CHAPTER-2

INDIAN BANKING INDUSTRY

MEANING OF BANK

Bank is a lawful organisation, which accepts deposits that can be withdrawn

on demand. It also lends money to individuals and business houses that
need it.

ROLE OF BANKING
Banks provide funds for business as well as personal needs of individuals.
They play a significant role in the economy of a nation. Let us know about
the role of banking.
It encourages savings habit amongst people and thereby makes funds
available for productive use.
It acts as an intermediary between people having surplus money and those
requiring money for various business activities.
It facilitates business transactions through receipts and payments by
cheques instead of currency.
It provides loans and advances to businessmen for short term and longterm purposes.
It also facilitates import-export transactions.
It helps in national development by providing credit to farmers, small-scale
industries and self-employed people as well as to large business houses
which lead to balanced economic development in the country.
It helps in raising the standard of living of people in general by providing
loans for purchase of consumer durable goods, houses, automobiles, etc.

TYPES OF BANKS
On the basis of functions, the banking institutions in India may be divided into the
following types:
1. Central Bank (RBI, in India)
2. Commercial Banks
Public Sector Banks
Private Sector Banks
Foreign Banks
3. Development Banks (IFCI, SFCs)
4. Co-operative Banks
Primary Credit Societies
Central Co-operative Banks
State Co-operative Banks
5. Specialised Banks (EXIM Bank, SIDBI, NABARD)
Central Bank
A bank which is entrusted with the functions of guiding and regulating the
banking system of a country is known as its Central bank. Such a bank does
not deal with the general public. It acts essentially as Governments banker,
maintain deposit accounts of all other banks and advances money to other
banks, when needed. The Central Bank provides guidance to other banks
whenever they face any problem. It is therefore known as the bankers bank.
Functions of Central Bank
The Reserve Bank of India is the central bank of our country.
The Central bank functions as a banker, agent and financial adviser to the
government. It maintains record of Government revenue and expenditure
under various heads.
It also advises the Government on monetary and credit policies and decides
on the interest rates for bank deposits and bank loans.
The central bank acts as the bankers' bank in three capacities:
(a) custodian of the cash preserves of the commercial banks;

(b) as the lender of the last resort; and (c) as clearing agent.
In this way, the central bank acts as a friend, philosopher and guide
to the commercial banks.
In addition, foreign exchange rates are also determined by the central bank.
Another important function of the Central Bank is the issuance of currency
notes, regulating their circulation in the country by different methods. No
other bank than the Central Bank can issue currency.
Commercial Banks
Commercial banks are the financial institutions that accept deposits from the
people and advances loans. Commercial Banks also create credit. In India,
such banks alone called commercial banks which are established in
accordance with the provision of the Banking Regulation Act, 1949.
Functions Of Commercial Banks
The functions of commercial banks are of two types.
(a) Primary functions; and
(b) Secondary functions
Primary functions
The primary functions of a commercial bank includes:
(i) Accepting deposits: The most important activity of a commercial bank is to
mobilise deposits from the public. People who have surplus income and
savings find it convenient to deposit the amounts with banks. Banks give
interest on this deposit.
(ii)
Granting loans and advances: The second important function of a
commercial bank is to grant loans and advances. Such loans and advances
are given to members of the public and to the business community at a
higher rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies according to the
purpose and period of loan and also the mode of repayment.
Loans: Loan is a sum of money that is expected to be paid back with
interest.

 A loan is granted for a specific time period.

Generally commercial banks provide short-term loans.
But term loans, i.e., loans for more than a year may also be
granted.
The borrower may be given the entire amount in lump sum or in
instalments.
Loans are generally granted against the security of certain assets.
Advances: An advance is a credit facility provided by the bank to its
customers. It differs
from loan in the sense that loans may be granted for
longer period, but advances are normally granted for a short period of time.
Further the purpose of granting advances is to meet the day-to-day
requirements of business. The rate of interest charged on advances varies
from bank to bank.
Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft
and bill discounting.
Cash Credit
Cash credit is an arrangement whereby the bank allows the borrower to draw
amount upto a specified limit. The amount is credited to the account of the
customer.
Overdraft
Overdraft is also a credit facility granted by bank. A customer who has a
current account with the bank is allowed to withdraw more than the amount
of credit balance in his account.
Discounting of Bills
Banks provide short-term finance by discounting bills, that is, making
payment of the amount before the due date of the bills after deducting a
certain rate of discount.
Secondary functions
In addition to the primary functions of accepting deposits and lending money,
banks perform a number of other functions, which are called secondary
functions. These are as follows:
Issuing letters of credit, travellers cheque, etc.

Undertaking safe custody of valuables, important documents and securities

by providing safe deposit vaults or lockers.
Providing customers with facilities of foreign exchange dealings.
Standing guarantee on behalf of its customers, for making payment for
purchase of goods, machinery, vehicles etc.
Collecting and supplying business information.
Providing reports on the credit worthiness of customers.
Types of Commercial banks
Commercial banks are of three types i.e., Public sector banks, Private sector
banks and Foreign banks.
Public Sector Banks:
These are banks where majority stake is held by the Government of India or
Reserve Bank of India. Examples of public sector banks are: State Bank of
India, Corporation Bank, Bank of Baroda and Dena Bank, etc.
Private Sectors Banks:
In case of private sector banks majority of share capital of the bank is held by
private individuals. These banks are registered as companies with limited
liability. For example: The ICICI Bank, Axis Bank, Federal Bank etc.
Payment Banks and Small Banks:
The Reserve Bank of India has introduced the concept of Payment Banks and
Small Banks. These banks can offer deposit and remittances but it is
compulsory for them to invest all their funds in safe investments such as
government securities. The Reserve Bank of India is still to announced the
rules for such banks. Post offices may be considered to be made into payment
banks.
Foreign Banks:
These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Some of the foreign banks
operating in our country are Hong Kong and Shanghai Banking Corporation
(HSBC), Citibank, American Express Bank, Standard & Chartered Bank,
Grindlays Bank, etc. The number of foreign banks operating in our country
has increased since the financial sector reforms of 1991.

Note: According to a report by RBI there are 47 Foreign Banks branches

in India as on March 31, 2013.
Development Banks
Business often requires medium and long-term capital for purchase of
machinery and equipment, for using latest technology, or for expansion and
modernization. Such financial assistance is provided by Development Banks.
They also undertake other development measures like subscribing to the
shares and debentures issued by companies, in case of under subscription of
the issue by the public. Industrial Finance Corporation of India (IFCI) and State
Financial Corporations (SFCs) are examples of development banks in India.
Co-operative Banks
People who come together to jointly serve their common interest often form
a co-operative society under the Co-operative Societies Act. When a cooperative society engages itself in banking business it is called a Cooperative Bank. The society has to obtain a licence from the Reserve Bank of
India before starting banking business. Any co-operative bank as a society has
to function under the overall supervision of the Registrar, Co-operative
Societies of the State. As regards banking business, the society must follow
the guidelines set issued by the Reserve Bank of India.
Types of co-operative banks
There are three types of co-operative banks operating in our country. They
are primary credit societies, central co-operative banks and state co-operative
banks. These banks are organized at three levels, village or town level, district
level and state level.
Primary Credit Societies:
These are formed at the village or town level with borrower and nonborrower members residing in one locality. The operations of each society are
restricted to a small area so that the members know each other and are able
to watch over the activities of all members to prevent frauds.
Central Co-operative Banks:
These banks operate at the district level having some of the primary credit
societies belonging to the same district as their members. These banks

provide loans to their members (i.e., primary credit societies) and function as
a link between the primary credit societies and state co-operative banks.
State Co-operative Banks:
These are the apex (highest level) co-operative banks in all the states of the
country. They mobilise funds and help in its proper channelisation among
various sectors. The money reaches the individual borrowers from the state
co-operative banks through the central co-operative banks and the primary
credit societies.
Specialised Banks
There are some banks, which cater to the requirements and provide overall
support for setting up business in specific areas of activity. EXIM Bank, SIDBI
and NABARD are examples of such banks. They engage themselves in some
specific area or activity and thus, are called specialised banks and are
Development Financial Institutions. Let us know about them.
Export Import Bank of India (EXIM Bank)
Exim bank was established in the year 1982.
It is headquartered in Mumbai, India.
If you want to set up a business for exporting products abroad or
importing products from foreign countries for sale in our country, EXIM
bank can provide you the required support and assistance.
The bank grants loans to exporters and importers and also provides
information about the international market
Small Industries Development Bank of India (SIDBI)
SIDBI was established in the year 1990.
Its headquarters is in Lucknow.
If you want to establish a small-scale business unit or industry, loan on
easy terms can be available through SIDBI.
It also finances
modernisation of small-scale industrial units, use of new technology
and market activities. The aim and focus of SIDBI is to promote, finance
and develop small-scale industries.
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

National Bank for Agriculture and Rural Development (NABARD) is an

apex development bank in India established on 12 July 1982.
Its headquarters is in Mumbai (Maharashtra).
The Committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD), set up by the Reserve
Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman,
conceived and recommended the establishment of the National Bank
for Agriculture and Rural Development (NABARD).
ROLE AND FUNCTIONS
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.
NABARD refinances the financial institutions which finances the rural
sector.
The institutions which help the rural economy, NABARD helps develop.
NABARD also keeps a check on its client institutes.
It regulates the institution which provides financial help to the rural
economy.
It provides training facilities to the institutions working in the field of
rural upliftment.
It regulates the cooperative banks and the RRBs.
It promotes research in the fields of rural banking, agriculture and rural
development.
Subsidiaries of NABARD
Nab cons: NABARD Consultancy Services (Nabcons) is a wholly owned
subsidiary promoted by National Bank for Agriculture and Rural

Development (NABARD) and is engaged in providing consultancy in all

spheres of agriculture, rural development and allied areas.
NABARD Financial Services Limited, [NABFINS]: It is a subsidiary of
NABARD with equity participation from NABARD (owns 68%), Government
of Karnataka, Canara Bank Union Bank of India, Bank of Baroda,
Dhanalakshmi Bank and Federal Bank. It is a non-deposit taking NBFC
registered with the Reserve Bank of India and shall operate throughout
India. The main objectives of the Company are to provide financial services
in two broad areas of agriculture and microfinance.
Agri Business Finance (AP) Limited (ABFL) : It was incorporated under
Companies Act., 1956 on 17 February 1997. It is a state specific financial
institution registered as Non Banking Finance Company. ABFL was
incorporated with the objective of providing credit and to offer facilities
for promotion, expansion, commercialization and modernization of
enterprises engaged in Agriculture and allied activities.
BANKERS INSTITUTE OF RURAL DEVELOPMENT (BIRD)
Established in 1983, at Lucknow, is an autonomous institute promoted and
funded by NABARD. BIRD was established primarily to cater to the training
needs of RRB personnel. The Institute, has, since 1st April 1992, been
catering to the training and information needs of rural bankers through its
topical training programs/seminars. The Institute's mandate also includes
Research and Consultancy in the related areas.

RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF)

The Rural Infrastructure Development Fund (RIDF) continues to sanction
and disburse funds to State Governments. The Rural Infrastructure
Development Fund (RIDF) is operated by NABARD with funds raised from
the scheduled commercial banks (public sector banks and private sector)

which are unable to meet their targets for priority sector and/or agriculture
lending.
NON BANKING FINANCIAL COMPANIES (NBFCs)
A Non-Banking Financial Company (NBFC) is a company a) registered under
the Companies Act. 1956, b) its principal business is lending, investments in
various types of shares/stocks/bonds/debentures/securities, leasing, hirepurchase, insurance business, chit business, and c) its principal business is
receiving deposits under any scheme or arrangement in one lump sum or in
installments. However, a Non-Banking Financial Company does not include
any institution whose principal business is agricultural activity, industrial
activity, trading activity or sale/purchase/construction of immovable
property. NBFCs whose asset size is of Rs.100 cr or more as per last audited
balance sheet are considered as systemically important NBFCs. The rationale
for such classification is that the activities of such NBFCs will have a bearing
on the financial stability in our country.
The Reserve Bank of India regulates and supervises Non-Banking Financial
Companies which are into the business of (i) lending (ii) acquisition of shares,
stocks, bonds, etc., or (iii) financial leasing or hire purchase. The Reserve Bank
also regulates companies whose principal business is to accept deposits.
(Section 45I (c) of the RBI Act, 1934)
The Reserve Bank has been given the powers under the RBI Act 1934 to
register, lay down policy, issue directions, inspect, regulate, supervise and
exercise surveillance over NBFCs that meet the 50-50 criteria of principal
business. The Reserve Bank can penalize NBFCs for violating the provisions of
the RBI Act or the directions or orders issued by RBI under RBI Act. The penal
action can also result in RBI cancelling the Certificate of Registration issued to
the NBFC, or prohibiting them from accepting deposits and alienating their
assets or filing a winding up petition.
Differences between NBFCs and Banks
NBFCs lend and make investments and hence their activities are akin to that
of banks; however there are a few differences as given below:
i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot
issue cheques drawn on itself;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks.
MODERN MODES OF TRANSACTION
E-banking (Electronic Banking)
With advancement in information and communication technology, banking
services are also made available through computer. Now, in most of the
branches you see computers being used to record banking transactions.
Information about the balance in your deposit account can be known through
computers. In most banks now a days human or manual teller counter is
being replaced by the Automated Teller Machine (ATM). Banking activity
carried on through computers and other electronic means of communication
is called electronic banking or e-banking.
Automated Teller Machine (ATM)

Banks have now installed their own Automated Teller Machine (ATM)
throughout the country at convenient locations. By using this, customers can
deposit or withdraw money from their own account any time.
Debit Card
Banks are now providing Debit Cards to their customers having saving or
current account in the banks. The customers can use this card for purchasing
goods and services at different places in lieu of cash. The amount paid
through debit card is automatically debited (deducted) from the customers
account.
Credit Card
Credit cards are issued by the bank to persons who may or may not have an
account in the bank. Just like debit cards, credit cards are used to make
payments for purchase, so that the individual does not have to carry cash.

Banks allow certain credit period to the credit cardholder to make payment of
the credit amount. Interest is charged if a cardholder is not able to pay back
the credit extended to him within a stipulated period. This interest rate is
generally quite high.
Net Banking
With the extensive use of computer and Internet, banks have now started
transactions over Internet. The customer having an account in the bank can
log into the banks website and access his bank account. He can make
payments for bills, give instructions for money transfers, fixed deposits and
collection of bills, etc.
Phone Banking
In case of phone banking, a customer of the bank having an account can get
information of his account, make banking transactions like, fixed deposits,
money transfers, demand draft, collection and payment of bills, etc. by using
telephone.
As more and more people are now using mobile phones, phone banking is
possible through mobile phones. In mobile phone a customer can receive and
send messages (SMS) from and to the bank in addition to all the functions
possible through phone banking.
With the advent of mobile banking customers are able to transfer money
from their accounts to any other account in the country using their
cellphones, through the National Payment Corporation of India's Inter-bank
Mobile Payment Service (IMPS). The facility allows transactions without the
need for a computer or an Internet-enabled phone.
NON PERFORMING ASSET
Non Performing Asset means an asset or account of borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or
loss asset, in accordance with the directions or guidelines relating to asset
classification issued by the Reserve Bank of India.
Ninety Days Overdue

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the 90 days overdue
norm for identification of NPAs, from the year ending March 31, 2004.
Interest and / or installment of principal remain overdue for a period of
more than 90 days in respect of a Term Loan.
The account remains out of order for a period of more than 90 days, in
respect of an Overdraft / Cash Credit.
The bill remains overdue for a period of more than 90 days in case of the
bill purchase and discounted.
Interest and / or installment of principal remain overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purpose.
Any amount to be received remains over-due for a period of more than 90
days in respect of the other accounts.
THE DEBTS RECOVERY TRIBUNAL
The Debts Recovery Tribunal have been constituted under Section 3 of the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The
original aim of the Debts Recovery Tribunal was to receive claim applications
from Banks and Financial Institutions against their defaulting borrowers. For
this the Debts Recovery Tribunal (Procedure) Rules 1993 were also drafted.
While initially the Debts Recovery Tribunals did perform well and helped the
Banks and Financial Institutions recover substantially large parts of their non
performing assets, or their bad debts as they are commonly known, but their
progress was stunted when it came to large and powerful borrowers. These
borrowers were able to stall the progress in the Debts Recovery Tribunals on
various grounds, primarily on the ground that their claims against the lenders
were pending in the civil courts, and if the Debts Recovery Tribunal were
adjudicate the matter and auction off their properties irreparable damage
would occur to them.
SARFAESI
The lenders continued to groan under the weight of the Non Performing
Assets. This led to the enactment of one more drastic act titled as the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interests Act, also called as SRFAESI Act or SRFAESIA for short.

This new Act, the SRFAESI Act, empowered the lenders to take into their
possession the secured assets of their borrowers just by giving them notices,
and without the need to go through the rigors of a Court procedure.
INDIAN BANKS' ASSOCIATION
The Indian Banks' Association (IBA) was formed on the 26th September
1946 with 22 members.
As on June 2011 IBA has 161 members.
The members comprise of
Public Sector Banks
Private Sector Banks
Foreign Banks having offices in India and
Urban Co-operative Banks