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Role Of Banks in Indian Economy

Role of banks in Indian Economy

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Role Of Banks in Indian Economy

We would like to extend my gratitude to IMCOST for giving me a wonderful learning


We are thankful to Prof. Tushar Padwal for giving us the opportunity to explore topic Role of
Banks in Indian Economy . While preparing this report we got an opportunity to study the
intricacies of the same, we are thankful to Prof. Tushar Padwal for the same.


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Role Of Banks in Indian Economy

Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was
the most active trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered.

The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.
By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve
Bank was nationalized and given broader powers.

The Public Sector emerged as the driver of economic growth consequent to the industrial
revolution in Europe. With the advent of globalization, the public sector faced new challenges in
the developed economies. No longer the public sector had the privilege of operating in a sellers
market and had to face competition both from domestic and international competitors. Further, in
the second half of the 20th century in the developed economies, the political opinion started
swinging towards the views that the intervention as well as investment by Government in
commercial activities should be reduced to the extent possible.

Why banking:

Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors. For the past three
decades India's banking system has several outstanding achievements to its credit. The most
striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in
India. In fact, Indian banking system has reached even to the remote corners of the country. This
is one of the main reason of India's growth process. The government's regular policy for Indian
bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of


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Role Of Banks in Indian Economy

Journey of Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:

Phase I: Early phase from 1786 to 1969 of Indian Banks

Phase II: Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

Phase III: New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.

Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These
three banks were amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, and mostly the European, Europeans-shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were set up. Reserve Bank of India came in1935.

During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in India as the Central Banking Authority. During those
days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow.
Abreast of it the savings bank facility provided by the Postal department was comparatively

Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially
in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI
and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was
nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in

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Role Of Banks in Indian Economy

1980 with seven more banks. This step brought 80% of the banking segment in India under
Government ownership. The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the
sunshine of Government ownership gave the public implicit faith and immense confidence.
This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his
name which worked for the liberalisation of banking practices. The country is flooded with
foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to
customers. Phone banking and net banking is introduced. The entire system became more
convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is
all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not
yet fully convertible, and banks and their customers have limited foreign exchange exposure.


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Role Of Banks in Indian Economy

After Independence in 1947, the government took the view that loans extended by colonial banks
were biased toward working capital for trade and large firms. Moreover, it was perceived that
banks should be utilized to assist India’s planned development strategy by mobilizing financial
resources to strategically important sectors.
Reflecting these views, all large private banks were nationalized in two stages: in 1969 and then
in 1980. Subsequently, quantitative loan targets were imposed on these banks to expand their
networks in rural areas and they were directed to extend credit to priority sectors. These
nationalized banks were then increasingly used to finance fiscal deficits. Although non-
nationalized private banks and foreign banks were allowed to coexist with public-sector banks at
that time, their activities were highly restricted through entry regulations and strict branch
licensing policies. Thus, their activities remained negligible.

1) Against this background, the first wave of financial liberalization took place in the second
half of the 1980s, mainly taking the form of interest rate deregulation. Based on the 1985
report of the Chakravarty Committee, coupon rates on government bonds were gradually
increased to reflect demand and supply conditions.

2) The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People not just demanded more
from their banks but also received more.

3) Following the 1991 report of the Narasimham Committee I, more comprehensive reforms
took place that same year. The reforms consisted of:

• A shift of banking sector supervision from intrusive micro-level intervention over credit
decisions toward prudential regulations and supervision;
• A reduction of the CRR and SLR;
• Interest rate and entry deregulation;
• Adoption of prudential norms (convergence of developing financing institutions to with
commercial banks or non-bank financial institutions and an adoption of the integrated
system of regulation and supervision.)

4) Further, in 1992, the Reserve Bank of India issued guidelines for income recognition,
asset classification and provisioning, and also adopted the Basle Accord capital adequacy
standards. The government also established the Board of Financial Supervision in the
Reserve Bank of India and recapitalized public-sector banks in order to give banks
sufficient financial strength and to enable them to gain access to capital markets.

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Role Of Banks in Indian Economy

5) In 1993, the Reserve Bank of India permitted private entry into the banking sector,
provided that new banks were well capitalized and technologically advanced, and at the
same time prohibited cross-holding practices with industrial groups. The Reserve Bank of
India also imposed some restrictions on new banks with respect to opening branches, with
a view to maintaining the franchise value of existing banks.

6) Narasimham committee II (1998):

a) To suggest necessary legislative changes for implementation of electronic funds

transfer, with, inter alia, emphasis on:

• Encryption of Public Switching Telephone Network (PSTN) lines ;

• Admission of electronic files as evidence
• Treating Electronic Funds Transfers on par with crossed cheques / drafts
for purposes of Income Tax etc. ;
• Record keeping ;

b) To recommend approaches for development of Intra-bank/Intra-city communication

network to facilitate connectivity with VSATs

c) To suggest ways to bring about computerization of Government accounts in an

expeditious and efficient manner

d) To work out modalities necessary for development and optimal utilisation of a secure,
robust Wide Area Network (WAN) based on satellite with the necessary security systems,
by banks and other financial institutions, to ultimately develop a sound and efficient
payments system

e) To examine methods by which technological upgradation in banks and financial

institutions could be effected and in the context study the feasibility of establishment of
standards, designing payments system backbone and standards relating to security levels,
messages and smart cards by IDRBT.

f) To make recommendations for development of data warehousing and data mining, with
a view to creating opportunities for development of efficient Management Information
System (MIS) in near future

g) To recommend guidelines for outsourcing of programs development and

implementation work, and

h) To make recommendations on any other related issues like:

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Role Of Banks in Indian Economy

o assigning of risk weight of 2.5 per cent to cover market risk in respect of
investments in securities outside the SLR by March 31, 2001 in addition to a
similar prescription for Government and other approved securities by March 31,
2000, and
o Lowering of the exposure ceiling in respect of an individual borrower from 25 per
cent of the bank's capital fund to 20 per cent, effective April 1, 2000.

The aim of Narasimham committee I & II was to bring about “operational flexibility” and
“functional autonomy” respectively so as to enhance “efficiency, productivity and


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Role Of Banks in Indian Economy

Indian Banking System

Reserve Bank of India

Scheduled Non- Scheduled Banks

State Co Commercial Central Co op Commercial

operative banks Banks banks and Banks
Primary Credit

Indian Foreign
Banks Banks

Public Sector Private Sector

Banks Banks

State Bank of Other Regional

India nationalized rural banks

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Role Of Banks in Indian Economy


Reserve Bank of India (RBI) is India's central bank - it formulates, implements and monitors
India's monetary policy. Reserve bank of India was established in 1935 and nationalized in 1949.
It is fully owned by the Government of India and its headquarters are located in Mumbai. RBI
has 22 regional offices in the various state capitals of India. It has a majority stake in the State
Bank of India.

The main functions of the Reserve Bank of India are:

1. The Reserve Bank of India is the regulator and supervisor of the financial system

2. RBI defines the guidelines according to which the banking operations within which the
country's banking and financial system functions. It tries to protect depositors' interests and
provides cost-effective banking services to the public by monitoring the functioning of banks. If
a bank does not solve a customer’s problem they can approach the Reserve bank of India through
the Banking Ombudsman Scheme

3. Foreign exchange inflow and outflow is regulated by the Foreign Exchange Management Act,
1999 of RBI. All money transfer out of India, for both personal and trade purposes is subject to
limits defined by RBI

4. The Reserve Bank of India issues currency - notes and coins of various denominations. It also
issues and exchanges or destroys damaged currency and coins not fit for circulation. The design
of the currency is periodically modified to prevent circulation of fake currency.

5. The RBI is the banker to the Government of India. It performs merchant banking function for
the central and the state governments. Government departments bank with the Reserve bank of
India. For example, in Mumbai, the Income tax department issues tax refunds drawn on the
Reserve bank of India.

6 RBI is the banker to all major banks. It maintains banking accounts of all scheduled banks in
India. Deposits of up to Rs 1 lakh in scheduled banks are insured. Cash withdrawal tax is
applicable only for withdrawals from scheduled banks. Smaller co-operative banks usually are
not scheduled banks. Bank interest rates increase or decrease according to the RBI lending rates

7. The Reserve Bank of India also regulates the trade of gold. Currently 17 Indian banks are
involved in the trade of gold in India. RBI has invited applications from more banks for direct
import of gold to curb illegal trade in gold and increase competition in the market

8. In March 2006, RBI has issued know your customer guidelines for non banking finance
companies (NBFC). Customer whose deposit balance with the NBFC is less than Rs 50,000 or
outstanding credit more than Rs 1 lakh need not provide all the documents. The customers will
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Role Of Banks in Indian Economy

be categorized as low risk, medium risk and high risk. Sahara India is one of the largest NBFC in

9. RBI buys and sells foreign currency to maintain the exchange rate of Indian Rupee vs.
Foreign currencies like the US Dollar, Euro, Pound sterling and Japanese yen. Trends in
exchange rate values for these currencies are available on their website.

10. Depending on the liquidity in the money markets, RBI sets the maximum interest rate, Indian
banks can offer on NRI dollar deposits. From March 2006, banks can offer an interest rate equal
to the London Interbank Offered Rate (LIBOR) - an international benchmark rate on dollar

11. The cash reserve ratio (CRR) is the percentage of deposits that banks in India should keep
with RBI. This also depends on the liquidity in the money markets and is currently 5%. The
reverse repo rate is the rate at which RBI absorbs funds from banks.

12. RBI also regulates the opening /installation of ATM (Automatic Teller Machines). It is trying
to increase the density of the ATMs in rural areas. Fresh currency notes for ATMs are supplied
by RBI

13. There are about 1050 clearing houses which settle transactions related to cheques, drafts and
pay orders. The State Bank of India manages 567 clearing houses, mainly in the smaller cities
and towns.

14. The annual monetary policy is announced in April every year.

15. An outstation cheque from metro cities (Mumbai, Delhi, Chennai, Kolkata) costs banks only
50 paisa for clearing through the RBI clearing system but banks like ICICI bank charge Rs 100
for clearing the cheque. RBI has asked banks to display the service charges on their website, but
only 5 banks have complied so far.

16. RBI regulates the opening of branches by banks and ensures that they follow the Know Your
Customer guidelines.

17. To maintain the monetary stability so that the business and economic life can deliver welfare
gains of properly functioning mixed economy.

18. To maintain stable payments systems so that financial transactions can be safely and
efficiently executed.

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Role Of Banks in Indian Economy

19. To promote the development of financial infrastructure of markets and systems, and to enable
it to operate efficiently i.e. to play a leading role in developing a sound financial system so that it
can discharge its regulatory function efficiently.

20. T o ensure that credit allocation by the financial system broadly reflects the national
economic priorities and societal concerns.

21. To regulate overall volume of money and credit in the economy with a viaew to ensure a
reasonable degree of price stability.


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Role Of Banks in Indian Economy

For any financial system to mobilize and allocate savings of the country successfully and
productively and to facilitate day-today 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 society’s liquid savings and the entity through which payments are made is the Commercial

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 other
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

• PSU banks

• Private banks

• Foreign banks

a. PSU banks

Nationalized banks dominate the banking system in India. The history of nationalised banks in
India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the
SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July
1960, its seven subsidiaries were also nationalised with deposits over 200 crores. These
subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad
(SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank of Patiala (SBP),
State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT).

However, the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira
Gandhi. The major objective behind nationalisation was to spread banking infrastructure in rural
areas and make cheap finance available to Indian farmers. The nationalised 14 major commercial
banks were Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of
Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank,
Indian Overseas Bank, Oriental Bank of Commerce (OBC), Punjab and Sind Bank, Punjab
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National Bank (PNB), Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India

In the year 1980, the second phase of nationalisation of Indian banks took place, in which 7 more
banks were nationalised with deposits over 200 crores. With this, the Government of India held a
control over 91% of the banking industry in India. After the nationalisation of banks there was a
huge jump in the deposits and advances with the banks. At present, the State Bank of India is the
largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90
million customers through a network of 9,000 branches.

Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was
nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State
Banks of India (formed subsidiary) took place on 19th July, 1960. The second phase of
nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised
with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India
were under Government ownership. After the nationalisation of banks in India, the branches of
the public sector banks rose to approximately 800% in deposits and advances took a huge jump
by 11,000%.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over 200 crores.

Why Bank Nationalization?

The need for the nationalisation was felt mainly because private commercial banks were not
fulfilling the social and developmental goals of banking which are so essential for any
industrialising country. Despite the enactment of the Banking Regulation Act in 1949 and the
nationalisation of the largest bank, the State Bank of India, in 1955, the expansion of commercial
banking had largely excluded rural areas and small-scale borrowers.

The developmental goals of financial intermediation were not being achieved other than for
some favoured large industries and established business houses. Whereas industry’s share in
credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34 per cent
to 68 per cent, agriculture received less than 2 per cent of total credit. Other key areas such credit
to exports and small-scale industries were also neglected.

The stated purpose of bank nationalisation was to ensure that credit allocation occur in
accordance with plan priorities. Nationalisation took place in two phases, with a first round in

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Role Of Banks in Indian Economy

1969 covering 14 banks followed by another in 1980 covering 7 banks. Currently there are 27
nationalised commercial banks.

Initially, the focus was on the physical extension of banking services. There is no doubt that the
achievement has been impressive by any standards. From only 8261 in June 1969, the number of
branches of commercial banks increased to 65,521 in 2000. (Indeed, they had increased to even
more, but, as we shall see, the “reforms” of the nineties caused a decline in the number of rural
branches.) The expansion of rural branches was especially noteworthy. The population covered
by a branch decreased from 65,000 in 1969 to 15,000 in 2001. There were associated increases in
both deposits and credit flow

b. Private sector banks

Currently, India has 88 scheduled commercial banks (SCBs), 31 private banks and 38 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to
a report by ICRA Limited, a rating agency, private and foreign banks holding 18.2% and 6.5%
respectively, 0.3% non-scheduled commercial banks.

Old generation private banks

Old generation private banks are the banks which prevailed mainly before independence. The
only purpose of those banks was to serve specific religion, caste, race, or region. So, old
generation private banks served the purpose and function of development of very small section of

New generation private banks

New generation private banks like HDFC, ICICI, IDBI, and AXIS have grown with a rapid
branch expansion. The network of private sector bank grew at almost three times of all scheduled
commercial banks and more than four times that of public sector banks The star performers
among these banks were the Centurion Bank of Punjab (CBoP), HDFC Bank, ICICI Bank, and
the Axis Bank (formerly UTI Bank). These big four expanded their branch network at a rapid
rate of 14-16 percent per annum in terms of compound growth rates.

All these new private commercial banks adopted the functioning strategies and policies like that
of foreign banks. The work culture and service tendering is kept just in the proficient manner as
foreign banks keep.

• E.g. reduction in unnecessary no. of employees; working in efficient and effective

manner; proper classification of products and product-wise departments etc.

• Diverse product-line and large no. of branches.

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Role Of Banks in Indian Economy

• Performance of additional products in less cost: thus, cost cutting measures were taken by
these banks.

• Most important step taken by these banks was to serve small industries and small traders.

c. Foreign banks

Foreign banks working in India like Abn-amro, HSBC, CITI, Standard Chartered Bank brought
the drastic changes in whole banking industry. Foreign Banks in India always brought an
explanation about the prompt services to customers. After the set up foreign banks in India, the
banking sector in India also become competitive and accretive.

• Computerized functioning, core banking, ATM centres are the ideas generated by foreign

• More options for customers: cash management, channel financing, foreign currency

• New innovative products being introduced and fee based income increased to meet the
challenges ahead.

• Banc assurance and other products, outsourcing of some products, technology-based

payment systems.

• Product innovations and process re-engineering to meet customer requirements reduce

cost, improve efficiency.


Co-operative banks in this country are a part of vast and powerful structure of co-operative
institutions which are engaged in tasks of production, processing, marketing, distribution,
servicing and banking in India. The beginning co-operative banking in this country dates back to
about 1904, when official efforts were made to create a new type of institution based on
principles of co-operative organization & management, which were considered to be suitable for
solving the problems peculiar to Indian conditions.

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In rural areas, as far as the agricultural and related activities are concerned, the 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 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.


A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. Co-operative banks are often created by persons
belonging to the same local or professional community or sharing a common interest. Co-
operative banks generally provide their members with a wide range of banking and financial

Type, structure:





PLDB’ Branch
Initiatives towards development of co-operative banks: es of

1. Reorganisation of PACS’s (a scheme by NABARD).

2. Licensing of new USB’s liberalised.
3. National Co-operative Bank of India (NCBI) was registered in 1993.
(Multi-state co-operative society)-it has no regulatory functions.
4. Co-operative development bank (set up by NABARD).
5. Lending and borrowing rates of all co-operative have been more or less completely freed
or deregulated.
6. Allowing all PCB’s to undertake equipment leasing and hire-purchase financing.
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Role Of Banks in Indian Economy


• Co-operative bank performs all the main banking functions of deposit mobilisation,
supply of credit and provision of remittance facilities.

• Co-operative Banks belong to the money market as well as to the capital market.

• Co-operative Banks provide limited banking products and are functionally specialists in
agriculture related products. However, co-operative banks now provide housing loans

• UCBs provide working capital loans and term loan as well.

• Co-operative Banks are organised and managed on the principal of co-operation, self-
help, and mutual help. They work on the basis of “no profit no loss”. Profit maximization
is not their goal.

• Co-operative banks do banking business mainly in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs operate in semi-urban, urban, and metropolitan areas

• 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
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

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Role Of Banks in Indian Economy

• 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.


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

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) The Industrial Development Bank of India (IDBI)

(2) The Small Industries Development Bank of India (SIDBI)

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(3) National Bank for Agriculture and Rural development of India (NABARD)

(4) Export Import Bank of India (EXIM)

(5) The Industrial Finance Corporation of India (IFCI)

(6) The Industrial Reconstruction Bank of India (IRBI)

(7) The National Small Industries Corporation (NSIC)

(8) The National Industrial Development Corporation (NIDC)

(9) Shipping credit and Investment corporation of India (SCICI)

a. Industrial Development Bank of India (IDBI):

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 set
up 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 non-project nature such as equipment finance,
asset credit and equipment leasing, merchant banking, debenture trusteeship and Forex services
to corporate. 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,
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Role Of Banks in Indian Economy

both in rupee and foreign currencies, for green-field projects as also for expansion,
modernization 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, IDBI’s 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

The migration to the new business model of commercial banking, with its gateway to low-cost
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.

In particular, IDBI would leverage the strong corporate relationships built up over the years to
offer customized and total financial solutions for all corporate business needs, single-window
appraisal for term loans and working capital finance, strategic advisory and “hand-holding”
support at the implementation phase of projects, among others.

IDBI’s transformation into a commercial bank would provide a gateway to low-cost deposits like
Current and Savings Bank Deposits. This would have a positive impact on the Bank’s overall
cost of funds and facilitate lending at more competitive rates to its clients. The new entity would
offer various retail products, leveraging upon its existing relationship with retail investors under
its existing Suvidha Flexi-bond schemes. In the emerging scenario, the new IDBI hopes to realize
its mission of positioning itself as a one stop super-shop and most preferred brand for providing
total financial and banking solutions to corporate and individuals, capitalizing on its intimate
knowledge of the Indian industry and client requirements and large retail base on the liability

Main Functions of IDBI:

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Role Of Banks in Indian Economy

• IDBI coordinates between various financial institutions who are highly involved in
providing financial assistance, promoting, and developing various industrial units

• 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

• IDBI works for the advancement of technology and other welfare schemes to ensure
economic development.

• Industrial Development Bank of India acts as a catalyst in various industrial development


• IDBI provides financial assistance to all kinds of industrial units which comes under the
provisions of the IDBI Act

• IDBI has served various industrial sectors in India for about three years and has grown
leaps and bounds in its size and operating units

Other Important Functions:

Promotional and Developmental Activities:

In fulfillment of its developmental role the Bank continues to perform a wide range of
promotional activities relating to developmental programmes for new entrepreneurs, consultancy
services for small and medium enterprises and programmes designed for accredited voluntary
agencies for economic upliftment of the underprivileged. These include entrepreneurship
development, self-employment and wage employment in industrial sector for weaker sections of
society through voluntary agencies, support to Science and Technology Entrepreneurs' Parks,
Energy Conservation, Common Quality Testing Centre’s for small industries.
With a view to making available at reasonable cost, consultancy and advisory services to
entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other All-
India Financial Institutions, has set up a network of Technical Consultancy Organizations
(TCOs) covering the entire country. TCOs offer diversified services to small and medium
enterprises in the selection, formulation and appraisal of projects, their implementation and

Infrastructure financing:

IDBI remains a prominent player in infrastructure financing. It has been forefront in structuring
and financing of infrastructure projects in the areas of power, telecom, roads, airports, seaports,
railways, and logistics as well as special economic zones (SEZs) ever since the infrastructure
opened to private sector investment, and a significant share of its aggregate goes to infrastructure
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Role Of Banks in Indian Economy

sector. IDBI continues to provide assistance to road projects considering the importance of road
infrastructure development for achieving higher growth in the national economy. Recognizing
the critical role of infrastructure development in the growth of national economy and huge
investment in the sector, focused approach was followed to provide end-to-end solutions to the
infrastructure companies’ viz. corporate advisory, syndication of debt/equity, financial
structuring, term loans, working capital, securitization and other related services.

Financial Inclusion:

In addition to providing development finance, IDBI stands committed to financial inclusion and
in this endeavor, designs products and services catering to wider sections of the society. As a
first step bank had earlier launched the ‘sabka’ savings account with an intention to make basic
banking services accessible to a vast majority of the unbanked and under banked population.
The facility offers core-banking facilities and conveniences at a low average balance
requirement. The scheme was subsequently further modified so as to cover a wider network of
customers. IDBI bank initiated the mobile cash van satara to serve the surrounding areas

b. Small scale Industrial Development Bank of India (SIDBI)

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, co-ordinates and
further strengthens various arrangements for providing financial and non-financial assistance to
small-scale, tiny, and cottage industries.

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Role Of Banks in Indian Economy

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: Small Industries Development Fund and 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 eligible for assistance from SIDBI is
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:

• SIDBI will now refinance the SFCs and commercial banks for modernization projects up
to Rs 50 lakhs from unutilized corpus of about Rs 75 crore;

• SIDBI’s refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc. for
composite loans will be doubled to Rs 100 lakhs

• 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;

• 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.

SIDBI has entered into MOU with many banks, governmental agencies, international agencies,
R&D institutions, and industry associations for developing SSIs.

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Role Of Banks in Indian Economy

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Role Of Banks in Indian Economy

c. 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:

• It grants direct loans in India and outside for the purpose of imports and exports;

• Refinances loans to banks and other notified financial institutions for the purpose of
international trade ;

• Rediscounts usance export bills for banks;

• Provide overseas investment finance for Indian companies toward their equity
participation in joint venture abroad and guarantees, along with banks, obligations on
behalf of project exporters;

• 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

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Role Of Banks in Indian Economy

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

• Various Stages of Exports Covered by EXIM Bank-

• Development 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’s

The Small and Medium Enterprises (SME) Finance

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Role Of Banks in Indian Economy

The importance of SME sector is well-recognized world over owing to its significant
contribution in achieving various socio-economic objectives, such as employment generation,
contribution to national output and exports, fostering new entrepreneurship and to provide depth
to the industrial base of the economy. India has a vibrant SME sector that plays an important role
in sustaining economic growth, increasing trade, generating employment and creating new

Indian SMEs require business advisory services to enhance their international competitiveness in
a highly competitive globalizing world. The SMEs find the services of reputed national and
international consultants as not cost effective and often, not adequately focused. Recognizing this
knowledge gap, EXIM Bank of India has been endeavoring to provide a suite of services to its
SME clients. These include providing business leads, handholding during the process of winning
an export contract and thus assisting the generation of export business on success fee basis,
countries/ sector information dissemination, capacity building in niche areas such as quality,
safety, export marketing, etc. and financial advisory services such as loan syndication, etc

Agri Finance:

The globalization and post-WTO scenario offers considerable scope for exports of Indian
agricultural products. E Bank has a dedicated Agri Business Group to cater to the financing
needs of export oriented companies dealing in agricultural products.
Financial assistance is provided by way of term loans, pre-shipment/post-shipment credit,
overseas buyers' credit, bulk import finance, guarantees etc. Term loans with varying maturities
are provided for setting up processing facilities, expansion, modernization, purchase of
equipment, import of equipment/technology, financing overseas joint ventures and acquisitions
The Bank has strong linkages with other stakeholders in agri sector such as Ministry of Food
Processing Industries, GOI, NABARD, APEDA, Small Farmers' Agri-Business Consortium
(SFAC), and National Horticultural Board etc. Apart from financing, the Bank also provides a
range of advisory services to agri exporters.
The Bank also publishes a number of Occasional Papers, Working Papers on export potential of
various sub-sectors in agriculture and a bi-monthly publication in different languages on global
scenario in agri-business and opportunities therein.

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Role Of Banks in Indian Economy

d. National Bank of Agriculture and Rural Development (NABARD):

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Role Of Banks in Indian Economy

NABARD was set up on July 12, 1982 under Act of parliament as a central or apex institutions
for financing agricultural and rural sectors.

National Bank for Agriculture and Rural Development (NABARD) is an apex development bank
in India. It has been accredited with "matters concerning policy, planning and operations in the
field of credit for agriculture and other economic activities in rural areas in India".

NABARD was established by an act of Parliament on 12 July 1982 to implement the National
Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit
Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India and
Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere
agencies to provide credit in rural areas.

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.

It provides short term finance assistance for period of 18 months to state co-operative banks,
commercial banks, RRBs, and so on for wide range of activities in the areas of production,
trading, marketing and storage. It also gives loans up to 20 years of maturity to the state
government to enable them to subscribe to the share capital of co-operative credit societies.

Serves as an apex financing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas

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.

Co-ordinates the rural financing activities of all institutions engaged in developmental work at
the field level and maintains liaison with Government of India, State Governments, Reserve
Bank of India (RBI) and other national level institutions concerned with policy formulation

Undertakes monitoring and evaluation of projects refinanced by it.

NABARD's refinance is available to State Co-operative Agriculture and Rural Development

Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs),
Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate
beneficiaries of investment credit can be individuals, partnership concerns, companies, State-
owned corporations or co-operative societies, production credit is generally given to individuals.

NABARD provides:
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Role Of Banks in Indian Economy

• Long term finance for minor irrigation facilities, plantations, horticulture, land
development, farm mechanizations, animal husbandry, fisheries etc.

• Short term loan assistance fir financing of seasonal agricultural operations, marketing of
crops, purchase/procurement/distribution of agricultural inputs etc.

• Medium loan facilities for approved agricultural purposes;

• Working capital refinance for handloom weavers

• Refinance for financing government- sponsored programmes such as IRDP, Rozgar

Yogna etc.

Besides this pivotal role, NABARD also:

 Acts as a coordinator in the operations of rural credit institutions

 Extends assistance to the government, the Reserve Bank of India and other organizations
in matters relating to rural development

 Offers training and research facilities for banks, cooperatives and organizations working
in the field of rural development

 Helps the state governments in reaching their targets of providing assistance to eligible
institutions in agriculture and rural development
Acts as regulator for cooperative banks and RRBs

Role of NABARD:

General aspects:

• NABARD should be a managing agency of Government of India for public investments

in rural India.

• It should be the chief overseer, grand planner for public investment and ensure that each
rupee spent in rural India generates a net positive return for rural India.

• NABARD should not resort to passive funding. NABARD has to make things happen by
organizing people and providing knowledge.

• The strength of NABARD is its good networking capabilities. It can act as a coordinating
agency for all the developmental works taking place at the grass roots level.

• The greatest comparative advantage of NABARD is its ability to decontaminate the

effects of subsidy and making public spending more efficient.

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Role Of Banks in Indian Economy

• It is a folly for NABARD to become a Commercial Bank. It is the only institution which
can handle public finance better than the government.

e. Industrial Finance Corporation of India (IFCI):

The IFCI was the first development bank to be established in the country immediately in 1948
with the principal objective to provide medium and long term finance to industrial concerns,
especially in circumstances where normal banking accommodation is inappropriate or resource
to capital issue methods is impracticable.

The Corporation was empowered to assist industrial concerns organized as public limited
companies or co-operative societies and engaged in the manufacture, preservation or processing
of goods or in shipping, mining or hotel industry or in generation and distribution of electricity or
any other form of power. The functions of the Corporation have been enlarged from time to time
and include at present granting of loans and advances to industrial concerns, subscribing to, or
underwriting of, their shares and debentures and guaranteeing loans, raised by them from the
market or banks, deferred payments, foreign loans and credit arrangements.

f. Industrial Reconstruction Bank of India (IRBI):

Industrial Reconstruction Corporation of India Ltd. (IRCI) was set up in April 1971 with an
objective to undertake re-construction and rehabilitation of sick and closed industrial units. This
was later converted to Industrial Reconstruction Bank of India (IRBI) in 1984 by an Act of
Parliament. IRBI is a specialized primary all-India financial institution with primary objective of
functioning as principal credit and reconstruction agency for revival of sick and closed units.
IRBI undertakes the projects of modernization, expansion, and diversification and rationalization
of industrial units and extends financial assistance in the form of (i) granting loans and advances
to third parties granting loan to the unit, and subscribing and underwriting of shares and

IRBI comes into picture when specific cases of sick industries are referred to it by the banks and
financial institutions that have already financed that project.IRBI may also participate in other
projects involving modernization, diversification, and expansion of existing units but its share
cannot exceed more than two 20 per cent of the project cost. Such financing assistance is
disbursed in consortium with other all-India financing institutions.

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Role Of Banks in Indian Economy


1. Capital Formation:

The significance of DFIs lies in their making available the means to utilize savings generated in
the economy, thus helping in capital formation. Capital formation implies the diversion of the
productive capacity of the economy to the making of capital goods which increases future
productive capacity. The process of Capital Formation involves three distinct but interdependent
activities, viz., saving financial intermediation and investment.

However, poor country/economy may be, there will be a need for institutions which allow such
savings, as are currently forthcoming, to be invested conveniently and safely and which ensure
that they are channeled into the most useful purposes.

A well-developed financial structure will therefore aid in the collections and disbursements of
investible funds and thereby contribute to the capital formation of the economy. Indian capital
market although still considered to be underdeveloped has been recording impressive progress
during the post-interdependence period.

2. Support to the Capital Market:

The basic purpose of DFIs particularly in the context of a developing economy, is to accelerate
the pace of economic development by increasing capital formation, inducing investors and
entrepreneurs, sealing the leakages of material and human resources by careful allocation thereof,
undertaking development activities, including promotion of industrial units to fill the gaps in the
industrial structure and by ensuring that no healthy projects suffer for want of finance and/or
technical services. Hence, the DFIs have to perform financial and development functions on
finance functions, there is a provision of adequate term finance and in development functions
there include providing of foreign currency loans, underwriting of shares and debentures of
industrial concerns, direct subscription to equity and preference share capital, guaranteeing of
deferred payments, conducting techno-economic surveys, market and investment research and
rendering of technical and administrative guidance to the entrepreneurs.

3. Rupee Loans:

Rupee loans constitute more than 90 per cent of the total assistance sanctioned and disbursed.
This speaks eloquently on DFI’s obsession with term loans to the neglect of other forms of
assistance which are equally important. Term loans unsupplemented by other forms of assistance
had naturally put the borrowers, most of whom are small entrepreneurs, on to a heavy burden of
debt-servicing. Since term finance is just one of the inputs but not everything for the
entrepreneurs, they had to search for other sources and their abortive efforts to secure other forms
of assistance led to sickness in industrial units in many cases.
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Role Of Banks in Indian Economy

4. Foreign Currency Loans:

Foreign currency loans are meant for setting up of new industrial projects as also for expansion,
diversification, modernization or renovation of existing units in cases where a portion of the loan
was for financing import of equipment from abroad and/or technical know-how, in special cases.

5. Subscription to Debentures and Guarantees

Regarding guarantees, it is well-known that when an entrepreneur purchases some machinery or

fixed assets or capital goods on credit, the supplier usually asks him to furnish some guarantee to
ensure payment of installments by the purchaser at regular intervals. In such a case, DFIs can act
as guarantors for prompt of installments to the supplier of such machinery or capital under a
scheme called ‘Deferred Payments Guarantee’.

6. Assistance to Backward Areas:

Operations of DFI’s in India have been primarily guided by priorities as spelt out in the Five-
Year Plans. This is reflected in the lending portfolio and pattern of financial assistance of
development financial institutions under different schemes of financing. Institutional finance to
projects in backward areas is extended on concessional terms such as lower interest rate, longer
moratorium period, extended repayment schedule and relaxed norms in respect of promoters’
contribution and debt-equity ratio. Such concessions are extended on a graded scale to units in
industrially backward districts, classified into the three categories of A, B and c depending upon
the degree of their backwardness. Besides, institutions have introduced schemes for extending
term loans for project/area-specific infrastructure development. Moreover, in recent years,
development banks in India have launched special programmes for intensive development of
industrially least developed areas, commonly referred to as the No-industry Districts (NID’s)
which do not have any large-scale or medium-scale industrial project. Institutions have initiated
industrial potential surveys in these areas.

7. Promotion of New Entrepreneurs:

Development banks in India have also achieved a remarkable success in creating a new class of
entrepreneurs and spreading the industrial culture to newer areas and weaker sections of the
society. Special capital and seed Capital schemes have been introduced to provide equity type of
assistance to new and technically skilled entrepreneurs who lack financial resources of their own
even to provide promoter’s contribution in view of long-term benefits to the society from the
emergence of a new class of entrepreneurs. Development banks have been actively involved in
the entrepreneurship development programmes and in establishing a set of institutions which
identify and train potential entrepreneurs. Again, to make available a package of services
encompassing preparation of feasibility of reports, project reports, technical and management
consultancy etc. at a reasonable cost, institutions have sponsored a chain of 16 Technical
Consultancy organizations covering practically the entire country. Promotional and development
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Role Of Banks in Indian Economy

functions are as important to institutions as the financing role. The promotional activities like
carrying out industrial potential surveys, identification of potential entrepreneurs, conducting
entrepreneurship development programmes and providing technical consultancy services have
contributed in a significant manner to the process of industrialization and effective utilization of
industrial finance by industry. IDBI has created a special technical assistance fund to support its
various promotional activities. Over the years, the scope of promotional activities has expanded
to include programmes for up gradation of skill of State level development banks and other
industrial promotion agencies, conducting special studies on important issues concerning
industrial development, encouraging voluntary agencies in implementing their programmes for
the uplift of rural areas, village an cottage industries, artisans and other weaker sections of the

8. Impact on Corporate Culture:

The project appraisal and follow-up of assisted projects by institutions through various
instruments, such as project monitoring and report of nominee directors on the Boards of
directors of assisted units, have been mutually rewarding. Through monitoring of assisted
projects, the institutions have been able to better appreciate the problems faced by industrial
units. It also has been possible for the corporate managements to recognize the fact that interests
of the assisted units and those of institutions do not conflict but coincide. Over the years,
institutions have succeeded in infusing a sense of constructive partnership with the corporate
sector. Institutions have been going through a continuous process of learning by doing and are
effecting improvements in their systems and procedures on the basis of their cumulative

The promoters of industrial projects now develop ideas into specific projects more carefully and
prepare project reports more systematically. Institutions insist on more critical evaluation of
technical feasibility demand factors, marketing strategies and project location and on application
of modern techniques of discounted cash flow, internal rate of return, economic rate of return
etc., in assessing the prospects of a project. This has produced a favorable impact on the process
of decision-making in the corporate seeking financial assistance from institutions. In fact, such
impact is not continued to projects assisted by them but also spreads over to projects financed by
the corporate sector on its own.

The association of institutions in the management of corporate bodies has considerably facilitated
the process of progressive professionalism of the corporate management. Institutions have been
able to convince the corporate managements to appropriately re-orient their organizational
structure, personal policies and planning and control systems. In many cases, institutions have
successfully inducted experts on the Boards of assisted companies. As part of their project
follow-up work and through their nominee directors, institutions have also been able to bring
about progressive adoption of modern management techniques, such as corporate planning and
performance budgeting in the assisted units. The progressive professionalism of industrial
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Role Of Banks in Indian Economy

management in India reflects one of the major qualitative changes brought about by the


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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