Indian Banking System

Module 2
Indian Banking System : Introduction, Evolution and History of RBI, Functions/Role of RBI
Monetary Policy in India: Objectives of Monetary Policy, instruments, features.
Role of NBFCs in India
Other Financial Institutions (EXIM Bank, NABARD, SIDBI, SFCs)
Bank
• A bank is a financial institution that accepts deposits from the public
and creates credit. Due to their importance in the financial stability of
a country, banks are highly regulated in most countries.
Core activities:
a. Acceptance of deposits: Demand deposits, Time deposits
b. Lending of funds
c. Credit Creation
d. Ancillary functions
Bank
First Bank of the World:
• The most famous Italian bank was the Medici bank, established by
Giovanni Medici in 1397. The oldest bank still in existence is Banca
Monte dei Paschi di Siena, headquartered in Siena, Italy, which has
been operating continuously since 1472.

First Bank of India:

• Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829–32; and the General
Bank of India, established in 1786 but failed in 1791. The largest
bank, and the oldest still in existence, is the State Bank of India (S.B.I).
It originated as the Bank of Calcutta in June 1806.
 Development in Indian Banking System
• 1770 – First bank of India – Bank of Hindustan
• 1806 – Bank of Calcutta
• 1809 – Bank of Calcutta renamed as Bank of Bengal
• 1840 – Bank of Bombay
• 1843 – Bank of Madras
• 1921 – BOB, BOC and BOM merged to form Imperial Bank of India
• 1935 – RBI was formed
• 1955 – Imperial Bank of India became State Bank of India
• 1960 – State Banks of India was given control of eight state-associated
banks
• 1969 – Nationalization of 14 banks
• 1980 – another six nationalized
 Development in Indian Banking System
• Narasimhan Committee (1991) recommendations changed the
face of Indian Banking :

• recommended prudential norms, entry of private sector banks

and gradual reduction of SLR and CRR
• Competition infused in 1993 by allowing setting up of private
sector banks

• Khan Committee (1997) recommended : universal banking,

mergers and amalgamation and a risk based supervisory
framework
• Verma Committee recommended greater use of IT, restructuring
of weak banks and VRS for bank staff.
 Types of Banks
Indian
Banks

RBI Non-Scheduled
Banks

Scheduled
Banks

Scheduled Commercial Scheduled Co-

Banks (SCBs) operative Banks

Public Sector Private Sector Foreign Regional Rural

Banks Banks Banks Banks

Nationalized SBI and Old Private New Private

Banks associates Sector Banks Sector Banks
The Central bank – The Regulator - RBI
INTRODUCTION TO RBI

Established in April 1935 under the RESERVE BANK OF INDIA ACT, 1934
Head Quarter – MUMBAI (Maharashtra).
The Reserve Bank of India is the central banking institution of India and controls the
monetary policy of the rupee.

Present Governor (August, 2018): Dr Urjit Patel

History Of RBI

It was set up on the recommendations of Hilton Young Commission

It was started as share-holders bank with a paid up capital of 5 crores
Initially it was located in Kolkata
It moved to Mumbai in 1937
Initially it was privately owned
Since 1949, the RBI is fully owned by the Government of India.
Its First governor was Sir Osborne A. Smith
The First Indian Governor was Sir Chintaman D. Deshmukh
MAIN FUNCTIONS
Issuer of currency

Monetary authority

Manager of exchange control

Minimum Reserve System - Principle of

Currency Note Issue

Developmental role

Related functions
FUNCTIONS
• Issuer of currency
The bank issues and exchanges or destroys currency and
coins 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.
FUNCTIONS

• Issuer of currency
There are 19 issue offices. The currency goes to 4102
currency chests and 3783 coin depots. (Data as of
September, 2016)
FUNCTIONS
• Monetary authority
Main monetary authority of the country.
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 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
FUNCTIONS

• Manager 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.
FUNCTIONS
• Manager of exchange control
FUNCTIONS

• Minimum Reserve System - Principle of Currency

Note Issue
RBI can issue currency notes as much as the country requires,
provided it has to make a security deposit of Rs. 200 crores,
out of which Rs. 115 crores must be in gold and Rs. 85 crores
must be FOREX Reserves.
This principle of currency notes issue is known as the 'Minimum
Reserve System'.
FUNCTIONS

• Developmental role
The central bank has to perform a wide range of promotional functions to support
national objectives and industries.

 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.
FUNCTIONS

• Related functions
The RBI is also a banker to the government and performs merchant banking
function for the central and the state governments.
Acts as their banker.
There is now an international consensus about the need to focus the tasks of
a central bank upon central banking.
Monetary Policy
• As RBI has to control the money supply in India, it issues
monetary policy. Monetary policy can be classified as:
• Expansion Policy: Increases Money supply in the economy at rapid
rate
• Contraction Policy: Expands Money supply in the economy at slower
rate
 Monetary Policy
• Indicators of Monetary Policy

• Open market operation: It involves buying & selling of government

securities by RBI.
• Bank rate/Discounting rate- It is the rate at which RBI provides financial
accommodation to schedules commercial & cooperative banks.
• Overnight rate – Rate at which banks lend money to other banks.
• Cash Reserve Ratio & Statutory Liquidity Ratio.
• Direct credit controls- Control demand and supply of money.
• Repo Rate & Reverse Repo Rate- An agreement of repurchasing the security.
Current rates
(As on 29th August, 2017) (As on 26th July, 2018)
• CRR: 4% • CRR: 4%
• SLR: 20.00% • SLR: 19.50%
• Policy Repo Rate: 6.00% • Policy Repo Rate: 6.25%
• Reverse Repo Rate : 5.75% • Reverse Repo Rate : 6.00%
• Marginal Standing Facility Rate : 6.25% • Marginal Standing Facility Rate : 6.50%
• Bank Rate: 6.25% • Bank Rate: 6.50%
• Base Rate: 9.00% - 9.55% • Base Rate: 8.75% - 9.45%
• Savings Deposit Rate: 3.50% - 4.00% • Savings Deposit Rate: 3.50% - 4.00%
• Term Deposit Rate > 1 Year: 6.25% - • Term Deposit Rate > 1 Year: 6.25% -
6.75% 7.00%
• MCLR (Overnight): 7.75% - 8.10% • MCLR (Overnight): 7.80% - 8.05%
Developmental Banks
Developmental Institutions
• For any developing economy, developmental financial institutions play
significant role in developing the economy, by lending long term loans
to dedicated sectors.
• These institutions help various sectors and industries by lending them
money, underwriting and buying shares & debentures.
Developmental Institutions
Developmental Institutions
• All India Financial Institutions (AIFI):
• IFCI – Industrial Finance Corporation of India Ltd.
• ICICI – Industrial Credit and Investment Corporation of India Ltd
• IDBI – Industrial Development Bank of India
• IDFC – Infrastructure Development Finance Company of India Ltd
• IIBI – Industrial Investment Bank of India Ltd
• NABARD – National bank for Agriculture and Rural Development
• NHB – National Housing Bank
• SIDBI – Small Industrial Development Bank of India Ltd
Developmental Institutions
• All India Financial Institutions (AIFI):
• LIC – Life Insurance Corporation
• UTI – Unit Trust of India
• GIC – General Insurance Corporation
• EXIM – Export Import Bank of India
• TFCI – Tourism Finance Corporation of India
• PFC – Power Finance Corporation
IRFC – Indian Railway Finance Corporation
• REC – Rural Electrification Corporation
• HUDCO – Housing and Urban Development Corporation
Developmental Institutions
• State Level/ Regional Level:
• SFC – State Finance Corporation
• SIDC – State Industrial Development Corporations

• Other Institutions:
• ECGC – export Credit and Guarantee Corporation
• DICGC – Deposit Insurance and Credit Guarantee Corporation
Major Developmental Institutions

Major
Institutions

EXIM NABARD SIDBI SFCs

EXIM – Export-Import Bank of India
• Set Up By An Act Of Parliament In September, 1981
• Wholly Owned By Government Of India
• Commenced Operations In March, 1982
• Completing 23 Years Of Operations In End - March 2005
• It lends money to:
• Indian Firms
• Commercial Banks (so that banks can further give
loans to export oriented units)
• Overseas Firms
Role of Exim Bank
• Principal financial institution in India for coordinating working of
institutions engaged in financing exports and imports.

• Objective: Established “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
country’s international trade…”
EXIM - Network of 14 Offices in India & Overseas

Head Office
+
9 Domestic Offices
Delhi
Guwahati

Ahmedabad Kolkata

Mumbai
Hyderabad
Pune

Bangalore
Chennai
EXIM - Network of 14 Offices in India and Overseas

Milan Budapest
Washington D.C.

Singapore

Johannesburg
NABARD – National Bank for Agriculture and
Rural Development
• NABARD was established in July 1982 with an initial capital of Rs.100
Crores.

• The paid up capital of NABARD is Rs.2,000 crore, subscribed by the GOI

and RBI at Rs.550 crore and Rs.1,450 crore respectively.

• NABARD started its operation in Nov. 1982.

• The bank was organized with the basic objective of establishing an apex
institution in the field of agricultural & rural development.
 Subsidiaries

(1) NABCONS:
NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary promoted
by National Bank for Agriculture and Rural Development (NABARD) and is engaged in
providing consultancy in all spheres of agriculture, rural development and allied areas.

(2) Bankers Institute of Rural Development (BIRD) :

Established in 1983, at Lucknow, is an autonomous institute promoted and funded by
NABARD. BIRD was established primarily to cater to the training needs of RRB
personnel.
 Schemes Provided By NABARD
• Kisan credit card scheme (KCC):
- KCC scheme introduced in august 1998
- providing free credit support to the farmers and is implemented across India by all
public sector bank ,RRBs etc..
- Farmers have flexibility of production credit and also avoid procedural delays.

• Rural infrastructure development fund:

- RIDF was initially setup in NABARD in 1995-96 with a corpus of Rs.2000 crores.
- Major objective is rural infrastructure projects pertaining to irrigation, flood protection,
rural roads and bridge etc..
- The fund has completed 13 years of operation by 2007-08.
Roles/Functions of NABARD
1) Developmental Role: it helps in developing the agricultural sector by
giving various facilities. The credit facilities provided by NABARD
help in improving the agricultural activities. Along with credit facility,
it also provides financial assistance, awareness and consultancy
services.
2) Credit Function: It lends credit by giving loan, purchasing shares and
debentures of companies associated with agricultural development.
3) Regulatory Function: It regulates RRBs and Co-operative Banks.
SIDBI – Small Industries Development Bank
of India
• Small Industries Development Bank of India (SIDBI), set up on April 2,
1990 under an Act of Indian Parliament, acts as 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 Functions
• Financing Activities
• Financial assistance is provided to small industries with regards to Giving funds
for project, buying equipment, buying technology and issuing of equity shares
to collect funds from public.
• Development Services
• Developmental role is performed by SIDBI by providing loan to agencies who
are helping small industries in developing.
SFCs – State Financial Corporations
• The State Finance Corporations (SFCs) are the integral part of
institutional finance structure in the country. SEC promotes small and
medium industries of the states. Besides, SFCs are helpful in ensuring
balanced regional development, higher investment, more employment
generation and broad ownership of industries.
• At present there are 18 state finance corporations (out of which 17
SFCs were established under SFC Act 1951). Tamil Nadu Industrial
Investment Corporation Ltd. established under Company Act, 1949, is
also working as state finance corporation.
 SFCs – State Financial Corporations
• Government of India empowers states to establish various financial institutions which help
the development of small and medium sized industries.
• Functions:
• The SFCs grant loans mainly for acquisition of fixed assets like land, building, plant
and machinery.
• The SFCs provide financial assistance to industrial units whose paid-up capital and
reserves do not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crore as may be
specified by the central government).
• The SFCs underwrite new stocks, shares, debentures etc., of industrial concerns.
• The SFCs provide guarantee loans raised in the capital market by scheduled banks,
industrial concerns, and state co-operative banks to be repayable within 20 years.
 NBFCs –
Non-Banking Financial
Company
NBFCs - Non-Banking Financial Company
• A Non-Banking Financial Company (NBFC) is a company registered
under the Companies Act, 1956 engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities
of a like nature, leasing, hire-purchase, insurance business, chit business.

• It does not include any institution whose principal business is that of

agriculture activity, industrial activity, purchase or sale of any goods
(other than securities) or providing any services and
sale/purchase/construction of immovable property.
What is difference between banks & NBFCs?
• NBFCs are doing functions similar to banks but they are not banks.
• NBFCs lend and make investments and hence their activities are akin to
that of banks; however there are a few differences as given below:
• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on itself;
• Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks.
 NBFCs
 RBI has classified the NBFCs as follows:  RBI and the Task Force has identified the
following roles for NBFCs:
 Asset Financing Companies
• Development of sectors like Transport and
 Investment Companies Infrastructure
 Loan Companies • Substantial employment generation
• Help and increase wealth creation
• Broad base economic development
• Irreplaceable supplement to bank credit in rural
segments
• Major thrust on semi-urban, rural areas and first
time buyers/ users
• To finance economically weaker sections
 Categorization of NBFCs

 Equipment Leasing Company

 Hire Purchase Company
 Loan Company
 Investment Company
 Mutual Benefit Financial Company (MBFC) like Nidhis
 Miscellaneous Non-banking Companies (MNBC) like Chit Funds
 Housing Finance Companies (HFC)
 Residuary Non-banking Company (RNBC)