Financial Institutions.docx

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SCHOOL OF MANAGEMENT STUDIES,

PUNJABI UNIVERSITY PATIALA

SUBMMITED TO:


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INTRODUCTION

In financial economics, a financial institution is an institution that provides financial services

for its clients or members. Probably the most important financial service provided byfinancial institutions is acting as financial intermediaries. Most financial institutions are

regulated by the government.

Broadly speaking, there are three major types of financial institutions:

1. Deposit-taking institutions that accept and manage deposits and make loans, including

banks, building societies, credit unions, trust companies, and mortgage loan companies

2. Insurance companies and pension funds; and

3. Brokers, underwriters and investment funds.

An establishment that focuses on dealing with financial transactions, such as investments,

loans and deposits. Conventionally, financial institutions are composed of organizations such

as banks, trust companies, insurance companies and investment dealers. Almost everyone has

deal with a financial institution on a regular basis. Everything from depositing money to

taking out loans and exchange currencies must be done through financial institutions.

Since all people depend on the services provided by financial institutions, it is imperative that

they are regulated highly by the federal government. For example, if a financial institution

were to enter into bankruptcy as a result of controversial practices, this will no doubt cause

wide-spread panic as people start to question the safety of their finances. Also, this loss of

confidence can inflict further negative externalities upon the economy.

The Financial Institutions in India mainly comprises of the Central Bank which is better

known as the Reserve Bank of India, the commercial banks, the credit rating agencies, the

securities and exchange board of India, insurance companies and the specialized financial

institutions in India.


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ROLE OF BANKS AND FINANCIAL INSTITUTIONS IN

ECONOMY

Money lending in one form or the other has evolved along with the history of the mankind.Even in the ancient times there are references to the moneylenders. Shakespeare also referred

to Shylocks who made unreasonable demands in case the loans were not repaid in time

along with interest. Indian history is also replete with the instances referring to indigenous

money lenders, Sahukars and Zamindars involved in the business of money lending by

mortgaging the landed property of the borrowers.

Towards the beginning of the twentieth century, with the onset of modern industry in the

country, the need for government regulated banking system was felt. The British government

began to pay attention towards the need for an organised banking sector in the country and

Reserve Bank of India was set up to regulate the formal banking sector in the country. But the

growth of modern banking remained slow mainly due to lack of surplus capital in the Indian

economic system at that point of time. Modern banking institutions came up only in big cities

and industrial centres. The rural areas, representing vast majority of Indian society, remained

dependent on the indigenous money lenders for their credit needs.

Independence of the country heralded a new era in the growth of modern banking. Many new

commercial banks came up in various parts of the country. As the modern banking network

grew, the government began to realise that the banking sector was catering only to the needs

of the well-to-do and the capitalists. The interests of the poorer sections as well as those of

the common man were being ignored.

In 1969, Indian government took a historic decision to nationalise 14 biggest private

commercial banks. A few more were nationalised after a couple of years. This resulted intransferring the ownership of these banks to the State and the Reserve Bank of India could

then issue directions to these banks to fund the national programmes, the rural sector, the plan

priorities and the priority sector at differential rate of interest. This resulted in providing

fillip the banking facilities to the rural areas, to the under-privileged and the downtrodden. It

also resulted in financial inclusion of all categories of people in almost all the regions of the

country.


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However, after almost two decades of bank nationalisation some new issues became

contextual. The service standards of the public sector banks began to decline. Their

profitability came down and the efficiency of the staff became suspect. Non-performing

assets of these banks began to rise. The wheel of time had turned a full circle by early

nineties and the government after the introduction of structural and economic reforms in the

financial sector, allowed the setting up of new banks in the private sector.

The new generation private banks have now established themselves in the system and have

set new standards of service and efficiency. These banks have also given tough but healthy

competition to the public sector banks.

Modern Day Role

Banking system and the Financial Institutions play very significant role in the economy. First

and foremost is in the form of catering to the need of credit for all the sections of society. The

modern economies in the world have developed primarily by making best use of the credit

availability in their systems. An efficient banking system must cater to the needs of high end

investors by making available high amounts of capital for big projects in the industrial,

infrastructure and service sectors. At the same time, the medium and small ventures must also

have credit available to them for new investment and expansion of the existing units. Rural

sector in a country like India can grow only if cheaper credit is available to the farmers for

their short and medium term needs.

Credit availability for infrastructure sector is also extremely important. The success of any

financial system can be fathomed by finding out the availability of reliable and adequate

credit for infrastructure projects. Fortunately, during the past about one decade there has been

increased participation of the private sector in infrastructure projects.

The banks and the financial institutions also cater to another important need of the society i.e.

mopping up small savings at reasonable rates with several options. The common man has the

option to park his savings under a few alternatives, including the small savings schemes

introduced by the government from time to time and in bank deposits in the form of savings


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accounts, recurring deposits and time deposits. Another option is to invest in the stocks or

mutual funds.

In addition to the above traditional role, the banks and the financial institutions also perform

certain new-age functions which could not be thought of a couple of decades ago. The facility

of internet banking enables a consumer to access and operate his bank account without

actually visiting the bank premises. The facility of ATMs and the credit/debit cards has

revolutionised the choices available with the customers. The banks also serve as alternative

gateways for making payments on account of income tax and online payment of various bills

like the telephone, electricity and tax. The bank customers can also invest their funds in

various stocks or mutual funds straight from their bank accounts. In the modern day

economy, where people have no time to make these payments by standing in queue, the

service provided by the banks is commendable.

While the commercial banks cater to the banking needs of the people in the cities and towns,

there is another category of banks that looks after the credit and banking needs of the people

living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been

sponsored by many commercial banks in several States. These banks, along with thecooperative banks, take care of the farmer-specific needs of credit and other banking

facilities.

Future

Till a few years ago, the government largely patronized the small savings schemes in which

not only the interest rates were higher, but the income tax rebates and incentives were also in

plenty. The bank deposits, on the other hand, did not entail such benefits. As a result, thesmall savings were the first choice of the investors. But for the last few years the trend has

been reversed. The small savings, the bank deposits and the mutual funds have been brought

at par for the purpose of incentives under the income tax. Moreover, the interest rates in the

small savings schemes are no longer higher than those offered by the banks.

Banks today are free to determine their interest rates within the given limits prescribed by the

RBI. It is now easier for the banks to open new branches. But the banking sector reforms are


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still not complete. A lot more is required to be done to revamp the public sector banks.

Mergers and amalgamation is the next measure on the agenda of the government. The

government is also preparing to disinvest some of its equity from the PSU banks. The option

of allowing foreign direct investment beyond 50 per cent in the Indian banking sector has

also been under consideration.

Banks and financial intuitions have played major role in the economic development of the

country and most of the credit- related schemes of the government to uplift the poorer and the

under-privileged sections have been implemented through the banking sector. The role of the

banks has been important, but it is going to be even more important in the future.


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COMMERCIAL BANKS

Commercial banks form a significant part of the countrys Financial Institution System.

Commercial Banks are those profit seeking institutions which accept deposits from general

public and advance money to individuals like household, entrepreneurs, businessmen etc.

with the prime objective of earning profit in the form of interest, commission etc. The

operations of all these banks are regulated by the Reserve Bank of India, which is the central

bank and supreme financial authority in India. The main source of income of a commercial

bank is the difference between these two rates which they charge to borrowers and pay to

depositors. Examples of commercial banks ICICI Bank, State Bank of India, Axis Bank,

and HDFC Bank.

Classification of commercial banks

1. Scheduled banks :- Banks which have been included in the Second Schedule of RBI

Act 1934. They are categorized as follows:

o Public Sector Banks: - are those banks in which majority of stake is held by

the government. Eg. SBI, PNB, Syndicate Bank, Union Bank of India etc.

o Private Sector Banks :- are those banks in which majority of stake is held by

private individuals. Eg. ICICI Bank, IDBI Bank, HDFC Bank, AXIS Bank etc.

o Foreign Banks: - are the banks with Head office outside the country in which

they are located. Eg. Citi Bank, Standard Chartered Bank, Bank of Tokyo Ltd.

etc.

2. Non scheduled commercial banks :- Banks which are not included in the Second

Schedule of RBI Act 1934.


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ACTIVITIES OF COMMERCIAL BANKS

Primary Functions of Commercial Banks:

Deposit Acceptance: Being a short term credit dealer, the commercial banks accept the

savings of public in the form of following deposits:

Fixed term deposits

Current A/c deposits

Recurring deposits

Saving A/c deposits

Tax saving deposits

Deposits for NRIs

Lending Money: a second major function is to give loans and advances and thereby earn

interest on it. This function is the main source of income for the bank. Overdraft facility:

Permission to a current A/c holder of withdrawal more than to what he has deposited.

Loans & advances: A kind of secured and unsecured loans against some kind of security.

Discounting of bill of exchange: in case a person wants money immediately, he/she can

present the B/E to the respective commercial bank and can get it discounted.

Cash credit : Facility to withdraw a certain amount of money on a given security.

Secondary Functions of Commercial Banks:

Agency functions: Bank pays on behalf of its customers as an agent and gets paid fee for

agency functions such as:


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Payment of taxes, bills

Collection of funds through bills, cheques etc.

Transfer of funds

Sale-purchase of shares and debentures

Collection/Payment of dividend or interest

Acts as trustee & executor of properties

Forex Transactions

General Utility Services: locker facility

Credit Creation: It is one of the most outstanding function of commercial banks. A bank

creates credit on the basis of its primary deposits. It further lends the money which people has

deposited with the bank also charge interest on this money, which is much higher than what it

actually pays to depositor. Thus bank generates money for itself.

List of Commercial Banks in India

SBI & Associates:

State Bank of India

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

Nationalised Banks:


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Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

IDBI Bank Ltd.

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab & Sind Bank

Punjab National Bank

Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

Foreign Banks:

ABN Amro Bank


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Abu Dhabi Commercial Bank

American Express Banking Corporation

Antwerp Diamond Bank

AB Bank

Bank International Indonesia

Bank of America

Bank of Bahrain & Kuwait

Bank of Ceylon

Bank of Nova Scotia

Bank of Tokyo Mitsubishi UFJ

Barclays Bank

BNP Paribas

Calyon Bank

Chinatrust Commercial Bank

Citibank

DBS Bank

Deutsche Bank

Hongkong& Shanghai Banking Corporation

JP Morgan Chase Bank

JSC VTB Bank

Krung Thai Bank

Mashreq Bank


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Mizuho Corporate Bank

Oman International Bank

Shinhan Bank

SocieteGenerale

Sonali Bank

Standard Chartered Bank

State Bank of Mauritius

UBS AG


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INSURANCE COMPANIES

Indian Insurance Market History

Insurance has a long history in India. Life Insurance in its current form was introduced in

1818 when Oriental Life Insurance Company began its operations in India. General Insurance

was however a comparatively late entrant in 1850 when Triton Insurance company set up its

base in Kolkata. History of Insurance in India can be broadly bifurcated into three eras: a) Pre

Nationalisation b) Nationalisation and c) Post Nationalisation. Life Insurance was the first to

be nationalized in 1956. Life Insurance Corporation of India was formed by consolidating the

operations of various insurance companies. General Insurance followed suit and was

nationalized in 1973. General Insurance Corporation of India was set up as the controlling

body with New India, United India, National and Oriental as its subsidiaries. The process of

opening up the insurance sector was initiated against the background of Economic Reform

process which commenced from 1991. For this purpose Malhotra Committee was formed

during this year who submitted their report in 1994 and Insurance Regulatory Development

Act (IRDA) was passed in 1999. Resultantly Indian Insurance was opened for private

companies and Private Insurance Company effectively started operations from 2001.

Insurance Market- Present:

The insurance sector was opened up for private participation four years ago. For years now,

the private players are active in the liberalized environment. The insurance market have

witnessed dynamic changes which includes presence of a fairly large number of insurers both

life and non-life segment. Most of the private insurance companies have formed joint venture

partnering well recognized foreign players across the globe.

There are now 29 insurance companies operating in the Indian market 14 private life

insurers, nine private non-life insurers and six public sector companies. With many more

joint ventures in the offing, the insurance industry in India today stands at a crossroads as

competition intensifies and companies prepare survival strategies in a detariffed scenario.


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There is pressure from both within the country and outside on the Government to increase the

foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV

partners to bring in funds for expansion.

There are opportunities in the pensions sector where regulations are being framed. Less than

10 % of Indians above the age of 60 receive pensions. The IRDA has issued the first license

for a standalone health company in the country as many more players wait to enter. The

health insurance sector has tremendous growth potential, and as it matures and new players

enter, product innovation and enhancement will increase. The deepening of the health

database over time will also allow players to develop and price products for larger segments

of society.

State Insurers Continue To Dominate There may be room for many more players in a large

underinsured market like India with a population of over one billion. But the reality is that the

intense competition in the last five years has made it difficult for new entrants to keep pace

with the leaders and thereby failing to make any impact in the market.

Also as the private sector controls over 26.18% of the life insurance market and over 26.53%

of the non-life market, the public sector companies still call the shots.

The countrys largest life insurer, Life Insurance Corporation of India (LIC), had a share of

74.82% in new business premium income in November 2005.

Similarly, the four public-sector non-life insurersNew India Assurance, National Insurance,

Oriental Insurance and United India Insurance had a combined market share of 73.47% as

of October 2005. ICICI Prudential Life Insurance Company continues to lead the private

sector with a 7.26% market share in terms of fresh premium, whereas ICICI Lombard

General Insurance Company is the leader among the private non-life players with a 8.11%

market share. ICICI Lombard has focused on growing the market for general insurance

products and increasing penetration within existing customers through product innovation

and distribution.

Reaching Out To Customers No doubt, the customer profile in the insurance industry is

changing with the introduction of large number of divergent intermediaries such as brokers,


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LIFE INSURANCE CORPORATION OF INDIA (LIC)

Life Insurance Corporation of India (LIC) was formed in September, 1956 by an Act of

Parliament, viz., Life Insurance Corporation Act, 1956, with capital contribution from the

Government of India. The then Finance Minister, Shri C.D. Deshmukh, while piloting the

bill, outlined the objectives of LIC thus: to conduct the business with the utmost economy, in

a spirit of trusteeship; to charge premium no higher than warranted by strict actuarial

considerations; to invest the funds for obtaining maximum yield for the policy holders

consistent with safety of the capital; to render prompt and efficient service to policy holders,

thereby making insurance widely popular.

Since nationalisation, LIC has built up a vast network of 2,048 branches, 100 divisions and 7

zonal offices spread over the country. The Life Insurance Corporation of India also transacts

business abroad and has offices in Fiji, Mauritius and United Kingdom. LIC is associated

with joint ventures abroad in the field of insurance, namely, Ken-India Assurance Company

Limited, Nairobi; United Oriental Assurance Company Limited, Kuala Lumpur and Life

Insurance Corporation (International) E.C. Bahrain. The Corporation has registered a joint

venture company in 26th December, 2000 in Kathmandu, Nepal by the name of Life

Insurance Corporation (Nepal) Limited in collaboration with Vishal Group Limited, a local

industrial Group. An off-shore company L.I.C. (Mauritius) Off-shore Limited has also been

set up in 2001 to tap the African insurance market.

Some Areas of Future Growth

Life Insurance

The traditional life insurance business for the LIC has been a little more than a savings

policy. Term life (where the insurance company pays a predetermined amount if the

policyholder dies within a given time but it pays nothing if the policyholder does not die) has

accounted for less than 2% of the insurance premium of the LIC (Mitra and Nayak, 2001).

For the new life insurance companies, term life policies would be the main line of business.


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Health Insurance

Health insurance expenditure in India is roughly 6% of GDP, much higher than most other

countries with the same level of economic development. Of that, 4.7% is private and the rest

is public. What is even more striking is that 4.5% are out of pocket expenditure (Berman,

1996). There has been an almost total failure of the public health care system in India. This

creates an opportunity for the new insurance companies.

Thus, private insurance companies will be able to sell health insurance to a vast number of

families who would like to have health care cover but do not have it.

Pension

The pension system in India is in its infancy. There are generally three forms of plans:

provident funds, gratuities and pension funds. Most of the pension schemes are confined to

government employees (and some large companies). The vast majority of workers are in the

informal sector. As a result, most workers do not have any retirement benefits to fall back on

after retirement. Total assets of all the pension plans in India amount to less than USD 40

billion.

Therefore, there is a huge scope for the development of pension funds in India. The finance

minister of India has repeatedly asserted that a Latin American style reform of the privatized

pension system in India would be welcome (Roy, 1997). Given all the pros and cons, it is not

clear whether such a wholesale privatization would really benefit India or not (Sinha, 2000).


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CREDIT RATING AGENCIES

The credit rating agencies in India mainly include ICRA and CRISIL. ICRA was formerly

referred to the Investment Information and Credit Rating Agency of India Limited. Their

main function is to grade the different sector and companies in terms of performance and

offer solutions for up gradation.

Functions of Credit rating agencies in India:

The credit rating agencies in India offer varied services like mutual consulting services,

which comprises of operation up gradation, risk management.

The have special sections to carry on research and development work of the industries. They

provide training to the employees and executives of the companies for better management.

They examine the risk involved in a new project, chalk out plans to fight with the problem

successfully and thus ameliorate the percentage of risk to a great extent. For this they carry

on thorough research into the respective industry. They have started offering services to the

mutual fund sector through the application of fund utilization services. The major industries

currently graded by the credit rating agencies include agriculture, health care industry,

infrastructure, and maritime industry.

Guidelines for Credit rating agencies in India:

The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999

offers various guidelines with regard to the registration and functioning of the credit rating

agencies in India. The registration procedure includes application for the establishment of a

credit rating agency, matching the eligibility criteria and providing all the details required.

They have to undergo the strict examination procedure with regard to the details furnished by

them. They are required to prepare internal procedures, abidance with circulars. They are

offered guidelines regarding the credit rating procedure, by the Act. The credit rating


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agencies are provided with compliance officers. They are required to show their accounting

records.

CRISIL:

CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field of

assessment service for the banks. Highly skilled members manage the agency.

Ms.RoopaKudva who acts as the Managing Director and Chief Executive Officer of the

company heads it. The company has set up large number of committees to look after dispersal

of various services offered by the company for example, investor grievance committee,

investment committee, rating committee, allotment committee, compensation committee and

so on. The head office of the company is located at Mumbai and it has established offices

outside India also.

ICRA:

ICRA was established in the year 1991 by the collaboration of financial institutions,

investment companies, and banks. The company has formed the ICRA group together with itssubsidiaries. The company is headed by Mr.Piyush G. Mankad and offers products like short-

term debt schemes, Issue-specific long-term rating and offers fund based as well as non-fund

based facilities to its clients.


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MICRO FINANCE

The Planning Commission of India had in 2007 set up a High Level Committee for looking

into reforms to be made in the national microfinance sector. The committee was chaired by

Raghuram G Rajan who was a professor with the Graduate School of Business of the

University of Chicago. The committee had provided its report during September 2008.

In its report the committee had stated that the microfinance sector of India was a successful

one but several factors were limiting its progress. A major issue was the capability of the

micro finance institutions (MFI) to generate substantial capital. The approximate demand for

micro-credit in India is a significant one and so the MFIs needed to have several sources for

generating their finances, in addition to loans from banks that may be regarded as a

traditional source of finance.

Yet another major problem in this regard was the regulatory scenario that was in a far from

desirable condition. The management information system in India at that time was also not

developed well enough, thus adding to the problems.

The supply of management staff, which is properly trained, was a major hindrance as well.

The report stated that if this problem could be addressed properly then the micro finance

companies could think of increasing their operations substantially.

Micro Finance Institutions (Development and Regulation)Bill 2012

The Department of Financial Services has formed the Micro Finance Institutions

(Development and Regulation) Bill 2012. According to NamoNarainMeena, a Minister of

State of Finance the main aims behind introducing this step may be enumerated as below:

To create an accepted regulatory structure for promoting, regulating, and developing

the micro finance sector


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To provide the section of Indian population, which does not have access to banks, the

ability to avail proper financial services

To assist with the consistent growth of the sector

The bill is a modified version of the one introduced in 2007 Micro Financial Sector

(Development and Regulation) Bill 2007, which had lapsed when the LokSabha was

dissolved at that period.

The new bill is also expected to provide a constitution that will be used for the Micro Finance

Development Council. The council will be suggesting the government on developmentalpolicies, programs and other relevant steps.

The bill, introduced in May 2012, will aim to help the RBI set performance benchmarks for

different sectors. These standards will be regarding justifiable means for recovering loan and

other operational methods of the MFIs.

The RBI is also supposed to establish a microfinance fund that will be used for providing

them loans, seed capital, and grants. This fund will also be used to provide training to

professionals who are working in this sector.

State Micro Finance Council

The Micro Finance Institutions (Development and Regulation) Bill 2012 also enables the

setting up of the State Micro Finance Councilthis will be done either on a per state basis or

for 2 or more states at a time. The decision will depend on the amount of microfinance

business a state has.

The Council will be reporting to the Central Government on how the various measures,

meant to help with the micro finance institutions progress, have been implemented.


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Micro Finance Institutions (Development and Regulation) Bill 2012 Industry

Reception and Effect

There have been some last minute alterations to the microfinance bill and this has created a

lot of problems for banks and other members of the financial industry. The bill has increased

limit for loan credit by ten times, from INR 50 thousand to INR 5 lakh and this is expected to

the nature of operations of the MFIs from lending to the poor to lending to the economically

well-off classes. According to the bill this amount can be taken up to 10 lakh rupees by the

RBI as well.

The suggestions made in the draft bill have been supported by the Malegam Committee,

which had been established by the RBI in order to look into the various problems that plague

the countrys microfinance sector.

A senior manager of Sa-Dhan, which was assisting the Finance Ministry implement the

feedback on the bill, has revealed that the previously mentioned clause has been a recent

addition. Sa-Dhan is a forum of companies that work on community finance.

A banker based in Hyderabad and working with the IndusInd Bank has stated that once this

rule comes into play personal loans will get grouped as microfinance, further stating that with

an upper limit of 5 lakh the originally intended beneficiaries might not be there.

Normally the MFIs provide small loans to the economically disadvantaged people at

approximate interest rates of 26 percent. If the increased limit is accepted then it will help the

MFIs lend to a greater group of borrowers.

YeshwantThorat who has previously served as the National Board for Agriculture and Rural

Development chairman states that the increased limit is not in tune with reality. He has also

questioned its justifiability from the context of social equality.


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NABARD

MFI Clients

However, these measures have not been deemed to be sufficient. The Principal Secretary

(Rural Development) of Andhra Pradesh, Reddy Subramanyam, has stated that the states

should be playing a bigger role with regards to regulating the MFIs.

Ramesh Arunachalam, who is a practitioner of rural finance and is also writing a book on the

microfinance problems in Andhra has stated that lenders such as the banks and SIDBI are

controlling the committees being set up to monitor the MFIs. He predicts that there could be aconflict of interest in future.

The previous bill had asked for the bigger MFIs to be given systematic importance they

were supposed to adhere to RBI directives in addition to the normal MFI related regulations.

This suggestion has been done away for now.


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COMMERCIAL BANKS

The word ''bank'' originally was referred to an individual or organization which acted as a

money changer and exchanged one currency for another but these days, a bank is aninstitution in which people keep their cash balances in the form of deposits and further these

institutions lend to the people who require funds.

"Banks are institutions whose debt-usually refers to as 'bank deposits - are

commonly accepted in final settlement of other's debts." -

------ Prof. Sayers

According to the Banking Regulator Act 1949, ''Banking means the accepting for the

purpose of lending or investment of deposit of money from the public, repayable on

demand or otherwise and withdrawal by cheque, draft, order or otherwise."

In India, banking originated in the first decade of 18th century when the General

Bank came into existence in 1786 which was followed by the Bank of Hindustan.

Both these banks are now defunct. The oldest bank in existence in India is the State

Bank of India which was established as the Bank of Calcutta in Calcutta in June

1806.

In early 1990s, the Narasimha Rao government embarked on the policy of

liberalization and gave license to small number of private banks, which later came to

be known as new generation banks such as ICICI Bank and HDFC Bank. In India,

banking is considered fairly matured in terms of supply, product range and reach

although reach in rural India still stands a challenge for the private sector and foreign

banks.


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Functions of Commercial Banks

Primarily, the business of a commercial bank is to hold deposits and make loans as well as

investments with the object of securing profits for its shareholders. The major functions areexplained as follows

Receiving Deposits from the Public

Fixed Deposits

Savings Deposits

Demand Deposits

Fixed Deposits

Making Loans and Advances

Cash Credit

Loans

Bank Overdraft

Discounting of Bills

Agency Functions

General Utility Functions

Receiving Deposits from the Public

It is one of the important functions of a commercial bank. Those having excess cash balance

and want to store it in a safe place can deposit same with a bank. In addition to this, the bank

also offers the depositors with a convenient means for transferring funds by using various

instruments. Deposits are of various types fixed deposits, savings deposits, and demand

deposits.

Fixed Deposits

Fixed deposits are made for a pre-specified time which range from 15 days to 10 years and

cant be withdrawn before the maturity of the deposit. These are also termed as Time

Deposits or Long Term Deposits. This source of income is generally considered as risk


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free as the depositor cant withdraw the funds before maturity and hence they offer a higher

interest rate. Usually, higher the time period higher is the interest rate.

Savings Deposits

These types of accounts come with some restrictions on the withdrawal and the bank pays

interest rate on the amount deposited in it. It is generally opened for non trading purpose. The

aim behind these types of accounts is to build the saving habits and to tap the surplus through

these small savings.

Demand Deposits

Also known as Current Deposits, these deposits have a main feature that the depositor can

deposit or withdraw anytime from the bank. Usually this account is used by traders for their

business purpose. No interest is paid on these deposits instead the bank may charge for the

various services provided to the customer. Sometimes the bank also provides overdraft

facility with the account.

Fixed Deposits

Fixed deposits are made for a pre-specified time which range from 15 days to 10 years and

cant be withdrawn before the maturity of the deposit. These are also termed as Time

Deposits or Long Term Deposits. This source of income is generally considered as risk

free as the depositor cant withdraw the funds before maturity and hence they offer a higher

interest rate. Usually, higher the time period higher is the interest rate.

Making Loans and Advances

The basic function of a commercial bank is to make loans and advances from the money

raised through deposits. The bank may give a loan against a security only but sometimes the

bank doesnt ask for a security. Generally a bank gives a loan in the following form

Cash Credit


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A cash credit is an arrangement by which the places a certain amount to the credit of the

customer and he can use the money as and when he needs. Interest is charged only on the

amount actually used by him and not on the limit granted. Generally, cash credit is granted on

a bond or certain other securities. This method of lending is very broadly used in India.

Loans

A loan is a specified amount which is sanctioned by the banker to the customer It is granted

for a fixed period. The specified amount is placed to the credit of the borrower. He can

withdraw the amount in lump sum or draws cheques against this sum for any amount. Interest

is charged on the full amount whether the borrower makes use of it or not. The rate of interest

charged for a loan is generally less than that of cash credit.

Bank Overdraft

Bank overdraft is given to the account holders of the bank. With the help of this facility the

customer can overdraw his account up to the maximum of the sanctioned limit. The bank may

or may not ask for the security.

Discounting of Bills

This type of arrangement is used to finance the short term requirements of the customer. The

bank purchases the bills of exchange at a discounted rate from the customer.

Agency Functions

These functions are provided by the bank as an agent to its customers. Some of them are

listed as below: -

Collection and payment of cheques and bills on the behalf of the customers.

Collection of dividend, rent, interest, etc.

Purchase and sale of securities

Acting as a trustee or executive, etc.


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General Utility Functions

Apart from the above functions the bank also renders some services to the public also. Some

of them are as follows: -

Transfer of Funds

Issue of notes, drafts and travellers cheques

Underwriting

Helping in the Foreign Exchange transactions


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Types of Banks

Central Bank

Commercial Bank

Public Sector Banks Private Sectors Banks

Foreign Banks

Co-operative banks

Primary Credit Societies

Central Co-operative Banks

State Co-operative Banks

Regional Rural Banks (RRB) Specialized Banks

Export Import Bank of India (EXIM Bank)

Small Industries Development Bank of India (SIDBI)

National Bank for Agricultural and Rural Development (NABARD)

Merchant Bank


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Central Bank

The Reserve Bank of India is the central bank of the country entrusted with monetary

stability, the management of currency and the supervision of the financial as well as the

payments system.

Its functions and focus have evolved in with the changing economic environment. Its history

is not only relates with the economic and financial history of the country, but also gives

insights into the thought processes that have helped shape the country's economic policies.

In India the Reserve Bank of India (RBI) acts as a central bank as well as the governing body

of the banking sector. The RBI was established on April 1, 1935 in as per the provisions of

the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank, where the

Governor sits and where policies are formulated, was initially established in Calcutta but was

permanently moved to Mumbai in 1937. Though originally privately owned, since

nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Commercial Bank

These banks accept deposits and grant short-term loans and advances to their customers.

Moreover, commercial banks also provide medium-term and long-term loans to business

enterprises. There are various types of banks on the basis of their ownership and they are

explained as follows

Public Sector Banks

These banks have majority of stake held by the Government of India or RBI. Examples of

public sector banks are: State Bank of India, Corporation Bank, Bank of Baroda and Dena

Bank, etc.

Private Sectors Banks


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These banks have majority of share capital of the bank held by private individuals. These

banks are registered as companies with limited liability. For example: The Jammu and

Kashmir Bank Ltd., Bank of Rajasthan Ltd.,

Foreign Banks

These banks are registered and have their headquarters in a foreign country but operate their

branches in our country. Some of the foreign banks operating in our country are Hong Kong

and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard &

Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country

has increased since the financial sector reforms of 1991.

Co-operative banks

People who come together to jointly serve their common interest often form a co-operative

society under the Co-operative Societies Act. When a co-operative society engages itself in

banking business it is called a Co-operative Bank. The society has to obtain a license from

the Reserve Bank of India before starting banking business. Any co-operative bank as a

society is to function under the overall supervision of the Registrar, Co-operative Societies of

the State. As regards banking business, the society must follow the guidelines set and issued

by the Reserve Bank of India.

The three types of co-operative bank are explained as follows

Primary Credit Societies

These are formed at the village or town level with borrower and non-borrower membersresiding in one locality. The operations of each society are restricted to a small area so that

the members know each other and are able to watch over the activities of all members to

prevent frauds.


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Central Co-operative Banks

These banks operate at the district level having some of the primary credit societies belonging

to the same district as their members. These banks provide loans to their members (i.e.,

primary credit societies) and function as a link between the primary credit societies and state

co-operative banks.

State Co-operative Banks

These are the apex (highest level) co-operative banks in all the states of the country. They

mobilize funds and help in its proper channelization among various sectors. The money

reaches the individual borrowers from the state co-operative banks through the central co-

operative banks and the primary credit societies.

Regional Rural Banks (RRB)

The Rural Banking is the new buzz in the banking sector which has made a lot of

significance. Basically the main aim of these banks is to build the financial infrastructure

right from the bottom i.e. the agricultural sector. Many banks have aggressively initiated the

process of penetration in the rural market in order to stimulate the growth process.

The following are some of the banks which are working for the rural areas.

United bank of India

Syndicate bank

Co-operative Bank

NABARD

Since the RRBs have large number of small accounts, these banks have to face the high

operational costs and thus low profits. Cost-cutting is the only remedy available to boost

profits and achieve branch viability which can be achieved through computerization but the

availability of power in rural areas is one of the great problems. Another problem is of rural

illiteracy. The rural customers have been spoon-fed for too long and expect the bank staff to

do everything for themright from filling up the pay-in-slip / withdrawal form and arranging


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National Bank for Agricultural and Rural Development (NABARD)

It is a central or apex institution for financing agricultural and rural sectors. If a person is

engaged in agriculture or the activities like handloom weaving, fishing, etc. NABARD can

provide credit, both short-term and long-term, through regional rural banks. It provides

financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale

industries, cottage and village industries handicrafts and allied economic activities in rural

areas.

Merchant Bank

The merchant bankers are those financial intermediary involved with the activity of

transferring capital funds to those borrowers who are interested in borrowing. The activities

of the merchant banking in India are very vast in nature of which includes the following: -

The management of the customers securities

The management of the portfolio,

The management of projects and counselling as well as appraisal

The management of underwriting of shares and debentures

The circumvention of the syndication of loans

Management of the interest and dividend etc


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SEBI

Securities and Exchange Board of India (SEBI) is an apex body for overall development

and regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI

was set up as a non-statutory body. Later on it became a statutory body under the Securities

Exchange Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers

over practically all the aspects of capital market operations.


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ROLE FUNCTIONS OF SEBI

The role or functions of SEBI are discussed below.

1. To protect the interests of investors through proper education and guidance as regards

their investment in securities. For this, SEBI has made rules and regulation to be

followed by the financial intermediaries such as brokers, etc. SEBI looks after the

complaints received from investors for fair settlement. It also issues booklets for the

guidance and protection of small investors.

2. To regulate and control the business on stock exchanges and other security markets.For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers

is made compulsory and they are expected to follow certain rules and regulations.

Effective control is also maintained by SEBI on the working of stock exchanges.

3. To make registration and to regulate the functioning of intermediaries such as stock

brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries

operating on the securities market. In addition, to provide suitable training to

intermediaries. This function is useful for healthy atmosphere on the stock exchange

and for the protection of small investors.

4. To register and regulate the working of mutual funds including UTI (Unit Trust of

India). SEBI has made rules and regulations to be followed by mutual funds. The

purpose is to maintain effective supervision on their operations & avoid their unfair

and anti-investor activities.

5. To promote self-regulatory organization of intermediaries. SEBI is given wide

statutory powers. However, self-regulation is better than external regulation. Here, the

function of SEBI is to encourage intermediaries to form their professional

associations and control undesirable activities of their members. SEBI can also use its

powers when required for protection of small investors.

6. To regulate mergers, takeovers and acquisitions of companies in order to protect the

interest of investors. For this, SEBI has issued suitable guidelines so that such

mergers and takeovers will not be at the cost of small investors.

7. To prohibit fraudulent and unfair practices of intermediaries operating on securities

markets. SEBI is not for interfering in the normal working of these intermediaries. Its
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function is to regulate and control their objectional practices which may harm the

investors and healthy growth of capital market.

8. To issue guidelines to companies regarding capital issues. Separate guidelines are

prepared for first public issue of new companies, for public issue by existing listed

companies and for first public issue by existing private companies. SEBI is expected

to conduct research and publish information useful to all market players (i.e. all

buyers and sellers).

9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-

regulating organizations and to take suitable remedial measures wherever necessary.

This function is undertaken for orderly working of stock exchanges & intermediaries.

10.To restrict insider trading activity through suitable measures. This function is useful

for avoiding undesirable activities of brokers and securities scams.


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RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India's central banking institution, which controls the

monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Rajin accordance with the provisions of the Reserve Bank of India Act, 1934

[2]. The share capital

was divided into shares of 100 each fully paid which was entirely owned by private

shareholders in the beginning.[3]

Following India's independence in 1947, the RBI was

nationalised in the year 1949.

The RBI plays an important part in the development strategy of the Government of India. It is

a member bank of the Asian Clearing Union. The general superintendence and direction of

the RBI is entrusted with the 20-member-strong Central Board of Directorsthe Governor

(currently Duvvuri Subbarao), four Deputy Governors, one Finance Ministry representative,

ten Government-nominated Directors to represent important elements from India's economy,

and four Directors to represent Local Boards headquartered at Mumbai, Kolkata, Chennai and

New Delhi. Each of these Local Boards consist of five members who represent regional

interests, as well as the interests of co-operative and indigenous banks.


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History

19351960

The old RBI Building in Mumbai

The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles

after the First World War. It came into picture according to the guidelines laid down by Dr.

Ambedkar. RBI was conceptualized as per the guidelines, working style and outlook

presented by Dr Ambedkar in front of the Hilton Young Commission. When this commission

came to India under the name of Royal Commission on Indian Currency & Finance, each

and every member of this commission were holding Dr Ambedkars book named The

Problem of the Rupee Its origin and its solution.[4]

The Bank was set up based on the

recommendations of the 1926 Royal Commission on Indian Currency and Finance, also

known as the HiltonYoung Commission.[5]

The original choice for the seal of RBI was The

East India Company Double Mohur, with the sketch of the Lion and Palm Tree. However it

was decided to replace the lion with the tiger, the national animal of India. The Preamble of

the RBI describes its basic functions to regulate the issue of bank notes, keep reserves to

secure monetary stability in India, and generally to operate the currency and credit system in

the best interests of the country. The Central Office of the RBI was initially established in

Calcutta (now Kolkata), but was permanently moved to Bombay (now Mumbai) in 1937. The

RBI also acted as Burma's central bank, except during the years of the Japanese occupation of

Burma (194245), until April 1947, even though Burma seceded from the Indian Union in

1937. After the Partition of India in 1947, the Bank served as the central bank for Pakistan

until June 1948 when the State Bank of Pakistan commenced operations. Though originally
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set up as a shareholders bank, the RBI has been fully owned by the Government of India

since its nationalization in 1949.[6]

19501960

In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru,

developed a centrally planned economic policy that focused on the agricultural sector. The

administration nationalized commercial banks[7]

and established, based on the Banking

Companies Act of 1949 (later called the Banking Regulation Act), a central bank regulation

as part of the RBI. Furthermore, the central bank was ordered to support the economic plan

with loans.

19601969

As a result of bank crashes, the RBI was requested to establish and monitor a deposit

insurance system. It should restore the trust in the national bank system and was initialized on

7 December 1961. The Indian government founded funds to promote the economy and used

the slogan Developing Banking. The Government of India restructured the national bank

market and nationalized a lot of institutes. As a result, the RBI had to play the central part of

control and support of this public banking sector.

19691985

In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks.

Upon Gandhi's return to power in 1980, a further six banks were nationalized.[5]

The

regulation of the economy and especially the financial sector was reinforced by the

Government of India in the 1970s and 1980s.[9]

The central bank became the central player

and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[10]

These measures aimed at better economic development and had a huge effect on the company

policy of the institutes. The banks lent money in selected sectors, like agri-business and small

trade companies.

The branch was forced to establish two new offices in the country for every newly

established office in a town.


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The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy

to reduce the effects.

19851991

A lot of committees analysed the Indian economy between 1985 and 1991. Their results had

an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira

Gandhi Institute of Development Research and the Security & Exchange Board of India

investigated the national economy as a whole, and the security and exchange board proposed

better methods for more effective markets and the protection of investor interests. The Indian

financial market was a leading example for so-called "financial repression" (Mackinnon and

Shaw).

[14]

The Discount and Finance House of India began its operations on the monetarymarket in April 1988; theNational Housing Bank, founded in July 1988, was forced to invest

in the property market and a new financial law improved the versatility of direct deposit by

more security measures and liberalisation

19912000

The national economy came down in July 1991 and the Indian rupee was devalued.[16]

The

currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised

restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory

liquidity ratio. New guidelines were published in 1993 to establish a private banking sector.

This turning point should reinforce the market and was often called neo-liberal.[17]

The

central bank deregulated bank interests and some sectors of the financial market like the trust

and property markets.[18]

This first phase was a success and the central government forced a

diversity liberalisation to diversify owner structures in 1998.

The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed

nationalized banks in July to interact with the capital market to reinforce their capital base.

The central bank founded a subsidiary companytheBharatiya Reserve Bank Note Mudran

Limitedin February 1995 to produce banknotes.

Since 2000

The Foreign Exchange Management Act from 1999 came into force in June 2000. It should

improve the foreign exchange market, international investments in India and transactions.


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The RBI promoted the development of the financial market in the last years, allowed online

banking in 2001 and established a new payment system in 20042005 (National Electronic

Fund Transfer).[21]

The Security Printing & Minting Corporation of India Ltd., a merger of

nine institutions, was founded in 2006 and produces banknotes and coins.

The national economy's growth rate came down to 5.8% in the last quarter of 20082009[23]

and the central bank promotes the economic development.

Structure

RBI runs a monetary museum in Mumbai

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.

The Government nominated Arvind Mayaram, as a director on the Central Board of Directors

with effect from August 7, 2012 and vice R Gopalan, RBI said in a statement on August 8,2012. .

Governors

The current Governor of RBI is 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 Harun Rashid Khan.Deputy Governor K C Chakrabarty's

term has been exteded further by 2 years.
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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 servebeside the advice of

the Central Board of Directorsas a forum for regional banks and to deal with delegated

tasks from the central board.[27]

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 19992000.

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.[28]

It has 19 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 09 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 Mumbai, Chennai, Kolkata and New Delhi.

Main functions


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Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting

"Prosperity through agriculture".

The RBI Regional Office in Delhi.

The regional offices of GPO (in white) and RBI (in sandstone) at Dalhousie Square, Kolkata.
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Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations. The 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. The Reserve

Bank has a separate Issue Department which is entrusted with the issue of currency notes.

The assets and liabilities of the Issue Department are kept separate from those of the Banking

Department. 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 40 crore (400 million) 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. Due to the exigencies of the Second World War and

the post-war period, these provisions were considerably modified. Since 1957, the Reserve

Bank of India is required to maintain gold and foreign exchange reserves of 200 crore (2

billion), of which at least 115 crore (1.15 billion) should be in gold and 85 crore (850

million) in the form of Government Securities.[citation needed] The system as it exists today is

known as the minimum reserve system.

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.Its 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,


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monitors economic indicators like the gross domestic product and has to decide the design of

the rupee banknotes as well as coins.

Managerial of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act,

1999. Objective: to facilitate external trade and payment and promote orderly development

and maintenance of foreign exchange market in India.

Issuer of currency

The bank issues and exchanges or destroys currency notes and coins that are not fit for

circulation. The objectives are giving the public adequate supply of currency of good quality

and to provide loans to commercial banks to maintain or improve the GDP. The basic

objectives of RBI are to issue bank notes, to maintain the currency and credit system of the

country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the

economic structure of the country so that it can achieve the objective of price stability as well

as economic development, because both objectives are diverse in themselves.

Banker of Banks

RBI also works as a normal bank where account holders can deposit money. Since RBI does

not deal with retail banking minimum balance for opening account with RBI is very high.

RBI issues cheque books to its account holders and clears payment for them when produced.

Detection Of Fake currency

In order to curb the fake currency menace, RBI has launched a website to raise awareness

among masses about fake notes in the market.www.paisaboltahai.rbi.org.in provides

information about identifying fake currency.

Developmental role

The central bank has to perform a wide range of promotional functions to support national

objectives and industries.[8]

The RBI faces a lot of inter-sectoral and local inflation-related

problems. Some of this problems are results of the dominant part of the public sector.


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Related functions

The RBI is also a banker to the government and performs merchant banking function for the

central and the state governments. It also acts as their banker. The National Housing Bank

(NHB) was established in 1988 to promote private real estate acquisition. [34] The institution

maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that

Indian banking system is resilient enough to face the stress caused by the drought like

situation because of poor monsoon this year.

Policy rates and reserve ratios

Policy rates, Reserve ratios, lending, and deposit rates as of 18 June, 2012

Bank Rate 9.00%

Repo Rate 8.00%

Reverse Repo Rate 7.00%

Cash Reserve Ratio (CRR 4.75%

Statutory Liquidity Ratio (SLR) 23.0%

Base Rate 10.00%10.50%

Reserve Bank Rate 4%

Deposit Rate 8.00%9.25%

Bank Rate

RBI lends to the commercial banks through its discount window to help the banks meet

depositors demands and reserve requirements. The interest rate the RBI charges the banks

for this purpose is called bank rate. If the RBI wants to increase the liquidity and money

supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and

money supply in the system, it will increase the bank rate. As of 25 June, 2012 the bank rate

was 9.0%.


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Cash Reserve Ratio (CRR)

Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent

upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of

securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR)

for scheduled banks without any floor rate or ceiling rate ( [Before the enactment of this

amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR

for scheduled banks between 3% and 20% of total of their demand and time liabilities]. RBI

uses this tool to increase or decrease the reserve requirement depending on whether it wants

to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio

(CRR) will make it mandatory on the part of the banks to hold a large proportion of their

deposits in the form of deposits with the RBI. This will reduce the size of their deposits and

they will lend less. This will in turn decrease the money supply. The current rate is 4.75%. (

As on Date- 25 June, 2012).

Statutory Liquidity Ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash

and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger

proportion of their resources in liquid form and thus reduces their capacity to grant loans and

advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds

from loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market operationsbuying and selling

of eligible securities by central bank in the money marketto influence the volume of cash

reserves with commercial banks and thus influence the volume of loans and advances they

can make to the commercial and industrial sectors. In the open money market, governmentsecurities are traded at market related rates of interest. The RBI is resorting more to open

market operations in the more recent years.

Generally RBI uses three kinds of selective credit controls:

1. Minimum margins for lending against specific securities.

2. Ceiling on the amounts of credit for certain purposes.

3. Discriminatory rate of interest charged on certain types of advances.


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Direct credit controls in India are of three types:

1. Part of the interest rate structure i.e. on small savings and provident funds, are

administratively set.

2. Banks are mandatory required to keep 24% of their deposits in the form of

government securities.

3. Banks are required to lend to the priority sectors to the extent of 40% of their

advances.


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SPECIALIZED FINANCIAL INSTITUTIONS

The list ofspecialized financial institutions in India mainly includes, Export-Import

Bank Of India, Board for Industrial & Financial Reconstruction, Small Industries

Development Bank of India, National Housing Bank. They are government

undertakings established with a view to offer financial as well as technical assistance

to the Indian industries.

Export-Import Bank Of India

The Export-Import Bank Of India ranks high among the specialized financial

institutions in India.

It was set up in the year 1981 to enhance International Trade in India with the aid of a

two-way approach. It offers financial assistance to the exporters and importers and

also by acting as a link between the various financial institutions to ensure overall

development of the Indian financial market. The bank offers financial assistance to

the various sectors like agriculture, export, import, and film industry. For the

agricultural sector the bank has arranged for unique financial programs like posting

shipment credit, terming loans etc. The category of term loans are issued for

modernization, purchase of equipments, acquisitions etc. For the exporters the bank

provides warehousing finance, export lines of credit facilities. The funded capital

scheme of the bank includes long-term working capital, cash flow financing, and the

non funded capital scheme include letter of credit limits, guarantee limits. For the film

industry the bank has arranged for cash flow financing for film production, funds for

exhibition in overseas market. The bank is engaged in offering specialized services

Human Resource Management, Research and Planning, Internal Audit etc. The

Export-Import Bank Of India has set up offices through out India and in foreign

countries as well. The head office is located at Mumbai and Shri. T. C. Venkat

Subramanian acts as the Chairman and Managing Director of the bank.


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Small Industries Development Bank of India

The Small Industries Development Bank of India also ranks high among the

specialized financial institutions in India. It was founded in the year 1990 to develop

the small-scale industry in India with the aid of advisory services. The bank offers

financial assistance to the small and medium scale industries and coordinated the

functioning of the other financial institutions that caters to the need of the agro-

industries in India. The Small Industries Development Bank of India offers financial

assistance for significant issues like infrastructure development, rehabilitation for sick

industrial units. The investors can take the advantage of the unique fixed deposit

scheme offered the bank. For the recently launched companies the bank provides

composite loan, technology up gradation fund, direct credit scheme etc. The existing

members are allowed direct credit scheme, credit linked capital subsidy etc. For the

up gradation of the standard of Indian women and to help them achieve financial

independence the bank offers two specialized financial program named as marketing

fund for women and MahilaUdhyamNidhi. The bank is located at Lucknow and

ShriRajender Mohan Malla acts as its Chairman and managing director.

National Housing Bank

The National Housing Bank was established in the year 1988 as per the guidelines of

the National Housing Bank Act, 1987 with a view to accelerate the growth of the

Housing Financing Institutions by providing them with financial and other required

assistance. The company extends financial assistance for entire infrastructural

development offers refinance to the existing housing finance companies etc. The bank

has set up specialized divisions like Development and Risk Management, Project

Finance, Refinancing Operations, Resource Mobilization and Management etc. The

head office is located at New Delhi and Shri S. Sridhar acts as the Chairman &

Managing Director of the bank.

Board for Industrial & Financial Reconstruction

The Board for Industrial & Financial Reconstruction was set up in the year 1987 in


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order to advise on all the aspects that need to be up graded for a sick industrial unit.

The Sick Industrial Companies (Special Provisions) Act, 1985 guides the activities of

the board. The board assesses the type of sickness and the industrial units that

eligibility criteria. The main eligibility criteria for the companies are that they should

be registered under the Companies Act for at least 5 years.


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