such a manner as to confirm to the priorities ofdevelopment and not in terms of return on their capital. Thebanks now play a more positive role. Thus, the central bankdoes not merely stop at playing a regulatory role i.e., regulationof bank credit but it also plays a developmental role. It helps tocreate a machinery or agency for financial development plans.It ensures that the available finance is diverted to the rightchannels. For successful implementation of the developmentprogrammes, it becomes necessary to make credit facilitiesavailable to high priority sectors and to see that the availablefunds are not squandered away in non-essential or non-planexpenditure.

iv) Banks promote Balanced Regional Development :

By opening branches in backward areas the banks make creditfacilities available there. Also, the funds collected in developedregions through deposits may be channelised for investment inthe under developed regions of the country. In this way, theybring about more balanced regional development.

v) Expansion of Credit :

To maintain a high level of economic activity, it is imperativethat credit must expand. In an era of economic developments,banks create credit more liberally and thereby make fundsavailable for the development of various projects. Thus, banksmake a valuable contribution to the speed and the level ofeconomic development in the country.

vi) Banks promote growth with stability :

Banks regulate the rate of investment by influencing the ratesof interest. The primary function of the Reserve Bank of Indiawas to regulate the issue of bank notes and keep adequatereserves to ensure monetary stability. Now, it has assumed wider

14


responsibility to help in the task of economic development. Inaddition to regulating currency and controlling credit, the RBIhas been playing a vital role in the financing and supervision ofthe development programmes for agriculture, trade, transportand industry. It has created special funds for promotingagricultural credit and has created special Institutions forwidening facilities for industrial finance. The other banks toohave cooperated in these areas by opening new branches to tapthe savings of the people and lend them to entrepreneurs.

Thus, banks come to play dominant and useful role in promotingeconomic development by mobilising the financial resourcesof the community and by making them flow into desiredchannels.

In recent years, commercial banks in India have been adoptingthe strategy of innovative banking in their business operations.This implies the application of new techniques, new methodsand novel schemes in the areas of deposit mobilisation,deployment of credit and bank management. To attract moredeposits, Banks have introduced many attractive savingschemes such as education deposit plan, perennial pension planretirement schemes, loan linked recurring deposit schemes etc.,Mobile bank branches have also been introduced by a numberof banks. Innovations have also been made in the credit side byintroducing education loan schemes, housing finance, creditcards, packing credit and post shipment credit for exporters,consumer credit, which pool the investors funds for investingin a diversified portfolio of securities so as to spread and reducerisks.

In addition to various activities like innovative banking,promoting entrepreneurship, retail banking and ruraldevelopment, the commercial banks have promoted variousschemes like advances to priority sectors and credit guaranteeschemes. These are discussed in the role and functions ofspecialised banks.

2.4 ROLE AND FUNCTIONS OF SPECIALISED ANDINSTITUTIONAL BANKS

The role and functions of the following institutional banks arediscussed below. The role & functions of many other financialinstitutions shall be dealt with at the appropriate place of thismodule along with their structure. The few institutional banksthat are discussed below operate under various schemes of theGovernment along with other Commercial Banks. Some ofthese schemes are given below :

(a) Lead Bank Scheme :

The Lead Bank Scheme, under which the leadbanks play therole of pace setter for banking and credit development, has hada special significance for banks as agents of change. It hasimparted a new direction to the branch expansion policy. Districtcredit planning exercises have made blockwise estimates ofcredit needs. The scheme has also focussed the attention of the

banks on the concept of the banking needs of the area. Thescheme has opened up new vistas in the field of rural banking.The credit plans envisage schemes of credit extension, mainlyfor the development of priority sectors and for the benefit ofthe weaker sections. In terms of the guidelines issued by theReserve Bank of India, the Annual Action Plans (AAP) coverIntegrated Rural Development Programme (IRDP), and the leadbanks have assumed a part of the responsibility for formulatingplans which fit into the Rural Development schemes coveringviable economic activities, and which can be pursued by theIRDP beneficiaries.

(b) Integrated Rural Development Programme :

The Integrated Rural Development Programme (IRDP) is amajor instrument to alleviate rural poverty. Its objective is toenable selected families in rural areas to cross the poverty line.This is achieved by providing productive assets and inputs tothe target groups. The assets are provided through financialassistance in the form of subsidy by the government and termcredit advanced by financial institutions, primarily by banks.

Commercial banks have been the principle agents of IRDPimplementation through their branch network. Commercialbanks have looked upon the IRDP as an opportunity to takebanking to the rural areas and have made earnest endeavors tocontribute to its success.

(c) Poverty Alleviation Programme :

Presently, the programme is limited to the financing of suchtraditional activities as dairy, poultry and village industriesincluding basket making, carpentry, handlooms etc., where thescale of production is very small and the technology used inthe production process is primitive. Commercial banks, StateBank of India, in particular, have taken a number of steps toenable the borrowers to increase the scale of production andimprove the production processes by offering technical support,demonstration plots, financial and management consultancy etc.,and by conducting management appreciation programmes andorganising entrepreneurial development programmes. Someof the institutional banks operating these schemes are as follows:

1. Co-operative Banks:

Cooperative Banks also played a limited but important role inthe banking system of the country. There are a number of suchbanks which include State Cooperative Banks (SCBs), CentralCooperative Banks (CCB), Primary Cooperative Banks(PCBs), Land Development Banks (LDBs), PrimaryAgricultural Credit Societies (PACs) etc.

a) Primary Co-operative Banks:

Commonly called the Urban Cooperative Banks, they are smallsized Cooperatively organized banking units which operate inmetropolitan, urban and semi- urban centres to cater mainly tothe need of small borrowers. The Reserve Bank is responsiblefor licensing of existing/new banks and branches, sanctioning


15

of credit limits to SCBs on behalf of PCBs for financing theSSI unit as well as conducting their statutory inspections.

b) Land Development Banks (LDBs):

In the cooperative credit structure the Land Development Banksi.e., State Land Development Banks (SCDBs) and PrimaryLand Development Banks (PLDBs) provide long term creditfor agriculture.

The major sources of funds for the SLDB are the specialdevelopment debentures and ordinary debentures. The ordinarydebentures programme of the SLDB is finalised by theNABARD.

2. Regional Rural Banks

Objectives :

RRBs are primarily organised to develop the rural economyby providing, for the purpose of development of agriculture,trade, commerce, industry and other productive activities in therural areas, credit and other facilities, particularly the small andmarginal farmers, agricultural labourers, artisans and smallentrepreneurs and for matters connected therewith and incidentalthereto.

Capital Structure:

The authorised capital of each Regional Rural Bank shall beRs.5 crores provided that the Central Government may afterconsultation with the National Bank and the sponsor Bank,increase or reduce such authorised capital. Of the capital, 50%shall be subscribed by the Central Government, 15% by theconcerned State Government and 35% by the sponsor Bank.

Management :

The general superintendence, direction and management of theaffairs and business of a RRB vests in the Board of Directorswho may exercise all the powers and discharge all the functionswhich may be exercised or discharged by the RRB.

OPERATIONS :

During the financial year 1991-92 (upto September 1991) whilethe number of RRBs remained unchanged at 196, the totalnumber of districts covered by RRBs increased to 385 ascompared with 380 in the preceding year.

Aggregate deposits of RRBs rose from Rs.4267 crores toRs.5141 crores at the end of September 1991 recording a growthof 20.5%.

Borrowings of RRBs from sponsor Banks NABARD, SIDBIand other institutions aggregated Rs.1702 crores as at the endof September 1991 of which Rs.1471 crores were fromNABARD alone.

NABARD also offered assistance to RRBs for setting uptechnical, monitoring and evaluation cells for preparation andevaluation of schemes under project lending.

3. Role and Functions of an EXIM Bank

The EXIM Bank is established by an Act of 1981 for functioningas the principal Financial Institution for co-ordinating theworking of institutions engaged in financing export and importof goods and services with a view to promoting Countrysinternational trade. The EXIM bank may grant in or outsideIndia loans and advances either by itself or in participation withany other bank or financial institutions. It may also grant loansand advances to scheduled Banks or Financial Institutions;underwrite issue of stock, shares, bonds or debentures of aCompany engaged in export or import; accept, collect, discount,purchase, sell or negotiate bills or promissory notes connectedwith export or import; grant issue or endorse letters of credit;finance export or import of machinery or equipment; buy orsell foreign exchange; undertake surveys techno-economic orany other study; provide technical administrative or financialassistance of any kind of export or import; plan, promote ordevelop export oriented concerns; collect, compile anddisseminate market and credit informations and do such otheracts and things necessary to discharge the duties and functionsunder the Act [Sec 10].

4. Role and Functions of Re-Construction Bank

Industrial Re-Construction Bank is established by the Act of1984 with a view to function as the principal credit and re-construction agency for industrial revival. The bank is to act asthe agent of the central or State Govts,RBI, SBI,State co-operative bank and other public financial institutions. It maycarry on and transact the following functions; granting of loansand advances to industrial concerns, guaranting or counter-guaranteeing or providing indemnity, under-writing issues ofstock shares and debentures; providing credit to State levelagencies for granting industrial loans; providing infra-structurefacilities, machineries and other equipments, consultancy andmerchant banking services; transfering or acquiring anyinstrument relating to loans and advances; providing managerialassistance; granting or opening or issues of letters of credit;and doing such other acts or things as may be incidental to orconsequential upon the powers and duties under the Act.[Sec.18]

5. National Housing Bank

This specialised bank was established by an Act of 1987 inorder to promote housing finance institutions. The Bank maypromote, establish, support or aid in the promotion of housingFinance institutions; make loans and advances for housingfinance, purchase stock shares, bonds and debentures; guaranteethe financial obligation of housing finance institutions; draw,accept, discount negotiable instrument; provide technical andadministrative assistances to housing finance institutions; doany other business the Central Govt may on therecommendations of the RBI authorise the institutions to do.

The above discussions about the functions of the specialisedbanks are only illustrative.

16


Country wise

State wise

NABARD

All India Large scale

Agriculture

VARIOUS DEVELOPMENT BANKS & FINANCIAL INSTITUTIONS AT A GLANCE

AFCSLDB

RRB

Mutual fundsLIC, GIC including UTI and its subsidiariesSHCICRSIL/ CARE / ICRADFHI

EXIM BANKECGC

Small Scale

State Level

Industrial Development

Export/Import

Capital Market

NSICSIDBI

ICICIIDBIIFCIIRBI

SFC

SIDC

SIIC

Housing > NHB & HB of Commercial Banks (HDFC)

Insurance & Credit guarantee > DICGC

NABARD National Bank for Agriculture and Rural Development

AFC Agriculture Finance Corporation

SLDB State Land Development Bank

RRB Regional Rural Banks

SEBI Securities and Exchange Board of India

SHC Stock Holding Corporation of India

CRISIL Credit Rating Information Service of India

ICRA Investment Information and Credit Rating Agency of India

DFHI Discount and Finance House of India

EXIM BANK Export Import Bank of India

ECGC Export Credit and Guarantee Commission

ICICI Industrial Credit and Investment Corporation of India

IDBI Industrial Development Bank of India

IFCI Industrial Finance Corporation of India

IRBI Industrial Reconstruction Bank of India

NSIC National Small Industries Corporation

SIDBI Small Scale Industrial Development Bank of India

SFC State Finance Corporation

SIDC State Industrial Development Corporations

SIIC State Industrial Investment Corporations

NHB National Housing Bank


17

Having regard to the nature and range of activities of themerchant bankers and their responsibilities to SEBI Investorsand Issuers of securities it has been decided to have fourcategories of merchant bankers.

Category I : Those authorised to act in the capacity of issuemanager/co-advisor/consultant and portfolio manager to anissue and underwriter to an issue as mandatorily required.

Category II : Those authorised to act in the capacity of co-manager, advisor or consultant to an issue or portfolio manager,and

Category III : Those authorised to act only in the capacity ofadvisor or consultant to an issue.

Category IV : Advisors and consultants who provideconsultancy and guidance to certain terms of authorisation havealso been specified for merchant bankers a few of which arelisted below.

a. All Merchant bankers must obtain the authorisation of SEBI

b. SEBI may collect from the merchant bankers an initialauthorisation fee an annual fee and a renewal fee.

c. The Merchant bankers must have a minimum net worthwhich is based on the category into which they areclassified.

Category I - 1 Crore

Category II - 50 Lakhs

Category III - 20 Lakhs

Category IV - NIL

d. Lead Manager/Merchant bankers would be responsible forensuing timely refunds and allotment of securities tothe investor.

e. The merchant banker shall make available to SEBI suchinformation documents returns and reports as may beprescribed and called for.

f. SEBI has already prescribed a code of conduct for merchantbankers, which they should adere to.

The above terms of authorisation have been framed to makemerchant bankers more responsible and liable and anynegligence on the part of the merchant bankers can be proceedagainst legally.

This will ensure that fake companies whose only intention is todefraud the Public do not have any access to the stock marketand the investing public at large.

2.5 ROLE AND FUNCTIONS OF NON-BANKINGFINANCIAL INSTITUTIONS

Merchant Banking :

In addition to the Commercial banking and specialised bankingactivities merchant banking has also grown in stature and gainedan important place in the financial system of the country.

Merchant Bankers are governed by the Securities and ExchangeBoard of India (Merchant Bankers) Rules 1992. MerchantBanker is defined as any person who is engaged in the businessof issue management either by making arrangement regardingselling, buying or subscribing to securities as Manager,Consultant, Adviser or rendering corporate advisory service inrelation to such issue management. Public money plays a vitalrole in financing a large number of projects both in public andprivate sectors. Hundreds of Crores of rupees are tapped fromCapital market every year to finance industrial projects. Toraise the money from the capital market, promoters have tobank upon merchant bankers who manage the issue.

Role of Merchant Bankers:

Merchant bankers are designated as managers to the issue. Theyare specialised agencies whose main business is to attract publicmoney to Capital issues. They render the following services.

a) Drafting of prospectus and getting it approved from thestock exchanges.

b) Appointing, assisting in appointing bankers, underwriters,brokers, advertisers etc.

c) Obtaining the consent of all the agencies involved in publicissue.

d) Holding brokers conference/investors conference.

e) Deciding the pattern of advertising

f) Deciding the branches where applications money shouldbe collected.

g) Deciding the dates of opening and closing of the issue.

h) Obtaining the daily report of application money collectedat various branches.

i) Obtaining subscription to the issue and

j) After the close of issue, obtaining consent of stock exchangefor deciding basis of allotment etc.

Merchant Bankers charge a heavy fee for rendering the abovementioned services. The fees are so lucrative that manynationalised banks which had separate merchant bankingdivisions have now opened separate subsidiary companies forrendering merchant banking services.

DICGC Deposit Insurance and Credit Guarantee Corporation

LIC Life Insurance Corporation of India

GIC General Insurance Corporation of India

UTI Unit Trust of India.

18


SUB-TOPICS:

3.1. Structure of a Scheduled Commercial Bank.

3.2. Structure of State Bank of India.

3.3. Structure of EXIM Bank

3.4. Structure and Management of a Nationalised Bank

3.1 STRUCTURE OF A SCHEDULED COMMERCIALBANK

The composition of a Board of Directors of a Scheduled Bankshall consist of a whole time Chairman, or a whole time Directorwho shall be the Chairman of the Board of Directors and otherelected and nominated part-time members. Of course in a recentamendment part time Chairman can also be appointed.According to Sec.10A of Banking Regulation Act (BRA), 1949as amended in 1968, not less than 51% of the number ofmembers shall consist of persons having special knowledge inone or more of the areas, such as accountancy, agriculture andrural economics, banking, cooperation, economics, finance, law,small-scale industries or any other special knowledge which inthe opinion of the Reserved Bank be useful in the bankingcompany. Atleast two of three members must have specialknowledge of practical experience in agriculture or ruraleconomy cooperation or small-scale industries.

The Chairman and a Director of the Banking Companyappointed by the RBI shall not be required to hold qualificationshares in the banking Company. The management of the wholeaffairs of the banking company shall be entrusted with the wholetime Director who is also the Chairman of the Company subjectto superintendence, control and direction of the Board ofDirectors. The Chairman must have special knowledge andpractical experience of working of a banking company or ofthe SBI or any subsidiary bank or a financial institution[Sec.10B(4)]. The RBI has the power to remove the Chairmanor the whole time Director or Chief Executive Officer (whatevername called) for reasons to be recorded in writing with effectfrom such date as may be specified by order. Any personappointed as a Chairman, Director or Chief Executive Officershall hold office during the pleasure of RBI and subject theretofor a period not exceeding three years as the RBI may specify.The RBI has the power to appoint Additional Director.

Directors of a Banking company other than the whole timeDirectors shall not hold office for a period exceeding 8 years.A Chairman of a whole time Director removed from office shallcease to be a Director of a Company and shall not to eligible tobe appointed as a Director either by election or by co-option orotherwise for a period of four years from the date of suchremoval. If the office of a Chairman of a Banking Company isvacant the RBI may appoint a person qualified underSec.10B(4). No Banking Company shall employ a ManagingAgent.

3.2 STRUCTURE OF STATE BANK OF INDIA

A flow chart of the Managment of the SBI is given below

Central Chairman

Two Managing Directors

Board (CB) President of the thirteen Local Boards

Four elected Directors

Comprise Ten other Directors

Local Boards at each local Head Office

Chairman Directors Six one elected Chiefex-offico of CB from nominated member G.M. of

the area members the localH. Office

SBI which is still a shareholders bank in which RBI is themajority shareholder and private shareholders are minorityshareholders. The bank shall be managed by the Central Boardof Directors which shall be guided by the Central Government.All such directions of the Central Government shall be giventhrough the RBI. The Central Board shall consist of theChairman to be appointed by Central Government inconsultation with the RBI, two Managing Directors appointedby the Central Government in consultation with RBI, presidentsof the Local boards and four elected members elected by theshareholders other than by the RBI provided the shareholdershold more than 25% of the share capital. One Director takenfrom the workmen to be appointed by the Central Government,One Director to be appointed by the Central Government fromthe employees not less than two and not more then six Directorto be appointed by the Central Government in consultation withRBI from persons having the special knowledge of the workingof cooperative institutions and of rural economy or experiencein commerce, industry, banking or finance. One nominatedDirector by the Central Government and one nominated Directorby the RBI (sec 19 of the SBI Act). The Chairman, and eachmanaging Director shall hold office for such term not exceeding5 years as the Central Government may fix. They may howeverbe eligible for the appointment. The Central Government hasthe right to terminate them by serving notice of not less than 3months or paying 3 months salary in lieu of the notice withinthe time.

The local boards of all local head offices comprise of theChairman ex officio and Directors of the Central Board comingfrom that are ex officio, six members nominated by the CentralGovernment in consultation with RBI, one elected memberfrom the shareholders other than RBI and Chief GeneralManager of the area. The Governor of the RBI in consultationwith the Chairman of the SBI shall nominate members of the

3. STRUCTURE OF BANKING INSTITUTIONS


19

local board. The member of the local board shall hold officenot exceeding 3 years but shall continue in office until thesuccessor be nominated.

The local boards shall exercise all powers and perform allfunctions and duties of the SBI as may be approved by theCentral board. All questions are decided by the majority.Similarly local boards are also to meet at such place and timeand observe such rules and procedures as may be prescribed

3.3 STRUCTURE OF EXIM BANK

The management of the EXIM, bank is nested in the boardcomprising :

(a) A Chairman and Managing Director appointed by theCentral Government

(b) One Director nominated by the RBI

(c) One Director nominated by the Development Bank

(d) One Director nominated by the Export Credit and GuaranteeCorporation.

(e) Not more than 12 Directors nominated by the CentralGovernment of whom 5 are Government officials, not morethan 3 are from schedule banks and not more than 4 arepersons having special knowledge of professionalexperience in export and import of finance.

The Board may constitute such committees either wholly orpartly by Directors and of other persons. The committees meetat such time and place and shall observe such rules andprocedures and transact such business as may be prescribed.Directors of a Board hold office for a period not exceeding 6years. Nominated Directors hold office during the pleasure ofthe authority nominating them. Chairman and ManagingDirectors hold office for such term not exceeding 5 years buteligible for the appointment.

3.4 STRUCTURE AND MANAGEMENT OF ANATIONALISED BANK

Under Sec 9 of the Banking Companies (Acquisition of Transferof Undertakings Act 1970 the Central Government was giventhe power to make schemes in consultation with the RBI forthe purpose of :

(a) Management by board of Directors, the appointment ofmanaging Directors, the holding of board meetings andallied matters.

(b) Meetings of the Board

(c) Appointment of Committees of the Board

(d) Constitution of Regional Consultative Committees and theirBoards.

Nationalised Banks are managed by the Board of Directorshaving 15 nominated members including two fulltime Directorsof whom one is the managing Director. The Composition ofthe Board is at follows :

(a) Two whole time Directors including the Managing Director,(b) One Director from the employer, (c) One Directorrepresenting Workmen, (d) One Director representingdepositors, (e) Three Directors representing farmers, workersand artisans, (f) One Director who is an official of the RBI, (g)One Director who is the official of the Central Government,and (h) not more than 5 Directors having knowledge or practicalexperience of the working of nationalised Banks. The Directorshold office during the pleasure of the Central Government for aperiod not exceeding 3 years. They may however be re-appointed. Clause 13 of the scheme provide provisions forconstituting management of the Board. The Board mayconstitute advisory committees consisting Directors or partlywith Directors or partly with other persons for advising theBoard on matters refer to them.

The Board has to meet atleast 6 times in a year and once in eachquarter and the head office of the Bank or at such other place asthe Board may decide. All questions are to be decided bymajority votes.

The scheme also provides for appointment of regionalcompetitive committees for six regions specified by theCommittee. The Committee shall consist of not more than threepersons nominated by the Central Government and tworepresentatives from each of the State in respective regions.One representative to be nominated by the Central Governmentas desired by the RBI. Meetings of the consultative Committeeshall be presided over by Minister of Finance or his deputy.The functions of these committees shall be to review bankingdevelopments within the region and recommend on such mattersas may be referred to it by the Central Government and theRBI.

20


SUB-TOPICS

4.1 Introductory Note

4.2 Industrial Finance Corporation of India (IFCI)

4.3 State Financial Corporations (SFC's)

4.4 The Industrial Credit and Investment Corporation of India(ICICI)

4.1 INTRODUCTORY NOTE

The economic development of a country depends inter alia onits financial system. In the long run, the larger the proportionof financial assets to real assets, the greater the scope foreconomic growth. Investment is a pre-condition for economicgrowth. In order to sustain the growth, continued investmentis a prime importance, Finance is a major input in the growthprocess. This is where the financial institution play a vital role.The major function of financial institutions whether short termor long term, is to provide the maximum financial convenienceto the public. This is achieved in the following manner.

a) Promoting the overall saving of the economy by wideningthe financial system.

b) Distributing the existing savings in a more efficient mannerso that those in greater need from the social and economicpoint of view, get priority in allotment; and

c) Creating credit and deposit money and facilitating thetransactions of trade, production and distribution infurtherance of the economy.

The integrated structure of the financial institution in the countrycomprises to 12 institutions at the National level and 44 at theState level. The structure consists of five All India DevelopmentBanks (AIDBs) four Specialized Financial Institutions (SFIs),three Investment Institutions, 18 State Financial Corporations(SFCs) and 26 State Industrial Development Corporations(SIDCs). The AIDBs are Industrial Development Bank of India(IDBI), Industrial Finance Corporation of India (IFCI),Industrial Credit and Investment Corporation of India (ICICI),Small Industries Development Bank of India (SIDBI) andIndustrial Reconstruction Bank of India (IRBI). The SFIs areRisk Capital and Technology Finance Corporation Ltd, (RCTC),Technology Development and Investment Company of Indialtd., (TDICI), SCICI Ltd, and Tourism Finance Corporation ofIndia Ltd (TFCI).

The investment activities are conducted by Life InsuranceCorporation of India (LIC), Unit Trust of India (UTI), andGeneral Insurance Corporation of India (GIC) and itssubsidiaries and various Mutual Funds.

Among the All India Development Banks, IDBI, IFCI, ICICIand IRBI provide assistance to medium and large industriesand SIDBI to the tiny and small sector. They also undertakepromotional and developmental activities. Among thespecialised financial institutions, RCTC and TDIC are involved

in risk capital, venture capital and technology developmentfinancing. SCICI, which was originally set up for financingshipping, deep sea fishing and allied activities has diversifiedits operations to other industrial sectors also. TFCI is engagedin financing hotels tourism and related projects. Of theinvestment institutions, LIC and GIC which primarily take careof the life and general insurance needs of the society and UTIwhich is a mutual fund mobilising the savings of the communityfor channelising into productive sectors, are active participantsin providing finance to industry both by way of term loans andsubscription to equity and debentures. The SFCs provideassistance mainly to small sector and SIDCs to the mediumand large sectors in their respective states besides undertakingpromotional and development activities. The FinancialInstitutions, evolved over the years have been instrumental inproviding term finance in the form of loan, underwriting anddirect subscription to equity and debentures and guarantees.Looking to the emerging needs of the industrial sector theyhave also introduced a variety of financial products and services.

4.2 INDUSTRIAL FINANCE CORPORATION OFINDIA (IFCI)

The need for speedier industrial expansion and formodernisation and replacement of obsolete machinery in alreadyestablished industries paved the way for establishment of theIndustrial Finance Corporation of India in 1948. IFCI was thefirst development bank to be established for providing mediumand long term credits to industrial concerns. IFCI wasestablished under such circumstances where normal bankingaccommodation was inappropriate and recourse to capital issuemethods were impracticable.

Capital: The Authorised capital of the IFCI was Rs.10 Croresit was subsequently raised to 20 crores by the IFCI Act, 1972.Presently the authorised capital is 250 crores Fifty percent ofthe share capital of IFCI is held by the IDBI and the remaining50% is held by commercial and cooperative banks.

The corporation is authorised to issue bonds and debentures inthe open market within certain limits.

Functions: The following are the major functions of the IFCI :

1) To guarantee loans raised by industrial concerns.

2) To grant loans and advances to or subscribe to thedebentures of industrial concerns.

3) To underwrite the issue of stocks, shares, bonds ordebentures by industrial concerns.

4) To extend guarantee in respect of deferred payments byimporters

5) To subscribe directly to the stock or shares of any industrialconcern.

The IFCI caters to the financial needs of large and mediumsized limited companies in the public and private sectors andcooperative societies engaged in the manufacture, preservation,

4. FINANCIAL INSTITUTIONS AND THEIR FUNCTIONS


21

processing, shipping, mining or hotel industry or in generationand distribution of electricity or any other form of power.

The IFCI provides assistance in all forms-sanction of rupee loansand foreign currency loans, underwriting of and subscribing toshare and debenture issues, guaranteeing of deferred paymentsetc.

However, the corporation cannot compete with the commercialbanks in financing industrial concerns but supplement their workby granting loans in such amounts and for such periods as areoutside the scope of ordinary commercial banks.

The corporation now functions as a subsidiary of the IDBI underits supervision, guidance and control.

Before granting loan to any industrial concern applying forfinancial aid, the corporation scrutinizes the applicationcarefully and the following points are evaluated i.e.,

a) the importance of the industry to the national economy;

b) the feasibility of and the cost of the scheme for whichfinancial aid is required;

c) technical, financial and economic viability;

d) the competence of the management;

e) the nature of the security offered.

f) the adequacy of the supply of technical personnel and rawmaterials; and

g) the quality of the product and the countrys requirementsof the product manufactured.

While lending, the corporation requires the security of fixedassets such as land, buildings, plant and machinery and it doesnot normally lend against raw materials or finished products. Itordinarily requires the personal guarantee of directors and hasthe right to appoint two directors to the board of managementof the borrowing concern in order to ensure efficientmanagement and also to safeguard the interests of thecorporation. In fact, the corporation has the right to take overthe management of a concern or to sell the property mortgagedin the event of continuous default in the payment of interestand of the principal advanced to the concern. It obtains periodicreports from the borrowing concerns and also undertakesperiodic inspection.

In addition to providing assistance by way of project financeand financial services like equipment leasing, equipmentprocurement, buyers and suppliers credit, finance to leasingand hire purchase concerns etc., IFCI also provides merchantbanking services. It also helps industrialisation through a rangeof promotional activities.

The promotional services cover funds support for technicalconsultancy, risk capital venture capital, technologydevelopment, tourism and tourism related activities, housing,development of securities market and investor protectionupgradation of managerial skills, entrepreneurship development,science and technology, entrepreneurs perks, research etc, andsubsidy support through promotional schemes of IFCI to helpthe entrepreneurs and enterprises in the village and smallindustries (VSI) sectors.

Operations:

The Cumulative financial assistance sanctioned by theCorporation since its inception in 1948 upto end March 1993aggregated 16650-93 crores against which disbursementsamounted to Rs.8650.6 crores. Among the many industrieswhich have received financial assistance from the corporationare those which are of high national priority such as fertilizers,cement, power generation, paper, industrial machinery, etc.

During the year 1992, IFCI introduced one more scheme offinancial service i.e. Installment credit scheme, with a view toproviding an option to borrowers for availing assistance foracquiring equipment for industrial use. The scheme is flexiblein regard to repayment and has a simplified procedure forinterest payment.

The above scheme is similar to the soft loan scheme introducedby the Corporation in 1976 which provided financial assistanceto productive units in selected industries i.e. Cement, Cotton,Textile, Jute, Sugar and certain engineering industries onconcessional term to overcome the backlog in modernisationreplacement and renovation of their plant and equipment so asto achieve higher and more economic levels of production. Thescheme is administered by IDBI with financial participation byIFCI and ICICI. The basic criterion for assistance under thescheme was the weakness of the units on account ofobsolescence of machinery.

The IFCI has also sponsored the Risk Capital Foundation toprovide assistance in the form of interest free personal loans tonew entrepreneurs including technologists and professionalsfor meeting a part of the promoters contribution to equity capital.With the amendments in 1986-87 to the IFCI Act, the area ofoperations of the IFCI has been enlarged. The corporation hasbeen designated as the nodal point to administer the JuteModernisation Fund constituted by the Government of India inorder to revitalise and modernize the jute industry.

The IFCI has also been appointed as the agent of the governmentfor disbursement of loans from the Sugar Development Fundfor rehabilitation and modernization of sugar units. During1986-87, the IFCI established a Merchant Banking division totake up assignment of capital restructuring, merger andamalgamation, loan syndication with other financial institutionsand trusteeship assignments. It also provides guidance toentrepreneurs in project formulation, resource management etc.

During the same year, IFCI also introduced a promotionalscheme called the scheme of Interest Subsidy for encouragingQuality Control measures in the small scale sector.

The Investment Information and Credit Rating Agency of IndiaLtd., (IICRA), set up by IFCI, commenced operations inSeptember 1991 and rated 39 instruments by 31st March 1992.

With a view to provide training facilities for workers in theindustry and organisations connected with industrialdevelopment and for retraining and reorientation of workers inspecific industries covering skills and attitudes to adjust totechnological changes, IFCI established, in January 1992, anational level institute called the Institute of LabourDevelopment at Jaipur in Rajasthan.

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IFCI has been playing the role of a leader by identifying thevarying financial needs of industry and has promoted specialisedinstitutions to cater to these needs, such as :

Managment Development Institute (MDI)

Risk Capital and Technology Finance Corporation Ltd(RCTC)

Investment Information and Credit Rating Agency of IndiaLtd (ICRA)

Tourism Finance Corporation of India Ltd (TFCI)

Institute of Labour Development (ILD)

IFCI has also co-sponsored national institutions like

Stock Holding Corporation of India (SHCIL)

Entrepreneurship Development Institute of India (EDII)

Over-the-Counter Exchange of India Ltd (OCTCEI)

National Stock Exchange of India Ltd. (NSEIL)

Bio-tech Consortium (India) Ltd.

4.3 STATE FINANCIAL CORPORATIONS (SFCS)

Implementation of programmes for planned industriesdevelopment and their success depends, on the availability ofadequate financial resources for a wide variety of projects. Sincethe Indian Banking system had confined itself to financing theworking capital requirements of trade and industry, the need toset up long term financial institutions was greatly felt. Thiscould ensure adequate flow of assistance in the form of capitalto Industrial projects. However, the IFCI which was set up forthis very purpose could cater only to the corporate sector andindustrial co-operatives.

To reduce the imbalance, it was decided to set up regionaldevelopment banks to cater to the needs of the small andmedium enterprises. Thus, the State Financial Corporationscame into existence by an Act of the Parliament passed in 1951called the State Financial Corporations Act, 1951.

Under the provisions of the Act, SFCs are established by therespective State Governments for providing term finance tomedium industries operating in 18 different States includingNew Delhi

SFCs are under the control of the IDBI and the StateGovernments.

SFCs grant financial assistance to public limited Companies,private limited Companies, partnership firms and proprietaryconcerns in the form of loans and advances, subscription toshares and debentures, underwriting of new issues and guaranteeof loans. They also operate the seed capital scheme on behalfof IDBI and SIDBI.

The SFCs operating at the State level have grown to be anintegral part of the financial system of the country. They havebeen fairly successful in achieving balanced regional socio-economic growth. they have been instrumental in catalysinghigher investment and generating greater employmentopportunities and widening the ownership base of the industries.

The working group set up by IDBI in 1990-91 to service theoperations of SFCs has made wide-ranging recommendationsfor improving the working of SFCs.

4.4 THE INDUSTRIAL CREDIT AND INVESTMENTCORPORATION OF INDIA (ICICI)

The Company was set up as a Development Finance Institutionon January 5, 1955 under the Indian Companies Act, 1913,with the support of the Government of India and the activeinvolvement of the World Bank.

The need for setting up such a finance institution came outbecause the existing institutional frame work was not geared tothe job of bringing about a rapid industrial revolution throughprivate effort. Hence, the basic objective of ICICI at the timeof formation was to assist the countrys industrial developmentby providing finance.

ICICI has an unique structure. It is a development agency withtwin objectives i.e. assist in the industrial development of thecountry and earn profit for its shareholders.

Capital structure:

The Corporation was registered as a company with an authorisedcapital of Rs.25 crores and a subscribed capital of Rs. 5 crores.Today the capital stands at a whooping Rs.300 crores(authorised) and a subscribed capital or Rs.171 crores. ICICIhas been meeting its financing requirements through internalgeneration of funds and borrowings in the domestic andinternational markets. Internal generation of funds by way ofrepayment of loans, receipt of interest etc. constitutes a majorsource of funding ICICIs resource requirements. ICICI hasbeen raising rupee resources, within the regulatory frameworkof the RBI, mainly by issue of Bonds in the nature of promissorynotes, convertible debentures, equity and loans from institutionssuch as Unit Trust of India & Life Insurance Corporation ofIndia.

In the recent past, however, ICICI has been endeavoring todiversify its resource base on account of Government policiesencouraging it to seek funds from commercial sources. In thisregard, it has entered the Certificates of Deposit market andhas scrutinised a part of its assets.

Management & Organisation:

ICICI is efficiently managed by a Board of Directors comprisingpersonalities drawn from such diverse fields as finance andbanking, industry and government service. The day-to-dayaffairs are handled by the Managing Director supported by thesenior executives of ICICI.

The organisation is characterised by a high degree ofprofessionalism, delegation of authority and effective clientservicing through swift communication and computerised databasis.

Objectives:

The main objects of the company as set out in its Memorandumof Association are:


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To carry on the business of assisting industrial enterprises withinthe private sector of the industry in India by -

a) assisting in the creation, expansion and modernisation ofsuch enterprises;

b) encouraging and promoting the participation of privatecapital, both internal and eternal, in such enterprises;

c) encouraging and promoting private ownership of industrialinvestments and the expansion of investment markets;

d) providing finance in the form of long or medium term loansorequity participation;

e) sponsoring and underwriting new issues of shares andsecurities;

f) guaranteeing loans from other private investment sources;

g) making funds available for re-investment by revolvinginvestments as rapidly as possible;

h) providing or assisting in obtaining directly or indirectly,advice or services in various fields including management,finance, investment, technology, administration, commerce,law, economics, labour, accountancy, taxation etc;

i) performing and undertaking activities relating to leasing,giving on hire or hire purchase, warehousing, billmarketing, factoring and other related fields.

Operations:

ICICI began its activities in the 1950s predominantly as aforeign currency lender and gradually diversified its activitiesto rupee lending over a period of time with the growth ofindigenous capital goods industry.

Till 1985, term lending to industry was the main form offinancial assistance provided by ICICI. So long as thecorporation received rupee funds at special rates by way ofgovernment guaranteed bonds and lent these funds at fixed rates,it earned reasonable returns. However, the lending ratesremained constant even as the cost of funds were increasing.This led to a pressure on the margins thereby forcing thecorporation to expand its non-project financing to other areaslike leasing of industrial equipment, asset credit and deferredpayment financing of sale of industrial equipment.

Non project financing showed a faster growth rate than projectfinancing and the share of this segment in the annual approvalsrose from a mere 13.6% in 1980 to 42.5% in 1991.

In addition to assistance provided to industries, ICICI alsoencourages projects in backward areas and those related topollution control. ICICI is in the process of carrying out acomprehensive study to identify the scope for technologicalcollaboration between companies in India and suitable agenciesin the industrialised countries for instituting more efficientpollution control measures.

In order to improve the exportability of Indian products, ICICIhas been providing assistance to existing companies fortechnology upgradation, modernization and balancing

equipment out of lines of credit obtained from the World Bank.The Corporation is also making concerted efforts to developprogrammes for the benefit of export oriented companies bychalking out an export marketing strategy and helping themproduce internationally acceptable quality of products. TheCorporation provides financial support in the form of grantsfrom the Productivity Fund and Export Development Fund.

During 1991-92, the ICICI initiated the Export BreakthroughService in collaboration with Developing Countries TradeAgency (DCTA) an agency funded by the British Government.Under the service, exporters who require market and commercialinformation necessary for entering new export markets areintroduced to selected market research consultants. Funds arealso provided towar

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