Regional Rural Banks of India: Evolution, Performance and Management

Copyright © 2015 by Dr. Jitendra Kumar Ram.

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

www.partridgepublishing.com/india

CONTENTS

Preface

Acknowledgements

CHAPTER 1:   INTRODUCTION

Importance Of Banks In Economic Development

The Role Of Finance In The Economic Development

Importance Of Rural Economy And Rural Development

Banking System In India

Rbi And Commercial Banks

Bank Rate

Cash Reserve Ratio (CRR)

Statutory Liquidity Ratio (SLR)

Open Market Operations

Repo And Reverse Repo Operations

CHAPTER 2:   DEVELOPMENT OF BANKING IN INDIA

Ancient India – Up To 1947

Banking During 1947 To 1969

Banking During 1969 To 1991

Branch Expansion: 1992-2012

CHAPTER 3:   REGIONAL RURAL BANKS

Overview

Historical Perspective

Salient Features Of RRBs:

Progress Of RRBs

Review Of Performance Of RRBs By Various Committees During 1975-1990

Reform Phase: 1991-2005

Committee On Financial System, 1991

Policy Measures To Strengthen RRBs

Bhandari Committee, 1994

Committee On Revamping Of RRBs, 1996 (Basu Committee)

Performance Of RRBs: 1991-2005

Post Amalgamation Phase: 2005-2012

Profitability And RRBs

Highlights Of Performance Of RRBs During 2013-2014

CHAPTER 4:   REGIONAL RURAL BANKS ACT: IMPORTANT PROVISIONS

Establishment And Incorporation Of Regional Rural Banks

Authorised Capital

Management

Board Meetings

Business Of The Rural Banks

Miscellaneous

CHAPTER 5:   ROLE OF VARIOUS AGENCIES

Role Of The Central Government

Role Of Reserve Bank Of India

Role Of Sponsor Bank

Role Of State Government

Role Played By Nabard

Empowered Committees For RRBs

CHAPTER 6:   ORGANISATIONAL PATTERN OF RRBS

The Chairman

Board Of Directors

Manpower Planning For RRBs

Categorisation Of RRBs

Head Office Level

Controlling Office

Branch Categorisation

CHAPTER 7:   CONTROL MECHANISM FOR EFFICIENT OPERATIONS

Issue Of Instructions

Submission Of Control Returns

Delegation Of Discretionary Powers

Inspection Visits

Internal Audit And Inspection

Management Audit

Statutory Audit

Nabard Inspection

Audit System: Goi Guidelines

General Guiding Principles

Guiding Principles On Risk Based Internal Audit (Rbia)

Guiding Principles On Information Systems (Is) Audit

Guiding Principles On Concurrent Audit

CHAPTER 8:   FINANCIAL MANAGEMENT

General Principles Of Sound Lending

Lending Policy Of The Bank

Prudential Norms Relating To Lending

Investment By RRBs

Interpretation Of Financial Statements

Interpretation Of Major Ratios

Risk Management

Asset-Liability Management (ALM)

Recovery And NPA Management

CHAPTER 9:   DEPOSIT ACCOUNTS

Savings Bank Account

Current Deposit Accounts

Time Deposits

Recurring Deposit Account

Monthly/ Quarterly Income Certificate

Hybrid Deposit Schemes

Payment Of Term Deposit

Rounding Off:

Payment Of Interest On Deposit Maturing On A Holiday:

Premature Renewals:

Overdue Term Deposits

CHAPTER 10:   MAINTENANCE OF DEPOSIT ACCOUNTS

Introduction

Opening Of Deposit Accounts

Introduction Not Mandatory For Opening Accounts

Photographs Of Account Holders

Exceptions

Address Of Account Holders

Other Safeguards

Financial Inclusion

Settlement Of Claims In Respect Of Deceased Depositors

Settlement Of Claims In Respect Of Missing Persons

Deposit Mobilisation

Greater Co-Ordination Between Banking System And Income-Tax Authorities

‘Know Your Customer’ (KYC) Guidelines And Anti Money Laundering (AML) Standards

CHAPTER 11:   PRINCIPLES OF ADVANCES & MODE OF CREDIT

Principles Of Sound Lending

Safety

Liquidity

Purpose

Profitability

Security

Spread Of Risks

Basis Of Credit

Character

Capacity

Capital

Overdraft

Cash Credit Account

Demand Loan

Term Loan

Interest On Advance/Loans

CHAPTER 12:   SECURITIES AND DOCUMENTATION

Introduction

Creating Charge Over Securities

Modes Of Creating Charge

Loan Documentation

Stamping Of Documents

Limitation Period

CHAPTER 13:   LENDING TO PRIORITY SECTOR

Introduction

Internal Working Group On Priority Sector Lending

Categories Of Priority Sector

Agriculture (Direct And Indirect Finance)

Micro And Small Enterprises (Direct And Indirect Finance)

Micro Credit

Education Loans

Housing Loans

Other Important Features Of The Guidelines

Targets/Sub-Targets

Agriculture - Direct Finance

Finance To Others

Finance For Agriculture And Allied Activities

Micro And Small Enterprises - Direct Finance

Education Loans

Housing Loans

State Sponsored Organizations For Scheduled Castes/ Scheduled Tribes

Weaker Sections

CHAPTER 14:   COMMON GUIDELINES FOR PRIORITY SECTOR ADVANCES

Introduction

Processing Of Applications

Mode Of Disbursement Of Loan

Repayment Schedule

Rates Of Interest

Penal Interest

Service Charges / Inspection Charges

Insurance Against Fire And Other Risks

Photographs Of Borrowers

Discretionary Powers

Machinery To Look Into Complaints

CHAPTER 15:   STAGES OF LENDING

Receipt Of Loan Application

Calling For Complementary Information

Pre-Sanction Appraisal

Laying Down Terms And Conditions

Execution Of Loan Documents And Creation Of Charge On The Security

Disbursement Of Credit

Post-Sanction Follow-Up And Supervision

Recovery Of Bank Credit

CHAPTER 16:   MANAGEMENT OF ADVANCES

Introduction

Working Capital Requirements

Loan System For Delivery Of Bank Credit

Credit Administration

Rate Of Interest

No Objection Certificate

Opening Of Current Accounts

Certification Of Accounts Of Non-Corporate Borrowers By Chartered Accountants

Defaults In Payment Of Statutory Dues By Borrowers

Sanction Of Advances

Monitoring Operations In Loan Accounts

Annual Review Of Advances

Valuation Of Properties-Empanelment Of Valuers

Diversion Of Funds

End-Use Of Funds

Exchange Of Credit Information

Filing Of Suits To Recover Dues From Willful Defaulters

CHAPTER 17:   NPA: CLASSIFICATION & PROVISION

General

Definitions

Income Recognition

Asset Classification

Provisioning Norms

CHAPTER 18:   MANAGEMENT OF NPA

Pre-Stage Warning Signals For NPA

Strategies For Reduction In NPAS

CHAPTER 19:   BANKING TECHNOLOGY AND RRBS

Introduction

Ict And Rrbs

Core Banking Solution (CBS)

Online Banking / Internet Banking

Mobile Banking

NEFT & RTGS

Wayforward

ANNEXURE I Important Recommendations Of Various Committies (Since 1997) On Functioning of RRBs

ANNEXURE II State wise Distribution of RRBs as on 31.03.2012

ANNEXURE III Sponsor Bank wise Distribution of RRBs as on 31.03.2012

ANNEXURE IV Bank-wise Financial Position of RRBs as on 31.3.12 (Amount in Rs crores)

ANNEXURE V Purpose wise outstanding of Loans and Advancesof RRBs during 2006-2012 (Rs Crore)

ANNEXURE VI Credit deposits and Investment Deposit Ratio of RRBs (in per cent)

ANNEXURE VII Loan Issued and Credit Flow to Agriculture by RRBs.

ANNEXURE VIII Growth in number of RRBs during 1975 TO 2012

ANNEXURE IX Deposits, Advance & C D Ratios of RRBs (1975-2012)

ANNEXURE X Productivity per Bank & Productivity per Branch of RRBs (1975-2012)

ANNEXURE XI List Of RRBs as on 31.03.2014

ANNEXURE XII Priority Sector Lending-Targets and Classification

BIBLIOGRAPHY

PREFACE

Regional Rural Banks (RRBs) form a vital component of banking in India. Since their birth on the 2nd October, 1975, they have been contributing enormously to the socio-economic development of rural India. Be it propagation of Self Help Groups, doubling of agriculture credit, financial inclusion or opening of savings accounts under Prime Minister Jan Dhan Yojana (PMJDY), RRBs have always led from the front. But RRBs have failed in getting the attention it deserves from both the policy makers and the controllers and also from the fraternity from academics. Though plenty of literature on commercial banking of India is available, qualitative literature on RRBs is scarce.

This book has born out of eagerness to fill the long felt gap in availability of qualitative literature on genesis, growth, performance and management of RRBs in India. It has been designed keeping in view the needs of all the stake holders of the RRBs e.g. the employees, the management, the controllers, the policymakers and above all the customers.

Data from the RBI and the NABARD have been meticulously compiled so that the readers get a thorough overview of the Indian banking in general and Regional Rural Banks in particular. The book will enable all the employees, particularly the new entrants to understand day to day operations of rural banking and in getting a glimpse of the various regulatory guidelines issued by the RBI and the NABARD. The book covers systematically all the aspects of a RRB and uncovers the practical aspects of functioning of a rural bank.

The language used in the book is plain, simple and understandable to all. The book will act as a good reference book for the senior bankers and serve as a personal handbook for the young bankers.

The design of the book is as under:

• Chapter 1 highlights the role of finance and banks in the economic development.

• Chapter 2 describes development of banking in India from the ancient India to 2013.

• Chapter 3 looks at the genesis, development and growth of RRBs from 1975-2014.

• Chapters 4 and 5 discuss provisions of the RRBs Act and role of various agencies.

• Chapters 6 and 7 deal in organisation pattern and control mechanism of RRBs.

• Chapter 8 examines the financial management.

• Chapters 9 and 10 cover the deposit functions of the rural banks.

• Chapter 11 describes principles of advances and modes of credit.

• Chapter 12 details securities and documentation of loans.

• Chapters13 and 14 depict priority sector of lending.

• Chapters 15 and 16 describe various stages of lending and management of advances.

• Chapters 17 and 18 sketch rules for classification of assets and management of NPA.

• Chapter 19 discusses the importance of IT in development of RRBs.

Regional Rural Banks in India have been making great stride in terms of expansion of branches and growth in their balance sheets. It is hoped that this book will not only add to the available literature on RRBs, but also contribute to their efficient and effective management.

ACKNOWLEDGEMENTS

I am indebted to my bank, Odisha Gramya Bank (earlier Baitarani Gramya Bank) for the enriching experience it has provided me since 1984.

My special gratitude goes to my doctoral guide, Dr Rabi N Subudhi, Professor KIIT School of Management, Bhubaneswar, without his constant encouragement this volume would not have seen the light of the day.

My thanks are also to all my friends and colleagues, particularly Mr L.B.Mohapatra, Mrs Gayatri Mohapatra, Mr Nachiketa Das, Mr S.S.Mohanty, Mr S.S.Behera, Mr B.K.Sinha, Mr B.N.Sahoo, Mr Bijoy Ojha, Mr Braja Kar, Bipin Das, Sandeep Agarwalla and Jugal Agarwalla without their constant support this book would not have been possible.

I also owe a debt of gratitude to all the members of my family, namely, Ashok, Sangita, Rajesh, Anita, Rahul, Shruti, Neha, Divya and Sumanyu, who have always inspired me to move on in life.

A book of this nature cannot be a solo performance; I also acknowledge my sincere indebtedness to those great authors whose books have helped me in preparation of this book.

Dedicated

to

my beloved parents

Smt Sona Debi

and

Late Shri Nandakishore Ram

CHAPTER 1

INTRODUCTION

Bank is a financial organization which keeps money in accounts for its clients, lends money, exchanges currency and facilitates the transmission of funds. The origin of banks, in some form or other, in India dates back to the ancient time. But it took its modern form during the British Raj with the establishment of Bank of Bengal in Calcutta on June 2, 1806. It was followed by setting up of two more Presidency Banks, namely, the Bank of Bombay in 1840 and the Bank of Madras in the year 1843. But the two events which can be considered as turning points in the history of Indian banking are the formation of the Imperial Bank of India by merging the three Presidency Banks in 1921 and the establishment of the Reserve Bank of India in 1935. With the passage of time, the Indian banking passed through much turmoil but survived to witness India getting her independence on August 15, 1947. Then came the Banking Regulation Act, 1949 which imposed discipline on the Indian banking organizations. Acquisition of the Imperial Bank of India by the Reserve Bank of India in 1955 and naming it as the State Bank of India was another milestone in the banking history of the country. But the most epochal event in post-independent history of India was the nationalization of the 14 major private commercial banks by the Government of India. It turned over a new leaf for the Indian banking. The Indian banking which was considered to be ‘class banking’ till then started to grow into ‘mass banking’.

In 1975, the Government of India felt that though nationalization of banks had resulted in opening of new branches in hither to unbanked areas still they were unable to reach the rural people and the villages where the majority of the populace lived. A vast country like ours can ill afford to have its majority without having banking facilities. So the Government of India promulgated an ordinance on September 26, 1975 to set up a dedicated bank to serve the poor masses living in the far flung rural areas of India. Thus came the Regional Rural Banks (RRBs) into existence. The RRBs which had a modest beginning with setting up of 5 banks on the October 2, 1975 witnessed exponential growth and in 1990 there were 196 RRBs serving the rural people through its 14443 branches spread in nook and corner of India. The Regional Rural Banks have been successful in fulfilling the mandate with which they were established.

In 1991, the Indian economy passed through a tough time and the foreign exchange reserves depleted to such a low level as was not enough to meet 15 days demand. To tide over the crisis the Reserve Bank of India had to pledge its gold reserves with International Monetary Fund (IMF) and Bank of England for loans. The financial crisis forced the Government to restructure the economy and the hither to controlled Indian economy was opened up to international competition. The Government kick started many reform measures and adopted the policies of liberalization, privatization and globalization (LPG). In the 1990’s not only India but also many other countries witnessed several instances of economic crisis and resorted to reform measures for opening up of their economies. As the fall of Berlin Wall on November 9, 1989 had ended the era of Cold War, the economic crisis of 1990’s opened up the world economy and made the world a ‘Global Village’ in its true sense.

The banking sector of India which formed an integral part of the Indian financial system also witnessed sea change in banking policies. The performance of all the public sector banks including the Regional Rural Banks (RRBs) came under scanner in a time when the policy regime was prone to let the market principle rule. The Committee on Financial Systems, 1991 (Narasimham Committee) highlighted the poor financial performance of the Regional Rural Banks ignoring all other indicators of achievements earlier lauded by various committees set up by the Reserve Bank of India and Government of India. Since then many a committee has been set up and many policy changes have been brought in to strengthen the Regional Rural Banks of India.

In the run up, the Reserve Bank of India set up the Internal Working Group on Regional Rural Banks to explore the possible measures which could strengthen the Regional Rural Banks working in India and to make them operationally efficient so that they could meet the objectives of their existence. The committee under Chairmanship of A.V. Sardesai (2005) revisited the restructuring of RRBs. The Sardesai Committee held that to improve the operational viability of RRBs and take advantage of the economies of scale, the route of merger/amalgamation of RRBs may be considered taking into account the views of the various stakeholders. It recommended that in the first phase, the RRBs sponsored by the same bank and working in the same state would be amalgamated and in the second phase, Regional Rural Banks sponsored by different sponsor banks working in the same state would me amalgamated to form state level RRBs. The recommendations of the Committee were accepted and at the instructions of the Government of India the process was initiated in September, 2005 and was completed by 2009-10, bringing down the number of RRBs working in India from 196(March, 2004) to 82 in March 2010, 133 in March 2006, 96 in March 2007, 90 in March 2008, and 86 in March 2009. The second phase of amalgamation started in 2012-13, by amalgamating RRBs sponsored by different banks but working in the same state. It resulted in bringing down the number of RRBs to 57 in March 2014.

BACKGROUND

IMPORTANCE OF BANKS IN ECONOMIC DEVELOPMENT

Banking forms an integral part of the economic system of any nation. It is an important constituent of the economic system. Banking system has a critical role in attainment of the macro-economic goals of a country. It acts as a vehicle for socio-economic change and it also performs the job of a catalyst for economic growth. Banks greatly contribute in the economic development of a nation as it mobilizes the savings of the nation and makes them available for investment in high priority sectors by which it facilitates better utilization of the scarce resources of the country. The role of banks in an under developed or in a developing nation becomes more crucial as the banking habits of the people are not developed and banking infrastructure are also scarce. The task of developing banking habits, spreading it and providing banking infrastructure to the masses is a stupendous task on the part of the banks.

THE ROLE OF FINANCE IN THE ECONOMIC DEVELOPMENT

The role of finance in the economic development of a country has been widely accepted in the literature. Capital deficiency is one of the important features of underdeveloped or developing countries. Professor Nurkse rightly observes that The so called ‘undeveloped’ areas as compared with the advanced, are underequipped with capital in relation to their population and natural resources (Nurkse, 1973). He adds that, ‘low income leads to low savings, which in turn results in low capital formation’. But when the savings of economically surplus units are pooled together in commercial banks, it results in a large reservoir of social capital.

The prime task of economic development in any developing country is to raise the rate of capital formation in these countries. The United Nations in one of its report has very well observed that Economic progress is a function among other things of the rate of new capital formation. The ultimate objective of any development programme is to break the vicious cycle between the capital shortage and the underdevelopment and to plan the best way of efficient and optimum rate of capital formation. Therefore, the key process of making growth possible begins with capital formation or capital accumulation.

Adoef opined that developing economies do not suffer as much from lack of national resources as they do from the under-utilization of the existing resources. Capital formation is, therefore, sin qua-non for utilizing these dormant and unexploited resources. It is needless to say that capital formation largely depends on the effectiveness of the institutions which funnel the money capital flows (Adoef, 1943). Capital formation requires an act of investment together with capacity to save. Capital grows by investment and investment necessitates more savings.

The process of capital formation involves three interdependent activities. These are:

i) an increase in the value of real savings, so that resources can be released for investment purposes;

ii) the availability of a widespread finance and credit mechanism so that investible funds can be collected from a wide range of different sources and claimed by investors and

iii) the act of investment itself, by which resources are used for increasing the capital stock.

These are the three activities relating to formation of capital which the financial institutions or banks of a nation contribute to economic growth. There are many financial institutions functioning in a country, but it is the commercial banks that occupy a distinct position.

Banks do the function of disintermediation in an economy as it channels the surplus funds to the sectors which are deficient of funds. It was Schumpeter, the German economist (Schumpeter J., 1911, 1934) who put the role of financial intermediation at the center of economic development. According to him banks which play the important role of financial intermediation have great role in economic development as they affect allocation of savings as a result of which productivity, technical change and the rate of economic growth are impacted. Schumpeter, the first modern economist, regarded the banking system as one of the two key agents (the other being entrepreneurship) in the whole process of economic development (Schumpeter J., 1993).

Financial intermediation has positive impact on the process of economic development because finance has a significant role in economic development. Economy, without finance, is impossible. It seems to be the case that where enterprise leads, finance follows. The same impulse stands within an economy which sets enterprise on foot, makes owner of wealth venturesome and when a strong impulse to invest is fettered by lack of finance, devices are invested to release it and institutions are developed (Patrick, 1996).

The researchers have been analyzing the role of banks in the economic development of various nations for long period. According to Gulde et al the financial sector plays an important role in the process of economic development of a nation. Financial institutions, particularly banks, are the main intermediation conduits between saving and investment in an economy. The best financial systems limit, quantify, gather and negotiate all operation risks, and incite the savers to invest, by offering them a proportional payment to the scale of the incurred risks. Financial intermediaries when they are efficient allow mobilizing saving from diverse sources and allocate it to more productive activities, what benefits not only investors and beneficiaries of the investments but also the whole economy (Gulde, 2007). To Levine, a banking system which efficiently channels financial resources to productive use is a powerful mechanism for economic growth (Levine, 1977). Banks are the main financial intermediaries in India.

So the crucial role played by the commercial banks in economic development of a developing nation like India cannot be ignored. Rather, the role of banks has become more relevant and significant in the changing structure and requirement of the Indian economy. The increased horizon of commercial banks identifies itself with the problems and responsibilities for making banking instrument for bringing about social and economic transformation of a developing country. Social responsibilities have undergone far reaching changes. Banks have become the prime mover and pace setters for the achievement of socio-economic objectives of the country (Gupta, 1993).

The literature provides innumerable evidences highlighting the importance of banks in socio-economic development of India. According to Patnaik, the Commercial Banks constitute the heart of the financial structure of India since they have the ability to add to the money supply and thus create additional purchasing power (Patnaik U et al, 2006).

Jha says that banking is an important segment of the tertiary sector and acts as a backbone of economic progress (Jha, 1985). The banks render vital services to the masses belonging to various sectors of the economy like agriculture, industry-small scale or large scale (Vashist, 1991). The banking system is one of the few institutions that impinge on the economy and affect its performance for better or worse. They act as a development agency and are a source of hope and aspiration of the masses (Sooden, 1992). According to Akhtar et al (2011), the banks have become an omnibus institution in the modern times to which people of varied interests look for help and success (Akhtar, 2011).

To summarize, the banks contribute substantially to the economic development of a country through the act of financial intermediation. In this respect banks are a necessary concomitant of economic development. The banks are the life blood of any economy and more so in case of a developing economy. They act as a vehicle of socio-economic transformation.

IMPORTANCE OF RURAL ECONOMY AND RURAL DEVELOPMENT

The population of India is 1.21bilion as per 2011census. Out of which 833 million i.e. 68.84 per cent live in 640 thousand villages. Agriculture and allied sector accounted for 14.00 per cent of GDP in 2011-12, employed 58.00 per cent of the total work force. To highlight the importance of rural economy in the national economy of India, some of the important observations made in the study made by ASSOCHAM on the status of rural development in India and published in January, 2012 are given below:

i) 69 per cent of the country’s total population inhabits in villages.

ii) There has been increase in the purchasing power of the rural people.

iii) The average per capita consumption expenditure of the poorest 20% people remained unchanged, the average household income of the richest 20 per cent people increased by 7.7 per cent during the last five year period. It has resulted in increased inequalities.

iv) Between 2004-05 and 2009-10, the inequality (Gini Coefficient*) in rural India had marginally increased from 0.264 to 0.274.

[*Gini coefficient is commonly used as a measure of inequality of income or wealth. A Gini coefficient of zero expresses perfect equality. A Gini coefficient of one (or 100%) expresses maximal inequality among values.]

The implications of the findings of the study are that increased inequality adversely affects the people’s quality of life. It leads to a higher incidence of poverty and slow down progress in health and education. Therefore, decreasing income inequality is necessary for accelerating economic and human development.

In India, both the State and Central governments play major roles in the socio-economic development of the states. If the policy makers of both the central and state governments want to reduce the inequality among the people belonging different sections of the society, they should aim to achieve higher economic growth and at the same time make more efforts to make the growth inclusive. The banks in general and banks operating in rural areas in particular have major responsibilities in achieving these tasks.

BANKING SYSTEM IN INDIA

The banking system in India consists of public sector banks, private banks, development banks, specialized banks, regional rural banks and cooperative banks. The Figure – 1.1 below gives a bird’s eye view of Indian banking structure as on 31.03.2013.

The banks in India can be divided into two groups. Those are: Commercial banks and Co-operative Banks. A detail discussion of commercial banks has been attempted below.

Figure 1.1: Indian Banking Structure (as on 31.03.2013)

Commercial Banks

The commercial banks in India play a great role in the economy of India. These are divided into two categories: Scheduled Commercial Banks and Non-Scheduled Commercial Banks.

Scheduled Commercial Banks

According to Section 42 (B) of the Reserve Bank of India Act, 1934 the scheduled commercial banks are those banks that are included in the Second Schedule of RBI Act. As on March, 2013, there were 146 scheduled commercial banks.

Non-Scheduled Commercial Banks

Non-scheduled commercial banks are those that are not included in the second schedule of the Reserve Bank of India Act, 1934. Generally their paid-up capital is less than Rs 5 lakhs and they do not have the same facilities as enjoyed by the scheduled commercial banks. As on March, 2013, there were 4 non-scheduled commercial banks.

Scheduled commercial banks are further classified into public sector banks, private sector, foreign banks and Regional Rural Banks.

Public Sector Banks: The public sector banks are categorized as under:

Private Sector Banks: The private sector banks are further grouped into Old Private Sector Banks and New Private Sector Banks. As on 31.03.2013 there were 13 Old Private Sector Banks and 7 New Private Sector Banks in India.

Foreign Banks: Foreign banks are those banks which are incorporated outside India. There are 43 Foreign Banks with 334 branches working in India as on 31.03.2013.

Regional Rural Banks: The Regional Rural Banks are set up and regulated under Regional Rural Banks Act, 1976. There 64 Regional Rural Banks operating as on 31.03.2013 throughout the country.

RBI AND COMMERCIAL BANKS

Commercial banks and the Reserve Bank of India help each other in the development and progress of the Indian economy. Their roles are not contradictory but complementary to each other. The Reserve Bank of India Act 1934 and the Banking Regulation Act 1949, confer powers on the RBI to regulate the activities of scheduled commercial banks. This relationship is very close and of varied nature.

The Reserve Bank of India controls the volume of money supply in the economy. It also controls the volume of credit and the quality of credit granted by commercial banks through the use of following instruments.

Money Supply

Money Supply is the total quantity of money available in the economy at a particular time. However, in the narrow sense, the currency in circulation in the economy and the amount of demand deposits available with the banks can be termed as money supply. The RBI supply currency and banks create deposits.

The Instruments of Money Supply

The Central bank has many tools in its control to affect money supply in the economy. The RBI has powers and flexible norms to use these tools according to the economic situations, requirements of money and growth of economy from time to time. The policy document through which RBI decides and uses various instruments is known as Monetary Policy. This is issued by RBI twice in a year, i.e. April and October, conventionally known as Busy Season and Slack Season Credit policy respectively. There is