ROLE OF BANKING INSTITUTUIONS IN INDIA 2014

PROJECT ASSIGNMENT
ON ROLE OF BANKING INSTITUITONS IN INDIA

(BANKING LAW)

Submitted to: DR. AJAY FACULTY BANKING LAW Submitted by: MANASI AGARWAL Roll No- 428 7TH SEMESTER, 4TH YEAR

ROLE OF BANKING INSTITUTUIONS IN INDIA 2014 ACKNOWLEDGEMENT

I feel highly elated to present the project Research on ROLE OF BANKING INSTITUTIONS IN INDIA, which owes its very existence to a number of people without thanking whom, I would fail to do proper justice to its original profounder. Firstly, I would like to thank the Banking Law Subject Faculty, DR. AJAY for showing his belief in me and considering me potent enough to carry out the research methodology, and thereby assigning the said topic to me. In fact without his continuous exemplary guidance and worm- view criticism the project could never have reached its current stature. Thus I extend a sincere heart-felt thanks to My Preceptor DR. AJAY - the ever helping Faculty of CHANAKYA NATIONAL LAW UNIVERSITY.

Secondly, I would like to extend my sincere acknowledgement towards the Librarian of CNLU, for making all the reading materials available relevant for my Research Paper, within such short notice. Infact the CNLU Library came up as an excellent source for all the requisite data.

Thirdly, I would like to thank the Managing staff of CNLU, for providing me with the facility of 24 hours/ 7 days a week Internet connection, since the search engines namely, www.google.com, www.bing.com, where an indispensable need to facilitate data access within fractions of seconds.

MANASI AGARWAL ROLL NO 428

ROLE OF BANKING INSTITUTUIONS IN INDIA 2014 RESEARCH METHODOLOGY

Method of Research: The researcher has adopted a doctrinal as well as non doctrinal method of research. The researcher has made extensive use of the library at the Chanakya National Law University and also the internet sources as well as interacted with the general mass of society. Scope and Limitations The project offers a comprehensive study of the ROLE OF BANKING INSTITUTIONS IN INDIA. The research paper does not provide a complete understanding of the all the provisions of banking institutions in the country. Chapterisation I have divided the project into various chapters. Each dealing with different aspects of the topic. In the initial chapters, I have discussed elaborately, the meaning of banking institutions. Further, I have elaborate different functions of the bank and lastly; I have concluded the topic by summarising the highlighting aspects of the banks of the country. Sources of Information The researcher has relied on secondary sources for the purposes of this project such as books, articles. Style of writing The researcher has adopted a descriptive and analytical style of writing for the purposes of this research paper. Mode of citation A uniform mode of citation has been followed throughout the course of this project.

ROLE OF BANKING INSTITUTUIONS IN INDIA 2014

TABLE OF CONTENTS
___________________________________________________________________________ 1. Introduction .01 2. Meaning and definition of Bank ....02-04 3. Utility of Banks .......................................................04 4. Role of banks in socio-economic development ................04-06 5. Classification of banking system in India .....................................06-07 6. Central Bank ..07-10 7. Advances to priority sectors and credit guarantee schemes10-13
8. Commercial Banks .13-15 9. Development Banks....16-22

10. Co-operative societies 23-24 11. Conclusion ...25 12. Bibliography 26

ROLE OF BANKING INSTITUTUIONS IN INDIA 2014

INTRODUCTION
_________________________________________________________________________ A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout the day. The banking system in India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, Indias banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguards the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashiers cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role is accepting deposits and lending funds from these deposits.

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DEFINITION OF BANK
As per the Banking Act 1979: This was the first UK Act to put banking regulation on a statutory footing. This Act introduced the requirement for institutions to be licensed in order to accept deposits from the public. It made no attempt to define a bank or banking business and its provisions were applicable only to deposit taking institutions. As per Lord Denning The best description in UK law is found in Case Law. In United Dominions Trust v Kirkwood1, Lord Denning in the Court of Appeal describes what makes up a bank. In this case, Kirkwood, a garage, argued that UDT could not recover on a debt because they were neither a bank, and as unregistered money lenders, they were unable to recover due to the provisions of the Moneylenders Act 1990. Consequently, UDT sought to show that it was a bank. The Court of Appeal defined 3 elements for determining whether or not a person is a banker: 1. The nature of the banking services provided. 2. The importance of these services in relation to the business as a whole. 3. The reputation of the institution. Lord Denning also found that the following were characteristics usually found in the business of banking: a) Accepting money from and collecting cheques for customers and placing these at the credit of the customers accounts. b) Honouring cheques or orders drawn on bankers by the customers when presented for payment, and debiting their customers accounts. c) Keeping running accounts for customers in which debits and credits were entered.

As per The Banking Act, 1987 The Banking Act, 1987 of England defined a bank as a body corporate or a non-corporate that was recognised by the bank of England to accept deposits as defined by that act. Besides
1

United Dominions Trust v Kirkwood (1966) 2KB 431.

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this laboured effort, there appeared to be no statutory definition of the term bank per se in English Banking Act, 1987. As per Banking Regulation Act, 1949 As per Section 5(b) of Banking Regulation Act, 1949 Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India. Explanation: Any company which is engaged in the manufacture of goods or carries on any trade and which accepts the deposits of money from public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause." As per Section 5(d) of Banking Regulation Act, 1949, company means any company as defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act. NEED OF THE BANKS Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. The following functions of the bank explain the need of the bank and its importance: To provide the security to the savings of customers. To control the supply of money and credit To encourage public confidence in the working of the financial system, increase savings speedily and efficiently. To avoid focus of financial powers in the hands of a few individuals and institutions. To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of customers

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UTILITY OF BANKING INSTITUTIONS
Banks are extremely useful and indispensible institution for a modern community. They are custodian and distributors of liquid capital and essential ingredient for commercial and industrial activities. The utility of bank can be summarised as follows: a) The banks create purchasing power, in the form of bank notes, cheques, bill, draft, etc and economise the use of metallic money which is very expensive and cumbersome. b) Banks transfers fund, by bringing lenders and borrowers together, and by helping funds to move from place to place and from person to person in a convenient and inexpensive manner, through the use of cheques bills and drafts. In this way they help trade and economy. c) The bank encourage the habit of saving among the people and enable small savings, which otherwise would have been scattered ineffectively, to be accumulated in large funds and thus made available for investments of various kinds. In this way they promote economic development through capital formation. d) By encouraging saving and investment, the banks increase the productivity of resources of the county and thus contribute general prosperity and welfare by promoting economic development. e) The bank agency functions are very useful to the customers of the bank. They undertake to make various types of payment on behalf of their customers and also make several types of collection on their behalf. Thus, the banks are useful to both the community in general and individual customer in particular.

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ROLE OF BANKS IN SOCIO-ECONOMIC DEVELOPMENT
Banks play a vital role in economic development of the country as explained hereunder: A safe and sound financial sector is a prerequisite for sustained growth of any economy. Globalization, deregulation and advances in information technology in recent years have brought about significant changes in the operating environment for banks and other financial institutions. These institutions are faced with increased competitive pressures and changing customer demands. These, in turn, have engendered a rapid increase in product innovations and changes in business strategies. While these developments have enabled improvement in the efficiency of financial institutions, they have also posed some serious risks. Banks play a very useful and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to developing countries may be viewed thus: 1. Promoting capital formation 2. Encouraging innovation 3. Monetisation 4. Influence economic activity 5. Facilitator of monetary policy 6. Promote growth with stability 7. Promote balanced regional development 8. Financing the priority sectors Above all view we can see in briefly, which are given below:

1. PROMOTING CAPITAL FORMATION A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They

mobilize the ideal and dormant capital of the country and make it available for productive purposes.

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2. ENCOURAGING INNOVATION Innovation is another factor responsible for economicdevelopment. The entrepreneur in

innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress. 3. MONETISATION Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial banks branches. 4. INFLUENCE ECONOMIC ACTIVITY Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity. 5. FACILITATOR OF MONETARY POLICY Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact. 6. PROMOTE GROWTH WITH STABILITY Banks regulate the rate of investment by influencing the rate of interest. The primary function of RBI was to regulate the issue of banks notes and keep adequate reserve to ensure monetary stability. 7. PROMOTE BALANCED RESIOANL DEVELOPMENT By opening branches in backward areas the bank make credit facilities available here. Also, the funds collected in developed regions through deposits may be channelized for investment in the underdeveloped regions of the country. 8. FINANCING THE PRIORITY SECTORS The banks and financial institutions operate in a manner as to confirm the priorities of development and not in terms of return their capital. The banks now play a more positive role.

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CLASSIFICATION OF BANKING SYSTEM IN INDIA
Indian banking industry has been divided into two parts, organized and unorganized sectors. The organized sector consists of Reserve Bank of India, Commercial Banks, Co-operative Banks and also Specialized Financial Institutions (IDBI, NABARD, SIDBI, EXIM etc). The unorganized sector, which is not homogeneous, is largely made up of money lenders and indigenous bankers.

An outline of the Indian Banking structure may be presented as follows:1. Central Bank (Reserve banks of India). 2. Indian commercial banks. A. Scheduled Commercial Banks a. State Bank of India and its Associates2 b. Nationalised Banks c. Foreign Banks d. Regional Rural Banks e. Other Scheduled Commercial Banks. B. Non-Scheduled Commercial Banks 3. Development banks NABARD IDBI SIDBI EXIM

4. Co-operative banks.

The subsidiaries to State Bank of India are: (i) The State Bank of Bikaner & Jaipur; (ii) The State Bank of Hyderabad; (iii) The State Bank of Indore; (iv) The State Bank of Mysore; (v) The State Bank of Mysore; (v) The State Bank of Patiala; (vi) The State Bank of Saurashtra; and (vii) The State Bank of Travancore.

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CENTRAL BANK
A central bank is the apex financial institution in the banking and financial system of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. Indias central bank is the Reserve Bank of India established in1935. A central bank is usually state owned but it may also be a private organization. For instance, the Reserve Bank of India (RBI), was started as a shareholders organization in 1935, however, it was nationalized after independence, in 1949. It is free from parliamentary control.

Reserve Bank of India The Reserve Bank of India is a Central Bank and was established in April 1, 1935 in accordance with the provisions of reserve bank of India act 1934. The central office of RBI is located at Mumbai since inception. Though originally the reserve bank of India was privately owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. RBI is governed by a central board (headed by a governor) appointed by the central government of India. RBI has 22 regional offices across India. The reserve bank of India was nationalized in the year 1949. The general superintendence and direction of the bank is entrusted to central board of directors of 20 members, the Governor and four deputy Governors, one Governmental official from the ministry of Finance, ten nominated directors by the government to give representation to important elements in the economic life of the country, and the four nominated director by the Central Government to represent the four local boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Board consists of five members each central government appointed for a term of four years to represent territorial and economic interests and the interests of cooperative and indigenous banks.

The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory basis of the functioning of the bank. The bank was constituted for the need of following: To regulate the issues of banknotes. To maintain reserves with a view to securing monetary stability

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To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows: Bank of Issue: The RBI formulates, implements, and monitors the monitory policy. Its main objective is maintaining price stability and ensuring adequate flow of credit to productive sector. Regulator-Supervisor of the financial system: RBI prescribes broad parameters of banking operations within which the countrys banking and financial system functions. Their main objective is to maintain public confidence in the system, protect depositors interest and provide cost effective banking services to the public. Manager of exchange control: The manager of exchange control department manages the foreign exchange, according to the foreign exchange management act, 1999. The managers main objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issuer of currency: A person who works as an issuer, issues and exchanges or destroys the currency and coins that are not fit for circulation. His main objective is to give the public adequate quantity of supplies of currency notes and coins and in good quality. Developmental role: The RBI performs the wide range of promotional functions to support national objectives such as contests, coupons maintaining good public relations and many more. Related functions: There are also some of the related functions to the above mentioned main functions. They are such as, banker to the government, banker to banks etc. Banker to government performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks maintains banking accounts to all scheduled banks. Controller of Credit: RBI performs the following tasks: It holds the cash reserves of all the scheduled banks. It controls the credit operations of banks through quantitative and qualitative controls. It controls the banking system through the system of licensing, inspection and calling for information.

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It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Supervisory Functions: In addition to its traditional central banking functions, the Reserve Bank performs certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act 1934 and the banking regulation act 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

Promotional Functions: With economic growth assuming a new urgency since independence, the range of the Reserve Banks functions has steadily widened. The bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies.

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ADVANCES TO PRIORITY SECTORS AND CREDIT GUARANTEE SCHEMES
As far back as in 1967-68, the RBI in its credit policy has introduced the concept of Priority Sector Lending to tide over the severe imbalances, existed then both in agricultural and industrial fronts. In order to channelise the flow of credit to the priority sectors RBI had enunciated a credit policy. The major impediment before the introduction of the concept of PSL was that for various historical reasons, the bulk of bank advances was directed towards medium and large scale industries and big business houses, whereas, sectors like culture, small scale industries and export were languishing for want of funds. The concept of PSL was evolved to ensure the flow of adequate credit from banks to certain prioritised segments of the economy, as enunciated in the national planning priorities To give incentive to banks for lending to small borrowers under priority sector. The RBI in January 1971 has set up the Credit Guarantee Corporation of India Limited, Now known as the Deposit Insurance and Credit Guarantee Corporation. The idea was to administer a comprehensive credit guarantee scheme for loans by banks to the individual small borrowers under the priority sector. During the period of social control of banks, major banks did make an attempt to assist the agricultural sector by providing credit for marketing of agricultural products. Despite commercial banks' lending to agriculture under (a) direct financing and (b) indirect financing, the lending towards agriculture did not exceed two per cent of the total credit. It was in the post-bank nationalisation period only the PSL and mass banking concepts were crystalized for the purpose of credit deployment. After the bank nationalisation in July, 1969, RBI has adopted lending to the following broad segments under priority sector: (a) agriculture, (b) small scale industries and (c) exports. The composition of the priority sector remained somewhat vague even after the bank nationalisation. There was wicle variation as far as compiling PSL data are concerned among various banks. Later a more comprehensive classification of categories under PSL was evolved and adopted on the basis of a report submitted by Informal Study Group on statistics relating to priority sectors constituted by RBI.3

Reserve Bank of India, Annual Report, 1976-77, Bombay.

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CATEGORIES OF PRIORITY SECTOR: The broad categories of priority sector for all scheduled commercial banks are as under: (i) Agriculture (Direct and Indirect finance): Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and to others (such as corporates, partnership firms and institutions) up to Rs. 20 lakh, for taking up agriculture/allied activities.Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in Section I, appended. (ii) Small Scale Industries (Direct and Indirect Finance): Direct finance to small scale industries (SSI) shall include all loans given to SSI units which are engaged in manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) excluding land and building does not exceed the amounts specified in Section I, appended. Indirect finance to SSI shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector. (iii) Small Business / Service Enterprises shall include small business, retail trade, professional & self employed persons, small road & water transport operators and other service enterprises as per the definition given in Section I and other enterprises that are engaged in providing or rendering of services, and whose investment in equipment does not exceed the amount specified in Section I, appended. (iv) Micro Credit: Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semiurban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards, will constitute micro credit. (v) Education loans: Education loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those granted to institutions; (vi) Housing loans: Loans up to Rs. 15 lakh for construction of houses by individuals, (excluding loans granted by banks to their own employees) and loans given for

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repairs to the damaged houses of individuals up to Rs.1 lakh in rural and semiurban areas and up to Rs.2 lakh in urban areas. In addition to the above, various other schemes were introduced for the benefit of the priority sectors like the: (a) National rural employment programme (NREP) which basically dealt with the problem of unemployment and underemployment in the rural areas. (b) Rural landless employment guarantee programme (RLEGP) more specifically to tackle the problem of unemployment among the landless and create durable assets for strengthening the rural infrastructure. (c) Self Employment Scheme for Educated Unemployed Youth (SEEUY) SEEUY was launched by the then Prime Minister on 15 august, 1983 to provide self employment opportunities to the educated unemployed youth who are matriculates for starting industry, service and business avocations by providing subsidy through Government and loan by Commercial banks. (d) Development of Women and Children in Rural Areas (DWCRA) DWCRA is a subscheme of IRDP. This was started in 1982-83 wit11 the main objective of focussing attention towards women members of the BPL rural families. This scheme was started to provide self-employment opportunities to women without depending upon their men folk. This scheme is a group activity with 10 to 15 women each for taking up economic activities suited to their skill and aptitude. A group strategy is adopted to motivate the rural women to come together and break social bonds, which have denied them income generating opportunities.

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COMMERCIAL BANKS
For any financial system to mobilize and allocate savings of the country successfully and productively and to facilitate day-to-day transactions there must be a class of financial institutions that the public view as safe and convenient outlets for its savings. In virtually all countries, the single dominant class of institutions that emerged as both the respiratory of a dominant class of the societys liquid savings and the entity through which payments are made is the Commercial Banks.

The commercial banks in India play a major role in the development of the country itself. These banks are primarily concerned with providing loans and accepting deposits. Several ot her facilities are also provided by the commercial banks in India. At the same time, the commercial banks in India have the opportunity to develop manifold in the future because the economy of India is developing at a good pace and thus the financial institutions of the country are bound to develop with this growth. The name commercial banking may suggest a number of things, but the term is used to differentiate the other forms of banking from this particular form. The commercial banks in India generate funds for the purpose of financing their various financial requirements through a definite process. The commercial banks in India accept deposits from different sources like businesses and individuals. A wide range of financial products have been developed by these banks to encourage the savings habit of the clients. There are savings deposits, term deposits and many more to attract the investors. These deposits are recycled in the economy through the loans and other credit products. Commercial banks are divided into: (a) Scheduled Commercial Banks are grouped under following categories: i. ii. iii. iv. v. State Bank of India and its Associates Nationalised Banks Foreign Banks Regional Rural Banks Other Scheduled Commercial Banks.

(b) Non-Scheduled Commercial Banks

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Scheduled Banks: Scheduled Banks in India constitute those banks which have been included in the second schedule of RBI Act 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide Section 42(6a) of the Act. Scheduled banks in India means the State Bank of India constituted under the State Bank of India Act, 19554, a subsidiary bank as defined in the State Bank of India (subsidiary banks) Act, 19595, a corresponding new bank constituted under section 3 of the Banking companies (Acquisition and Transfer of Undertakings) Act, 19806 or any other bank being a bank included in the Second Schedule to the Reserve bank of India Act, 19347 but does not include a co-operative bank. For the purpose of assessment of performance of banks, the Reserve Bank of India categories those banks as public sector banks, old private sector banks, new private sector banks and foreign banks, i.e. private sector, public sector, and foreign banks come under the umbrella of scheduled commercial banks.

The role and functions of the Scheduled Financial institutional banks are discussed below: 1. They constitute an important source of long term finance to industry. Over a period of time, there has been a steady growth in the number of industrial units assisted, and in the amount of loan sanctioned and distributed by Scheduled Financial Institutions. 2. Scheduled Financial Institutions have played an important role in the development of (a) Small scale industry, and (b) Projects in backward areas. 3. They have helped new and small entrepreneurs in setting up industry. 4. Through their operations involving underwriting of and direct subscription to the issue of shares and debentures, they have been important players in the capital market. These operations have a favourable impact on the ability of industrial concerns to raise funds from capital market.

4 5

(23 of 1955) (38 of 1959) 6 (40 of 1980), 7 (2 of 1934),

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5. These institutions have improved the allocation of funds to industry and thus, have aided in better use of the available resources for the economic development of the country. 6. SFIs have been a source of technical and managerial advice to the industry. They have also helped in identification, evaluation and execution of new investment projects. 7. These institutions have been helpful in the establishment of concerns which required extra-ordinarily large amounts of finance for their projects with a long gestation period Regional rural bank: The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs. Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs. 5 Crores. There are several concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and to attend their problems. Unscheduled Banks: Unscheduled Bank in India means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank

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DEVELOPMENT BANKS
Development Banks should be understood as institutions whose primary interest lies in financing or they may (and they do mostly) undertake development utilities as well. In other words, institutions undertaking financial and developmental functions are considered as development banks. Structure of Development Banks/ Development Financial Institutions During the post-independence period, India is well-served by a network of development banks, at the national as well as state levels. At present, there are seven all India industrial development banks, viz. (1) National Bank for Agriculture and Rural development of India (NABARD) (2) The Small Industries Development Bank of India (SIDBI) (3) The Industrial Development Bank of India (IDBI) (4) Export Import Bank of India (EXIM)

NABARD (National Bank for Agriculture and Rural Development) NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It is an apex refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas It 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. It co-ordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India and other national level institutions concerned with policy formulation. It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions. It undertakes monitoring and evaluation of projects refinanced by it. It promotes research in the fields of rural banking, agriculture and rural Development NABARD also offers various credit facilities like: 1. Short-term/ Medium term/ Long-term refinance for various types of

production/marketing/ procurement activities at attractive interest rates to various

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organizations, societies, Govts etc. Investment Credit (Medium and Long Term) Refinance with a mission of Accelerating Private Capital Formation to Promote Sustainable and Equitable Agriculture and Rural Prosperity with Refinance as Lever 2. Rural Infrastructure Development Fund (RIDF) is a fund to promote the investment in infrastructure for agriculture. State Governments as well as Panchayat Raj Institutions (PRIs), Non-Governmental Organisations, Self-Help Groups, etc. are eligible to borrow out of RIDF for their schemes like ongoing Irrigation, Flood Protection, Watershed Management projects, rural Road & Bridge projects, Primary and Secondary Schools, Primary Health Centers, Village Haats, Joint Forest Management, Terminal and Rural Market/Godowns, Rain Water Harvesting, Watershed development, flood protection, drainage, Cold Storage, Riverine Fisheries, Fishing Harbour & Jetties, Mini/Small Hydel Projects in Power Sector, Rural Drinking Water Supply Schemes, Citizen Information Centres, Modern abottoir, Seed/Agri./Hori. Farms, etc. 3. Rural Farm and Non Farm Sector Schemes 4. Refinance for Rural Housing Facilities scheme provides Credit to the Individuals, Co-operative Housing Societies, Public Bodies, Housing Boards/ Housing Development Authorities/ Improvement, Trusts, Local Bodies, Voluntary agencies and NGOs, Housing Finance Companies registered, with NHB for finance extended by them to housing projects in the 'rural' areas only. The finance is provides for Construction of New Houses as well as Repairs/Renovation of existing houses in rural areas/ Rainwater Harvesting Structures/ Sanitary Latrines, etc. 5. Under the Micro Credit Innovation scheme, NABARD facilitates sustained access to financial services for the unreached poor in rural areas through various microfinance innovations in a cost effective and sustainable manner 6. NABARD has been designated the Implementing Agency for implementing the Revival Package in all the states. The Department for Cooperative Revival and Reforms (DCRR) has been constituted in NABARD for this purpose. NABARD is providing dedicated manpower at the national, state and district levels for implementing the Package. 7. Loans to State Governments for funding equity of Co-operative Credit Institutions. 8. NABARD has formulated a Model scheme for issue of Kisan Credit Cards to farmers, on the basis of their land holdings, for uniform adoption by banks, so that the

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farmers may use them to readily purchase agricultural inputs such as seeds, fertilisers, pesticides, etc. and also draw cash for their production needs. Farmers have to get in touch with Authorised banks to use this facility not normally eligible for assistance under this fund. 9. SWAROJGAR CREDIT CARD SCHEME aims at providing adequate and timely credit ie. working capital or block capital or both to small artisans, handloom weavers, service sector, fishermen, self employed persons, rickshaw owners, other microentrepreneurs, SHGs, etc from the banking system in a flexible, hassle free and cost effective manner. Borrowers in urban areas can be covered under SCC Scheme. 10. NABARD Consultancy Services (Nabcons) is engaged in providing consultancy in all spheres of agriculture, rural development and allied areas. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional

development, infrastructure, training, etc., internalized for more than two decades.

SIDBI (Small Scale Industrial Development Bank of India) The SIDBI was set up in October 1989 under the Act of parliament as a wholly owned subsidiary of the IDBI. It is the central or apex or principal institution which oversees coordinates and further strengthens various arrangements for providing financial and nonfinancial assistance to small-scale, tiny, and cottage industries. SIDBI objectives are: To initiate steps for technological up gradation and modernization of existing units To expand channels for marketing of SSI sector products in India and abroad To promote employment-oriented industries in semi-urban areas and to check migration of population to big cities. It operates two funds: a) Small Industries Development Fund and b) Small Industries Development Assistance Fund.

The operation of the former and of National Equity Fund which were earlier looked by IDBI is now handled by the SIDBI. Its financial assistance is channeled through the existing credit delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, co-operative banks and RRBs. The total number of institutions are eligible for assistance from SIDBI is

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900. It discounts and rediscounts bills arising from the sale of machinery to small units; extends seed capital/soft loan assistance through National Equity Fund and through seed capital schemes of specialized lending institutions; refinance loans; and provide services like factoring, Leasing and so on. The union budget 1996-97 envisaged a number of measures to develop small-scale sector with SIDBI as the focal point. They include: 1. SIDBI will now refinance the SFCs and commercial banks for modernization projects upto Rs 50 lakhs from unutilized corpus of about Rs 75 crore; 2. SIDBIs refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc. for composite loans will be doubled to Rs 100 lakhs 3. SIDBI will participate in venture capital funds set up by public sector institutions as well as private companies up to 50 percent of the total corpus of the fund, provided such fund is dedicated to the financing of small-scale industry; 4. SIDBI will provide refinance lending institutions which are now permitted to lend to SSI units seeking ISO certification of quality. Since its inception SIDBI has provided assistance to the entire SSIs sector including tiny, village, and cottage industries through suitable schemes tailored to meet the requirement of setting up of new products, expansions, diversifications, modernization, and rehabilitation. It has provided equity capital, domestic and foreign currency term loans, working capital finance, etc.

IDBI (Industrial Development Bank of India) The IDBI was set up as a wholly-owned subsidiary of the RBI on July 1, 1964 under the Act of parliament, and by merging the Industrial Refinance Corporation (IRC) which, in turn, was setup by the government earlier in June 1958. In February 1976, the IDBI was delinked from the RBI and since then, it has become a separate and independent entity wholly owned by the government. It is now the central or apex institution in the field of industrial finance. Its main objective is to provide credit, term finance and financial services for the establishment of new projects as well as expansion, diversification, modernization and technology up gradation of the existing industrial enterprise in order to bring about industrial development in the country. It also provides several diversified financial products of nonproject nature such as equipment finance, asset credit and equipment leasing, merchant banking, debenture trusteeship and Forex services to corporate.

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It functions as a development financing agency in its own right, in addition to its work of co-coordinating, supplementing, and monitoring the operations of other term lending institutions in the country. It also provides indirect assistance in the form of discounting/rediscounting long term bills/promissory notes of term loans given by SFCs, banks and so on and subscribing to resources of notified financial institutions such as SFCs, ICICI,IRBI, and so on. There are more than 850 primary lending institutions which are eligible for refinancing facilities of the IDBI. It also takes up various promotional activities such as balance development of regions, entrepreneurship development, technology development, and so on. During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country. IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of products and services, covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green field projects as also for expansion, modernisation and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients. IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms. IDBI has played a pioneering role, particularly in the pre-reform era (1964-91),in catalyzing broad based industrial development in the country in keeping with its Government-ordained development banking charter. In pursuance of this mandate, IDBIs activities transcended the confines of pure long-term lending to industry and encompassed, among others, balanced industrial growth through development of backward areas, modernization of specific industries, employment generation, entrepreneurship development along with support services for creating a deep and vibrant domestic capital market, including development of apposite institutional framework.

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The migration to the new business model of commercial banking, with its gateway to lowcost current, savings bank deposits, would help overcome most of the limitations of the current business model of development finance while simultaneously enabling it to diversify its client/asset base. IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation Bank. The Private Bank was the fastest growing banking company in India. The bank was pioneer in adapting to policy of first mover in tier 2 cities. The Bank also had the least NPA and the highest productivity per employee in the banking industry. Main Functions of IDBI: 1. IDBI coordinates between various financial institutions who are highly involved in pr oviding financial assistance, promoting, and developing various industrial units 2. IDBI is also engaged in a variety of promotional activities such as development programs for the fresh entrepreneurs, planning of consultancy services for both the small scale enterprises and the medium sized industrial units 3. IDBI works for the advancement of technology and other welfare schemes to ensure economic development. 4. Industrial Development Bank of India acts as a catalyst in various industrial development programs 5. IDBI provides financial assistance to all kinds of industrial units which comes under the provisions of the IDBI Act 6. IDBI has served various industrial sectors in India for about three years and has grown leaps and bounds in its size and operating units

EXPORT-IMPORT BANK OF INDIA (EXIM BANK) The EXIM bank was set up in January 1982 as a statutory corporation wholly owned by central government. Its paid up capital in 1988-89 was Rs 220.50 crores. Activities performed by EXIM Bank: 1. It grants direct loans in India and outside for the purpose of imports and exports 2. Refinances loans to banks and other notified financial institutions for the purpose of international trade ; 3. Rediscounts usance export bills for banks;

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4. Provide overseas investment finance for Indian companies toward their equity particip ation in joint venture abroad and guarantees, along with banks, obligations on behalf of project exporters; 5. It is also a co-coordinating agency in the field of international finance and it undertakes development of merchant banking activities in relation to export oriented industries; Thus it provides fund based as well as non fund based assistance in the foreign trade sector. The main objective of Export-Import Bank (EXIM Bank) is to provide financial assistance to promote the export production in India. The financial assistance provided by the EXIM Bank widely includes the following: Direct financial assistance Direct financial assistance Foreign investment finance Term loaning options for export production and export development Pre-shipping credit Buyer's credit Lines of credit Re-loaning facility Export bills rediscounting Refinance to commercial banks

The Export-Import Bank also provides non-funded facility in the form of guarantees to the Indian exporters Various Stages of Exports Covered by EXIM BankDevelopment of export makers Expansion of export production capacity Production for exports Financing post-shipment activities Export of manufactured goods Export of projects Export of technology and software

ROLE OF BANKING INSTITUTUIONS IN INDIA 2014

CO-OPERATIVE SOCIETIES
Co-operative banks in this country are the part of vast and powerful structure of cooperative institution which is engaged in task of production, processing, marketing, distribution, servicing and banking in India. The cooperative banking system in this country were started around 1904, when official efforts were made for create new type of institution based on principle of co-operative organisation and management, which were considered to be suitable for solving the problem peculiar to Indian conditions. In rural areas, as far as agriculture and related activities are concerned, supply of credit was inadequate and money lenders would exploit the poor people in rural areas providing them loans at higher rates. Co-operative banks in India are registered under cooperative societies act. The co-operative banks are also regulated by RBI and governed by Banking Regulation Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Establishments: 1. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. 2. Co-operative Banks belong to the money market as well as to the capital market. 3. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. 4. UCBs provide working capital loans and term loan as well. Functions 1. Co-operative Banks are organised and managed on the principal of co-operation, selfhelp, and mutual help. They work on the basis of no profit no loss. Profit maximization is not their goal. 2. Cooperative banks do banking business mainly in the agriculture and rural sector.How ever, UCBs, SCBs, and CCBs operate in semi-urban, urban, and metropolitan areas also. 3. The State Co-operative Banks (SCBs), Central Cooperative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans up to Rs 1 lakh to an

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individual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures

A. Cooperative banks in India finance rural areas under: Farming Cattle Milk Hatchery Personal finance

B. Cooperative banks in India finance urban areas under: Self-employment Small scale units Home finance Consumer finance Personal finance

Some facts about Cooperative banks in India: Some cooperative banks in India are more forward than many of the state and private sector banks. According to NAFCUB the total deposits & lending of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele.

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CONCLUSION
___________________________________________________________________________ We can conclude that the financial sector is a nerve system of Indian economy. Banking plays an important role in development of economy. For steady growth in economy innovations and development in financial sector is very important. Economy of any country faces lots of challenges and problems. To tackle those problems financial sector plays a vital role. The financial sector makes the economy efficient to the extent where it can rival other developed economies in the world. Financial sector also faces lots of problems but it should develop certain strategies to come out of these problems which is very important for healthy growth of economy. The banking system in India has undergone significant changes during last 16 years. There have been new banks, new instruments, new windows, new opportunities and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment incomes, it has also entailed greater competition and consequently greater risks. India adopted prudential measures aimed at imparting strength to the banking system and ensuring its safety and soundness, through greater transparency, accountability and public credibility. Banking sector reform has been unique in the world in that it combines a comprehensive reorientation of competition, regulation and ownership in a non-disruptive and cost-effective manner. Indeed banking reform is a good illustration of the dynamism of the public sector in managing the overhang problems and the pragmatism of public policy in enabling the domestic and foreign private sectors to compete and expand. There has been no banking crisis in India. The Government took steps to reduce its ownership in nationalised banks and inducted private ownership but without altering their public sector character. The underlying rationale of this approach is to assure that the salutary features of public sector banking were not lost in the transformation process. On account of healthy market value of the banks shares, the capital infusion into the banks by the Government has turned out to be profitable for the Government.

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BIBLIOGRAPHY
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BOOKS 1. Tannan, M.L. and Datta, C.R. Tannan's Banking Law and Practice in India, Indian Law House, New Delhi, 1997. 2. Vasudevan, S.V. Theory of Banking, S. Chand &Company Ltd, New Delhi, 1984. 3. Sundharanl, K.P. Varshney, P.N. Banking Theory Law and Practice, Sultan Chand & Sons, New Delhi, 1987. 4. Panicker, K.K. Banking theory and systems, S. Chand and Co. Ltd. New Delhi 2010. 5. Davar, S.R. Law and Practice of Banking, Progressive Corporation Private Ltd, Bombay, 1986.

WEBSITE:
http://www.scribd.com/doc/9669980/Indian-Banking-and-Economy http://www.scribd.com/doc/21923483/ROLE-OF-BANKS-IN-INDIAN-ECONOMY http://download.nos.org/srsec319/319-20.pdf http://shodhganga.inflibnet.ac.in/bitstream/10603/2031/10/10_chapter%201.pdf