❖ Banking:

Banking is the business of accepting for the purpose of lending or investment, of deposits of
money from the public repayable on demand and withdraw-able by cheque, draft, and
order or otherwise.”

❖ Banking Regulation Act, 1949:

The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in
India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949
and changed to Banking Regulation Act 1949 from 1 March 1966. It is applicable in jammu
and kashmir from 1956. Initially, the law was applicable only to banking companies. But,
1965 it was amended to make it applicable to cooperative banks and to introduce other
changes.

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❖ Types of Banks:

Central Banks is the apex institution which supervises and controls the entire banking
system. Each country has one central bank. The Reserve Bank of India (RBI) is the central
bank of our country.

These banks play the most important role in modern economic organization. Their business
mainly consists of receiving deposits, giving loans and financing the trade of a country. They
provide short-term credit, i.e., lend money for short periods. This is their special feature.

❖ Scheduled banks:
A scheduled bank, in India, refers to a bank which is listed in the 2nd Schedule of the
Reserve Bank of India Act, 1934. Banks not under this Schedule are called non-scheduled
banks. Scheduled banks are usually private, foreign and nationalized banks operating in
India.

❖ Cooperative banking:

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A cooperative bank is an institution which is owned by its members. They are the
culmination of efforts of people of same professional or other community which have
common and shared interests, problems and aspirations. Cooperative Banks in India have
become an integral part of the success of Indian Financial Inclusion story. Indian
cooperative structures are one of the largest such networks in the world with more than
200 million members.

The structure of cooperative network in India can be divided into 2 broad segments:
Urban and Rural.

Urban Cooperatives can be further divided into scheduled and non-scheduled. Both the
categories are further divided into multi-state and single-state. Majority of these banks fall
in the non-scheduled and single-state category.

The rural cooperatives are further divided into short-term and long-term structures. Short-
term cooperative structures are further sub-divided as:

• State Cooperative Banks- They operate at the apex level in states

• District Central Cooperative Banks-They operate at the district levels
• Primary Agricultural Credit Societies-They operate at the village or grass-root level.

Likewise, the long-term structures are further divided into –

❖ State Cooperative Agriculture and Rural Development Banks (SCARDS)- These operate at
state-level.

Primary Cooperative Agriculture and Rural Development Banks (PCARDBS)-They operate at

district/block level.

❖ State Bank of India:

State Bank of India is a public sector banking and financial services company. It has its
headquarters in Mumbai, Maharashtra. The oldest commercial bank in India, SBI originated
in 1806 as the Bank of Calcutta. Along with the Bank of Bombay (founded 1840) and the
Bank of Madras (founded 1843), it was one of three so-called presidency banks, each of
which was jointly owned by the provincial government and private subscribers. In 1921 the
presidency banks were merged to form the Imperial Bank of India (IBI), which then became
the largest commercial enterprise in the country. In 1955 the government of India and the
country’s central bank, the Reserve Bank of India (founded 1935), assumed joint ownership
of IBI, which was renamed the State Bank of India. Four years later, by the State Bank of
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India (Subsidiary Banks) Act, banks earlier operated by individual princely states became
subsidiaries of SBI.

State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of
Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides
Bharatiya Mahila Bank (BMB), merged with SBI with effect from April 1, 2017.

❖ Nationalization of Banks in India:

The measure of bank nationalisation came into effect on 19 July 1969. The ownership of 14
major commercial private banks - estimated to be controlling 70 percent of the deposits in
the country - was transferred to the government. There were primarily two reasons why
the ownership of these 14 banks was transferred to the government. The first was the
unpredictable manner in which these functioned as private entities. Second, these
commercial banks were seen as catering to the large industries and businesses. Agriculture,
as a sector, was largely ignored by these banks. 11 years hence, a second nationalisation
took place in April 1980, wherein six more banks were put under government control.

❖ Function of bank:

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❖ Types of Deposits:

Banks are called custodians of public money and mobilization of the deposits from the
public is the most important function of the commercial banks. Mainly, there are two
types of deposits viz. Time Deposits and Demand Deposits.

❖ Time Deposits:

When money is deposited with a “tenure” , it cannot be withdrawn before its maturity
fixed at a particular time. Such deposits are called “Time deposits” or “Term deposits”.
The most common example of Time deposits is “Fixed Deposit”. The rate of interest on
time deposits is usually higher than demand deposits.

❖ Demand deposits:

If the funds deposited can be withdrawn by the customer (depositor / account holder)
at any time without any advanced notice to banks; it is called demand deposit. One can
withdraw the funds from these accounts any time by issuing cheque, using ATM or
withdrawal forms at the bank branches. The money as demand deposit is liquid and can
be encashed at any time. The demand deposits may or may not pay interest to the
depositor. For example, while we get an interest on savings accounts; no interest is paid
on current accounts.

❖ CASA Deposits:

CASA deposits refers to Current Account Saving Account Deposits. As an aggregate the
CASA deposits are low interest deposits for the Banks compared to other types of the
deposits. The Bank with High CASA ratio (CASA deposits as % of total deposits) are in a
more comfortable position than the Banks with low CASA ratios.

❖ Non Resident Ordinary Accounts (NRO):

It is a rupee denominated account and can be in the form of savings or current or

recurring or fixed deposit. The income which is deemed to accrue or arise in India can
be deposited only this type of account. Examples of such forms of incomes are Rent,
Dividend and Commission etc. Such incomes cannot be deposited in NRE Account.

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 Moreover, the interest earned on this form of account is also taxable as compared to
NRE and FCNR Account in which Tax on Interest is not levied in India.

❖ Non-Resident External Account (NRE):

It is a rupee denominated account and the amount in this type of account is freely
repatriable. This type of NRI Account can either be in the form of Savings, Current,
Recurring or Fixed Deposit. There is no tax applicable in India on funds lying in NRE
accounts.

❖ Foreign Currency Non Resident Account (FCNR):

It can only be opened in Foreign Currency and not in the Indian Currency. It is a form of
fixed deposit on which regular interest is paid. As Interest Rates in India (approx 7-8%)
are much higher as compared to the interest rates in western countries (approx 1-2%),
many NRI’s invest their surplus funds in fixed deposits in India through this type of NRI
Account Another benefit of this type of NRI Bank Account is that the investor will not
have to bear any risk of fluctuations in the foreign currency. This type of NRI Bank
Account can be opened for a minimum of 1 year and a maximum of 5 years. Moreover,
the interest earned on this form of NRI Bank Account is also exempted from tax in India.

❖ NOSTRO Account:

Italian word 'nostro' means 'ours'. Hence, Nostro account points at - "Our account with
you" Nostro accounts are generally held in a foreign country (with a foreign bank), by a
domestic bank (from our perspective, our bank). For example, SBI account with HSBC in
U.K.

❖ VOSTRO Account:

Italian word 'vostro' means 'yours'. Hence, Vostro account points at - "Your account
with us" Vostro accounts are generally held by a foreign bank in our country (with a
domestic bank). It generally maintained in Indian Rupee (if we consider India) For
example, HSBC account is held with SBI in India.

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❖ LORO Account:

Again, Italian word 'loro' means 'theirs'. Therefore, it points at - "Their account with
them" Loro accounts are generally held by a 3rd party bank, other than the account
maintaining bank or with whom account is maintained. For example, BOI wants to
transact with HSBC, but doesn't have any account, while SBI maintains an account with
HSBC in U.K. Then BOI could use SBI account.

❖ Advancing Loans:
Advancing Loans refers to one of the important functions of commercial banks. The public
deposits are used by commercial banks for the purpose of granting loans to individuals and
businesses. Commercial banks grant loans in the form of overdraft, cash credit, and
discounting bills of exchange.

❖ Discounting of bills:

Discounting of bill is a process of settling the bill of exchange by the bank at a value less
than the face value before maturity date.

❖ Cash Credit:
Cash credit can be defined as an arrangement made by the bank for the clients to withdraw
cash exceeding their account limit. The cash credit facility is generally sanctioned for one

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year but it may extend up to three years in some cases. In case of special request by the
client, the time limit can be further extended by the bank.

❖ General Utility Functions:

Include the following functions:
• Providing Locker Facilities:
Implies that commercial banks provide locker facilities to its customers for safe keeping of
jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due
to theft at homes.

• Issuing Traveler’s Checks:

Implies that banks issue traveler’s checks to individuals for traveling outside the country.
Traveler’s checks are the safe and easy way to protect money while traveling.

• Dealing in Foreign Exchange:

Implies that commercial banks help in providing foreign exchange to businessmen dealing
in exports and imports. However, commercial banks need to take the permission of the
central bank for dealing in foreign exchange.

• Transferring Funds:
Refers to transferring of funds from one bank to another. Funds are transferred by means
of draft, telephonic transfer, and electronic transfer.

❖ NABARD:

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National Bank for Agriculture and Rural Development (NABARD) is an apex development
financial institution in India, headquartered at Mumbai with regional offices all over India.
NABARD came into existence on 12 July 1982 by transferring the agricultural credit
functions of RBI and refinance functions of the then Agricultural Refinance and
Development Corporation (ARDC). It was dedicated to the service of the nation by the
late Prime Minister Smt. Indira Gandhi on 05 November 1982. Set up with an initial
capital of Rs.100 crore, its’ paid up capital stood at Rs.10,580 crore as on 31 March 2018.
Consequent to the revision in the composition of share capital between Government of
India and RBI, NABARD today is fully owned by Government of India.

NABARD’S VISION: Development Bank of the Nation for Fostering Rural Prosperity.

MISSION: Promote sustainable and equitable agriculture and rural development through
participative financial and non-financial interventions, innovations, technology and
institutional development for securing prosperity.

❖ GOVT. SPONSORED SCHEMES UNDER NABARD:

The Government of India encourages farmers in taking up projects in select areas by

subsidizing a portion of the total project cost. All these projects aim at enhancing capital
investment, sustained income flow and employment areas of national importance.

NABARD has been a proud channel partner of the Government in some of these schemes
shown in this section. Subsidy as and when received from the concerned Ministry is passed
onto the financing banks.

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 • Dairy Entrepreneurship Development Scheme
• Capital Investment Subsidy Scheme for Commercial Production Units for organic/
biological Inputs
• Agri clinic and Agribusiness Centres Scheme
• National Livestock Mission

❖ Reserve bank of India:

The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank
was initially established in Calcutta but was permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and where policies are formulated. Though
originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by
the Government of India.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve
Bank as: "to regulate the issue of Bank notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency and credit system
of the country to its advantage; to have a modern monetary policy framework to meet the
challenge of an increasingly complex economy, to maintain price stability while keeping in
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mind the objective of growth." The Reserve Bank's affairs are governed by a central board
of directors. The board is appointed by the Government of India in keeping with the
Reserve Bank of India Act.

❖ Functions of Reserve Bank of India:

Monetary Authority:

• Formulates, implements and monitors the monetary policy.

• Objective: maintaining price stability while keeping in mind the objective of growth.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations within which the country's

banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors' interest and
provide cost-effective banking services to the public.

Manager of Foreign Exchange:

• Manages the Foreign Exchange Management Act, 1999.

• Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.

Issuer of currency:

• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and
coins and in good quality.

Developmental role:

Performs a wide range of promotional functions to support national objectives.

Banker to the Government:

Performs merchant banking function for the central and the state governments; also acts as
their banker.

Banker to banks:

Maintains banking accounts of all scheduled banks.

Controller of the Credit:

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The RBI undertakes the responsibility of controlling credit created by the commercial banks.
RBI uses two methods to control the extra flow of money in the economy. These methods
are quantitative and qualitative techniques to control and regulate the credit flow in the
country. When RBI observes that the economy has sufficient money supply and it may
cause inflationary situation in the country then it squeezes the money supply through its
tight monetary policy and vice versa.

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❖ Monetary policy of RBI:

Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy
used by the government of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.

Description:

In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of
money in order to meet the requirements of different sectors of the economy and to
increase the pace of economic growth.

The RBI implements the monetary policy through open market operations, bank rate policy,
reserve system, credit control policy, moral persuasion and through many other
instruments. Using any of these instruments will lead to changes in the interest rate, or the
money supply in the economy

Monetary policy can be expansionary and contractionary in nature. Increasing money

supply and reducing interest rates indicate an expansionary policy. The reverse of this is a
contractionary monetary policy.

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❖ Bank Rate:

Bank rate, also referred to as the discount rate .It s the rate of interest which a central
bank charges on its loans and advances to a commercial bank. Whenever a bank has a
shortage of funds, they can typically borrow from the central bank based on the monetary
policy of the country.

❖ MSF:
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 Marginal Standing Facility is a liquidity support arrangement provided by RBI to
commercial banks if the latter doesn’t have the required eligible securities above the SLR
limit.

❖ Launch of Marginal Standing Facility (MSF):

The MSF was introduced by the RBI in its monetary policy for 2011-12 after successfully test
firing it from December 2010 onwards.

Under MSF, a bank can borrow one-day loans form the RBI, even if it doesn’t have any
eligible securities excess of its SLR requirement (maintains only the SLR). This means that
the bank can’t borrow under the repo facility.

❖ Repo Rate:

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of
India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is
used by monetary authorities to control inflation.

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❖ Reverse Repo Rate:

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India
in case of India) borrows money from commercial banks within the country. It is a monetary
policy instrument which can be used to control the money supply in the country.

❖ Cash Reserve Ratio:

The Cash Reserve Ratio refers to a certain percentage of total deposits the commercial
banks are required to maintain in the form of cash reserve with the central bank. The
objective of maintaining the cash reserve is to prevent the shortage of funds in meeting the
demand by the depositor. The amount of reserve to be maintained depends on the bank’s
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experience regarding the cash demand by the depositors. If there had been no government
rules, the commercial banks would keep a very low percentage of their deposits in the form
of reserves.

❖ Statutory liquidity Ratio:

The central bank has the legal power to change the CRR any time at its discretion. The cash
reserve ratio is a legal requirement and therefore it is also called as a Statutory Reserve
Ratio (SRR). The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the
commercial bank is required to maintain with them in the form of liquid assets in addition
to the cash reserve ratio.

❖ Open Market Operations:

The Open Market Operations refers to the sale and purchase of government securities and
treasury bills by the central bank of the country with a view to regulate the supply of
money in the economy. When the central bank wants to increase the money supply in the
economy, it purchases the government securities, i.e., bills, and bonds. On the other
hand, the central bank sells the government bonds and securities if the money supply is to
be curtailed. The open market operations are one of the most widely used measures of
monetary control.

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❖ Moral Suasion:
Moral Suasion refers to a method adopted by the central bank to persuade or convince the
commercial banks to advance credit in accordance with the directives of the central bank in
the economic interest of the country. Simply, the process in which the central bank
requests or persuade the commercial banks to comply with the general monetary policy of
the central bank is called a moral suasion

❖ Credit Rationing:
The Credit Rationing is a measure undertaken by the central bank to limit or deny the
supply of credit based on the investor’s creditworthiness and an increased loan demand. In
other words, a situation where the central bank denies credit to the borrowers who want
funds and are willing to pay a higher interest rate is called a credit rationing.

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❖ Inflation Targeting Framework:

Inflation targeting is a monetary policy in which a central bank estimates and makes public
a projected or “target” inflation rate. After declaration of target, the central bank attempts
to steer actual inflation towards the target through the use of interest rate changes and
other monetary tools. The Union Government has set an Consumer Price Index based
inflation target of 4±2% for the next five years i.e. till March 31, 2021. In this regard,
Union Government has also set-up Monetary Policy Committee (MPC) to adhere to the
target.

❖ Monetary Policy Committee:

In India, the monetary policy is responsibility of RBI. The main objectives of the monetary
policy in India are to maintain the price stability, securing the financial stability and to
ensure the adequate flow of credit. The Monetary Policy Committee was set up in 2015
after amending the RBI Act. In context, a Monetary Policy Framework Agreement was
signed on February 20, 2015.

Monetary Policy Committee is an executive body of 6 members. Of these, three members

are from RBI while three other members are nominated by the Central Government.
Governor of the Reserve Bank of India is the ex-officio chairperson of the committee. Each
member has one vote. In case of a tie, the RBI governor has casting vote to break the tie.
MPC is needed to meet at least four times a year and make public its decisions following
each meeting.

❖ Line of Credit:
The Line of Credit is the agreement between the financial institution (bank) and the
individual (company or government) with respect to the maximum loan amount that an
individual can borrow from a bank any time he wants, provided the loan amount does not
exceed the set limit in the agreement. The line of credit can be secured by collaterals or
could be unsecured depending on the past credit records of the individual.

❖ Kiosk Banking:
The Kiosk Banking is the initiative taken by the RBI for those living in villages or other
remote areas who are deprived of banking services due to the non-availability of a bank
branch in their locality. In such arrangement, the person is not required to go the bank to

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avail the banking services. Instead, the bank comes to the village where the person can
make the transactions.

❖ Non-Banking Financial Companies (NBFCs):

The Non-Banking Financial Companies (NBFCs) are the financial institutions that offer the
banking services, but does not comply with the legal definition of a bank, i.e. it does not
hold a bank license.

NBFCs do the business of loans and advances, acquisition of shares, stock, bonds,
debentures, securities issued by Government. They also deal in other securities of like
marketable nature, leasing, hire-purchase, insurance business, chit business.

Usually, the 50-50 test is used as an anchor to register an NBFC with RBI. 50-50 Test means
that the companies at least 50% assets are financial assets and its income from financial
assets is more than 50% of the gross income.

Non-Banking Financial Companies are regulated by different regulators in India such as RBI,
Irda, SEBI, National Housing Bank and Department of Company Affairs. NBFCs which are
regulated by other regulators are exempted from the requirement of registration with RBI
but they need to register with respective regulators.

The major differences between NBFCs and Banks are as follows:

• NBFC cannot accept demand deposits (they can accept term deposits).

• NBFCs do not form part of the payment and settlement system i.e. they cannot issue
cheques drawn on itself.

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❖ Merchant Banking:
Merchant banking can be defined as a skill-oriented professional service provided by
merchant banks to their clients, concerning their financial needs, for adequate
consideration, in the form of fee. Merchant banks are a specialist in international trade and
thus, excel in transacting with large enterprises.

Any person, indulged in issue management business by making arrangements with respect
to trade and subscription of securities or by playing the role of manager/consultant or by
providing advisory services, is known as a merchant banker.

❖ Mezzanine Financing:
The Mezzanine Financing is a quick way to raise loans for the expansion of current
business operations, from the investors or the financial institution such as a bank, without
keeping any collateral security against it. But however, the lender has the right to convert
the debt capital to ownership or equity interest in the company, in case the borrower
defaults in the payment of the loan.
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The mezzanine financing includes no collateral security and involves minimum due
diligence, the risk is high for the lender.

❖ Chit Fund Company:

The Chit Fund Company is a financial institution engaged in the principal business of
managing, conducting and supervising the chit scheme. The chit scheme is also known by
different names, such as Chitty,Kuri, Chit, Chit Fund

The operations of the Chit Fund Company are governed by the Chit Fund Act, 1982,
administered by the State Governments. While the deposit taking activities of, such firm is
regulated by the Reserve Bank of India.

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❖ Microfinance:
The Microfinance is the cluster of banking services, relatively of lower monetary amounts,
designed specifically to meet the banking requirements of an unemployed or low-income
people. Microfinance is the arrangement of financial services including loans, savings,
insurance, money transfers and remittances offered to the lower income groups or poor
entrepreneurs, who otherwise cannot avail the standard banking services.

❖ Mutual Benefit Finance Companies:

The Mutual Benefit Finance Companies also called as “Nidhis”, are the non-banking
finance companies that enable its members to pool their money with a predetermined
investment objective. The main sources of funds are share capital, deposits from its
members, deposits from the general public

❖ Rural banking:
Rural banking has become integral to the Indian financial markets with a majority of Indian
population still living in rural or semi-urban areas. Government of India and the Reserve
Bank of India have been continuously working to achieve complete financial inclusion i.e.
timely and sufficient access to financial services and credit at an affordable cost, in the vast
expanse of our country.

❖ RBI has also encouraged the spread of these banks by undertaking the following:

• Allowing non-target group financing for RRBs.

• Recapitalisation and recapitalisation and restructuring of RRBs.
• Simplification of lending procedures as per Gupta Committee recommendations
• Special credit plans
• Kisan Credit
• Deregulation of lending rates Direct financing for SCBs
• Various relaxations in investment policies and non-fund business

❖ Jan Dhan Yojana:

Pradhan Mantri Jan Dhan Yojana (PMJDY) or National Mission for Financial Inclusion was
launched on 28 August 2014 to ensure affordable access to financial services viz. Bank
accounts, remittance, credit, insurance and pension. This scheme was launched to provide

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basic banking accounts to 7.5 crore unbanked people with RuPay debit card and overdraft
facility (after six months).

Facilities offered under the scheme:

• A bank account with no minimum balance; and interests on deposits

• Debit cards
• Accidental Insurance Cover of Rs. 1 Lakh; life cover of Rs.30000/- payable on death of
beneficiary.
• Overdraft facility up to Rs.5000/- on satisfactory operation of 6 months.
• Easy transfer of money across India.
• Transfer of benefits under DBT in these accounts.
• Access to pension and insurance products.

❖ E-Banking :

Electronic banking can be defined as the use of electronic delivery channels for banking
products and services, and is a subset of electronic finance . The most important electronic
delivery channels are the Internet, wireless communication networks, automatic teller
machines (ATMs), and telephone banking. Internet banking is a subset of e-banking that is
primarily carried out by means of the Internet. The term transactional e- banking is also
used to distinguish the use of banking services from the mere provision of information

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❖ DIGITAL PAYMENT METHODS:

The Digital India programme is a flagship programme of the Government of India with a
vision to transform India into a digitally empowered society and knowledge economy.
“Faceless, Paperless, Cashless” is one of professed role of Digital India.
As part of promoting cashless transactions and converting India into less-cash society,
various modes of digital payments are available.
These mode are:

❖ Non -performing Assets:

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A Non-performing asset (NPA) is defined as a credit facility in respect of which
the interest and/or installment of principal has remained ‘past due’ for a specified period of
time. In simple terms, an asset is tagged as non performing when it ceases to generate
income for the lender. Reserve Bank of India defines, these non performing Assets
according to international best practices of “90 days overdue” norms. According to these
norms, a NPA is such a loan or advance given by a bank where the interest or installment of
the principal sum remains overdue for more than 90 days (in respect of a term loan).

Types of assets in Books of Banks:

• Standard assets :- Assets which are generating regular income to the bank.

• Sub-standard assets :- An asset which is overdue for a period of more than 90 days
but less than 12 months.

• Doubtful assets :- An asset which is overdue for a period of more than 12 months.

• Loss assets :- Assets which are doubtful and considered as non-recoverable by bank,
internal or external auditor or central bank inspectors

Sub-standard assets, Doubtful assets and Loss assets are NPA.

❖ ICICI Bank:

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Industrial Credit and Investment Corporation of India (ICCI) Ltd. was established in 1955 at
the initiative of World Bank, the Government of India (GoI) and representatives of Indian
industry, with the principal objective of creating a development nancial institution for
providing medium-term and long-term project nancing to Indian businesses. The ICICI Bank
was originally founded in 1994 by ICICI Limited, an Indian nancial institution and was its
wholly-owned subsidiary. Its headquarters is in Mumbai, Maharashtra. It provides a
comprehensive range of nancial and advisory products including project nancing for the
infrastructure sectors, corporate nance products, lease nance, guarantees and equity
products as well as advisory services.

❖ Industrial Finance Corporation of India (IFCI Bank):

Industrial Finance Corporation of India (IFCI) was set up on July 1, 1948 in New Delhi to
provide medium and long-term nancial assistance to the manufacturing, services and
infrastructure sectors. It is a Government Company under Section 2(45) of the Companies
Act, 2013. It is also a Systemically Important Non-Deposit taking NonBanking Finance
Company (NBFC-ND-SI), registered with the Reserve Bank of India (RBI). It grants loans only
to public limited companies and co-operatives but not to private limited companies or
partnership rms, both in rupees and foreign currencies. It also underwrites the issue of
stocks, bonds, shares, etc.

❖ Small Industries Development Bank of India (SIDBI):

Small Industries Development Bank of India (SIDBI) is the principal nancial institution for the
promotion, nancing and development of the Micro, Small and Medium Enterprise (MSME)
sector and also co-ordinates the functions of the institutions engaged in similar activities. It
was set up on April 2, 1990 under the Small Industries Development Bank of India Act,
1989. It has headquarters in Lucknow, Uttar Pradesh.

❖ Industrial Development Bank of India (IDBI):

Industrial Development Bank of India (IDBI) was constituted under Industrial Development
Bank of India Act, 1964 as a Development Financial Institution (DFI) and came into being as
on July 01, 1964. On October 1, 2004, the erstwhile IDBI was converted into a banking
company – IDBI Ltd. - to undertake the entire gamut of banking activities while continuing
to play its secular DFI role. Desirous of fuelling its business growth, IDBI Ltd. merged its
subsidiaries - the erstwhile IDBI Bank, IDBI Home Finance Ltd., IDBI Gilts, the erstwhile
United Western Bank Ltd., with itself over a period of time. IDBI Ltd. also changed its name
to IDBI Bank Ltd. to reflect its widened business functions. The registered office of the bank
is located in Mumbai.

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❖ All India Development Finance Institutions (DFIs) at a Glance

IFCI IDBI SIDBI

IFCI was the first DFI to be IDBI was initially set up as a SIDBI was setup as a
setup in 1948. Subsidiary of the RBI. In subsidiary of IDBI in 1989.
February 1976, IDBI was
made fully autonomous.

With Effect from 1 July 1993, IDBI was designated as apex
IFCI has been converted into organisation in the eld of
Public Limited Company. Development Financing.
However, it was converted
in a bank wef Oct 2004.
SIDBI was designated as
apex organisation in the eld
of Small Scale Finance. The
Union Budget of 1998-99
proposed the delinking of
SIDBI from IDBI.

The key function of IFCI was;
granting long-term loans(25
years and above);
Guaranteeing rupee loans
oated in open markets by
industries; Underwriting of
shares and debentures;
Providing guarantees for
industries.
The key functions of IDBI The key function of SIDBI
were; it provides renance was; to provide assistance to
against loans granted to small scale units; initiating
industries; it subscribed to steps for technological up
the share capital and bond gradation and
issues of other DFIs; it also modernization of SSIs;
acted as the coordinator of expanding the marketing
DFIs at all India level. channel for the Small Scale
Industries product;
promotion of employment
creating SSIs

❖ UTI:

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative control
of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. UTI Mutual Fund was carved out of the erstwhile Unit Trust of India (UTI) as a
SEBI registered mutual fund from 1 February 2003. The Unit Trust of India Act 1963 was
repealed, paving way for the bifurcation of UTI into – Specified Undertaking of Unit Trust of
India (SUUTI); and UTI Mutual Fund (UTIMF).
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❖ SIDBI:

Small Industries Development Bank of India (SIDBI) is a development financial institution in

India, headquartered at Lucknow and having its offices all over the country. Its purpose is to
provide refinance facilities and short term lending to industries, and serves as the principal
financial institution in the Micro, Small and Medium Enterprises (MSME) sector. SIDBI also
coordinates the functions of institutions engaged in similar activities. SIDBI operates under
the Department of Financial Services, Government of India.
SIDBI is one of the four All India Financial Institutions regulated and supervised by the
Reserve Bank; other three are EXIM Bank, NABARD and NHB. They play a salutary role in
the financial markets through credit extension and refinancing operation activities and
cater to the long-term financing needs of the industrial sector
SIDBI is active in the development of Micro Finance Institutions through SIDBI Foundation
for Micro Credit, and assists in extending microfinance through the Micro Finance
Institution (MFI) route. Its promotion & development program focuses on rural enterprises
promotion and entrepreneurship development.

❖ SFCs:

State Financial Corporations (SFCs) are the State level financial institutions which play a
vital role in the growth of small & medium enterprises in the concerned States. They offer
financial assistance in the form of direct subscription to debentures/equity, term loans,
guarantees, discounting of bills of exchange & seed/ special capital, etc. SFCs have been set
up with the purpose of catalyzing higher investment, engendering greater employment &
extending the ownership base of industries. They have also started offering assistance to
newer types of business activities like tissue culture, floriculture, poultry farming, services
related to engineering, marketing and commercial complexes
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❖ Banking Reforms in India:

In economic liberalisation and growing trend towards globalisation (external liberalisation),

various banking sector reforms have been introduced in India to improve the operation
efficiency and upgrade the health and financial soundness of banks so that Indian banks can
meet internationally accepted standards of performance.

• The first Narasimhan Committee (1991)

• The Verma Committee (1996),

• The Khan Committee (1997), and

• The Second Narasimhan Committee (1998).

Narsimham Committee I (1991) was formed to overhaul banking sector of India & to
overcome its problems. On the recommendations of Narasimhan Committee, following
measures were undertaken by government since 1991: –

• Lowering SLR and CRR - The high SLR and CRR reduced the profits of the banks. SLR
had been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with
banks for allocation to agriculture, industry, trade etc. Cash Reserve Ratio (CRR) is the
cash ratio of banks total deposits to be maintained with RBI. The CRR had been
brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the
funds locked up with RBI.

• Prudential Norms - Prudential norms have been started by RBI in order to impart
professionalism in commercial banks. The purpose of prudential norms includes
proper disclosure of income, classification of assets and provision for Bad debts so as
to ensure that the books of commercial banks reflect the accurate and correct
picture of financial position.

• Capital Adequacy Norms (CAN) - Capital Adequacy ratio is the ratio of minimum
capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%.

• Deregulation of Interest Rates - Narasimhan Committee advocated that interest

rates should be allowed to be determined by market forces. Since 1992, interest
rates have become much simpler and freer.

• Recovery of Debts - Government of India passed the “Recovery of debts due to Banks
and Financial Institutions Act 1993” in order to facilitate and speed up the recovery

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 of debts due to banks and financial institutions. Six Special Recovery Tribunals have
been set up. An Appellate Tribunal has also been set up in Mumbai.

• Competition from New Private Sector Banks – Banking was made more open for
private sector. New private sector banks have already started functioning. These new
private sector banks are allowed to raise capital contribution from foreign
institutional investors up to 20% and from NRIs up to 40%. This has led to increased
competition.

• Freedom of Operation - Scheduled Commercial Banks were given freedom to open

new branches and upgrade extension counters, after attaining capital adequacy ratio
and prudential accounting norms. The banks were also permitted to close non-viable
branches other than in rural areas.

• Local Area Banks (LABs) - In 1996, RBI issued guidelines for setting up of Local Area
Banks, and it gave Its approval for setting up of 7 LABs in private sector. LABs will
help in mobilizing rural savings and in channelling them into investment in local
areas.

• Supervision of Commercial Banks - RBI has set up a Board of financial Supervision

with an advisory Council to strengthen the supervision of banks and financial
institutions. In 1993, RBI established a new department known as Department of
Supervision as an independent unit for supervision of commercial banks.

Narasimham Committee Report II – 1998:

In 1998 the government appointed yet another committee under the chairmanship of Mr
Narsimham. It is better known as the Banking Sector Committee. It was told to review the
banking reform progress and design a programme for further strengthening the financial
system of India. The committee focused on various areas such as capital adequacy, bank
mergers, bank legislation, etc.

Recent Banking Committees: Recognizing that banking reforms are a continuous task,
following committee were setup by the government over the past few years:

Nachiket Mor committee :

Committee on Comprehensive Financial Services for Small Businesses and Low-Income

Households, set up by the RBI in September 2013, was mandated with the task of framing a
clear and detailed vision for financial inclusion and financial deepening in India. In its final
report, the Committee has outlined six vision statements for full financial inclusion and
financial deepening in India.

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P.J. Nayak committee:

Public Sector banks have been suffering with multiple problems of non-performing assets
(NPAs), large over-dues; competition, performance, political pressures and so on. In this
context, the former RBI governor Raghuram Rajan had constituted the P.J. Nayak
committee In January 2014 under Shri P.J Nayak, former Chairman and CEO, Axis Bank, and
Former Country Head, Morgan Stanley India. The core terms of reference for the
committee were based on governance, management and operational issues in the public
sector banks.

Urjit Patel committee:

Expert Committee to Revise and Strengthen the Monetary Policy Framework, headed by
the then RBI Deputy Governor Urjit R Patel submitted its report in 2014. Main objective of
the committee was to recommend what needs to be done to revise and strengthen the
current monetary policy framework with a view to making it transparent and predictable.

❖ BIS:

The Bank for International Settlements (BIS) is an international organization of central

banks which fosters international monetary and financial cooperation and serves as a bank
for central banks.” It also provides banking services, but only to central banks, or to
international organizations. Based in Basel, Switzerland, the BIS was established by the
Hague agreements of 1930. As an organization of central banks, the BIS seeks to make
monetary policy more predictable and transparent among its 55 member central banks.
The BIS’ man role is in setting capital adequacy requirements to safeguard bank’s
operations.

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❖ Basel Norms:

Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement

(BIS), which fosters cooperation among central banks with a common goal of financial
stability and common standards of banking regulations. Basel is a city in Switzerland. It is
the headquarters of Bureau of International Settlement (BIS), which fosters cooperation
among central banks with a common goal of financial stability and common standards of
banking regulations.

❖ BASEL I:

In 1988, BCBS introduced capital measurement system called Basel capital accord, also
called Basel 1. It focused almost entirely on credit risk. It defined capital and structure of
risk weights for banks. The minimum capital requirement was fixed at 8% of risk-weighted
assets (RWA). India adopted Basel 1 guidelines in 1999.

Objectives of Basel I were:

(a) to ensure an adequate level of capital in the international banking system

(b) to create a more level playing field in the competitive environment

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❖ BASEL II:

In 2004, Basel II guidelines were published by BCBS, which were considered to be the
refined and reformed versions of Basel I accord. The New Basel Capital Accord focused on,
three pillars viz.

❖ Basel III:

In 2010, Basel III guidelines were released. These guidelines were introduced in response to
the financial crisis of 2008. Basel III norms aim at making most banking activities such as
their trading book activities more capital-intensive. The guidelines aim to promote a more
resilient banking system by focusing on four vital banking parameters viz. capital, leverage,
funding and liquidity. Presently Indian banking system follows Basel II norms. The Reserve
Bank of India has extended the timeline for full implementation of the Basel III capital
regulations by a year to March 31, 2019.

The three pillars of BASEL-3 can be understood from the following figure:

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❖ Capital Adequacy Ratio:

The Capital Adequacy Ratio (CAR) is a measure of a bank's available capital expressed as a
percentage of a bank's risk-weighted credit exposures. CAR is the capital needed for a bank
measured in terms of the assets (mostly loans) disbursed by the banks. Higher the assets,
higher should be the capital by the bank.

A notable feature of CAR is that it measures capital adequacy in terms of the riskiness of the
assets or loans given. For example, if the bank has given loans to the government by
investing in government securities like government bonds, it need not keep any capital. This
is because, the riskiness of loans to government securities is zero and hence, the risk weight
for government securities is zero.

Capital is classified in terms of its degree of contribution from the owners (share holders).
Tier 1 Capital is more equity capital or it is provided by the most responsible people of the

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bank – its share holders. Hence, most of the tier 1 capital will be in the form of equities. On
the other hand, tier 2 capital is more in the form of reserves, debts etc.

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