BANKING SYSTEM IN INDIA

Banking system in India plays a vital role in the economic development of a country. Banking system in India can be broadly divided into unorganized sector and organized sector. Unorganized sector mainly comprises of money lenders and indigenous bankers. The organized sector consists of commercial banks, co-operative banks and regional banks. Apart from these institutions which provide short-term credit to businesses, there are number of specialized term lending institutions which provide long term requirements of industry, agriculture and foreign trade. Post office savings is another segment of banking system. The RBI, the Central Bank of the country is at the apex of the banking structure in India.

Indigenous Bankers Indigenous bakers lend money; act as money changers and finance internal trade by means of internal bill of exchange. With their own capital, they grant loans against securities such as gold, jewellery, land, promissory notes, etc. They also buy and sell remittance and discount hundies. They generally deal with agriculturist and small traders. The interest rate charged by them is higher than the interest charged by other banking institutions. According to RBI, about 50% of internal trade is financed by these indigenous bankers.

Commercial Banks Commercial banks are the oldest banking institutions in the organized sector. They constitute the predominant segment of the banking system in India. They cater to the needs of trade, commerce, industries, agriculture, small business, transport and other activities with a wide network of branches throughout the country. Commercial banking system consists of scheduled banks and non-scheduled banks. Scheduled banks: These banks are registered in the Second Schedule of the RBI. The following conditions must be fulfilled by a bank for inclusion in the Schedule: 1. The bank concerned must be carrying on a business of banking in India.

2. The bank must have paid-up capital and reserve of an aggregate value of not less than Rs. 5 lakhs. 3. It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interest of the depositor. Presently, the RBI has prescribed a minimum capital of Rs. 100 crore for starting a new commercial bank. Non- Scheduled Bank: Bank which is not included in the Second Schedule of the RBI is known as non-scheduled bank. The scheduled bank comes within the direct purview of the credit control measures of the Reserve Bank. They are entitled to borrowing and rediscounting facilities from the RBI.

Co-operative Banks: It is another component of the Indian banking system which was originated with the enactment of the Co-operative Credit Societies Act of 1904. The Act provided for the establishment of the credit societies for financing agriculturalists. The Co-operative Credit Societies Act, 1912 provided for the establishment of co-operative central banks by a union of primary credit societies. The co-operative movement to meet the needs of the agriculturalist received momentum only during the post independence era. The co-operative banking structure in India is a pyramid type of a three tier structure comprising
1. Primary Agricultural Co-operative Credit Society at the village level:

The primary co-operative societies function at the base of the co-operative credit system. It may be organized by ten or more persons normally belonging to a village or a cluster of villages. The society raises fund by ways of share capital, deposit from members and non-members and loans from District Central Co-operative Banks. The borrowing power of the members as well as the society is limited. Loans are given for short period for the purchase of cattle, fodder, fertilizers etc.
2. District Central Co-operative Banks at the district level, and:

It is a federation of primary credit societies in specified areas normally extending to the whole district. They raise funds by means of share capital from member societies, deposits from public and loans from the State Co-operative Bank. The main

task of these banks is to finance member societies. They also carry on commercial banking activities,. They act as balancing centres making available temporary excess funds of one primary society to another which is in need of them.
3. State C0-operative Bank at the state level:

It is a federation of Central Co-operative Banks. It receives deposits from the public and from local boards, municipalities etc. Further, they receive loans at call and short notice from the commercial banks and from RBI. The state govt contributes a certain portion of their working capital. The State Co-operative bank lends money to the Central Cooperative which in turn lends to primary societies.

Land Development Banks The agriculturalists require long-term loans in different scenarios and these requirements are met by the Land Development Banks. It is a 2 tier system with central land development bank at the state level and primary land development bank at the district level. Banks of Tamil Nadu, Mumbai, Andhra Pradesh and Karnataka are of this type.

Regional Rural Banks There was credit gap in the economy and in order to fill this gap, a new type of institution which could combine the local knowledge and familiarity with the rural problems which the co-operatives possess and the degree of organizational ability to mobilize deposits, access to money market and modernized outlook which the commercial banks have. The main objective of these banks is to provide credit and other facilities mainly to the small and marginal farmers, agricultural labourers. The RRBs are established by sponsor bank usually a public sector bank. The central govt with the consultation of the state govt and the sponsor bank setup RRBs. Each RRB is a separate entity closely linked to the sponsor bank. The authorized capital of each RRB is Rs. 1 crore and paid up capital is Rs. 25 lakh. Of this 50% is subscribed by the Central Govt, 15% by state govt and 35% by sponsor bank. The management and functioning of RRB is done by the nine members of the Board of Directors. 3 nominated by the Central Govt, 2 by State Govt and sponsor nominates 3. The chairman is usually appointed by the central govt and would be an officer of the sponsor bank. The board acts on the business principles and

in accordance with the directives and guidelines issued by RBI. The resources include:

Share Capital Deposits from public Borrowings from sponsor banks Refinance from NABARDA

Industrial development Bank Industrial Finance Corporation It was set up with the objective of making medium and long term credits more readily available to industrial concerns in India, particularly in circumstances where normal banking accommodation is inappropriate or recourse to capital issue method is impractical. Any limited company or co-operative society incorporated and registered in India is eligible for financial assistance from the IFCI. Assistance can be obtained in the form of rupee loans, sub-loans in foreign currencies, underwriting of and/or direct subscription to the shares and debentures of public ltd companies, guaranteeing of deferred payments on machineries imported from abroad or foreign currency loans raised from foreign institutions. The authorized capital of the corporation was raised to Rs. 20 crore in 1972. 50% of the capital is held by IDBI and the remaining by banks, insurance company, investment trusts etc. During 2006-07, the IFCI sanctioned Rs. 1050 crore.

State Finance Corporation It was established under the State Financial Corporation Act, 1951 with a view to provide medium and long term finance to medium and small industries. The financial resources of SFC consists of shared capital, issue of bonds, refinance from IDBI, borrowing from RBI, loans from state govt. The maximum amount of loan for a single concern is Rs. 60 lakhs.

Industrial Development Bank of India IDBI was established under Industrial Development Bank of India Act, 1975, as a wholly owned subsidiary of RBI. IDBI is the apex institution in the area of development banking. IDBI has been assigned the role of the

principle institution for coordinating, in conformity with the national policies, the activities of the institutions engaged in financing, promoting or developing industry. The entire of share capital of Rs. 50 crore of the IDBI was held by the RBI. With effect from 1976, it was transferred to the Central Govt. The authorized capital has been raised to Rs. 1000 crore. This can be raised to Rs. 2000 crore by the Central Govt.

Industrial Credit and Investment Corporation of India ICICI was established in 1955 to develop large and medium industries in private sector, at the initiative of the World Bank. Its objectives include: 1. Providing assistance in the creation, expansion and modernization of industrial enterprises 2. Encouraging and promoting the participation of private capital, both internal and external in such enterprise 3. Encouraging and promoting industrial investment and the expansion of investment market. Financial assistance is provided to non-traditional industries like engineering, chemicals, machinery, textile and transport equipment etc. The corporation has set up Housing Development Finance Corporation in 1977, to provide long term loans on reasonable terms, primarily for lower and middle income group housing schemes. In order to broad base technology development oriented activities, the corporation has promoted Technology Development and Information Company of India Ltd. The main function of the company would be technology financing which includes financing of commercial R&D schemes through grants and conditional loans, venture capital financing and technology up gradation financing. In 1987, venture capital schemes to provide long term financing assistance was launched. The Credit Rating Services of India Ltd promoted by ICICI became operational in 1987. It is an independent organization managed professionally. The banks and financing institutions have participated in the equity of this company. The ICICI Ltd was merged with ICICI Bank and the merger was approved by RBI.

Industrial Investment Bank of India Ltd

In 1971, the Govt of India established a new institution called Industrial Reconstruction Corporation of India(IRCI) with the main objective of reconstruction and rehabilitation of sick industrial undertakings. It was registered under the Indian Companies Act, with a share capital of Rs. 10 crore. The IRCI was converted into a statutory corporation in 1985 and was renamed as Industrial Reconstruction Bank of India (IRBI). The IRBI functions as the principal All India credit and reconstruction agency for industrial revival, assisting and promoting industrial development and rehabilitating industrial concern. IRBI was converted into a bank in 1997 and was renamed as Industrial Investment Bank of India Ltd.

Small Industries Development Bank of India It was set up as wholly owned subsidiary of IDBI. It takes responsibility of administering the Small Industries Development Fund and National Equity Fund for providing equity support for projects in tiny and small scale sectors.

Agricultural Development Banks NABARD(National Bank for Agricultural and Rural Development) National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India based in Mumbai,Maharashtra. It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India". NABARD was established by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas. It functions are: 1. serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas 2. takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. 3. co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments,Reserve Bank of

India (RBI) and other national level institutions concerned with policy formulation 4. undertakes monitoring and evaluation of projects refinanced by it.