Class-I Indian Financial System; Indian Banking System; Functions of Commercial Banks Types of Banks Role of Banks in Economic

c Development.

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government.

Finance as a function (i.e. verb) is defined as under1:"To provide or raise the 2: "To supply funds to": 3: "To furnish credit to". funds or capital for": financed a new car a daughter through law school.

financing

What is a Financial System

In finance, the financial system is the system that allows the transfer of money between savers and borrowers. It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.

Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely.

INDIAN FINANCIAL SYSTEM The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below; The global financial system (GFS) is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, e.g., banks and hedge funds.

Components of Financial System

Institutions: Players: Banks, Development Banks, Non-Banking Financial Company, Insurance Companies, Mutual Funds, Pension Funds, Stock Broking Companies,

Regulators: Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority, Forward Market Commission Markets: Stock Market, Forex Market, Derivatives Market, Credit Market, Commodities Market, Money Market (Call Money Market, Inter-Bank Market, Government Securities Market, Corporate Bonds Market). Regulations and laws

Indian Companies Act 1956, Negotiable Instruments Act-1881, Indian Contracts Act1872, SEBI Act-1992, Reserve Bank of India Act-1934, Banking Regulation Act1949, State Bank of India Act 1955, Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970, 1980, Securitisation And Reconstruction of Financial Assets and Enforcement Of Security Interest Act, 2002.

INDIAN BANKING SYSTEM Commercial Banks Public Sector Banks State bank group (eight banks): This consists of the State Bank of India (SBI) and Associate Banks of SBI. The Government of India owns the majority share(59.41%). SBI owns 100% in the four unlisted SBI associates are State Bank
of Hyderabad, State Bank of Indore, State Bank of Patiala and State Bank of Saurashtra. The other three State Bank of Travancore, State Bank of

Mysore and State Bank of Bikaner & Jaipur are listed. SBIs stake in these three banks is between 75 and 92.33 per cent.

Nationalized banks (19 banks): In 1969, the Government of India nationalized 14 scheduled commercial banks in order to expand the branch network, followed by six more in 1980. A merger of New Bank of India with PNB reduced the number from 20 to 19. Majority share holder in the Nationalized banks are Government of India. Other Public Sector Banks- IDBI Ltd.- Industrial Development Act-2003 Private Sector Banks: Old generation private Banks- Those which existed during pre-reforms period and were not nationalised during the both nationalisations. New Generation private Banks- Government of India relaxed the conditions for opening of private sector banks in the year 1994 as part of their liberalisation programme. HDFC Bank was the first bank to get licence among the new generation banks. E.g. The South Indian Bank Ltd. Federal Bank, Dhanalakshmi Bank HDFC Bank, ICICI Bank, Axis Bank, Yes Bank. Regional Rural Banks (RRBs): The government of India set up 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, artisans and small entrepreneurs. Initially, five RRBs were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total authorised capital was fixed at Rs. 1 crore which has since been raised to Rs. 5 Crore. Capital contribution ratio Central Government, Sponsoring Bank and the State Government in the ratio of 50:35:15. Local Area Banks-

With a view to providing institutional mechanisms for promoting rural savings as well as for the provision of credit for viable economic activities in the local areas, RBI had decided in 1996 to allow the establishment of new local banks in the private sector. This is expected to bridge the gaps in credit availability and enhance the institutional credit framework in the rural and semi-urban areas. Registration, Licensing : Scheduling The bank shall be registered as a public limited company under the Companies Act, 1956. It will be licensed under the Banking Regulation Act, 1949 and will be eligible for including in the Second Schedule of the Reserve Bank of India Act, 1934. Capital The minimum paid up capital for such a bank shall be Rs.5 crore. The promoters' contribution for such a bank shall at least be Rs.2 crore. Proposals having diversified share holdings, will be preferred. Promoters The promoters of the bank may comprise individuals, corporate entities, trusts and societies. In the application for a banking licence the details of the initial contribution of promoters, and the manner and method through which the minimum share capital of Rs.5 crore will be raised will need to be indicated. Area of Operation The area of operation of the proposed bank shall be a maximum of three geographically contiguous districts. Co-operative BankThe Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of

such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary cooperative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. The rural credit cooperatives may be further divided into short-term credit cooperatives and long-term credit cooperatives. With regard to short-term credit cooperatives, at the grass-root level there are around 92,000 Primary Agricultural Credit Societies (PACS) dealing directly with the individual borrowers. At the central level (district level) District Central Cooperative Banks (DCCB) function as a link between primary societies and State Cooperative Apex Banks (SCB). It may be mentioned that DCCB and SCB are the federal cooperatives and thus the objective is to serve the member cooperatives. As against three-tier structure of short-term credit cooperatives, the long-term cooperative credit structure has two tiers in many states with Primary Cooperative Agriculture and Rural Development Banks (PCARDB) at the primary level and State Cooperative Agriculture and Rural Development Bank at the state level. However, some states in the country have unitary structure with state level cooperative operating with through their own branches and in one state an integrated structure prevails. The organizational structure of the credit cooperatives in India is illustrated in chart I. Interestingly, under the Banking Regulation Act 1949, only State Cooperative Apex Banks, District Central Cooperative Banks and select Urban Credit Cooperatives are qualified to be called as banks in the cooperative sector. In other words, only these banks are licensed to conduct full-fledged banking business. The Co-operative Banks function in India on State Levels. Most of the Rural Cooperative banks function on Three-Tier and the Urban banks function on Two-Tier. At the National Level there is NABARD to organise the Agricultural Co-operatives. Also there is National Co-operative Union of India, as an apex instituion at National Level.

Development Financial Institutions 1. NABARD-set up in 1982- NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas 2. Exim Bank-1981- for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view topromoting the countrys international trade 3. National Housing Banks (NHB)-1988 (Wholly owned by RBI): NHB ensures a sound and healthy housing finance system in India through effective regulation and supervision of housing finance institutions. 4. Small Industries Development Bank of India (SIDBI)-1990, -Subsidiary of IDBI- for the financing, promotion, development and co-ordination of industry in the small scale sector. 5. Infrastructure Development Finance Company-1997 6. Power Finance Corporation-1986 7. DICGC-1962 8. ECGC-1957

Role of Banks in Economic Development

The economic development in India followed a socialist-inspired policies for most of its independent history, including state-ownership of many sectors; extensive regulation and red tape known as "Licence Raj"; and isolation from the world economy. India's per capita income increased at only around 1% annualized rate in the three decades after Independence. Since the mid-1980s, India has slowly opened up its markets through economic liberalization. After more fundamental

reforms since 1991 and their renewal in the 2000s, India has progressed towards a market-oriented economy. In the late 2000s, India's growth has reached 7.5%, which will double the average income in a decade. Analysts say that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government's 2011 target of 10%. Commercial banks play an important role in economic development of developing country. Economic development involves investment in various sectors of economy. The banks collect savings from the people and mobilize saving for investment in industrial project. The investors borrow from banks to finance the projects. Promote the growth rate through the reorientation of loan policy. Special funds are provided to the investors for the completion of projects. The banks provide a guarantee for industrial loan from international agencies. The foreign capital flows to developing countries for investment in projects. Banks play a major role in the socio-economic life of the country. They are no longer merely instruments for credit-mobilization and money-lending. They are no longer merely institutions for the benefits of a few individuals. They are now powerful instruments of economic growth and social justice. Banks have to act not only as purveyors of credit, but also as harbingers of social and economic development through a variety of enterprises, many of which may be tiny and yet capable of generating productive energies.