UNIT 3

Q4) EXPLAIN THE TWO MAIN DEPOSITORIES IN INDIA IN DETAIL.

ANS) The two main depositories in India are the National Securities Depository Limited
(NSDL) and the Central Depository Services Limited (CDSL). These depositories play a
crucial role in the Indian financial market by facilitating the electronic holding and transfer of
securities. Let me provide a detailed explanation of each:
National Securities Depository Limited (NSDL):

 Establishment: NSDL was established in 1996 as the first depository in India. It was
promoted by institutions such as the Industrial Development Bank of India (IDBI),
Unit Trust of India (UTI), and others.
 Operations: NSDL provides electronic depository services for various financial
instruments, including equities, bonds, debentures, and government securities.
 Ownership Structure: NSDL is a public limited company with a diverse ownership
structure, including financial institutions, banks, and the National Stock Exchange of
India (NSE).
 Services: NSDL offers services such as dematerialization (converting physical
securities into electronic form), electronic settlement of trades, and various value-
added services to market participants.
Central Depository Services Limited (CDSL):

 Establishment: CDSL was established in 1999, a few years after NSDL. It is another
depository that operates in the Indian capital market.
 Operations: Similar to NSDL, CDSL facilitates the holding and transfer of securities
in electronic form. It handles a variety of financial instruments, including equities,
bonds, and government securities.
 Ownership Structure: CDSL is also a public limited company with a diversified
ownership structure that includes various banks, financial institutions, and the
Bombay Stock Exchange (BSE).
 Services: CDSL provides services such as dematerialization, electronic settlement,
and other value-added services to market participants. It competes with NSDL to offer
efficient and secure depository services.
 UNIT-4
Q4) WHAT ARE THE ROLE AND IMPROTANCE OF NBFC?
ANS) Roles of NBFCs:

1. Credit Intermediation:
NBFCs play a crucial role in providing credit to various sectors of the economy,
especially to those segments that may not have easy access to traditional banking
services. They cater to the credit needs of small and medium enterprises (SMEs),
traders, and individuals.
2. Financial Inclusion:
NBFCs contribute to financial inclusion by reaching out to underserved and unbanked
segments of the population. They often operate in rural and remote areas where
traditional banks may not have a significant presence.
3. Asset Financing:
NBFCs are involved in asset financing, including loans for the purchase of vehicles,
machinery, equipment, and other assets. This facilitates capital formation in various
industries.
4. Housing Finance:
Many NBFCs specialize in housing finance, providing loans for home purchase and
construction. This supports the real estate sector and helps individuals fulfill their
housing needs.
5. Microfinance:
Some NBFCs focus on microfinance, offering small loans to low-income individuals
and micro-entrepreneurs. This helps in poverty alleviation and empowers individuals
at the grassroots level.
6. Investment Advisory Services:
NBFCs often offer investment advisory services, guiding individuals and businesses
on investment decisions. They may manage portfolios, provide wealth management
services, and offer customized financial solutions.
7. Foreign Exchange Services:
Certain NBFCs are authorized to provide foreign exchange services, facilitating
international trade and travel. They play a role in currency exchange, remittances, and
other related financial services.
8. Leasing and Hire Purchase:
NBFCs engage in leasing and hire purchase activities, allowing businesses and
individuals to acquire assets without significant upfront costs. This is particularly
beneficial for small businesses.

Importance of NBFCs:
1. Diversification of Financial System:
NBFCs contribute to the diversification of the financial system by providing
alternatives to traditional banking channels. This diversification enhances the overall
resilience of the financial sector.
2. Fill Gaps in Credit Market:
NBFCs often address gaps in the credit market by serving niche segments or catering
to the needs of specific industries. This helps in the efficient allocation of capital
across various sectors.
3. Promotion of Competition:
The presence of NBFCs promotes healthy competition in the financial industry,
encouraging innovation and efficiency. This competition can lead to better products
and services for consumers.
4. Tailored Financial Solutions:
NBFCs are known for their flexibility in designing and offering customized financial
solutions. This is particularly beneficial for borrowers with unique financial needs.
5. Job Creation:
The growth of NBFCs contributes to job creation as these companies expand their
operations. This is especially true in sectors such as microfinance, housing finance,
and asset financing.
6. Support for Priority Sectors:
NBFCs often focus on lending to priority sectors, including agriculture, small-scale
industries, and the unorganized sector. This aligns with national development goals
and priorities.
7. Risk Management:
NBFCs, through their risk assessment and management practices, contribute to the
overall stability of the financial system. Their operations are subject to regulatory
frameworks that help mitigate risks.
8. Innovation and Adaptability:
NBFCs are often more agile and adaptable than traditional banks, allowing them to
quickly respond to changing market conditions and customer needs. This capacity for
innovation can be beneficial for the entire financial ecosystem.

While NBFCs play a crucial role in the financial landscape, it's important to note that
they are subject to regulatory oversight to ensure stability and protect the interests of
depositors and investors. The Reserve Bank of India (RBI) is the primary regulatory
authority overseeing NBFCs in India.

Q6) EXPLAIN THE FOLLOWING TYPES OF BANKS:

a) PAYMENT BANKS
 b) SMALL FINANCE BANKS
c) COOPERATIVE BANKS
ANS)
a) PAYMENT BANKS
Payment Banks are a specialized category of banks introduced in India with the
objective of extending banking services to a larger population, particularly the
unbanked and underbanked segments. The concept of Payment Banks was introduced
by the Reserve Bank of India (RBI) to leverage technology and innovation in
providing efficient and accessible banking services. Here are key features and
functions of Payment Banks:

1. Objective:
The primary objective of Payment Banks is to promote financial inclusion by
providing small savings accounts and payment/remittance services to migrant
laborers, low-income households, and other unbanked or underbanked individuals.
2. Limited Services:
Payment Banks are not allowed to undertake the full range of banking activities like
traditional commercial banks. They are restricted from engaging in lending activities,
which means they cannot issue loans or credit cards.
3. Eligible Activities:
Payment Banks are permitted to offer a range of banking services, including:
 Acceptance of Deposits: Payment Banks can accept deposits from individuals,
but the deposit amount is capped at a certain limit.
 Remittance Services: They can provide remittance services, facilitating the
electronic transfer of funds.
 Internet Banking: Payment Banks are allowed to offer internet banking
services.
 Mobile Banking: They can provide mobile banking services.
 Bill Payments: Payment Banks can facilitate utility bill payments and other
transactions.
4. Small Savings Accounts:
Payment Banks are authorized to open small savings accounts for customers. These
accounts have limitations on the maximum balance and transaction amount.
5. Customer Focus:
Payment Banks are designed to cater to customers in remote areas and those who may
not have access to traditional banking services. They often use technology such as
mobile banking and digital wallets to reach a wider audience.

b) SMALL FINANCE BANKS

 Small Finance Banks (SFBs) are a specialized category of banks in India that focus on
providing financial services to unserved and underserved sections of the population,
including small business units, micro and small enterprises, and low-income
households. The concept of Small Finance Banks was introduced by the Reserve
Bank of India (RBI) to promote financial inclusion and provide banking services to
those segments that may not have easy access to traditional banking services. Here are
key features and functions of Small Finance Banks:

1. Objective:
- The primary objective of Small Finance Banks is to extend financial services to
small farmers, micro and small industries, unorganized sector entities, and other
segments that may not have access to formal banking channels.
2. Eligible Activities:
- Small Finance Banks are allowed to undertake the following activities:
- *Basic Banking Services:* They can accept deposits and provide a range of
banking services like savings accounts, fixed deposits, and recurring deposits.
- *Lending:* SFBs can engage in lending activities, providing loans and advances,
especially to small and marginal farmers, micro and small industries, and other
priority sectors.
- *Insurance and Mutual Funds:* They can distribute and market insurance and
mutual fund products.
- *Payment and Remittance Services:* Small Finance Banks can offer payment
and remittance services, facilitating electronic fund transfers.
3. Customer Focus:
- Small Finance Banks are designed to focus on serving the needs of the local
population in rural and semi-urban areas. They aim to reach out to those who may not
have access to mainstream banking services.
4. Ownership Structure:
- The ownership structure of Small Finance Banks includes a mix of public and
private entities. While some are promoted by existing microfinance institutions, others
may have diversified ownership with participation from various stakeholders.
5. Network and Technology:
- Small Finance Banks leverage technology to reach a wider audience. They often
use digital platforms and mobile banking to provide convenient and accessible
services to their customers.

Examples of Small Finance Banks in India include Equitas Small Finance Bank,
Ujjivan Small Finance Bank, and ESAF Small Finance Bank. These banks play a
crucial role in fostering economic development and financial inclusion by catering to
the unique needs of underserved and economically weaker sections of the society.

c) COOPERATIVE BANKS
Cooperative banks are financial institutions that operate on the principles of cooperation and
mutual assistance. They are owned and operated by their members, who are often customers
of the bank as well. These banks are established to provide financial services to their
members and to promote the economic interests of the community they serve. Cooperative
banks follow the cooperative principles and are guided by the values of self-help, self-
responsibility, democracy, equality, equity, and solidarity. Here are key features and
characteristics of cooperative banks:
1. Ownership and Structure:
- Cooperative banks are owned and operated by their members. Each member has voting
rights, regardless of the number of shares they hold. The principle of "one member, one vote"
is a key aspect of the cooperative structure.
2. Purpose and Objectives:
- The primary purpose of cooperative banks is to provide financial services to their
members. These services may include savings and deposit accounts, loans, and other banking
products. Cooperative banks often focus on the financial needs of a specific community or
group of people.
3. Membership:
- Membership in a cooperative bank is typically open to individuals who share a common
bond, such as living in the same locality, belonging to a particular profession, or being part of
a specific community. Members have both rights and responsibilities in the bank.
4. Dual Role:
- Cooperative banks often play a dual role as both a financial institution and a social
organization. In addition to providing financial services, they work towards the economic
development and upliftment of their members and the community.
5. Types of Cooperative Banks:
- Cooperative banks can be categorized into urban cooperative banks and rural cooperative
banks based on their geographical focus. Urban cooperative banks operate in urban and semi-
urban areas, while rural cooperative banks cater to the financial needs of rural areas.
6. Challenges:
- Cooperative banks may face challenges related to governance, financial management, and
regulatory compliance. Ensuring the financial sustainability of these banks while meeting the
diverse needs of their members is an ongoing challenge.
Examples of cooperative banks include credit cooperatives, cooperative credit societies, and
cooperative rural banks. The specific regulations and structure of cooperative banks may vary
from country to country.