Constituents of Financial System

Financial System

Financial
Intermediaries

Financial Markets

Financial Instruments
and services

Financial Intermediaries
Financial Intermediaries

Non Banking

Banking

Commercial

Co-operative

DFIs

Investment

NBFC

Introduction to Banking
Banks can be described as
Financial institutions whose current operations consist of
accepting deposits from the public and issuing loans.
Definition given by Hilton Young Commission in 1926 about
Bank;
"accepting, for the purpose of lending or investment of
deposits of money from the public, repayable on demand or
otherwise and withdraw able by cheques, draft, order or
otherwise".

Banking as a process

Functions of banking
1.
2.
3.
4.
5.
6.
7.
8.

Accepting Deposits from public/others (Deposits)

Lending money to public (Loans)
Transferring money from one place to another (Remittances)
Credit Creation
Acting as trustees
Keeping valuables in safe custody
Investment Decisions and analysis
Government business

Role of Bank in an Economy

Capital Formation
Monetization
Innovations

Economies of scale/Economies of scope which lie in

transaction cost.
It reduces transaction cost.
Payment System & Monetary Policy
Risk Polling & Pricing
Risk Transformation

Short Review (HISTROY)

The first bank in India, though conservative, was established in
1770. From 1770 till today, the journey of Indian Banking
System can be segregated into three distinct phases. They are
as mentioned below:

Early phase from 1770 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991
prior to Indian banking sector Reforms.
New phase of Indian Banking System with the
advent of Indian Financial & Banking Sector
Reforms after 1991.

Foundation Phase
1900-1969
The East India Company establishedHindustan Bank the first joint
stock bank established in 1770 & had to be wound up in 1832.
The General Bank of India was set up in the year 1786.
Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras
(1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of
India was established.
Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948 (2 Major Flows).

Estb. Of various banks

Allahabad Bank 1865

HSBC 1869
Punjab National Bank 1894
Canara Bank 1906
Indian Bank 1907
Bank of Baroda 1908
Central Bank of India 1911
Bank of Mysore 1913
Union Bank of India 1922

Expansion Phase
(1969-1980)

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.
1959 : Nationalization of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalization of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalization of seven banks with deposits over
200 crore.

Shortage of trained staff ; huge recruitment project

Consolidation & Reform Phase

Balance of Payment crisis 1991.
LPG Policy 1991: M Narasimham, a committee
recommendation.
The country is flooded with FDI, Foreign banks.
Technology driven Banks.
Innovated & diversified banking product/facility is
introduced.
One stop solution Banks are introduced.

Reserve Bank of India

Commercial Bank
Public Sector

Co-operative Bank

Private Sector

State Co-operative
Bank

State Land
Development Bank

Apex Banks
IDBI
NABARD

Nationalized Bank

Old Pvt Sector

Bank

Central Co-operative
Bank (District)

Central Land
Development Bank

EXIM Bank

IRBI
SBI & Associates

Regional Rural
Bank

New Pvt
Sector Bank

Foreign Bank

Primary Agriculture
Co-operative Bank

Primary Urban Cooperative Bank

Primary Land
Development Bank

NHB

Development Banking in India

A

Investment

Agriculture

NABARD
1982

AFC
1968

Insurance
Credit
Guarantee

Industry

LIC
1956

IDBI
1964

GIC
1971
UTI
1964

IFCI
1948
SFC
1951
ICICI
1955
IRBI
1985

Export
Import

Housing

EXIM
1982

NHB
1988

ECGC
1957

HDFC

Banking Structure
The commercial banking structure in India
consists of:
Scheduled Commercial Banks:
Must have Paid-up capital & Reserve not less than
Rs. 5 Lakhs
Satisfy the RBI that its affairs are not conducted in
a manner detrimental to the interests of its
depositors.

Banking structure
Cooperative Banks
A non Commercial bank registered under the cooperative act.
Commercial Banks

Public Sector Banks: Banks under control of the government group

consists of SBI & Associate, RRB, and other nationalized banks.

Old Pvt. Sector Banks: includes bank established by the privy

states, community, org.,or by a group of professionals for the cause of
economic betterment in there are of operation.

New Pvt. Sector Banks: After accepting recommendations of

Narsimham committee these banks were started as profit oriented
public limited companies.

Foreign Banks: incorporated outside India but have branches within

the country.
Example: ABN Amro, BNP Paribs, etc.

Public Sector Bank

1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank

11. Indian Overseas Bank

12. Oriental Bank of
Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

List of State Bank Group Banks in

India

State Bank of India

State Bank Of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore

Old Pvt. Sector Bank

1. Bank of Rajasthan Ltd

9. Karur Vysya Bank Ltd.-

2. Catholic Syrian Bank Ltd.

10. Laxmi Vilas Bank Ltd.

3. City Union Bank Ltd

11. Nainital Bank Ltd.-

4. Dhanalakshmi Bank Ltd

12. Ratnakar Bank Ltd.

5. Federal Bank Ltd

13. SBI Commercial and

6. ING Vysya Bank Ltd.

International Bank Ltd.

7. Jammu and Kashmir Bank

14. South Indian Bank Ltd.

Ltd

15. Tamilnad Mercantile Bank Ltd.

8 Karnataka Bank Ltd.

16. United Western Bank Ltd

New Pvt. Sector Bank

1. Bank of Punjab Ltd. (since merged with Centurian
Bank)
2. Centurian Bank of Punjab (since merged with HDFC
Bank)
3. Development Credit Bank Ltd.
4. HDFC Bank Ltd.
5. ICICI Bank Ltd.
6. IndusInd Bank Ltd.
7. Kotak Mahindra Bank Ltd.
8. Axis Bank (earlier UTI Bank)
9. Yes Bank Ltd.

RBIs Constitution
The RBI was constituted under Reserve Bank
of India Act, 1934 & started functioning with
effect from 1st April 1935.
The control of RBI vests in the central Board of
Directors that comprises the Governor, four
Deputy Governor & 15 Directors nominated by
the Union Government.

Reserve Bank Of India

Apex Body & Regulator of Indian Banking
Structure
Banker to Banks
Conduct Banking & financial operations of the
govt.
Issuer Of Currency
Monitor, formulate & implement monetary policy
of India
Manager of foreign Exchange
Development Role

The RBIs Regulatory Role

Licensing
Prescribing capital requirements
Setting prudential regulations to ensure solvency and
liquidity of the banks
Prescribing lending to certain priority sectors of the
economy
Regulating interest rates in specific areas
Setting appropriate regulatory norms related to income
recognition, asset classification,
Provisioning, investment valuation, exposure limits and
the like
Initiating new regulation

Regulatory Framework
Banks in India broadly governed by two
umbrella acts viz.
Reserve Bank of India Act, 1934 which specifies
the power of RBI over the banks.
Banking Regulation Act, 1949
In addition, banks like cooperative banks, development banks, etc
which are formed & registered under the separate acts like Central
or State cooperative societies Act, RRB Act etc., are also governed
by the respective acts.

Regulatory Framework
Banking Operation are also subject to the legal provisions contained
in certain other Acts as;
The Negotiable Instrument Act, 1881
The companies Act
The income Tax Act
Partnership Act, Contract Act
Securities & Exchange Board of India Act
Transfer of Properties Act
Registration Act, Stamp Act
Information Tech Act
Bankers Books Evidence Act
Preventing of Money laundering Act
Foreign Exchange Management Act, etc

Self Regulatory Organizations

In addition to the above legal framework, banks in India also
have self regulatory organizations (SROs) in the financial
system. At present, there are four SROs in the financial
system-

Indian Banks Association (IBA)

Foreign Exchange Dealers Association of India
(FEDAI)
Primary Dealers Association of India (PDAI)
Fixed Income Money Market & Derivatives
Association of India.

Cooperative Banks
Autonomous association of persons united
voluntarily to meet common economic, social &
cultural needs & aspirations through a jointly
owned & democratically controlled Entp.
Based on the values of;

Self help
Self Responsibility
Democracy
Equality
Equity & Solidarity.

7 Co-Operative principals
1.
2.
3.
4.
5.
6.
7.

Voluntary and open membership

Democratic member control
Member economic participation
Autonomy and independence
Education, training and information
Co-operation among Co-operatives
Concern for Community

Urban Cooperative Banks v/s Rural

cooperative banks
Urban Cooperative Banks
Self-employment
Industries
Small scale units
Home finance
Consumer finance
Personal finance

Rural Cooperative Banks

Farming
Cattle
Milk
Hatchery
Personal finance

Framework of Rural Cooperative Banks

Short Term Cooperative
Structure

State Coop Banks

District Coop Banks

Long Term Cooperative structure

Primary
Agriculture
Credit
Societies

State Co-op
Banks

Primary
Agriculture
Credit
Societies

RRB & Rural Banking in India

The government of India set up Regional Rural Banks (RRBs) on
October 2, 1975. The banks provide credit to the weaker sections of
the rural areas, particularly the small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs.
There are several concessions enjoyed by the RRBs by Reserve Bank
of India such as
lower interest rates and refinancing facilities from NABARD like
lower cash ratio,
lower statutory liquidity ratio,
lower rate of interest on loans taken from sponsoring banks,
managerial and staff assistance from the sponsoring bank
and reimbursement of the expenses on staff training.

Objectives of RRBS
To provide credit at the rate of interest at
which Co-operative credit societies provide.
To provide credits to small &marginal farmers,
agricultural labourers, rural artisans.
To remove paucity of finance in the rural
sector
To limit the area of functioning only to one or
two Districts in the state

Objectives of District Central Co-op

banks
To serve as a link between primary credit co-op
societies and state co-op bank.
To finance primary co-op agriculture credit societies &
to see that they work efficiently
To collect maximum deposits & introduce various
schemes of savings
To keep deposits of primary co-op credit society safely
To make availability of banking services to the rural
sector
To control working of primary credit societies.

Objectives of State co-op Banks

To work as the Apex bank at the state level.
To guide & supervise the functioning of district
central co-op banks and primary agriculture
societies & to develop the mutual relationship
among them.
The whole responsibility of banking business in
co-op sector lies on the state co-op banks.
It also shoulder the responsibility of the clearing
houses & financial institution.
To make maximum extension of credit to the rural
section.

NABARD as a regulator of
RRB
Conduct inspections of the RRBs and the co-operative
societies, without any prejudice to the authority of the RBI.
All the applications for opening a branch by RRBs or cooperative societies should be forwarded to the RBI through
the NABARD.
Copies of all returns submitted by the RRBs and cooperative societies to the RBI should also be furnished to
the NABARD.
NABARD is also empowered to obtain any information or
statement from the RRBs and the co-operative societies.

NABARD
Apex Development Bank in Rural sector.
Acts as regulator for cooperative banks and RRBs
Providing refinance to lending institutions in rural
areas.
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.

In short NABARD
Providing finance and also refinance for
production and marketing in the rural areas.
Coordinating and advising the operations of
institutions engaged in rural credit.
Promoting research in agriculture and rural
development.

NABARD
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 .

Queries & Doubts

Thank You

Assignment No. 1
Brief the history of Nationalization of banks
in India. Elaborating Need, Purpose,
advantage, disadvantage & success/ failure of
nationalization of Banks.
Max 5 Pages.
Marks 10.