ROLE OF BANKS AND FINANCIAL INSTITUTIONS IN INDIA

EVOLUTION BANKING IN INDIA

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Banking in India originated in the decade of the 18th century.

Writings of Manu and Kautilya contained the references to banking.

In the beginning of the 18th century ,East India Company launched a few commercial banks .

The first Indian Bank was Bank of Hindustan started in 1770 at Calcutta.

Bank of Calcutta, Bank of Bombay,& Bank of Madras

Imperial Bank was formed in 1921.After Independence which was known as State Bank Of India in 1955.

First purely Commercial Bank was Oudh Commercial Bank,1880.

Reserve Bank of India was established in 1934 April. Nationalised on January 1 1949

Dakshina Kannada District is known as “Cradle of Indian banking.”

Banks Nationalisation in India: Newspaper Clipping, TIMES OF INDIA, July 20, 1969

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Mobile banking and net banking is introduced. The entire system became more convenient . Time is given more importance than money.

TYPES OF BANKS

COMMERCIAL BANKS

INDUSTRIAL BANKS

AGRICULTURAL BANKS

EXCHANGE BANKS

SAVING BANK

CENTRAL BANK

WORLD BANK

The following functions of the bank explain the need of the bank and its importance:

• To provide the security to the savings of customers.

• To control the supply of money and credit

• To encourage public confidence in the working of the financial system, increase savings speedily and efficiently.

• To avoid focus of financial powers in the hands of a few individuals and institutions.

• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of customers

Need of the Banks

An outline of the Indian Banking structure may be presented as follows:-

1. Reserve banks of India.2. Indian Scheduled Commercial Banks.a) State Bank of India and its associate banks.b) Twenty nationalized banks.c) Regional rural banks.d) Other scheduled commercial banks.3. Foreign Banks4. Non-scheduled banks.5. Co-operative banks.

INDIAN BANKING STRUCTURE

SBI Associate Banks

State Bank of Hyderabad

State Bank of Patiala

State Bank of Travancore

State Bank of Bikaner & Jaipur

State Bank of Mysore

State Bank of Indore

State Bank of Saurashtra

List of Nationalized banks

Allahabad BankAndhra BankBank of BarodaBank of IndiaBank of MaharashtraCanara BankCentral Bank of IndiaCorporation BankDena BankIndian BankIndian Overseas BankPunjab National BankSyndicate BankUCO BankUnion Bank of IndiaUnited Bank of IndiaVijaya Banka

List of the new private sector banks in India

Name of the bank year of establishment

1. Axis Bank (earlier UTI Bank) 1995

2. Bank of Punjab 1989

3. Centurian Bank of Punjab 1994

4. Development Credit Bank 1930s

5. HDFC Bank 1994

6. ICICI Bank 1994

7. IndusInd Bank 1994

8. Kotak Mahindra Bank 1985

9. Yes Bank 2003- 2004

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Name of the Bank Year of establishment

1. Bank of Rajasthan 1943

2. Catholic Syrian Bank 1920

3. City Union Bank 1904

4. Dhanlaxmi Bank 1927

5. Federal Bank 1931

6. ING Vysya Bank 1930

7. Jammu and Kashmir Bank 1938

8. Karnataka Bank 1924

9. Karur Vysya Bank 1916

10. Lakshmi Vilas Bank 1926

11. Nainital Bank 1912

12. Ratnakar Bank 1943

13. SBI Commercial and international Bank 1955

14. South Indian Bank 1905

15. Tamilnad Mercantile Bank Limited 1921

16. United Western Bank 1933

List of the old private sector banks in India

FINANCIAL INSTITUTIONS

IN INDIA

The Financial Institutions in India mainly comprises of the

Central Bank which is better known as the Reserve Bank of India

commercial banks

credit rating agencies

securities and exchange board of India

investment institutions

specialized financial institutions in India.

RESERVE BANK OF INDIA

Established - April 1, 1935

Nationalized 1949Central Office –

initially established in Calcutta; permanently moved to Mumbai in 1937

The Reserve Bank of India was established in the year 1935 with a view to organize the financial frame work and facilitate fiscal stability in India.

The bank acts as the regulatory authority with regard to the functioning of the various commercial bank and the other financial institutions in India.

The bank formulates different rates and policies for the overall improvement of the banking sector. It issue currency notes and offers aids to the central and institutions governments.

MONETARY FUNCTIONS:

Monopoly of Note Issue (other than Rupee One notes and coins and subsidiary coins)

Banker to the Government

Bankers bank & lender of last resort

Control of Foreign Exchange operations

Acts as clearing house

Controller of credit

1. 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.

2. Banker to Government:

The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser.

The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir

3. Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India.

4. CONTROLLER OF FOREIGN EXCHANGE OPERATIONS:

Central govt authorized RBI to deal in foreign exchange, gold coin and bulletin.

5. ACTS AS CLEARING HOUSE:

Institution where mutual indebtedness between banks can be settled.

Acts as clearing of member banks

6. CONTROLLER OF CREDIT:

The Reserve Bank of India is the controller of credit.

It has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations.

Credit control WeaponsOf RBI

Bank Rate Policy

Minimum rate at which RBI is ready to grant loans & advances to commercial banks or to rediscount bills of exchange.

Open market operations

Purchase & Sale of government securities in the open market.

Variable Cash Reserve Ratio(CRR)Statutory Liquidity Ratio (SLR)

NON MONETARY FUNCTIONS:

SUPERVISORY FUNCTIONSPROMOTIONAL FUNCTIONS

1. Commercial Banks in India

Commercial Banks accepts deposits from people.

Lend money to people engaged in agriculture, commerce & Industry.

Mobilize the savings of the community and chanalise the savings to productive effort.

Mainly 2 types of commercial banking institutions in India such as Public sector banks and Private sector banks .

Functions of Commercial Bank

Primary FunctionsAccepting deposits

Receive Money from the public through various kinds of deposits like Fixed deposits, Savings deposits, Current deposits ,Recurring deposits etc.

Granting loans and advances

Lending money is the another important function. The important forms of lending are loans, cash credit, overdrafts, discounting of bills etc.

Secondary functions

1. Agency Services It collects cheques ,bills and Pro-notes

It makes payments for and on behalf of customer as per their standing instructions.

It purchases or sells Securities for its customers.

It facilitates easy and quick transfer of funds from the bank or branch to another.

It act as an agent correspondents or representatives of its customers.

It accept bill of exchange on behalf of its customers.

2, General utility services it issues commercial letters of credit.

it underwrites shares and debentures of the newly floated companies.

It undertakes the safe custody of valuables.

It act as a referee as to the responsibility and financial standing of its customers.

Modern Functions of Commercial Bank Changing cash for bank deposits and

bank deposits for cashTransfering bank deposists between

individuals and / or companies.Exchanging deposits for bills of

exchange,govt. bonds , secured and unsecured promises of trade and industrial units.

Underwriting capital issues.Providing 24 hours of payments through

ATMs.It issues credit cards ,smart cards etc.

2. Credit Rating Agencies in India:

The credit rating agencies in India were mainly formed to assess the condition of the financial sector and to find out avenues for more improvement. The credit rating agencies offer various services as:

Operation Up gradation

Training to Employees

Scrutinize New Projects and find out the weak sections in it

Rate different sectors

The two most important credit rating agencies in India are:

CRISIL(credit rating information services of India ltd)

ICRA(investment information of credit rating agency of India ltd)

CARE(credit analysis and research ltd)

3. Securities and Exchange Board of India:

The securities and exchange board of India, also referred to as SEBI was founded in the year 1992 in order to protect the interests of the investors and to facilitate the functioning of the market intermediaries. They supervise market conditions, register institutions and indulge in risk management.

The insurance companies offer protection against losses.

They deal in life insurance, marine insurance, vehicle insurance and so on. The insurance companies collect the little saving of the investors and then reinvest those savings in the market.

The insurance companies are collaborating with different foreign insurance companies after the liberalization process.

This step has been incorporated to expand the Indian Insurance market and make it competitive.

4. Insurance Companies in India

5. SPECIALISED FINANCIAL INSTITUTIONS:

SFIs are institutions set up mainly by the government for providing medium and long-term financial assistance to industry. As these institutions provide developmental finance, that is, finance for investment in fixed assets, they are also known as ‘development banks’ or ‘development financial institutions’. These institutions receive funds for their financing operations primarily from the government or other public institutions. These institutions also raise funds from the capital market.

They constitute an important source of long-term finance to industry. Over a period of time, there has been a steady growth in the number of industrial units assisted, and in the amount of loan sanctioned and distributed by SFIs.

Role ofSpecialized Financial Institutions

Specialized financial institutions are also an important source of such finance. In this lesson, we shall discuss the role and functions of specialized financial institutions.

Development Banks

Also known as industrial banks

It provides long term funds to industrial concerns.

Raise their funds by the issue of shares & debentures and mobilizing long term deposits from the public.

Formed mainly to finance the capital requirement of small ,medium ,and large scale industries.

Types of Specialised Financial InstitutionsSpecialised financial institutions may be divided into the following types:

(a) All India Development Banks1. Industrial Development Bank of India (IDBI)2. Small Industries Development Bank of India (SIDBI)3. Industrial Finance Corporation of India (IFCI)4. Industrial credit and Investment corporation of India (ICICI)5. National Bank for Agriculture and Rural Development(NABARD)6. Industrial Investment Bank of India Ltd. (previously, IndustrialReconstruction Bank of India)

(b) State-level Institutions1. State Financial Corporations (SFCs)2. State Industrial Development Corporations (SIDC)3. State Industrial Investment Corporations (SIIC)

(c) Investment institutions1. Unit Trust of India (UTI)2. Life Insurance Corporation of India (LIC)3. General Insurance Corporation (GIC)

Evolution of Hi-Tech Banking in India

Automated Teller Machines

Introduced in the mid 1970s

Withdraw money 24 hours a day

Payment of loan can be made through ATM

Point of sale terminal

It consists of two components –

a) A computer terminal linked on line to computerize customer information files in a bank

b) A plastic magnetically encoded transaction card

Electronic Data Interchange

Exchange of business documents like purchase order, invoices , etc in a standard, computer processable, universallly accepted format between trading partners.

Tele Banking

A customer can perform a number of transactions from their own home or office or anywhere they have access to a phone.

Customers can check balances,statement information ,transfer funds from one account to another etc.

Electronic Fund Transfer

Introduced by Reserve Bank of India in 1996 for fast transfer of funds between different bank customers electronically.

EFT system works on the principle of “NEXT DAY AVAILABILITY OF FUNDS “-means beneficiary gets the fund credited to his account on the very next day.

Debit cards

Individual get a Debit card along with a Personal Identification Number (PIN) when the card is swiped through the electronic terminal

ROLE OF BANKS AND FINANCIAL INSTITUTIONS IN ECONOMY

Banks perform various roles in the economy. First, they ameliorate the information problems between investors and borrowers by monitoring the latter and ensuring a proper use of the depositors’ funds.

They provide intertemporal smoothing of risk that cannot be diversified at a given point in time as well as insurance to depositors against unexpected consumption shocks.

Because of the maturity mismatch between their assets and liabilities,however, banks are subject to the possibility of runs and systemic risk

Banks contribute to the growth of the economy. Fourth, they perform an important role in corporate governance.

The relative importance of the different roles of banks varies substantially across countries and times but, banks are always critical to the financial system.

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.

 

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 the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.

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 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.

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