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Dhiraj Sharma


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 by financial 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. 3. Insurance companies and pension funds; and 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.



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 in transferring 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.


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


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

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, the small 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


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.


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:

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.

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.

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.



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:


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:


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


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



Mizuho Corporate Bank Oman International Bank Shinhan Bank SocieteGenerale Sonali Bank Standard Chartered Bank State Bank of Mauritius UBS AG



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.



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 insurers New 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,



corporate agents, and bancassurance. The industry now deals with customers who know what they want and when, and are more demanding in terms of better service and speedier responses. With the industry all set to move to a detariffed regime by 2007, there will be considerable improvement in customer service levels, product innovation and newer standards of underwriting. Intense Competition In a de-tariffed environment, competition will manifest itself in prices, products, underwriting criteria, innovative sales methods and creditworthiness. Insurance companies will vie with each other to capture market share through better pricing and client segmentation. The battle has so far been fought in the big urban cities, but in the next few years, increased competition will drive insurers to rural and semi-urban markets. Global Standards While the world is eyeing India for growth and expansion, Indian companies are becoming increasingly world class. Take the case of LIC, which has set its sight on becoming a major global player following a Rs280-crore investment from the Indian government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, Nepal and will soon start operations in Saudi Arabia. It also plans to venture into the African and AsiaPacific regions in 2006. The year 2005 was a testing phase for the general insurance industry with a series of catastrophes hitting the Indian sub-continent. However, with robust reinsurance programmes in place, insurers have successfully managed to tide over the crisis without any adverse impact on their balance sheets. With life insurance premiums being just 2.5% of GDP and general insurance premiums being 0.65% of GDP, the opportunities in the Indian market place is immense. The next five years will be challenging but those that can build scale and market share will survive and prosper.




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.



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).




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


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


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 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 its subsidiaries. The company is headed by Mr.Piyush G. Mankad and offers products like shortterm debt schemes, Issue-specific long-term rating and offers fund based as well as non-fund based facilities to its clients.



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


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 developmental policies, 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 Council this 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.



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.


This step has left the MFIs looking for an answer. A senior official with SKS Microfinance feels that this could be part of governmental planning to make microfinance inclusive of SME funding as well.

The law ministry, according to some finance ministry officials, may have played a critical role in this regard. It appears that the finance ministry had only prescribed some limits but the law ministry was unwilling to authenticate the bill sans any upper limit.

Right now, the MFIs have a couple of options. They can take up the matter with the Union Ministers for Law and Finance but this would only serve to postpone the bill. Otherwise they could fix the credit limit at 50 thousand and then let it go up to INR 1-1.25 lakhs in case of special situations. In that case too the ministry might need to revert to the government for revising the amount.

The new and old versions of the bill have some other differences as well. Previously it had been decided that the state microfinance committees would be informing the center in case of lots of defaults and bad debts.

These committees were supposed to be placed at the state capital or in the capital of a nearby state but this could have made it harder for the poor to get access to them. These were also supposed to act only in advisory capacities.

The committees have now been empowered to inform any and every violation to the RBI. The bill has also advised for the establishing of district level committees that will be led by a collector or at least an additional collector equivalent officer. These meetings will be held at 3 month intervals. They are to be attended by representatives from the following entities:

Local lead bank Regional MFIs




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 a conflict 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.



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 an institution 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. -



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 are explained 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



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



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.



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



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



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



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 members residing 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.



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 cooperative 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 them right from filling up the pay-in-slip / withdrawal form and arranging



attestation of their left thumb impression. Big farmers and high net worth individuals constitute a small chunk of the rural population. RBI has been taking interest in expanding credit to the rural sector. RBI has been taking a series of steps for providing timely and adequate credit through NABARD. Listed domestic banks have been forced to supplement NABARDs efforts-through the stipulation that 40 percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalization of Regional Rural Banks (RRBs) and setting up of local area banks (LABs).

Specialized Banks There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialized banks. Export Import Bank of India (EXIM Bank) If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. Small Industries Development Bank of India (SIDBI) If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries.



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



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.




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


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 selfregulating 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.




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 Raj in 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.




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



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.



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 monetary market in April 1988; the National 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 companythe Bharatiya 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.


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.


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


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.


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,


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 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.


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 Repo Rate Reverse Repo Rate Cash Reserve Ratio (CRR Statutory Liquidity Ratio (SLR) Base Rate Reserve Bank Rate Deposit Rate 9.00% 8.00% 7.00% 4.75% 23.0% 10.00%10.50% 4% 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%.


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, government securities 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.


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.




The list of specialized 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.



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 agroindustries 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


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.