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MODULE 1
1. Origin and kinds of banks
BANK MANAGEMENT 2. Unit and branch banking
3. Universal banking
MODULE 1 4. Banking system in India
MBA 5. Central Bank-Evolution-Functions-Control of
Credit
MACFAST 2010
6. Role of RBI-Organization and Management
Continued:

1 2

MODULE 1 contd. 1. ORIGIN AND KINDS OF BANKS

7. Commercial Banks • The word 'bank' is derived from the Italian
8. Co-operative Banks word 'banco' signifying a bench.
9. Development Banking • The bench was erected in the market-place,
10.NBFCs where it was customary to exchange money.
11.Unorganized Sector • The first such bench for money exchange was
12.Nationalisation & Social Responsibility of established in Italy in AD 808.
Banking
13.Privatisation & infusion of financial efficiency

3 4

Dates of establishment of major banks

• These benches were established by a
community of money traders called Lombard
Jews.
• Some of these benches grew to become banks

5 6

1

TYPES OF BANKING
• BRANCHING
• UNIT BANKING
• GROUP BANKING
• CHAIN BANKING
• NARROW BANKING
• UNIVERSAL BANKING.
7 8
• Unit banks are linked together by
“correspondent bank” system.
• In this system, unit banks keep a/cs with city
banks and city banks with reserve banks.
• This arrangement enables unit banks to make
remittances through the correspondent banks.
9 10
Unit banking
• Branching laws in most US states have been
eased in the last several years, permitting
geographic expansion and branch banking
networks across the United States.
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2 Unit and branch banking:
Unit banking
• A system where the operations of a bank are
confined to a single office.
• The theory is that each bank should be
– a local institution
– Locally financed
– Locally managed
– Drawing funds from local depositors
– Using its resources to develop local enterprises.
Unit banking in US
• Several US states prohibit branching, or
operation of more than one full-service
banking office.
• These states had only unit banks.
• Restrictive branching laws, encouraged
chartering of large numbers of small,
independently owned state banks, and large
multibank holding companies owning
numerous unit banks.
Branch banking
• Multi-office banking, generally defined as
accepting deposits or making loans at facilities
away from a bank's head office.
• Branch banking has gone through significant
changes since the 1980s as banks responded
to a more competitive financial services
market.
12
2

Branch banking
• Financial innovation such as internet banking
and ATMs will influence the future of "bricks
and mortar" banking by potentially reducing
the need to maintain extensive branch
networks to service consumers.
13
chain banking
• Chain banking differs from branch banking, or
multi-office banking within a single institution,
and group banking by affiliate banks within a
bank holding company.
• Its importance in the US banking system has
declined since the late 1980s with the rapid
growth of interstate banking and, in several US
states, more liberalized branching laws.
15
3. Universal banking
• Definition of Universal Banking: As per the
World Bank, " Universal Banks operate
extensive network of branches, provide many
different services, hold several claims on
firms(including equity and debt) and
participate directly in the Corporate
Governance of firms that rely on the banks for
funding or as insurance underwriters".
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chain banking
• Control of three or more independently
chartered banks by a few individuals, usually
through stock ownership or interlocking
directorships.
• Mainly practiced in USA in states where
branch banking was not permitted by law.
14
Group Banking
• A group of several banks controlled by a
holding company.
• Each bank has its own Board of Directors.
• The holding company
– Owns majority capital stock in group banks.
– Co-ordinates the activities of all banks of the
group
16
• A Universal Bank is a superstore for financial
products under one roof.
• Corporates can get loans and avail of other
services, while individuals can deposit and
borrow.
• It includes not only services related to savings
and loans but also investments.
18
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3. Universal banking ADVANTAGES OF BRANCH BANKING

• Universal banks offer a wide range of financial services, 1. Economies of large scale operation
like 2. Managing with lower cash reserves
– Mutual Funds, 3. Geographical spreading of risk
– Merchant Banking, 4. Safety of loans
– Factoring, 5. Easy remittance of funds
– Credit Cards, 6. Unified rate of interest
– Retail loans, 7. Better services to the community
– Housing Finance, 8. Wider scope for the selection of securities
– Auto loans, 9. Efficient management
– Investment banking, 10. Mobilization of resources
11. Easy collection of cheques and bills
– Insurance etc.
• This is most common in European countries.
19 20

DISADVANTAGES OF BRANCH BANKING ADVANTAGES OF UNIT BANKING

1. Lack consideration for individual needs
2. Drain of financial resources from small areas 1. Easy to manage and control
3. Red- Tape and delay 2. More initiative in local problems
4. Lack of sympathy for local needs 3. No diseconomies of scale
5. Loss-making branches will continue subsidised by other DISADVANTAGES
solvent branches. 1. Division of labour and specialization is not possible
6. Lack of effective control 2. Cannot face crisis
7. Huge expense 3. Inadequate resources
8. Concentration of economic power 4. Lack of efficient management
5. Small area of operation

21 22

Narrow banking : A concept Narrow banking

• Also called a safe bank • Yet to be implemented anywhere.
• Narrow banking would restrict banks to holding liquid
• Key aim is to reduce the riskiness of banks and
and safe government bonds.
• Loans would instead be made by other financial
avoid bank failures.
intermediaries.
• That is, the deposit taking and payment activities have
been separated from financial intermediation activities.
• Two different types of banks (financial companies) are
needed, one for each activity.

23 24

4

4. BANKING SYSTEM IN INDIA
• The first bank in India, The General Bank of
India was set up in 1786.
• A major landmark was establishment of
– Bank of Bengal (1809)
– Bank of Bombay (1840)
– Bank of Madras (1843)
by East India Company.
• These banks were called Presidency Banks
25
• The RBI, in the year 1955, acquired controlling
interest in the Imperial Bank of India.
• Imperial Bank was renamed in1955 as the
State Bank of India, through State Bank of
India Act.
27
Reasons for nationalization
• Concentration of wealth and economic power.
• Abuse of power by directors
• Denial of credit for agricultural operations.
• Discriminatory policy against small borrowers
• Credit for socially undesirable activities
• Violation of the priorities laid down in the
Plans
• Absence of balanced banking development
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Imperial Bank
• The Presidency Banks were amalgamated in
1921, to form Imperial Bank.
• Imperial Bank of India performed all the
normal functions of a commercial bank.
• In the absence of any central banking
institution in India until 1935, the Imperial
Bank of India also performed a number of
functions of a central bank.
26
Bank Nationalisation
• The RBI was nationalized in 1949 in terms of
the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948
• Another major landmark was nationalisation
of the 14 biggest private sector banks in 1969.
• The stated reason for the nationalization was
to give the government more control of credit
delivery.
28
• A second dose of nationalization of 6 more
commercial banks followed in 1980.
• With the second dose of nationalization, the
GOI controlled around 91% of the banking
business of India.
30
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Major objectives The Banking System at present

• Removal of control by a few • The Indian Banking system consists of
• Provision of adequate credit for agriculture, – A. Unorganised Sector
small scale industry and export. – B. Organised Sector
• Giving a professional bent to management
• Encouragement of a new class of
entrepreneurs
• The provision of adequate training as well as
terms of service for bank staff.

31 32

A. Unorganized Banking sector 11. Unorganized Banking sector

• Money lenders • Money lenders
• Indigenous bankers • Indigenous bankers
(Indigenous = Originating where it is found) (Indigenous = Originating where it is found)
• Landlords • Landlords
• Traders • Traders
Organized in the form of family or Organized in the form of family or
personal business personal business

33 34

Unorganised Sector: Indigenous bankers and

Broad classification of Indigenous bankers
• Those whose principal business is banking
• Those who combine their banking business
with other trading functions
• Those who are principally traders but employ
their surplus funds in banking.
moneylenders
• Banking in India is as old as the Vedas
• Many references in the Vedas (composed
about 1500 B.C) and Manusmruti (written
between 200 BCE and 200 CE).
• Also in Arthasasthra (200 CE)
• Indigenous bankers financed Indian trade and
commerce before the advent of European.

35 36

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Trade guilds Usury

• Merchants of trade guilds were doing banking • Usury = lending money at an exorbitant
business, individually and collectively. rate of interest
• They collected deposits as trustees and paid • Moneylenders charged exorbitant rates and
interest. cheated illiterate borrowers.
• Moneylenders were initially held in respect.
• But, over the centuries, they came to be
regarded as usurious, for their malpractices.

37 38

Advent of British and Banks BANKING COMMISSION RECOMMENDATIONS

REGARDING INDIGENOUS BANKERS
• With British rule, indigenous banking received a
great setback. • Model central uniform legislation should be made
• European type banks were established. • They should be controlled through their contacts
• Uniform currency was introduced which hit the with commercial banks.
money-changing part of their business. • Internal & external auditing
• The British govt took various steps to control the • Should regulate interest rates charged by
malpractices of moneylenders. indigenous bankers.
• The co-operative movement was strengthened, • A code of conduct should be evolved for their
which replaced moneylenders in their areas of operation
operation.

39 40

Defects of indigenous banking B. Organised Banking Sector

• They have mixed banking & non banking
business
• The could not maintain secrecy of their
accounts
• They used to charge high rates of interest
• They face the shortage of capital also.

41 42

7

BANKING SYSTEM IN INDIA
The system is headed by Reserve Bank of India (RBI),
India’s central bank.
There are various types of banks, operating to meet
the requirements of various categories of people
engaged in:
 Agriculture
 Business
 Professions
 Employment etc.
Associate Banks of SBI
1 State Bank of Bikaner & Jaipur
2 State Bank of Hyderabad
3 State Bank of Indore
4 State Bank of Mysore
5 State Bank of Patiala
6 State Bank of Travancore
Categorisation of Banks 3
• Co-operative Banks
• Primary Credit Societies
• District Central Co-operative Banks
• State Co-operative Banks
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Categorisation of Banks
• Commercial banks
1. Public Sector Banks
SBI and Associate Banks
Nationalised Banks
2. Private Sector Banks
Old Private Sector Banks
New Generation Banks
3. Foreign Banks
4. Regional Rural Banks (RRB)
43 44
Categorisation of Banks 2
www.sbbjbank.com
• Development Banks
• The major development Banks are:
www.sbhyd.com • Industrial Finance Corporation of India—IFCI--1948
• Small Industries Development Bank of India- SIDBI—1990
www.indorebank.org • Industrial Investment Bank Of India- IIBI
• National Bank for Agriculture and Rural Development – NABARD
www.statebankofmysore.c • Export Import Bank of India – EXIM Bank
o.in
• Some other erstwhile Development banks have
www.sbp.co.in converted themselves into commercial banks
• Industrial Development Bank of India—IDBI
www.statebankoftravancor
e.com • Industrial Credit and Investment Corporation of India-ICICI
45 46
5. Central bank - definition
• A central bank, reserve bank, or monetary
authority is a banking institution granted the
exclusive privilege to lend a government its
currency.
• It may also have supervisory powers, to
ensure that banks and other financial
institutions do not behave recklessly or
fraudulently.
47 48
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Some Central Banks Functions of a central bank (not all

• The first central bank of the world- Riks Bank
of Sweden - 1664
• The Bank of England- England -1694
• The Federal Reserve System- USA - 1913
49
functions are carried out by all central banks):
• implementing monetary policy
• setting the official interest rate – used to manage
both inflation and the exchange rate
• Note issue, controlling the nation's money supply
• the Government's banker
• the bankers' bank ("lender of last resort")
• managing the country's reserves of foreign exchange
and gold and the Government's stock register
• regulating and supervising the banking industry
• Control over lending by commercial banks
50

Monetary policy MONETARY POLICY

• Central banks implement a country's chosen
monetary policy.
• Economic policy of the government in the
monetary field.
• It operates through rate of interest and
availability of credit.
• Money consists of both currency and credit
money

51 52

Goals of monetary policy Goals of monetary policy

• Price Stability • Price Stability
• Unanticipated inflation leads to lender losses. Nominal
• High Employment contracts attempt to account for inflation. Effort successful
if monetary policy able to maintain steady rate of inflation.
• Economic Growth
• High Employment
• Interest Rate Stability • The movement of workers between jobs is referred to as
frictional unemployment. All unemployment beyond
• Financial Market Stability frictional unemployment is classified as unintended
• Foreign Exchange Market Stability unemployment. Reduction in this area is the target of
macroeconomic policy.

53 54

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Goals of monetary policy Goals contd.

• Economic Growth Interest Rate Stability
Economic growth is enhanced by investment in technological • Volatile interest and exchange rates generate costs to
advances in production. lenders and borrowers. Hence Interest Rate Stability is a
Encouragement of savings supplies funds that can be drawn goal of monetary policy.
upon for investment • Financial Market Stability
Stability in Financial markets such as market for equity and
market for debt, is necessary for growth and smooth
operation of industry and commerce.
• Foreign Exchange Market Stability
The exchange rate of a country’s currency needs to be stable
so that exports, imports and international investment are
facilitated.
55 56

Conflicts Among Goals Setting the official interest rates

• CB controls certain short-term interest rates.
• Goals frequently cannot be separated from each • These influence the stock and bond markets
other and often conflict. as well as mortgage and other interest rates.
• Costs must therefore be carefully weighed before
• However, CBs are not all powerful and they
policy implementation.
have only limited powers to put their policies
into effect.
• Most CBs have limited ability to influence
rates actually paid by private borrowers to
banks.
57 58

Repo Rate Reverse Repo Rate

• Whenever the banks have any shortage of
funds they can borrow it from RBI. Repo rate
is the rate at which banks borrow rupees from
RBI. A reduction in the repo rate will help
banks to get money at a cheaper rate. When
the repo rate increases borrowing from RBI
becomes more expensive.
59
• The rate at which RBI borrows money from
banks.
• An increase in Reverse repo rate can cause the
banks to transfer more funds to RBI due to the
attractive interest rate.
• It causes the money to be drawn out of the
banking system.
RBI fine tunes usage of CRR, Bank Rate, Repo
Rate and Reverse Repo rate to control liquidity
and interest rate.
60

10

Bank Rate
• A central bank adjusts the supply of currency
within national borders by adjusting the bank
rate.
• When the central bank reduces the bank rate, it
increases the attractiveness for commercial banks
to borrow, thus increasing the money supply.
• And vice versa.
• The instrument that has not been used by RBI
since April 2003, when it was brought down by
0.25% to 6%.
61
Banker to Government
• Central Bank (CB) acts as banker, fiscal agent
and advisor to Govt.
• It keeps the deposits of Central and State
Govts and makes payments on behalf of them.
• It manages the entire public debt on behalf of
the govt.
• It gives valuable advice to govt. on issues such
as devaluation, foreign exchange policy,
budgetary policy.
63
Lender of Last Resort
• CB assists commercial banks when they face
difficult situations such as “runs”, so as to save
the financial structure from collapse.
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Note Issue
• Issuing paper money is an important function
of a central bank.
• Having monopoly of note issue, the Central
Bank receives the following benefits.
1. Ensuring uniformity in the notes issued.
2. Creates confidence in public and brings stability
in monetary system.
3. Government is able to earn profit from printing
the currency (seigniorage)
62
Banker’s bank
• Commercial banks are required to keep a
certain percentage of their liabilities as Cash
Reserve with CB.
• They also maintain other deposit accounts
with CB for transfer of funds to various
centres.
• CB acts as a “clearing house” for other banks
and mutual obligations are settled through
this system.
64
Custodian of forex reserves
• CB keeps and manages the forex reserves of
the country.
• It regulates the exchange rate of the national
currency.
• If there are fluctuations in the forex rates, it
may have to buy or sell forex to minimise
instability.
66
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Banking Supervision Banking Supervision 2

• In some countries, Banking Supervision is
done by the CB.
• In other countries, Banking Supervision is
done by a govt. dept. or another independent
authority.
• The Bank Supervisor examines each bank’s
financials, behaviour and policies toward
customers.
67
• Any cartel of banks is closely watched and
controlled
• Most countries control bank mergers.
• They are weary of concentration in this
industry.
• Lending bubbles are a particular area of risk.
• In finance management, diversification
reduces risk.
68

Credit control Quantitative Methods

• This is a most important function of a Central
Bank.
• Used for controlling inflationary and
deflationary pressures within an economy.
– Quantitative methods.
– Qualitative (Selective) methods.
1. Bank Rate / Discount Rate policy
2. Open Market Operations
3. Variations in Reserve Ratios of Commercial
Banks

69 70

1. Bank Rate / Discount Rate policy Bank Rate

• Cen Bk controls credit by changing bank rate. • Bank rate is thus raised to control inflation.
• A rise in bank rate makes borrowing from CB • In the opposite direction, lowering the bank
more costly. rate offsets deflationary rendency.
• Commercial Bks increase lending rates for
customers.
• This discourages business activity.
• Conversely, lowering bank rate, offsets
deflationary tendencies.
71 72

12

2. Open Market Operations
• Direct buying and selling of securities (bonds)
by the Cen Bk on its own initiative is called
Open Market Operations.
• When Cen Bk sells, money is withdrawn from
the banking system and banks are forced to
curtail lending.
• This discourages business activity.
73
Variations in Reserve Ratios of
Commercial Banks
• The Cen Bk controls inflation and deflation by
varying the CRR and SLR of comml. banks.
75
SLR: Statutory Liquidity Ratio
• It is a part of deposits that Commercial Banks are
supposed to maintain with THEMSELVES IN
LIQUID FORM.
• Liquid form means:
Cash, Gold or Government Bonds.
• This is done, to ensure sufficient Liquidity with
Commercial Banks.
• It is again expressed as a percentage of total
deposits.
• It is also used as a monetary tool to regulate
money supply.
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Open Market Operations
• In times of depression, the Cen Bk buys
securities, increasing banks’ cash reserves
• Thereby, banks expand their loans, resulting in
expansion in investment, employment,
production and prices.
74
CRR : Cash Reserve Ratio.
• It is a percentage of Bank Deposits that Commercial
Banks are supposed to maintain with RBI.
• It is a monetary control tool that RBI uses to regulate
the Money Supply in the Economy.
When Inflation is High ( Money supply is high), RBI
increases the CRR Rate.
• Commercial Banks will have to keep more percentage
of deposits with RBI.
• This in turn will reduce the commercial bank's Lending
capacity.
• When lending capacity is reduced, money supply in the
economy is less, which will reduce inflation.
76
Current CRR & SLR rates in India
• SLR : 24%
CRR : 6%
78
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Qualitative or Selective credit

SCC
Control (SCC)
• This means the regulation and control of the • Margin requirements
supply of credit among its possible users. • Regulation of consumer credit
• The aim is to curtail use of bank credit for • Rationing of credit
hoarding , speculation and other undesirable • Direct action
activities.
• Moral suasion
• The important SCC are the following.

79 80

SCC
• Margin requirements: Cen Bk prevents
excessive use of credit for speculation, by
fixing minimum margins.
• Regulation of consumer credit: Cen Bk fixes
minimum down payment and maximum
number of instalments, thereby encouraging /
discouraging consumer credit.
SCC
• Rationing of credit: Cen Bk may fix ceiling for
– Aggregate portfolio of each commercial bk
– Ratio of capital of a comml bk to its total assets.
• Direct action: Issuance of directives by cen bk
to comml bks regarding loan policies.
• Moral suasion : Persuasion and request by cen
bk to comml bks to follow a certain monetary
policy.

81 82

Reserve Bank of India (RBI) 2 Structure

• RBI, is the central banking system of India 2.1 Central Board of Directors
• The institution was established on 1-4-1935 2.2 Organisation
during the British-Raj in accordance with the
provisions of the Reserve Bank of India Act,
1934.

83 84

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Central Board of Directors Organization:

20 Members Central Office : Mumbai

Members: Local Boards at: Mumbai, Kolkata, Chennai, New Delhi
The Reserve Bank of India has branch offices at most
Governor, state capitals and at a few major cities in India[total
Dy. Governors- 4 , of 18 places]
Govt. official -1
Directors nominated by govt.-10
Directors nominated from local boards-4

85 86

Major Departments of RBI Main Functions

• Department of Payment and Settlement Systems • Monetary Authority
Department of Banking Supervision
Department of Currency Management • Manager of exchange control
Internal Debt Management Department
Monetary Policy Department • Issuer of currency
Department of Government and Bank Accounts
Urban Banks Department • Developmental role
Department of Non-Banking Supervision
Rural Planning and Credit Department • Related functions
Department of Statistical Analysis and Computer Services
Inspection Department
Department of External Investments and Operations
Department of Information Technology
Foreign Exchange Department

87 88

Monetary Authority Monetary Authority

• RBI is the main monetary authority of the
country
• the central bank acts as the bank of the
national and state governments.
• It formulates, implements and monitors the
monetary policy.
• Objectives are maintaining price stability and
ensuring adequate flow of credit to productive
sectors.
89
• Is also the regulator and supervisor of the
financial system
• prescribes broad parameters of banking
operations within which the country's banking
and financial system functions.
• RBI controls the monetary supply, and
monitors economic indicators like the GDP
90

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Banking Ombudsman Scheme

• Objectives • formulated by the (RBI) for effective redressal
• to maintain public confidence in the system, of complaints by bank customers.
• protect depositors' interest
• provide cost-effective banking services to the
public

91 92

Manager of exchange control Issuer of currency

• The central bank manages 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.
• The bank issues currency and coins
• Exchanges or destroys currency and coins not
fit for circulation
• Objective: giving the public adequate supply
of currency of good quality

93 94

Developmental role Related functions

• 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.
• banker to central and the state governments
• performs merchant banking function for the
central and the state governments.
• maintains banking accounts of all scheduled
banks.

95 96

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Conclusion 7. Commercial Banks

• There is now an international consensus about Structure
the need to focus the tasks of a central bank • Scheduled Banks: Banks included in Second
upon central banking. Schedule of RBI Act,1934.
• RBI is far out of touch with such a principle, • Unscheduled Banks: Other banks
owing to the sprawling mandate described There are no such banks in India except
above.
– Local Area Banks (4)
• The recent financial turmoil world-over, has – Unscheduled Co-op banks
however, vindicated the Reserve Bank's role in
maintaining financial stability in India.
97 98

Scheduled Bank Classification of Scheduled Banks

• Banks in the 2nd schedule enjoy some benefits 1. Public Sector Banks
– they have access to accommodation by RBI SBI and Associate Banks
in times of liquidity constraint Nationalised Banks
• But, they become subject to RBI’s reserve 2. Private Sector Banks
requirements. Old Private Sector Banks
New Generation Banks
3. Foreign Banks
4. Regional Rural Banks (RRB)
99 100

Public Sector Banks (PSBs) SBI

• PSBs have either the Govt. of India or the RBI • SBI is India’s largest bank.
as the majority shareholder. • It has over 13000 branches, which is the
• The segment has second largest network in the world.
1. SBI and its Associates • The bank had 131 overseas offices spread over
2. Nationalised Banks 32 countries as on 31st Dec 2009
• The bank provides various domestic ,
international and NRI products and services
through its network.

101 102

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SBI & Associates Nationalised Banks

• It was the first bank in India to introduce
– Market segmentation of customers
– Planning and Performance Budgeting & Reporting
• SBI had 7 Associate banks, of which, State
Bank of Saurashtra has been merged with SBI.
• 14 banks were nationalised in 1969
• 6 more were nationalised in 1980
• Two of thenationalised banks were merged
with each other.
• At present, there are 19 nationalised banks.

103 104

Functions of Commercial Banks Primary Functions

• Primary Functions • Acceptance of deposits
• Secondary Functions • Granting Loans and Advances
• General Utility Functions

105 106

Deposits Deposits
• The most important activity of a comml bk is • Term Deposits
mobilising deposits from the public. • Demand Deposits
• Such deposits earn interest. • Term Deposits are kept with the bank for a
• The bank lends a major portion of the specified period (tenure)
deposits, to industry, trade, agriculture and • The interest rate depends on the tenure
individuals, and earns interest.

107 108

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Demand Deposits Loans and advances

• Savings Accounts: Earns nominal interest.
Number of transactions limited. Ideal type for
employees, pensioners etc.
• Current Accounts: Does not earn interest. No
limitation on number of transactions. Suitable
for businesses.
• Savings and Current Accounts can be cheque
operated.
• The second important function of a comml bk.
• Types of accounts:
– Cash credit: A running account, generally granted
against security of stock.
– Overdraft: Usually granted for personal credit facilities
– Bill discounting: Granted against security of trade bills.
Bank advances money against the bill. On due date,
the bank presents the bill to the drawee and collects
the bill amount.
– Term loan: Granted for acquiring fixed assets.
Repayable in instalments over a period not exceeding
7 years, usually.

109 110

Other Services Co-operative Banks

• Agency Services • The Co operative banks in India started
• Collection of cheques functioning almost 100 years ago.
• Bills of Exchange and promissory notes
• Execution of Standing Orders • The Cooperative bank is an important constituent
• Trustee Business of the Indian Financial System, judging by
• Safe Custody – the role assigned to co operative,
• Remittance of Funds – the expectations the co operative is supposed to fulfil,
• Issuing Letters of Credit – their number,
• Pension Payment
– and the number of offices the cooperative bank
• Government Transactions.
operate.

111 112

• The co operative movement originated in the West, but
the importance of such banks have assumed in India is
rarely paralleled anywhere else in the world.
• The cooperative banks in India play an important role
even today in rural financing.
• The business of cooperative bank in the urban areas
also has increased phenomenally in recent years due to
the sharp increase in the number of primary co-
operative banks.
• Co operative Banks in India are registered
under the Co-operative Societies Act.
• The cooperative bank is also regulated by the
RBI.
• They are governed by the Banking Regulations
Act 1949 and Banking Laws (Co-operative
Societies) Act, 1965.

113 114

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rural areas urban areas

• Cooperative banks in India finance rural areas • Cooperative banks in India finance urban
under: areas under: Self-employment
– Farming • Industries
– Cattle • Small scale units
– Hatchery
• Home finance
– Personal finance
• Consumer finance
• Personal finance

115 116

NAFCUB
• According to NAFCUB the total deposits &
lendings of Cooperative Banks in India is much
more than Old Private Sector Banks & also the
New Private Sector Banks.
• NAFCUB: National Federation of Urban Co-op
Banks and credit societies
• This exponential growth of Co operative Banks
in India is attributed mainly to their much
better local reach, personal interaction with
customers, their ability to catch the nerve of
the local clientele.

117 118

Co-operative Banks Differences – co-operative& commercial banks

• Co-operative Banks Commercial Co- operative

– Joint-stock – Co-operative
• Primary Credit Societies – Banking Regulation Act – Co-operatives societies Act
• District Central Co-operative Banks – Under direct control of RBI of 1904
– Both public and private sector – Under direct control
• State Co-operative Banks – Borrowers are only account Registrar of co-operative
holders and no influence on societies
policy maters
– Private sector
– Borrowers are member-
shareholders and have
voting power

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Merits of Co-op Banks Major problems

•
• Familiar with local conditions •
Weak capital base
NPAs increased sharply
• Lower administrative costs • Poor asset quality
• Increased competition with commercial banks
• Mobilization of small savings • Poor management
•
• Banking procedures are less complicated •
Lack of transparency
Limited branch network
• Financially security to the members • Wrong commercial decisions
• Political interference

121 122

Regional Rural banks( RRBs) Resources of RRBs

• Share capital,
• In 1975 , a working group-chairman- M. • Deposits from public,
Narasimhan to review the flow of institutional • Borrowing from sponsor banks,
credit to the rural people. • Refinance from NABARD
Major objectives
• An alternative agency to provide institutional – To provide low cost banking facilities to the poor
credit to the rural people. – to develop rural economy by providing credit & other facilities
• A combined form of co-operatives and to
Small and marginal farmers , agricultural labours, artisans and
commercial banks.
small entrepreneurs
– socio- economic upliftment and improvements in the living
standards of the clientele
123 124

RRB: problems RRB: Recommendations

• The principal problem is low recovery rates and loan over dues due Kelkar Committee- 1986
to- internal factors
– Weak monitoring and supervision • Enhancement of authorized capital from Rs 1 crore to Rs 5
– Apathy towards recovery crore and paid up share capital from Rs 25 lakh to Rs.1
– Failure to link lending with development crore.
– Ensuring end use of the loan • Appointment of Chairman of RRBs by concerned sponsor
External factors
bank in consultation with NABAD.
– political interference
– Willful default • Training RRB staff and giving financial assistance to them
– Draught and floods in the first five years of their existence – sponsor banks
– Under development • Provision of amalgamation of RRBs
– Lack of legal and administrative support from the state govt. in
the matter of recovery • Empowering the sponsor banks to monitor the progress of
RRBs
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Non Banking Finance Companies

Development banks-objectives NBFCs
• These are financial intermediaries engaged primarily in the business
• Serve as an agent of development- agriculture, industry, and
international trade. of accepting deposit and advancing loans.
• Accelerate the growth of the economy • It is mandatory that every NBFCs should be registered with RBI to
• Allocate resources to the high priority areas commence or carry on any business of NBFCs
• Rapid industrialization and employment generation • Certain categories of NBFCs which are regulated by other regulators
• Develop entrepreneurial skills like SEBI, IRDA, National Housing Bank
• Promote the development of rural areas
• Finance housing, SSIs, infrastructure, social utilities
Major categories
• Technical assistance • Equipment leasing
• Refinance • Hire purchase
• Women developement • Loan companies
• Investment companies
• Chit fund company

127 128

What is a Non-Banking Financial Company

(NBFC)? Registration with RBI
A company registered under the Companies Act,
1956 and
Engaged in the business of • In terms of Section 45-IA of the RBI Act, 1934,
• loans and advances, it is mandatory that every NBFC should be
• acquisition of shares / stock / bonds / debentures registered with RBI to commence or carry on
/ securities any business of non-banking financial
• leasing, hire-purchase, institution
• insurance business,
• chit business
• receiving deposits under any scheme or or
lending in any manner.

129 130

Exceptions Exceptions
To obviate dual regulation, certain categories of Venture Capital Fund/Merchant Banking
NBFCs which are regulated by other regulators companies/Stock broking companies
are exempted from the requirement of registered with SEBI,
registration with RBI viz. Insurance Company holding a valid Certificate of
Registration issued by IRDA,

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Different types of NBFCs

Exceptions
registered with RBI
Nidhi companies as notified under Section 620A • (i) Asset Finance Company (AFC)
of the Companies Act, 1956, • (ii) Investment Company (IC)
Chit companies as defined in clause (b) of • (iii) Loan Company (LC)
Section 2 of the Chit Funds Act, 1982
Housing Finance Companies regulated by
National Housing Bank.

133 134

Asset Finance Company RBI Classification

• AFC is a company with principal business of • The above type of companies are further
financing of physical assets such as classified into those accepting deposits or
– automobiles, those not accepting deposits.
– Machines etc. And
• not less than 60% of its total assets and total
income should be from this activity

135 136

Difference between banks &

Minimum Capital Requirement
NBFCs
Rs 200 lakh minimum net owned fund • NBFCs are doing functions akin to that of banks;
to be possessed before registration as NBFC however there are a few differences:
with RBI. (i) an NBFC cannot accept demand deposits;
(ii) an NBFC is not a part of the payment and
settlement system and as such an NBFC cannot
issue cheques drawn on itself;
(iii) deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation is not
available for NBFC depositors unlike in case of
banks.
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Need for regulation by RBI Achievements of Bank Nationalisation

• RBI regulates NBFCs because mismanagement
and / or malpractices in NBFCs may harm the
financial system.
• Branch expansion: From only 8261 in June 1969, the number of
branches of commercial banks increased to 65,521 in 2000.
• Increased Coverage of rural areas
• Growth in Deposit mobilization
• Growth in volume of credit
• Sectoral development of credit
• Advances to priority sectors: At the time of nationalisation the
priority sector concept was introduced by bringing agriculture,
small-scale industry, retail trade, small business and small
transport operators under its fold. It was made mandatory for
banks to provide 40 per cent of their net credit to these
''priority'' sectors (18 % to Agriculture).

139 140

Defects Social banking

• Increased trade unionism in banks • Social banking has three distinct components.
• Politically influenced unviable lending – Interest rate are kept below the average interest rate in
rural areas.
• Unmindful expansion – Identified ‘ priority sectors ‘ with specific targets &
• Overstaffing Lead Bank Scheme- LBS
– Banking development on the basis of population
• Poor customer service served per bank office.
• Lack of young blood in the top management NABARD--- An apex institution looking after the planning
and operation in the field of credit for agriculture and
other economic activities in rural areas.
Now social banking institutions are competing with the
commercial banks for getting more profit

141 142

Privatization-infusion of financial efficiency

• A committee was appointed on financial system-1991- M.Narashimhan
Suggestions
• to keep inflation and BOP position under control.
• Removal of license and permit system
• Remove protection and promote competition in foreign trade sector.
• Integration with world economy to attract capital and modern technology.
Major changes.
• Reduction in SLR and CRR
• Freedom for fixing lending rates
• Modern system of payment-ATMs, RTGS
• Entry of private sector banks
• Securitization Act to recover NPAS
RESULTS
• Number of commercial banks increased
• Number of total branches increased
• The population per bank office went up
• The aggregate deposits went up
• Bank advances increased
• The credit deposit ratio increased
• The income of the banks increased
• Operating profit went up
• The total assets went up

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