BANKING AND FINANCIAL INSTITUTIONS

RESERVE BANK OF INDIA

RBI is the central bank of the country i.e. an apex institution of Indian monetary system. It was
established on 1st April 1935 under the RBI Act 1934. RBI was set up as the private shareholders bank with
paid up capital of Rs. 5 crore. It was nationalized on 1st January 1949. The Reserve Bank follows an
st th
accounting year from 1 July to 30 June, which enables it to take into account the performance of banks,
which follow an April-March financial year. The executive head of the Bank is called the governor, who is
assisted by deputy governors and other executive officers. For general direction the Bank has a central board
of directors, supplemented by four local boards at Delhi, Calcutta, Madras and Bombay. The head office of the
Bank is at Mumbai.

Functions of RBI

1. Bank of Issue: RBI has the sole right to issue bank notes of all denominations. The issuing and distribution
of rupee one notes and coins and small coins all over the country is undertaken by the RBI as an agent of the
Government.
2. Banker to Governments: The RBI acts as an agent of Central Government for all states in India except
Jammu and Kashmir. The RBI has the obligation to transact government business. Central government and
all state governments maintain account with the RBI. It helps the centre and state governments to float new
loans and to manage public debt.
3. Banker's Bank : All commercial banks maintain current accounts with the RBI. The RBI provides
central clearing house facility to the banks in order to settle their mutual claims on each other. It also provides
financial assistance to the banks in the time of need so it is also called as the lender of the last resort.
4. Controller of money and Credit: The RBI regulates the supply of money and credit in the economy
through various instruments of monetary policy like CRR, SLR, Bank rate etc. It controls the
financial institutions through the system of licensing, inspection and by providing guidelines.
5 Exchange management and control: RBI manages foreign exchange rate of rupee through
regulating norms of convertibility in respect of various foreign exchange transactions.
6. Custodian of Foreign Exchange Reserves: RBI maintains the reserve of foreign exchange.
It acts as an agent of government in respect of Indian membership in the IMF.
7. Supervisory Functions: The RBI Act 1934 and the Banking Regulation Act 1949 have given
RBI wide powers of supervision and control of commercial and cooperative banks.
8. Promotional Functions : RBI promotes banking habits, extend banking facilities to rural
and semi-urban areas. Thus RBI has helped in setting up of various development finance
institutions like IDBI, ICICI, IFCI etc.
9. Publication of Monetary Data: RBI collects a variety of statistical information and publishes
the same periodically. Its important publications include 'Report on currency and finance', an annual
publication and the 'RBI-Bulletin', a monthly magazine.
Monetary Policy
Monetary Policy is an instrument of economic policy which acts by influencing the cost and
availability of money and credit in economy to various sectors. To achieve balance between economic
growth and control over inflation. RBI has followed the policy of 'Controlled monetary expansion'.
Instruments of Monetary Policy
There are two broad instruments of the monetary policy of the RBI i.e. quantitative
methods and qualitative methods as follows:
I. Quantitative Methods or General Methods Such-measures regulate the volume of money
and credit in the economy as a whole. Such measures include CRR, SLR, Bank Rate and open
market operation as follows:
(a) Cash Reserve Ratio (CRR) or Variable Reserve Ratio (VRR)
As per RBI Act 1934, banks have to keep a certain proportion or percentage of their total
deposits (time and demand liabilities) with RBI.
(b) Statutory Liquidity Ratio (SLR) It is the ratio of total deposits of banks which they have to
keep or maintain in the form of specified liquid assets with themselves. It can be varied in the range
of 0 to 40%.
(c) Bank Rate: It is the rate or interest charged by the RBI from commercial banks by way of
rediscounting their first class (approved) securities. In other words, it is the rate of interest at which
RBI lends to the commercial banks.
(d) Open Market Operations (OMO) It refers to buying and selling of Government securities by the
RBI in the financial markets. The open market operations in the short term government securities
are called repos and reverse repos.
(i) Repo: Repurchase operations or repurchase agreement. It is carried out under the
Liquidity Adjustment Facility (LAF) to stabilize short terms liquidity in the economy. Under this RBI
buys government securities for a short period (usually a fortnight) with an agreement to sell it later.
(ii) Reverse Repos: Under this RBI sells governments short term securities with an
agreement to buy them later.
Note: RBI has switched over to the international usage of the terms 'repo' and 'reverse repo'
effective from October 29, 2004. As per international usage, absorption of liquidity by the RBI is
termed as 'reverse repo' and the injection as 'repo'.
Reverse Repo Rate it is the rate of interest given by the RBI on Government securities reverse repo
operations.

Latest Credit Control Rates

1. CRR 6%
2. SLR 24%
3. Bank Rate 6%
4. Repo Rate 6.75%
5. Reverse Repo Rate 5.75%

II. Qualitative or Selective Methods

Such measures are used to control the availability and cost of money and credit for certain
sector of the economy. They regulate both the volume of loans and purpose for which loans are given,
They can be used for channeling, greater flow of credit into particular sectors and to restrict flow of
credit they have to keep or maintain in the form of specified liquid assets with themselves. It can be
varied in the range of 25 to 40% to certain sectors. Such measures include the following:
(a) Changing Margin requirements—Margin requirement refers to the excess of the value of
security required for a loan over the amount of loan sanctioned.
(b) Fixation of Ceilings of credit for different sector—RBI many fix maximum limit of credit
for various sectors.
(c) Discriminatory rate of interest- i.e. fixing different rates of interest for various sectors.
(d) Prohibition of discounting of Bills covering the sale of sensitive commodities—i.e.
restricting the flow of credit to various sectors.
(e) Credit rationing:—i.e. fixing of quota of credit in respect of various sectors.
III. Other Measures
(a)Moral Suasion: It refers to the persuasive methods used by RBI through the letters,
conferences, periodicals etc. to influence the operations of banking sector.
(b)Direct Action: RBI may initiate disciplinary action against the banks in case these do not
comply with its directives. It may include imposition of monetary penalty, derecognizing of
banks etc.

Types of Monetary Policy

Dear Money Policy: It is associated with high bank rate and other rates of interest It is pursued to squeeze the
liquidity from the economy through making the cost at borrowing money higher.

Cheap Money Policy: It is reverse of Dear Money Policy where by the bank rate and other rates of interest
are reduced In order to augment liquidity in the economy, thus making the; borrowing .of money easier.

Contractionary Monetary Policy: It seeks to reduce the liquidity in the economy by reducing the availability of
credit to commercial sector; by reducing credit creation capacity of commercial banks and by increasing the
cost of credit. In pursuing contraction monetary policy, bank rate, CRR, SLR are increased and under open
market operations, RBI sells government securities. Margin requirements are also increased.
Expansionary Monetary Policy: Under this, it seeks to increase liquidity and consequently bank rate,
SLR, CRR are decreased and RBI purchase government securities and margin requirements are also
decreased.
Bank of International Settlement (BIS)
BIS was established in1930 by 10 central banks. It is situated at Basel, Switzerland. It works as a
bank for central banks of the member countries. India got its membership in 1996.

COMMERCIAL BANKS
According to the Indian Banking Companies Act, "Banking company is one which transacts the business
of banking which 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". Bank is a
financial institution which performs three basic functions i.e. (a) Accepting deposits from public; (b) providing
cheque facility (withdrawable on demand) and; (c) lending.
Type of bank deposits
Banks accept deposits from the public in the following three broad accounts.
(1) Current Account Deposit: This type of account is generally maintained by the business
firms. Such deposits are regarded as demand deposits. There is no restriction on the number
of withdrawals. Banks do not provide interest on such, accounts rather they impose some service
charges on the depositors. Deposits under such accounts constitute demand liability of the banks.
(2) Fixed or Time Deposit Account: Cash is deposited in this account for a fixed period. This type of
deposits attract high rate of interest. Deposits under such accounts constitute 'time liability' of banks.
(3) Saving Account Deposits: This type of account is generally maintained by households.
Bank may impose some restrictions on the amount and number of withdrawals. Banks pay
interest on these accounts although its rate is less than the rate of interest paid on fixed
account/such deposits are the combination of demand and time liabilities of banks.
Balance Sheet of Banks
Balance sheet refers to the statement of assets and liabilities of an organization.
Assets Liabilities
Cash Paid up Capital and Reserves
Money at Call Deposits
Investments Borrowings
Loans and Bills discounted Other Liabilities

Scheduled / Non Scheduled Banks

Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks and non-
scheduled banks. The scheduled banks are those which are entered in the second schedule of RBI Act
1934. Such banks are those which have paid-up capital and reserves of an aggregate value of not less than
Rs.5 lakh and which satisfy RBI that their affairs are carried put in the interests of their depositors. All
commercial banks Indian and Foreign, regional rural banks and state co-operative banks are scheduled banks.
Non-scheduled banks are those which have not been included in the second schedule of RBI Act, 1934. At
present, there are only three non-scheduled banks in the country.
Scheduled commercial banks enjoy the following facilities.
» They can borrow from RBI.
» They can avail the facility of central clearing house i.e. mutual transactions amongst the banks are
settled through central clearing house.
Brief history of commercial banking in India
 Presidency Bank of Bengal established in 1806 was the first commercial bank in India.
Subsequently, Presidency Bank of Madras (l 840) and Presidency Bank of Bombay (1843) came into being. In
1921, the three presidency banks were merged and came to be known as Imperial Bank of India.
It was in 1955 that Imperial Bank of India was nationalized, and rechristened as State Bank of India.
It is the first nationalized bank of India. Along with it other seven banks were converted as its associates
banks which are collectively called State Bank Group. They are as follows:
1. The State Bank of Bikaner and Jaipur
2. The State Bank of Hyderabad
3. The State Bank of Indore
4. The State Bank of Mysore
5. The State Bank of Saurashtra
6. The State Bank of Patiala
7. The State Bank of Travancore
* The State Bank of Saurashtra has been merged into the State Bank of India(SBI).

The first Bank of limited liability managed by Indians was 'Oudh Commercial Bank, established in 1881.
Punjab National Bank was the second bank which was established by Indians in 1894.
Foreign Banks
Since the initiation of economic reforms in 1991, the RBI has adopted selective policy for allowing entry
to foreign commercial banks in the country.
Foreign Banks in India
 ANZ Grindlays  Bank of Ceylon
 China Trust Commercial Bank
 ABN-AMRO Bank
 BNP Paribas Bank '  Deutsche Bank
 Citi Bank  JP Morgan Chase Bank
 HSBC  Scotia Bank
 Standard Chartered Bank  Taib Bank
 Abu Dhabi Commercial Bank

Private Sector Banks

 Bank of Punjab  IndusInd Bank
 Bank of Rajasthan  ING Vysya Bank
 Catholic Syrian Bank  Jammu & Kashmir Bank
 Centurion Bank  Karnataka Bank
 City Union Bank  Karur Vysya Bank
 Dhanalakshmi Bank  Laxmi Vilas Bank
 Development Credit Bank  South Indian Bank
 Federal Bank  United Western Bank
 HDFC Bank  UTI Bank
 ICICI Bank
* Global Trust Bank was merged with the Oriental Bank of Commerce in 2004.
Indian Banks Abroad
Indian banks had their presence in 42 countries with a network of 93 branches. Bank of Baroda had
highest concentration with 88 branches, 6 subsidiaries and one joint venture in 17 countries, followed by
State Bank of India with 21 branches 5 subsidiaries, 2 joint ventures.
 SBI (Canada) Ltd. Ltd.
 SBI (California) Ltd.  BOB (Hong Kong)Ltd.
 SBI Finance Inc.  Bank of India Finance(Kenya) Ltd.
 SBI International (Mauritius)  IOB Properties Pte Ltd.
 Bank of Baroda Uganda) Ltd.  Bank of Baroda(Botswana) Ltd.
 Bank of Baroda(Kenya) Ltd.  Bank of Baroda(Guyana)Inc.
 Bank of Baroda (U.K.) Nominee  ICICI Bank UK Ltd
  ICICI Bank Canada Ltd  Indian Ocean International Bank
 Bank of Baroda (Tanzania) Ltd. (IOIB)
 Bank of Baroda (Dubai, Abu Dhabi,  Punjab National Bank International
Ras Al Khaimah, Deira,Dammam, Limited (PNBIL)
Salalah, Al Ain)  Bank of Baroda (Trinidad and
 Bank of Baroda Tobago) Limited
 Bank of Baroda  Bank of Baroda (Trinidad and
 ICICI Bank Eurasia LLC Tobago) Limited
 PT Bank Indomonex

FDI Limit in Indian Private Banks

The aggregate foreign investment in a private bank from all sources will be allowed up to a maximum of 74%
of the paid-up capital of the bank. At all times, at least 26% of the paid-up capital will have to be held by
residents, except in regard to a wholly owned subsidiary of a foreign bank.

Facts related with SBI

State Bank of India (SBI) is the largest commercial Bank of India. SBI conducts about 26% of the total banking
transactions in the country, while 32% are performed by all the nationalized bank and 8 representative offices
in 28 countries. Among the countries, UK registers the largest presence with 19 branches followed by Fiji with
9 branches.

Nationalization of Banks
It was on 19th June 1969, 14 commercial banks with the deposits of Rs.50 crore or above were
nationalized.
These banks were as follows:
1. The Central Bank of India 8. Dena Bank
2. Punjab National Bank 9. Bank of Maharashtra
3. Bank of India 10. Indian Overseas Bank
4. Syndicate Bank 11. Union Bank of India
5. Bank of Baroda 12. United Bank of India
6. Allahabad Bank 13. United Commercial Bank
7. Indian Bank 14. Canara Bank
In 1980, again 6 more commercial banks with deposits of Rs.200 crores or above were nationalized.
T hus t aki ng the number of public sect or commercial banks to 28 including SBI group.
These banks are as follows:
1. Punjab and Sindh Bank
2. Oriental Bank of Commerce
3. New Bank of India
4. Vijaya Bank
5. Corporation Bank
6. Andhra Bank
But 1993, New Bank of India was merged with P unj ab Nat i onal Bank t hus m aki ng t he t ot al number of
banks in public sector to 27.
Objectives of Nationalization
 To prevent concentration of economic power.
 To bring about regional spread of banking.
 To mobilize more and more saving deposits by infusing confidence of public in banking.
 To provide social orientation to the banking industry.
 To channelize bank funds in accordance with plan priorities.
 To develop a pool of professional bankers.
Assessment of performance of banks
Achievements
» After nationalization, there has been massive spread of bank branches, sharp rise in mobilization of deposits
and credit disbursement (credit distribution) to priority sector.
» Banking industry has transformed from class to mass banking.
» Banks have diversified into a large number of new areas like merchant banking, underwriting,
mutual funds, venture funds, off shore banking, virtual banking etc.

Failures
The impressive progress made by banking sector in achieving social goals and extending the geographical
reach has exacted a heavy toll in the form of declining profitability and efficiency of banking system. The causes
of declining profitability of banks are as follows:
a) On income side
 High SLR and CRR.
 In fulfilling social objectives of Government the quality of loan portfolio has deteriorated
 Political interference
 Loan melas and waiving of loans,
 Most of the priority sector landing has gone bad and thus increased non performing assets.
 Priority sector landing included an element of subsidy by decreasing the cost of credit.
(b) On Expenditure side
 Over staffing
 Uneconomic branch expansion.
 Prudential norms were not followed.
 Increased non-performing assets
 Priority sector landing increased the cost of servicing of loans.

Banking Sector Reforms

In 1982, Government appointed the Chakravarty Committee to review the working of the
monetary system. It submitted its report in 1985, but government did not undertake any
significant reform measure.
The government appointed the Committee on the Financial System under the chairmanship of
Mr. M. Narasimham, a former Governor of RBI. It was constituted in August, 1991 and it delivered its
report in November, 1991. Government again appointed a committee under the chairmanship of
Mr. M. Narasimham named 'Committee on Banking Sector Reforms' in 1998. Government implemented
almost all the recommendations of these committees. In fact, the banking sector reforms since 1991 were
based on the recommendations of the Narasimham Committee.
Recommendations of the Narasimham Committee-l (1991)
1. Reduce CRR and SLR in a phased manner.
2. Abolish branch reservation policy and give freedom to banks to open or close a branch other
than closing a branch in rural areas.
3. Banks should be permitted to tap the capital market.
4. Priority Sector Lending should be reduced from 40% to 10%. Priority Sector should be redefined.
5. There should be a four-tier banking structure.
(a) 3-4 banks should be of international character.
(b) 8-10 banks should be of national character.
(c) Local banks whose operations would be confined to a specific region,
(d) Rural Banks such as RRBs especially to finance agriculture and allied sector.
6. There should be speedy computerization of all the banks.
7. The interest rate structure should be deregulated to provide flexibility to banks to charge a rate of
interest depending upon their own perception of the customer.
8. An Asset Reconstruction Fund (ARF) should be set up to take over NPAs of banks.
9. A Board for Financial Supervision' should be set up under RBI to supervise banks.
10. 'Debt Recovery Tribunals' (DRTs) should be set up to expedite the recovery of debts.
11. Banks should properly classify their assets into standard, substandard,-doubtful and lost asset
and sufficient provisioning should be made against these.
12. Banks should maintain transparent balance sheets.
13. Banks should achieve and adhere to Capital Adequacy Ratio of 8% by 1998.
Recommendations of the Narasimham committee-ll (1998)
 1.Four-tier structure of banking.
2.Priority sector lending be reduced.
3.Rapid computerization of banks.
4.Se ttin g up o f an Asset Recon stru ctio n Fun d (ARF).
5.Merger of strong banks with strong banks so as to make them globally competent.
6.Capital Adequacy Ratio should be raised to 10%by 2002.
7.Abolish the Banking Services Recruitment Board (BSRB). The Banks be given freedom to frame
and execute their own recruitment policy.
8. The following acts should be urgently reviewed-—
(a) RBI Act, 1934
(b) Banking Regulation Act, 1949
(c) SBI Nationalisation Act, 1955
(d) Banking Nationlisation Act, 1969
9. Government share holding in the public sector banks should be reduced to 33%, in a phased
manner.
10. Activities of NBFCS. should be integrated into mainstream financial system.
11. Bank boards and bank functioning should be depolitized and professionalized.
Action taken by the government on Narasimham Committees Recommendations
1. CRR and SLR have been reduced drastically.
2. Banks are being permitted to access the capital market.
3. Speedy computerization of banks is being done.
4. Interest rates have been deregulated.
5. Asset Reconstruction Company (ARC) has been setup to take over the non performing assets of banks.
6. Debt Recovery Tribunals have been established.
7. BSRB has been abolished and banks are following their own recruitment policy.
8. Depoliticisation and professionalisation of banks is being done.
9. The activities of NBFCs are being integrated into main stream financial system.
10. Capital Adequacy Ratio has been fixed at 9% for the Indian Commercial Banks.

Terms related with Banking Sector

Lead Bank Scheme: It was introduced in 1969 on the recommendations of Gadgil Group. Under the
scheme all nationalized banks and three private banks were allotted specific districts where they were asked
to take the lead in surveying the scope of banking development especially expansion of credit facilities.
Service Area Approach: It was introduced in 1988 under the Lead Bank Scheme. Under it, banks
were to adopt a cluster of 15-25 villages and take up the task of intensive development of these villages.
Dif f erent ial Rat e of Int erest Scheme: It was introduced in 1972; under this banks were to
provide loans to weaker sections at concessional rate of interest of 4%. Banks were to provide at least 1% of
their total advances under the scheme.
Merchant Banking: Merchant Bankers are financial intermediaries between entrepreneurs and investors.
They carry out variety of services like acceptance of bills of exchange, issue and placing of loans and
securities, and unit trust management, along with banking services.
Universal Banks: A bank which provide a wide range of financial services in one largely unified
structure. These banks perform the functions of development finance institution, commercial banks,
investment banks, insurance, brokerage etc. They seek to integrate the activities of banks with other
financial intermediaries.
Venture Capital Funds: These are the financial intermediaries who provide financial assistance
and seed money (initial capital) to such entrepreneurs who wish to take up high risk, high technology and
innovative ventures. The SIDBI was the first in India to setup a venture capital Fund.
Capital Adequacy Ratio: Capital adequacy is the ability of a bank to meet the needs of their
depositors and other creditors in terms of availability of adequate funds. It is the ratio of total capital funds to
the risk weighted assets of a bank.
 Total capital funds
CAR = -------------------------------
Risk weighted assets
CAR is also termed as CRAR (Capital to risk weighted asset ratio). CAR is 9% at present in India.
Prime Lending Rate: It is the rate of interest charged by banks from its blue chip (high
creditworthy) borrowers. It is a floor rate of interest and serves as bench mark of interest rates charged from
other borrowers.
Interest Spread: It is the difference between the average rate of interest charged by banks from its
borrowers and averages rate of interest which it gives to its depositors.

Non-Performing Assets (NPAs)

NPA refers to an advance, or loan over which interest or installment of principal remain overdue for a
period of 91 days. Before March 31, 2004, the period of delinquency was two successive quarters (180
days)
Classification of NPAs
NPAs are classified into three 'categories on the basis of the following criteria:
(a) Sub-standard Assets: an asset of banks (loan) which remains NPA for less than or equal to
18 months.
(b) Doubtful Asset: an asset which remain NPA for over 18 months.
(c) Lost Asset: an asset whose loss has been identified by the bank, auditors or RBI but the
amount has not been written off.

Remedial measures
Measures taken by the government to reduce NPAs are as follows:
» Setting up of Debt Recovery Tribunals
» Restructuring and rescheduling of loans
» Corporate Debt Restructuring Scheme
» Setting up of Asset Reconstruction Company (ARC) in June '02
» Compromise settlements
» T h e e nact m e nt of t he S ecu ri t i zat i on an d Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002.

REGIONAL RURAL BANKS (RRBs)

Regi onal Rural Bank O rdinance was promulgated in 1975, which was later replaced by
Regional Rural Banks Act 1976 and thus in 1975 RRBs were established under the Act.
The main objective of the RRBs is the provision of credit and other facilities especially to small and marginal
farmers, agricultural labourers, artisans and small entrepreneurs. RRBs are sponsored by Public sector
commercial banks. The paid-up capital of each RRB was 25 lakhs of which 50% had been, contributed by
central government 15%; by state government and 35% by sponsoring commercial bank.
The area of regional rural banks is limited to a specific region comprising one or more districts of a
state. The lending rates of the RRBs should not be higher than the prevailing lending rates of co-
operative societies in any particular state. The sponsoring banks and the RBI provide many
subsidies and concessions to RRBs to enable the latter to function effectively. RBI has fixed CRR at 3% and
SLR at 25% for RRBs.
In 2005-06, the Government of India initiated the process of structural consolidation of RRBs by
amalgamating RRBs sponsored by the same bank within a State as per the recommendations of the
Vyas Committee (2004). The amalgamated RRBs were expected to provide better customer service
due to better infrastructure, computerization of branches, pooling of experienced work force, common
publicity, marketing efforts etc., and also derive the benefits of a large area of operation, enhanced
credit exposure limits and more diverse banking activities. As a result of the amalgamation, the number
of RRBs was reduced from 196 to 86 as on 31st March, 2009.

COOPERATIVE BANKS
 Origins of the cooperative movement in India can be traced back to the Cooperative Credit
Societies Act, 1904. The wide geographical coverage of cooperatives especially in rural areas was
primarily established to save small borrowers hailing from rural areas from usurious interest rates
charged by money lenders. Since its inception, it has been playing an important role in the socio-
economic development of the country by making available institutional credit at affordable cost
particularly to the agricultural sector. In the process, the cooperative movement in India has
facilitated the process of financial inclusion. Howsoever, the weak financial position of majority of
cooperative credit institutions has been a cause for concern.
The cooperative sector in India is divided into two major segments, viz., the Urban
Cooperative Banks (UCBs) and Rural Cooperatives. As names indicate, UCBs concentrate on credit
delivery in urban areas, while Rural Cooperatives concentrate on rural areas. The structure of the
cooperative banking sector in India is provided in the chart.
The Rural Cooperative Institutions
The rural Cooperative Banks are organized under the provisions of cooperative societies laws of
the respective states. Such banks provide short-term and medium-term credit (upto 3 -years) mainly to the
agriculture and allied activities'. Cooperative credit structure in India is federal in nature and is
organized in 3-tiers as follows:
Tier-1(State level) ----- State Cooperative Banks (SCBs)

Tier-2(District level) ----- Central Cooperative Banks (CCBs)

Tier-3(Village level) ----- Primary Agricultural Credit Societies (PACS)

Land Development Banks (LDBs)

LDBs provide long term and medium term credit to the agricultural sector. They are registered as limited
liability organizations under the cooperative society’s acts of the respective states. They have a two-tier
structure in most of the states. There is a Central Land Development Bank (CLDB) at the state level and below it
are the Primary Land Development Banks (PLDBs) at the block/tehsil or district levels. LDBs obtain the funds
from share capital, deposits and issue of bonds and debentures. Their debentures are mostly subscribed by
the NABARD, the LIC, commercial banks and the central and state governments.
Urban Cooperative Banks
The urban cooperative banking sector comprises a number of institutions which vary in terms of their size,
nature of business and geographic spread while concentrating on credit delivery in urban areas. As an
outcome of the on-going consolidation of the sector, there was a decline in the number of UCBs at end-
March 2010 to 1,674 from 1,721 in the previous year.
The urban cooperative sector reported overall net profits as at end-March 2010 with improved
asset quality. The overall financial performance of the rural cooperative sector witnessed some
improvement at end-March 2009 over the previous year, though the asset quality deteriorated. However,
the financial position of ground level institutions in the rural cooperative sector is a cause for concern as
they reported losses alongside a high NPA ratio. Further, the role of the cooperative sector in the Kisan
Credit Card Scheme, in terms of number of cards issued as well as amount of credit sanctioned, exhibited
a declining trend during the recent years.
DEVELOPMENT BANKS
Developments Banks are specialized financial institutions whose prime objective is to provide fillip to the
financial markets in order to facilitate economic development. They are also called Development
Finance Institutions (DFIs) as they are not banks in the literal sense of the term because they do not accept
deposits from the general public. They raise their resources from the Government, RBI, other financial
institutions and through the issue of bonds to the general public.
DFIs provide only medium and long term financial assistance. They provide financial
assistance to industry in the; form of term-loans, subscription to the share capital, underwriting and
providing guarantee f or term-loans. Their promotional role may take variety of forms like
provision of risk capital, under-writing, arranging, forex loans, identification of investment projects,
their evaluation, technical advice and management services.
Industrial Finance Corporation of India (IFCI)
• IFCI was set up in 1948 as the first term lending institution.
• It is a subsidiary of RBI.
Industrial Development Bank of India (IDBI)
• IDBI was set up in 1964 as a wholly-owned subsidiary of the RBI.
• It was made an autonomous institution in 1976.
• It is the apex industrial development bank of the country.
• It coordinates the activities of other financial institutions in the field of industrial finance.
• It extends refinance to financial institutions and banks i.e. provision of finance to financial institutions in
lieu of their lending to the industry
• IDBI was transformed into a universal bank, IDBI Limited in October 2004 i.e. a company
under the Companies Act, 1956 and a schedule bank under the RBI Act, 1934.
Industrial Credit and Investment Corporation of India (ICICI)
• It was set up in 1955 as a private-sector development bank.
• Its share capital was contributed by banks, insurance companies and foreign institutions like World
Bank, IMF etc.
• In March 2002, it was converted into the first universal bank of the country through its merger with
ICICI Bank Limited.

Industrial Reconstruction Corporation of India (IRCI)

• It was established in 1971 to revive sick industrial units.
• IRCI was converted into a statutory corporation, Industrial Reconstruction Bank of India (IRBI) in 1985.
• Further in 1997, IRBI was converted into a development bank, Industrial Investment Bank of India
(IIBI).
Small Industries Development Bank of India (SIDBI)
• SIDBI was established in 1989 as a wholly owned subsidiary of IDBI.
• It was delinked from IDBI in 1998.
• It is the principal institution for providing financial and non-financial assistance to the small scale
industries (SSIs).
Export-Import (EXIM) Bank
• Exim Bank was established in January 1982 as an apex institution relating to the financing of foreign
trade.
. It provides direct loans to exporters and importers and also undertake merchant banking activities
in relation to export-oriented industries.
• It coordinates the activities of financial institutions engaged in the field of financing
international trade as well as provides them refinance.
National Bank for Agriculture and Rural Development (NABARD)
It was established in July 1982 as an apex institution in the field of rural credit especially agricultural
credit.
It provides rural credit by way of refinance and loans to State Cooperative Banks (SCBs), Land Development
Banks (LDBs), Regional Rural Banks (RRBs) and other financial institutions.
It promotes financing, production, marketing and, investment activities related to agriculture, rural
development, small-scale industries and other allied economic activities in the rural areas.

National Housing Bank (NHB): It was established in July 1988 as a wholly-owned subsidiary of
the RBI. It is the apex institution in the field of housing finance. It provides direct finance as well as
refinance to eligible institutions in the housing sector.
SPECIALISED FINANCIAL INSTITUTIONS
IFCI Venture Capital Fund (IVCF): IFCI launched the Risk Capital Foundation (RCF) in 1975 to
provide financial assistance to innovative ventures at nominal rates of interest. RCF was converted into Risk
Capital and Technology Corporation Ltd. (RCTC) in January 1988.
 Tourism Finance Corporation of India (TFCI): It was established in 1989 to promote the
tourism industry in the country it provides financial assistance to conventional as well as non
conventional tourism projects-like ropeways, amusement parks etc.
Infrastructure Development Finance Company (IDFC): It was established in 1997 by the
domestic and international financial institutions to promote infrastructure in the country. The
company provides financial assistance for infrastructure projects like electricity, roads, railways, ports,
telecommunications, water supply etc.

NON-BANKING FINANCIAL INSTITUTIONS (NBFIs)

Non-Banking Financial Institutions / companies consists of all the financial intermediaries (who
mediate between lenders and borrowers) other than banks and Development Finance Institutions. NBFIs
refers to the heterogeneous group of financial institutions which raise funds from public and lend them to the
borrowers. NBFIs include mutual funds, insurance companies, investment companies, lease
companies etc.
Mutual Fund
It is an institution which raise funds from the public against the issue of its units. The funds thus
raised are invested into Government and Corporate securities by the investment specialists. They
channelize and mobilize small savings. In U.K. they are termed as Unit Trusts.
Unit Trust of India (UTI) -
UTI is a public sector mutual fund launched in July 1964. It aims to encourage and mobilize, savings of
the community and channalise them into productive corporate investments. The RBI contributed to
50% of its share capital and rest was subscribed by LIC, SBI, SCBs, IFCI and ICICI.
Unit Scheme-64: US-64 was the flagship scheme of the UTI, launched in, 1964, it was the first scheme in India
to Invest in non-deposit instruments like equity and corporate debt. On May 31, 2003, government wind up US-64
and its unit holders were issued government guaranteed tradeable bonds.
In October 2002, an ordinance was promulgated which repeated the UTI Act and created two entities i.e.
UTI-I and UTHI.
(a) UTI - I: It included all the protected schemes including US-64 for which assured repurchase prices
have been announced and assured return schemes. Government will meet its obligations annually to,
cover any deficit in UTI-I. It will be managed by a government appointed administrator.
(b) UTI-II: It will comprise of all net asset value (NAV) based schemes. It will be managed by a
professional chairman and Board of Trustees and will be disinvested. In January 2003, it was taken over
by its new owners i.e. SBI, Bank of Baroda, PNB, and LIC.

Insurance Companies
(a) Life Insurance Corporation (LIC): It was established in 1956 by nationalization and merger of all life
insurance companies into LIC. It mobilizes contractual savings into government and corporate securities.
(b) General Insurance Corporation (GIC): It was established in 1973 by nationalization of the private
insurance companies. All the existing companies were merged and reorganized into GIC and its four
subsidiaries viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd., and the United India Insurance Company Ltd. GIC sells insurance
against specified risk such as loss of property due to fire, accident etc.

Insurance Regulatory and Development Authority Act, 1999

The reforms in the insurance sector, started with the enactment of the Insurance Regulatory and
Development Authority Act 1999. The Act paved the way for the entry of private insurance companies into the
insurance market and also allowed FDI upto 26% in the insurance sector. It provided for the constitution of
the Insurance Regulatory and Development Authority (IRDA).
The Insurance Regulatory and Development Authority (IRDA) was constituted on 19th April, 2000 to
protect the interest of the holders of Insurance policies, and to regulate, promote and ensure-orderly growth of
the insurance industry. The authority consists of a chairperson, three whole time members and four part-time
members.
For regulating the insurance sector, the Authority has been issuing regulations covering almost the entire
segment of insurance industry, namely regulation of insurance agents, solvency margin, re-insurance,
registration of insurers, obligation of insurers to rural and social sector, accounting procedure etc.
Provident Funds: Such f unds are in important form of long-term contractual savings of the
household sector. It consists of the contributions of the employees and the matching contribution from their
employers. Provident funds have been made compulsory in the organized sector. The corpus of the fund
is invested in government and (especially fixed return) corporate securities.
Lease Companies: Such companies lease out machinery, equipment, plant etc. on rent to the firms.
The rent covers the return on initial capital, depreciation value of assets and service charges.
:
Investment Companies Such Companies raise funds from the public either directly or
indirectly and make direct investments in government or corporate securities. Mutual Funds,
Pension Funds, Provident Funds, Insurance Companies etc. are broadly classified under
investment companies.

Securities : Security or stock is a general term for all kinds of financial assets.
Bonds : These are fixed interest yielding securities. Bond holders are regarded as creditors
of the company.
Treasury Bills : These are short-term government bonds with maturity period ranging from 14 to 364
days.
Dated Securities : These are government bonds with maturity of over one year.
Debentures : These are fixed interest bearing bonds issued by limited companies against long-
term loans. Debenture holders are the creditors of the company.
Convertible Debentures: Such debentures can be converted into equity at a predetermined rate and
date.
Equities : Such securities confer ownership rights to the investors and entitle them to
receive dividends (distributed profits).
Share : It is a security issued by a limited company that makes the holder, a member
of the company and entitle to vote at general meetings and elect directors.
Share holders are the owners of the company.
Preference Share : These are equities which entitles the holder to limited membership or voting
rights. They usually yield fixed dividends.
Note : On the liquidation (selling off) of companies the claims of debenture holders are met first, followed
by the claims of preference share holders. Share holders get the residual amount, if any.