CHAPTER 1: Introduction- Indian Banking System

Banks have played a critical role in the economic development of

some developed countries such as Japan and Germany and most of the
emerging economies including India. Banks today are important not
just from the point of view of economic growth, but also financial
stability. In emerging economies, banks are special for three
important reasons. First, they take a leading role in developing other
financial intermediaries and markets. Second, due to the absence of
well-developed equity and bond markets, the corporate sector depends
heavily on banks to meet its financing needs. Finally, in emerging
markets such as India, banks cater to the needs of a vast number of
savers from the household sector, which prefer assured income and
liquidity and safety of funds, because of their inadequate capacity to
manage financial risks. Forms of banking have changed over the years
and evolved with the needs of the economy. The transformation of the
banking system has been brought about by deregulation, technological
innovation and globalization. While banks have been expanding into
areas which were traditionally out of bounds for them, non-bank
intermediaries have begun to perform many of the functions of banks.
Banks thus compete not only among themselves, but also with non-
bank financial intermediaries, and over the years, this competition has
only grown in intensity. Globally, this has forced the banks to
introduce innovative products, seek newer sources of income and
diversify into non-traditional activities.
Definition of banks
In India, the definition of the business of banking has been given in
the Banking Regulation Act, (BR Act), 1949. According to Section
5(c) of the BR Act, 'a banking company is a company which transacts
the business of banking in India.' Further, Section 5(b) of the BR Act
defines banking as, 'accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on
demand or otherwise, and withdraw able, by cheque, draft, order
orotherwise.' This definition points to the three primary activities of a
commercial bank which distinguish it from the other financial
institutions. These are: (i) maintaining deposit accounts including
current accounts, (ii) issue and pay cheques, and (iii) collect cheques
for the bank's customers.

Laws applicable in Case of Banks
1.Banking Regulation Act
2.RBI Act
3.Companies Act

In case of conflict judgement as Banking Regulation Act will prevail.
Functions of Commercial Banks
The main functions of a commercial bank can be segregated into three
main areas: (i) Payment System (ii) Financial Intermediation (iii)
Financial Services.
Main functions of a commercial bank
(i) Payment System
Banks are at the core of the payments system in an economy. A
payment refers to the means by which financial transactions are
settled. A fundamental method by which banks help in settling the
financial transaction process is by issuing and paying cheques issued
on behalf of customers. Further, in modern banking, the payments
system also involves electronic banking, wire transfers, settlement of
credit card transactions, etc.
In all such transactions, banks play a critical role.
(ii) Financial Intermediation
The second principal function of a bank is to take different types of
deposits from customers and then lend these funds to borrowers, in
other words, financial intermediation. In financial terms, bank
deposits represent the banks' liabilities, while loans disbursed, and
investments made by banks are their assets. Bank deposits serve the
useful purpose of addressing the needs of depositors, who want to
ensure liquidity, safety as well as returns in the form of interest. On
the other hand, bank loans and investments made by banks play an
important function in channelling funds into profitable as well as
socially productive uses.
(iii) Financial Services
In addition to acting as financial intermediaries, banks today are
increasingly involved with offering customers a wide variety of
financial services including investment banking, insurance-related
services, government-related business, foreign exchange businesses,
wealth management services, etc. Income from providing such
services improves a bank's profitability.

Other Financial Institutions
1.NBFC
2.INSURANCE COMPANIES
3.MUTUAL FUND HOUSES

Non-Banking Finance Companies (NBFCs)
India has many thousands of non-banking financial companies,
predominantly from the private sector. NBFCs are required to register
with RBI in terms of the Reserve Bank of India(Amendment) Act,
1997. The principal activities of NBFCs include equipment-leasing,
hire-purchase, loan and investment and asset finance. NBFCs have
been competing with and complementing the services of commercial
banks for a long time. All NBFCs together currently account for
around nine percent of assets of the total financial system. Housing-
finance companies form a distinct sub-group of the NBFCs. As a
result of some recent government incentives for investing in the
housing sector, these companies' business has grown substantially.
Housing Development Finance Corporation Limited (HDFC), which
is in the private sector and the Government-controlled Housing and
Urban Development Corporation Limited (HUDCO) are the two
premier housing-finance companies. These companies are major
players in the mortgage business, and provide stiff competition to
commercial banks in the disbursal of housing loans.
Insurance Companies
Insurance/reinsurance companies such as Life Insurance Corporation
of India (LIC), General Insurance Corporation of India (GICI), and
others provide substantial long-term financial assistance to the
industrial and housing sectors and to that extent, are competitors of
banks. LIC is the biggest player in this area.All insurance business in
India will be regulated by IRDA
Mutual Funds
Mutual funds offer competition to banks in the area of fund
mobilization, in that they offer alternate routes of investment to
households. Most mutual funds are standalone asset management
companies. In addition, a number of banks, both in the private and
public sectors have sponsored asset management companies to
undertake mutual fund business. Banks have thus entered the asset
management business, sometimes on their own and other times in
joint venture with others.

Apex Banking Institutions in India
RBI
The Reserve Bank of India was established on April 1, 1935 in
accordance with the provisions of the Reserve Bank of India Act,
1934.
The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of India.
Preamble
The Preamble of the Reserve Bank of India describes the basic
functions of the Reserve Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves
with a view to securing monetary stability in India and generally
to operate the currency and credit system of the country to its
advantage."

NABARD
NABARD is a Development Bank with a mandate for providing and
regulating credit and other facilities for the promotion and
development of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts and other allied economic
activities in rural areas with a view to promoting integrated rural
development and securing prosperity of rural areas, and for matters
connected therewith or incidental thereto.
In discharging its role as a facilitator for rural prosperity, NABARD
is entrusted with
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the client banks
Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India
and other organizations in matters relating to rural development
Offers training and research facilities for banks, cooperatives
and organizations working in the field of rural development
Helps the state governments in reaching their targets of
providing assistance to eligible institutions in agriculture and
rural development
Acts as regulator for cooperative banks and RRBs

NHB
The Honble Prime Minister of India, while presenting the Union
Budget for 1987-88 on February 28, 1987 announced the decision
to establish the National Housing Bank (NHB) as an apex level
institution for housing finance. Following that, the National
Housing Bank Bill (91 of 1987) providing the legislative framework
for the establishment of NHB was passed by Parliament in the
winter session of 1987 and with the assent of the Honble President
of India on December 23, 1987, became an Act of Parliament.
The National Housing Policy, 1988 envisaged the setting up of
NHB as the Apex level institution for housing.
In pursuance of the above, NHB was set up on July 9, 1988 under
the National Housing Bank Act, 1987.
NHB is wholly owned by Reserve Bank of India, which contributed
the entire paid-up capital.
The general superintendence, direction and management of the
affairs and business of NHB vest, under the Act, in a Board of
Directors.
The Head Office of NHB is at New Delhi.
NHB has been established to achieve, inter alia, the following
objectives
a. To promote a sound, healthy, viable and cost effective housing
finance system to cater to all segments of the population and to
integrate the housing finance system with the overall financial
system.
b. To promote a network of dedicated housing finance institutions
to adequately serve various regions and different income groups.
c. To augment resources for the sector and channelize them for
housing.
d. To make housing credit more affordable.
e. To regulate the activities of housing finance companies based on
regulatory and supervisory authority derived under the Act.
f. To encourage augmentation of supply of buildable land and also
building materials for housing and to upgrade the housing stock
in the country.
g. To encourage public agencies to emerge as facilitators and
suppliers of serviced land, for housing.
EXIM BANK
Export-Import Bank of India is the premier export finance institution
of the country. It commenced operations in 1982 under the Export-
Import Bank of India Act 1981. Government of India launched the
institution with a mandate to not just enhance exports from India, but
also to integrate the countrys foreign trade and investment with the
overall economic growth. Exim Bank of India has been both a catalyst
and a key player in the promotion of cross border trade and
investment. Commencing operations as a purveyor of export credit,
like other Export Credit Agencies in the world, Exim Bank of India
has evolved into an institution that plays a major role in partnering
Indian industries, particularly the Small and Medium Enterprises
through a wide range of products and services offered at all stages of
the business cycle, starting from import of technology and export
product development to export production, export marketing, pre-
shipment and post-shipment and overseas investment.
Objectives
for providing financial assistance to exporters and importers, and
for functioning as the principal financial institution for coordinating
the working of institutions engaged in financing export and import of
goods and services with a view to promoting the countrys
international trade
shall act on business principles with due regard to public interest
: The Export-Import Bank of India Act, 1981



SIDBI

Small Industries Development Bank of India (SIDBI), set up on April
2, 1990 under an Act of Indian Parliament, is the Principal Financial
Institution for the Promotion, Financing and Development of the
Micro, Small and Medium Enterprise (MSME) sector and for Co-
ordination of the functions of the institutions engaged in similar
activities.
SIDBI was established on April 2, 1990. The Charter establishing it,
The Small Industries Development Bank of India Act, 1989 envisaged
SIDBI to be "the principal financial institution for the promotion,
financing and development of industry in the small scale sector and to
co-ordinate the functions of the institutions engaged in the promotion
and financing or developing industry in the small scale sector and for
matters connected therewith or incidental thereto.

THANKS AND REGADS
*Please Try To Remember Years Of Acts if
Possible........................................