Banking System

The banking system is at the core of the financial structure of an

economy and supports its growth. It enables capital growth and
formation through financial intermediation by accumulating
savings from households, governments and businesses and
making credit available for productive activities.
The Indian banking has a multi-tier structure. The Reserve Bank of
India is the regulator of the banking system and the monetary
authority. Its functions include licensing banks and putting in
place regulations for a strong and stable banking system, be the
note-issuing authority and banker to the government and act as a
lender of last resort to the other banks by providing
accommodation in the form of advances. It also acts as a
controller of credit in the monetary system by effecting changes
in the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR)
and other selective credit controls, transact and regulate the
foreign exchange market.
Other apex regulators in the banking system include specialist
institutions that cater to the credit and financial needs of specific
groups. For example, the EXIM bank fosters the growth of export
and import activities. NABARD caters to the need of rural based
development and the National Housing Bank (NHB) regulates the
housing sector of the economy.
Commercial banks may be scheduled commercial banks which
include public sector banks, private sector banks, foreign banks
and regional rural banks or non-scheduled commercial

banks that include local area banks. Apart from commercial banks,
there are co-operative credit institutions such as the urban co-
operative banks and state and district level co- operative banks
that cover rural area needs. Payment banks have been notified by
the RBI to encourage financial inclusion to low income
households, small business and others by providing small savings
accounts and payment/remittance services. Their activities
include accepting current and savings deposits not exceeding
Rs.100,000, issuing ATM/Debit cards but not credit cards and
providing payment and remittance services. The bank cannot
undertake any lending activities. Small Finance Banks are another
category of banks approved by RBI to provide a savings vehicle,
banking facilities and to supply credit to small businesses,
marginal farmers, micro and small industries and other entities in
the unorganized sector.The capital requirements, functions and
obligations and regulatory provisions of each category are defined
by the RBI.
The primary function of the banking system is to accept deposits
and make credit available to those entities that qualify for it. The
banks act as an intermediary between those that have excess
funds to invest and those that need funds by undertaking the role
of mobilizing these surplus funds by taking deposits and lending it
on the basis of a credit evaluation done on the ability of the
borrowers to pay interest and return the principal. The banks also
provide a secure system for settling financial transactions of their
customers through a system of cheques and electronic payment
systems. Apart from these primary banking activities, banks also
provide third-party products and services to their clients by
offering advice on investments and insurance. Banks tie up with
mutual funds, portfolio management service providers, insurance
companies and others and offer their products and services.
1.3.2Securities Market
The securities market provides an institutional structure that