INTRODUCTION

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.

A financial system provides services that are essential in a modern economy.

The use of a stable, widely accepted medium of exchange reduces the costs of
transactions. It facilitates trade and, therefore, specialization in production.
Financial assets with attractive yield, liquidity and risk characteristics encourage
saving in financial form. By evaluating alternative investments and monitoring
the activities of borrowers, financial intermediaries increase the efficiency of
resource use. Access to a variety of financial instruments enables an economic
agent to pool, price and exchange risks in the markets. Trade, the efficient use
of resources, saving and risk taking are the cornerstones of a growing economy.
In fact, the country could make this feasible with the active support of the
financial system. The financial system has been identified as the most
catalyzing agent for growth of the economy, making it one of the key inputs of
development.

The Indian financial system is broadly classified into two broad groups:

i) Organized sector and

ii) Unorganized sector.

The financial system is also divided into users of financial services and
providers. Financial institutions sell their services to households, businesses,

1
and government. They are the users of the financial services. The boundaries
between these sectors are not always clear-cut. In the case of providers of
financial services, although financial systems differ from country to country,
there are many similarities.
(i) Central bank
(ii) Banks
(iii) Financial institutions
(iv) Money and capital markets and
(v) Informal financial enterprises.

1. Organized Indian Financial System

The organized financial system comprises of an impressive network of banks,
other financial and investment institutions and a range of financial instruments,
which together function in fairly developed capital and money markets. Short-
term funds are mainly provided by the commercial and cooperative banking
structure. Nine-tenth of such banking business is managed by twenty-eight
leading banks which are in the public sector. In addition to commercial banks,
there is the network of cooperative banks and land development banks at state,
district, and block levels. With around two-third share in the total assets in the
financial system, banks play an important role. Of late, Indian banks have also
diversified into areas such as merchant banking, mutual funds, leasing and
factoring.

The organized financial system comprises the following sub-systems:

1. Banking system
2. Cooperative system 3. Development Banking system
(i) Public sector
(ii) Private sector
4. Money markets and
5. Financial companies/institutions.

Over the years, the structure of financial institutions in India has developed and
become broad based. The system has developed in three areas - state,
cooperative, and private. Rural and urban areas are well served by the
cooperative sector as well as by corporate bodies with national status. There are
more than 4,58,782'* institutions channelizing credit into the various areas of
the economy.

2. Unorganized Financial System

On the other hand, the unorganized financial system comprises of relatively less
controlled moneylenders, indigenous bankers, lending pawn brokers, landlords,
traders etc. This part of the financial system is not directly amenable to control
by the Reserve Bank of India (RBI). There are a host of financial companies,
investment companies, and chit funds etc., which are also not regulated by the
RBI or the government in a systematic manner.
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However, they are also governed by rules and regulations and are, therefore
within the orbit of the monetary authorities. As the word 'Bank' is an
organization for receiving, storing providing money and other financial
mechanism to different players within the economy and assisting them in
deploying there funds in productive activities. The state NF bank in financial
sector could be described as a classical example of financial repression, until the
beginning of 1990's.

Banking in India is one of the oldest systems that can well be traced to the
initial time of development. These activities are normally performed by upper
class of the society by storing valuable wealth in so-called secured places like
temples & palaces Though these activities of banking system emerge, that time
when no currency were available and only barter system prevails''. This period
can well be termed as the initiation of banking system as we see in today's
world. Banking in India originated in the last decades of 18 century. The first
bank was the General Bank of India which started in 1786, The Bank of
Hindustan, both of which are now defunct. The oldest bank in existence in India
is the state Bank of India which originated in the Bank of Calcutta in June 1806
which almost immediately became the Bank of Bengal. This was one of the
presidency banks, the other two being the Bank of Bombay and Bank of
Madras. All three of which were established under charter from the British East
India Company. For many years the Presidency banks acts as a quasi-central
banks as did their successors. The three banks merged in 1921 to form the
imperial bank of India, which, upon India's independence, became state Bank of
India. India's independence marked the end of a regime of laissez faire for the
Indian banking. The government of India (GOI) initiated measures to play an
active role in the economic eye of the nation, and the Industrial Policy
Resolution adopted by the government in 1948 envisaged a mixed economy.
Despite these provisions, control and regulations, banks in India except the State
Bank of India continued to be owned and operated by private persons. This all
changed with the nationalization of major banks in India on 19 July 1967.
Additionally there was perception that banks should play a more prominent role
in India's development strategy by mobilizing resources for financial sector that
were seen as crucial for economic expansion. As consequences in 1967 the
policy of social control over banks was announced. Its own was to cause
changes in the management and distribution of credit by commercial bank°.
Following the nationalization Act 1969, 14 largest public sector banks were
nationalized which raised the Public Sector Bank's (PSB) share of deposits from
31 per cent to 86 per cent. The two main objectives of the nationalization were
rapid branch expansion and channeling of credit in line with priorities of the
year plan to achieve these goals the newly nationalized bank received
quantitative target for the expansion of branch network and for the percentage
of credit they had to extend to certain sector and groups in the economy, known
as priority s sector, which initially stood 33 per cent Six more banks were
nationalized in 1980 which raised the public sector's share of deposits to 92 per
cent. The second wave of nationalization occurred because of control over the
banking system which increasingly more important as a means to ensure priority
sector lending to reach the poor through a branch expansion network and to
raising public deposit.

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In addition to the nationalization of banks, the priority sector lending target
were raised to 40 per cent, however, the policies that were supposed to promote
a more equal distribution of funds, also led to inefficiencies in the Indian
Banking system. To alleviate this negative effect, first wave of liberalization
started in the second Half of 1980. The main policy changes were the
introduction of treasury bills, creation of money market, and a partial
deregulation of interest rates. Besides the establishment of priority sector credit
and nationalization of banks the government took further control over bank fund
by raising the statutory liquidity Ratio (SLR) and cash Reserve Ratio (CRR).
From a level of 2 per cent for the CRR and 25 percent for the SLR in 1960 both
witnessed a steep increase until 1991 to 15 percent and 38.6 per cent
respectively 14 India's banking system was an integral part of government
spending policies. Through the directed credit rules and statutory pre-emotions
it was captive sources of funds for the fixed deficits and key industries, through
the CRR and the SLR more than 50 percent of saving had either to be deposited
with the RBI or used to buy government securities out of the remaining saving
40 percent had to directed to the priority sector that were defined by the
government Besides these restrictions on the use of funds, government had also
control over the price of the fund i.e. interest rates on the saving and banks.
Earlier banking system was there in the big cities such as Bombay & Madras.
There a were few banks such as Bank of Allahabad, National Bank, Gudh
Commercial Bank and Canara Bank, Most of them stopped their operation
today, while some of them still serving under public sector. Most of the banks
during British period have functioned as private or family owned while
following the strict guidelines followed by the government, that this practice of
family or privately owned banks, Continued for quite few years after 1947 with
continuous increase of supervision by the government.

Due to many banks failures and crises over two centuries, and the damage they
did under laissez faire conditions; the needs of planned growth and equitable
distribution of credit was necessary where privately owned banks was
concentrated mainly on the controlling industrial houses and influential
borrowers; the needs of growing small scale industry and farming regarding
finance, equipment and inputs; from all these there emerged an inexorable
demand for banking legislation, some government control and a central banking
authority, adding up, in the final analysis, to social control and nationalization''.
Before the liberalization in 1991, there was a little effective competition in the
Indian Banking system for at least two reasons, first details prescriptions of RBI
concerning. Second, India had strict entry restrictions for new bank, which are
the main integrants of competition®, this 1991, New Economic policy brings
the spirit of competition among Indian banks with the new players of foreign
banks. It has undergone a major structural transformation after the
nationalization of 14 banks in 1969. During the last four decades of
nationalization, there has been phenomenal expansion of branch network,
particularly in the hitherto under banked rural areas. Besides a massive
qualitative change in the operation of banking system, our banks have been
called upon to assume a great variety of new responsibilities in the area of social
banking for which there are precedent or guidelines in the history of modern
banking anywhere in the world. However, the journey has not along been even

4
and smooth. There have been hurdles and impediments, stress and strains but
the dynamic fashion in which the banking industry has taken them in its ride
and surged ahead only demonstrates its resilience and inherent potentialities as
catalytic agent for social economic development" as seven new banks entered
the market between 1994-2000. In addition, over 20 foreign banks started
operations in India since 1994. By March 2004, the new private sector and
foreign banks had a combined share of utmost 20 per cent of total assets\ This
benefit the Indian banking sector attained through requirement and setting up a
by deregulating entry of new bank operations from improved technology,
specialized skills, better risk management practices and greater portfolio
diversification. As Indian banking system has undergone significant structural
transformation since the 1991 through this entry of foreign banks became more
liberal given in line recommendation of Report of the committee on financial
system. " freedom of entry into the financial system should be liberalized and
Reserve Bank of India should now permit the establishment of new banks in the
private sector, provided they conform to the minimum startup capital and other
requirement and set of prudential norms with regard to accounting, provisioning
and other aspect of operation". Another step is taken by government of India in
1998, through another committee. This committee is also chaired by Shri M.
Narasimham, pointed in 1998 to review/ the records of implementation of in
financial system reform and to take forward step and start the reform necessary
in year at ahead it is observed under committee that one of the most significant
measures instituted since 1991 has been the permission for new private banks to
be set up, and the more liberal approach towards foreign banks offices bang
opened in India. These steps have enhanced the competitive framework for
banking system in India, as the new private and foreign banks have higher
productivity level based on newer technology and lower level of operating.

This period ownership in public sector banks were so diversified with the
flexible entry norms for private and foreign banks, this changes the scenario of
competitions in the banking industry. Competition is itself the sign of progress,
this importance is also recognized by Reserve Bank when it observed that
competition is sought to foster by permitting new private sector banks, and
moire liberal entry of branches of foreign bank, competition is sought to be
fostered in process of autonomy and thus some response to rural and semi urban
area also by encouraging Local Area Banks. Some competitive diversification
of ownership in selected public sector banks has helped the pressures.

The competition induced by the new private sector banks has clearly
reenergized the Indian banking sector as a whole; new technology is now the
norm, new product are being introduced continuously, and new business
practices have become common place.

Present study is to evaluate the degree of competition in the banking sector,

with special reference to SB! & ICICI Bank in a globalised era.

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DEFINITION

The legal Definition of Bank is-”A corporation empowered to deal with cash,
domestic and foreign, and to receive the deposits of money and to loan those
monies to third-parties”

In 1899, the United States Supreme Court (Austen) used these words to define a
bank:
"A bank is an institution, usually incorporated with power to issue its
promissory notes intended to circulate as money (known as bank notes); or to
receive the money of others on general deposit, to form a joint fund that shall be
used by the institution, for its own benefit, for one or more of the purposes of
making temporary loans and discounts; of dealing in notes, foreign and
domestic bills of exchange, coin, bullion, credits, and the remission of money;
or with both these powers, and with the privileges, in addition to these basic
powers, of receiving special deposits and making collections for the holders of
negotiable paper, if the institution sees fit to engage in such business."

NEED FOR 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
India.

IMPORTANCE OF BANK IN THE DEVELOPMENT OF COUNTRY

Banks are one of the most important parts of any country. In this modern time money
and its necessity is very important. A developed financial system of the country can
ensure scope for attaining economic development. A modern bank provides valuable
services to a country. To attain development there should be a good developed financial
system to support not only the economic but also the society. So, a modern bank plays
a vital role in the socio economic matters of the country. Some of the important role of
banks in the development of a country is briefly mentioned below.
I- Promote Saving Habits among People
Bank attracts depositors by introducing attractive deposit schemes and providing
rewards or return in the form of interest. Banks providing different kinds of deposit
schemes to its customers. It enables to create banking habits or saving habits among
people
II- Capital Formation and Promoting of Industries

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Capital is one of the most important parts of any business or industry. It is the lifeblood
of business. Banks are helpful to increase capital formation by collecting deposits from
depositors and converting these deposits in to loans and advances to industries.
III- Easiness of Trade and Commerce Functions
In this modern era trade and commerce plays vital role between any countries. So, the
money transaction should be user friendly. A modern bank helps its customers to sent
funds to anywhere and receive funds from anywhere of the world. A well developed
banking system provides various attractive services like mobile banking, internet
banking, debit cards, credit cards etc. These kinds of services fasten and easing the
transactions. So, bank helps to develop trade and commerce.
IV- Generate Employment Opportunities
Since a bank promotes industry and investment, they automatically generate
employment opportunity. So, a bank enables an economy to generate employment
opportunity.

ROLE OF BANK IN INDIAN ECONOMY

Banking system plays a very significant role in the economy of a country. It is central
to a nation’s economy as it caters to the needs of credit for all the sections of the
society. Money-lending in one form or the other has evolved along with the history of
mankind. Even in the ancient times, there are references to the money-lenders, in the
form of sahukars and zamindars who lend money by mortgaging the land property of
the borrowers.
Towards the beginning of the 20 century, with the onset of modern industry in our
country, the need for government-regulated banking system was felt. The British
government began to pay attention towards the need for an organized banking sector in
the country and the Reserve Bank of India was set up to regulate the formal banking
sector in the country. Ever since they were nationalized in 1969, banks have been
playing a major role in the socio-economic life of the country. The have to act not only
as purveyors of credit, but also as harbingers of social and economic development
through a variety of enterprises, many of which may tiny and yet capable of generating
productive energies.
India is not only the world’s largest independent democracy, but also an emerging
economic giant. Without a sound and effective banking system, no country can have a
health economy. For the past three decades, India’s banking system has several
outstanding achievements to its credit. It is no longer confined to only the
metropolitans, but have reached even to the remote corners of the country. This is one
of the reasons of India’s growth process.
Agriculture in India has a significant history and it is demographically the broadest
economic sector and plays a significant role in the overall socio-economic fabric of
India. Finance in agriculture is an important as development of technologies. A
dynamic and growing agricultural sector needs adequate finance through banks to
accelerate overall growth. Most of the credit-related schemes of the government to
uplift the poorer and the under-privileged sections have been implemented through the
banking sector. With the passing of the Reserve Bank of India Act 1934, there were
improvements in agricultural credit. Earlier, the co-operative banks were the main
institutional agencies providing finance to agriculture. But after nationalization of 14
major commercial banks, it was mandatory for them to provide finance to agriculture as
a priority sector. Thus, agricultural credit acquired multi-agency dimension.
The government has allocated `10000 crore to the National Bank for Agriculture and
Rural Development (NABARD) for refinancing Regional Rural Banks (RRBs) to
disburse short term crop loans to small and marginal farmers. The short-term crop loans
scheme offers credit to farmers at 7 per cent interest rate. Besides, in order to reduce
post-harvest losses, farmers are eligible to get post-harvest loans up to six months at 4

7
per cent interest rate provided they keep their produce in warehouses. The rural sector
in a country like India can growth only if cheaper credit is available to the farmers for
their short-and medium-term loans. In addition, the farmers get loans for purchase of
electric motors with pump, tractors and other machinery, digging wells or boring wells,
purchase of dairy animals and for many other allied enterprises.
The Industrial Development Bank of India (IDBI) is the premier institution in India
purveying financial assistance to the industrial sector projects. It provides direct
financial assistance to the industrial concerns in the form of granting loans and
advances, and purchasing or underwriting the issues of stocks, bonds or debentures.
The creation of the Development Assistance Fund is the special of the IDBI. The Fund
is used to provide assistance to those industries which are not able to obtain funds
mainly because of heavy investment involved or low expected rate of returns.
Assistance from the Fund requires the prior approval by the government. Apart from
this, the IDBI even gives guidance to start a business.
In addition to the above traditional roles, banks also perform certain new age functions
which could not be thought of a couple of decades ago. Today, the banking sector is
one of the biggest service sectors in India. Availability of quality services is vital for
the well-being of the economy. The focus of banks has shifted from customer
acquisition to customer retention. With the stepping in of information technology in the
banking sector, the working strategy of the banking sector has been revolutionary
changes. Various customer-oriented products like internet banking, ATM services,
telebanking and electronic payment have lessened the workload of customers. The
facility of internet banking enables a consumer to access and operate his bank account
without actually visiting the bank premises. The facility of ATMs and credit/debit cards
has revolutionized the choices available with the customers. Banks also serve as
alternative gateways for making payments on account of income-tax and online
payment of various bills like the telephone, electricity and tax. In the modern-day
economy where people have not time to make these payments by standing in queue, the
services provided by banks are commendable.
To conclude, we can say that the modern economies of the world have developed
primarily by making best use of the credit availability in their systems. India is on the
march; far reaching socio-economic changes are taking place and Indian banks should
come forward to play this role in the process. The role of banks has been important, but
it is going to be even more important in the future

MODERN DAY ROLE OF BANKS AND FINANCIAL INSTITUTIONS IN

PRESENT ECONOMY

Banking system and the Financial Institutions play very significant role in the
economy. First and foremost is in the form of catering to the need of credit for all the
sections of society. The modern economies in the world have developed primarily by
making best use of the credit availability in their systems. An efficient banking system
must cater to the needs of high end investors by making available high amounts of
capital for big projects in the industrial, infrastructure and service sectors. At the same
time, the medium and small ventures must also have credit available to them for new
investment and expansion of the existing units. Rural sector in a country like India
can grow only if cheaper credit is available to the farmers for their short and medium
term needs. Credit availability for infrastructure sector is also extremely important.
The success of any financial system can be fathomed by finding out the availability of
reliable and adequate credit for infrastructure projects.Fortunately, during the past

8
about one decade there has been increased participation of the private sector in
infrastructure projects.
The banks and the financial institutions also cater to another important need of
the society i.e. mopping up small savings at reasonable rates with several
options. The common man has the option to park his savings under a few
alternatives, including the small savings schemes introduced by the government
from time to time and in bank deposits in the form of savings accounts,
recurring deposits and time deposits. Another option is to invest in the stocks or
mutual funds. In addition to the above traditional role, the banks and the
financial institutions also perform certain new-age functions which could not be
thought of a couple of decades ago. The facility of internet banking enables a
consumer to access and operate his bank account without actually visiting the
bank premises. The facility of ATMs and the credit/debit cards has
revolutionized the choices available with the customers. The banks also serve as
alternative gateways for making payments on account of income tax and online
payment of various bills like the telephone, electricity and tax. The bank
customers can also invest their funds in various stocks or mutual funds straight
from their bank accounts. In the modern day economy, where people have no
time to make these payments by standing in queue, the services provided by the
banks are commendable.
While the commercial banks cater to the banking needs of the people in the
cities and towns, there is another category of banks that looks after the credit
and banking needs of the people living in the rural areas, particularly the
farmers. Regional Rural Banks (RRBs) have been sponsored by many
commercial banks in several States. These banks, along with the cooperative
banks, take care of the farmer are specific needs of credit and other banking
facilities.

FUTURE ROLE OF BANKS AND FINANCIAL INSTITUTIONS IN

ECONOMY

Till few years ago, the government largely patronized the small savings schemes in
which, not only the interest rates were higher, but the income tax rebates and
incentives were also in plenty. The bank deposits, on the other hand, did not entail
such benefits. As a result, the small savings were the first choice of the investors. But
for the last few years the trend has been reversed. The small savings, the bank
deposits and the mutual funds have been brought at par for the purpose of incentives
under the income tax. Moreover, the interest rates in the small savings schemes are no
longer higher than those offered by the banks.

Banks today are free to determine their interest rates within the given limits
prescribed by the RBI. It is now easier for the banks to open new branches. But
the banking sector reforms are still not complete. A lot more is required to be
done to revamp the public sector banks. Mergers and amalgamation is the next
measure on the agenda of the government. The government is also preparing to
disinvest some of its equity from the PSU banks. The option of allowing foreign
direct investment beyond 50 per cent in the Indian banking sector has also been
under consideration. Banks and financial intuitions have played major role in

9
the economic development of the country and most of the credit-related
schemes of the government to uplift the poorer and the under-privileged
sections have been implemented through the banking sector. The role of the
banks has been important, but it is going to be even more important in the
future.

STRUCTURE OF BANKS

Reserve Bank of India

Scheduled

State Co operative
banks

Commercial Banks

Indian Banks

Public Sector Banks

State Bank of India

I.Non- Scheduled Banks

Central Co op
banks and Primary
Credit banks

Commercial Banks

Foreign Banks

Private Sector Banks

Other nationalized

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 banks

Regional rural
banks

RESERVE BANK OF INDIA

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 cred it more than Rs 1 lakh need not provide all the
documents. The customers will be categorized as low risk, medium risk and high risk.
Sahara India is one of the largest NBFC inIndia.
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.

11
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 deposits.
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.
19. To promote the development of financial infrastructure of markets and systems, and
to enable iit 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. To 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 view to
ensure a reasonable degree of price stability.

II.COMMERCIAL BANKS :

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 Banks
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

12
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 theeconomy 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 inIndia 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
National Bank (PNB), Syndicate Bank, UCO Bank, Union Bank of India, United Bank
of India VijayaBank.

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

13
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
firstround in1969 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

14
Currently, India has 88 scheduled commercial banks (SCBs), 31 private banks and
38foreign
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 18.2and
6.5respectively, 0.3% non-scheduled commercial banks.
Old generation private banksOld generation private banks are the banks which
prevailed mainly before indpendence. 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 society.
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.

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.

15
III.CO - OPERATIVE BANKS

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.
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.

Definition:
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
person
belonging to the same local or professional community or sharing a common interest.
Cooperative banks generally provide their members with a wide range of banking and
financialservices.

Initiatives towards development of co-operative banks:

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
freedor deregulated.
6. Allowing all PCB’s to undertake equipment leasing and hire-purchase financing.

Establishments:

Co-operative bank performs all the main banking functions of deposit mobilisation,

16
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
also.

UCBs provide working capital loans and term loan as well.

Functions:
Co-operative Banks are organised and managed on the principal of co-operation,
selfhelp, 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 also.

The State Co-operative Banks (SCBs), Central Cooperative Banks (CCBs) and Urban
Co-operative Banks (UCBs) can normally extend housing loans up to Rs 1lakh 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
 Personal finance

IV.DEVELOPMENT BANKS

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,

17
institutions undertaking financial and developmental functions are considered as
development
banks.
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)
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,

18
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,
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
framework.
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

19
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 tolow-cost
deposits like
Current and Savings Bank Deposits. This would have a positive impact on theBank’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 side.

Main Functions of IDBI:

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 programs

20
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
serices 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
toentrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration
with other AllIndia 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
review.
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
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

21
in this endeavor, designs products and services catering to wider sections of the society.
As afirst 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.

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, cooperative 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

22
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.

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
sector.
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

 Foreign investment finance
 Term loaning options for export production and export development
 Pre-shipping credit
 Buyer's credit

23
  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 exporters.

Various Stages of Exports Covered by EXIM Bank-

o Development of export makers

o Expansion of export production capacity

o Production for exports

o Financing post-shipment activities

o Export of manufactured goods

o Export of projects

o Export of technology and software’s

The Small and Medium Enterprises (SME) Finance

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
entrepreneurship.
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

24
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 etc.
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
rangeof
advisory
services
to
agriexporters.
The Bank also publishes a number of Occasional Papers, Working Papers on
exportpotential of
various sub-sectors in agriculture and a bi-monthly publication in different languages
on global
scenario
in
agri-businessand
oportunities

25
therein.

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

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 indevelopmental
work at

26
the field level and maintains liaison with Government of India, State Governments,
ReserveBank 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,
Stateowned corporations or co-operative societies, production credit is generally given
to individuals.

NABARD provides:

 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 inagricultureandruraldevelopment

Role of NABARD:

General aspects:
NABARD should be a managing agency of Government of India for public
investments

27
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.

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

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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
debentures.
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.

RESERVE BANK OF INDIA

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.

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

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 deposits.
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.

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

CONCLUSION:

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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