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COMMERCIAL BANK

MANAGEMENT
ASSIGNMENT 3

Submitted by:
Karan Kakkar (PGP/20/030)
G Nurjahan (PGP/20/021)
Financial System in India
India have a bank oriented system, with participation of government under the name of The
Reserve Bank of India which regulates the financial banking system of the country. The Banking System
in India is categorized into scheduled and non-scheduled banks. They are further divided into cooperative
and commercial banks. The Reserve Bank of India (RBI) controls all these banks It also acts as the bankers
bank.

Central banks also usually oversee the commercial banking system of their respective countries. In
contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in
the state, and usually also prints the national currency, which usually serves as the state's legal tender.

The main function of a central bank is to control the nation's money supply (monetary policy), through
active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of
last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually
also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial
banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most
developed nations are institutionally designed to be independent from political interference

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well. The main
objectives of monitoring monetary policy are Inflation control, Control on bank credit and interest rate
control. The Reserve Bank of India also has the sole right to issue currency notes except one rupee notes
which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared
unlimited legal tender throughout the country.

The regulation of RBI over other banks is exercised by having banking regulations, guidelines and circulars
that the banks are expected to follow. After having issued the instructions, RBI monitors to compliance to
them through offsite and onsite surveillance.
Which system is good for India?
Taking into consideration Indias market structure such as Environmental stability and Role of
market mechanisms in the environment, we would recommend that India follows Bank-
oriented financial systems with the participation of the Government.
Bank-oriented financial systems with the participation of the Government control the
redistribution of savings, primarily, through banks. The most important long-term financing
instruments for business activity are bank loans. In this case, the Government takes an active part
as on the capital market, so on the money market and the credit market, and it results in
formation of administrative prices. Government bonds are traded on the securities market;
financing of business activity comes through the banks and public financial institutions.
The decisive contribution of the bank-oriented financial system in Germany to the high economic
growth of the country stands testimony to the reliability of the above-mentioned banking system.
Due to long-term relationships between the Bank and Entrepreneur, information costs remain
low, and, comparing with individual investors, advantages of banks may be used. In addition,
banks have more profitable opportunities for influence and control than physical investors on
the capital market. Particular (main) difference between financing of the business activity
through banks lies in the fact that the individual contracts are signed in this form.