Banking Theory

BANKING THEORY
UNIT I
Origin of banks-Definition of banking- Classification of banks- Banking System: Unit
Banking – Branch Banking Universal Banking & Banking Markets – Functions of Modern
commercial Banks - Balance Sheet of commercial Banks – Credit Creation by commercial
Banks.
ORIGIN OF BANKS:
A bank is a financial institution and a financial intermediary that accepts deposits and
channels those deposits into lending activities, either directly by loaning or indirectly through
capital markets. A bank links together customers that have capital deficits and customers with
capital surpluses.
Due to their influential status within the financial system and upon national economies,
banks are highly regulated in most countries. Most nations have institutionalised a system known
as fractional reserve banking, in which banks hold only a small reserve of the funds deposited
and lend out the rest for profit. They are generally subject to minimum capital requirements
based on an international set of capital standards, known as the Basel Accords.
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance
Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its
roots in the ancient world. In the history of banking, a number of banking dynasties have played
a central role over many centuries. The oldest existing bank was founded in 1472.[1]
DEFINITION OF BANKING:
Banks can be defined as institutions for receiving, lending, exchanging, and safeguarding
money and, in some cases, issuing notes and transacting other financial businesses. It can also be
defined as a slope or activity.
As per Section 5(b) of the Banking Regulation Act, 1949, "banking" means the accepting,
for the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdraw able by cheque, draft, order or otherwise.
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Commercial banks are mainly concerned with managing withdrawals and deposits as
well as supplying short-term loans to individuals and small businesses. Consumers primarily use
these banks for basic checking and savings accounts, certificates of deposit and sometimes for
home mortgages. Investment banks focus on providing services such as underwriting and
corporate reorganization to institutional clients.
While many banks have a brick-and-mortar and online presence, some banks have only
an online presence. Online-only banks often offer consumers higher interest rates and lower fees.
Convenience, interest rates and fees are the driving factors in consumers' decisions of which
bank to do business with. As an alternative to banks, consumers can opt to use a credit union.
Features of banking:
1. Dealing in money:
The banks accept deposits from the public and advancing them as loans to the
needy people. The deposits may be of different types current, fixed, savings, etc.
accounts. The deposits are accepted on various terms and conditions.
2. Deposits must be withdrawn able:
The deposits (other than fixed deposits) made by the public can be withdraw able
by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are
usually withdrawn able on demand.
3. Dealing with credit:
The banks are the institutions that can create credit i.e., creation of additional
money for lending. Thus, "creation of credit' is the unique feature of banking.
4. Commercial in nature:
Since all the banking functions are carried on with the aim of making profit, it is
regarded as a commercial institution.
5. Nature of agent:
Besides the basic functions of accepting deposits and lending money as loans,
banks possess the character of an agent because of its various agency services.
Classification of banks:
1. Central bank:
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Central bank is the supreme monetary institution, which is at the apex of the
monetary and banking structure of a country. It is the leader of money market and as such
controls, regulates and supervises the activities of commercial banks. It is the central
monetary authority, which manages the currency and credit policy of the country and
functions as a banker to the government as well as to the commercial banks. It is difficult
to define central bank accurately.
However, different definitions have been given emphasizing one or more
functions of the central bank. De Kock defined central as "a bank which constitutes the
apex of the monetary and banking structure of the country."
According to Vera Smith, "the primary definition of central bank is a banking
system in which a single bank has either a complete or a residuary monopoly of note
issue.”
According to the Bank for International Settlements, a central bank is defined as
"the bank in any country to which has been entrusted the duty of regulating the volume of
currency and credit in that country."
In the words of Kent, a Central bank is an "institution charged with the
responsibility of managing the expansion and contraction of the volume of money in the
interest of general public welfare."
2. Commercial Banks:
Commercial banks are those banks which perform all kinds of banking functions
such as accepting deposits, advancing loans, credit creation, and agency functions. They
are also called joint stock banks because they are organised in the same manner as joint
stock companies. They usually advance short-term loans to customers. Of late, they have
started giving medium term and long-term loans also. In India 20 major commercial
banks have been nationalised, whereas in developed countries they are run like joint stock
companies in the private sector. Some of the commercial banks in India are Andhra Bank,
Canara Bank, Indian Bank, Punjab National Bank, etc.
3. Industrial or Development banks:
Industrial banks are those banks which provide medium term and long-term
finance to industries for the purchase of land, machinery etc. They underwrite the
debentures and shares of industries and also subscribe to them. In India, there are a
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number of financial institutions which perform the functions of industrial banks such as
Industrial Development Bank of India, Industrial Finance Corporation of India, Industrial
Credit and Investment Corporation of India, etc. Each State in India has its own State
Financial Corporation. These institutions are also known as Development Banks.
4. Exchange bank:
Exchange banks are those banks which deal in foreign exchange and specialise in
financing foreign trade. They are also called foreign exchange banks. In India, these
exchange banks have their head offices located outside India. The Chartered Bank and
the Brindlays Bank have their head officers in England, whereas the American Express
Bank, and Citi Bank have their head offices in the USA. These banks also render other
services such as collecting and supplying information about the foreign customers,
providing remittance facilities etc.
5. Co-operative banks:
Cooperative banks are those financial institutions which are organised on the
principle of cooperation. They provide short-term and medium-term loans to their
members. In rural areas, there are agricultural cooperative banks which accept deposits
and give loans to agriculturists, rural artisans, etc.
In urban areas, there are also cooperative banks which perform the functions of
ordinary commercial banks but give loans to their members only. There is a State
Cooperative Bank in every state of India with its branches at the district level known as
the Central Cooperative Bank. The Central Cooperative Bank, in turn, has is branches
both in urban and rural areas.
Every State Cooperative bank is an apex bank which provides credit facilities to
the Central Cooperative Banks. It mobilises financial resources from the richer sections
of the urban population by accepting deposits and creating credit like commercial banks
and borrowing from the money market. It also gets funds from the Reserve Bank of India.
6. Land Mortgage banks:
In a residential mortgage, a home buyer pledges his or her house to the bank. The
bank has a claim on the house should the home buyer default on paying the mortgage. In
the case of a foreclosure, the bank may evict the home's tenants and sell the house, using
the income from the sale to clear the mortgage debt.
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Mortgages come in many forms. With a fixed-rate mortgage, the borrower pays
the same interest rate for the life of the loan. Her monthly principal and interest payment
never change from the first mortgage payment to the last. Most fixed-rate mortgages have
a 15- or 30-year term. If market interest rates rise, the borrower’s payment does not
change. If market interest rates drop significantly, the borrower may be able to secure that
lower rate by refinancing the mortgage. A fixed-rate mortgage is also called a
“traditional" mortgage.
With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial
term, but then it fluctuates with market interest rates. The initial interest rate is often a
below-market rate, which can make a mortgage seem more affordable than it really is. If
interest rates increase later, the borrower may not be able to afford the higher monthly
payments. Interest rates could also decrease, making an ARM less expensive. In either
case, the monthly payments are unpredictable after the initial term.
Other less common types of mortgages, such as interest-only mortgages and
payment-option ARMs, are best used by sophisticated borrowers. Many homeowners got
into financial trouble with these types of mortgages during the housing bubble years.
7. Indigenous banks:
Indigenous bankers constitute the ancient banking system of India. They have
been carrying on their age-old banking operations in different parts of the country under
different names.
In Chennai, these bankers are called Chettys; in Northern India Sahukars,
Mahajans and Khatnes; in Mumbai, Shroffs and Marwaris; and in Bengal, Seths and
Banias. According to the Indian Central Banking Enquiry Committee, an indigenous
banker or bank is defined as an individual or private firm which receives deposits, deals
in hundies or engages itself in lending money.
The indigenous bankers can be divided into three categories:
(a) Those who deal only in banking business (e.g., Multani bankers);
(b) Those who combine banking business with trade (e.g., Marwaris and
Bengalies); and
(c) Those that deal mainly in trade and have limited banking business.
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The indigenous banker is different from the moneylender. The moneylender is not
a banker; his business is only to lend money from his own funds. The indigenous banker,
on the other hand, lends and accepts funds from public.
8. Savings Banks:
Savings bank, financial institution that gathers savings, paying interest or
dividends to savers. It channels the savings of individuals who wish to consume less than
their incomes to borrowers who wish to spend more. This function is served by the
savings deposit departments of commercial banks, mutual savings banks or trustee
savings banks (banks without capital stock whose earnings accrue solely to the savers),
savings and loan associations, credit unions, postal savings systems, and municipal
savings banks. Except for the commercial banks, these institutions do not accept demand
deposits. Postal savings systems and many other European savings institutions enjoy a
government guarantee; savings are invested mainly in government securities and other
securities guaranteed by the government.
Savings banks frequently originated as part of philanthropic efforts to encourage
saving among people of modest means. The earliest municipal savings banks developed
out of the municipal pawnshops of Italy. Local savings banks were established in the
Netherlands through the efforts of a philanthropic society that was founded in 1783, the
first bank opening there in 1817. During the same time, private savings banks were
developing in Germany, the first being founded in Hamburg in 1778.
The first British savings bank was founded in 1810 as a Savings and Friendly
Society by a pastor of a poor parish; it proved to be the forerunner of the trustee savings
bank. The origin of savings banking in the United States was similar; the first banks were
nonprofits institutions founded in the early 1800s for charitable purposes. With the rise of
other institutions performing the same function, mutual savings banks remained
concentrated in the north-eastern United States.
9. Supranational bank:
Special Banks have been created to deal with certain international financial
matters. World Bank is otherwise known as International Bank for Reconstruction and
Development (IBRD) which gives long-term loans to developing countries for their
economic and agricultural development.
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Asian Development Bank (ADB) is another Supranational Bank which provides
finance for the economic development of poor Asian countries. They generally provide
finance at concessional interest rates and for long-term needs.
These institutions are the creations of World bodies promoted by various
countries or central banks of different countries. The European Central Bank established
in June 1998 by countries in the European Union is another example of Supranational
Bank.
10. International bank:
International Banks are those which are operating in different countries. While, the
registered office/head office is situated in one country, they operate through their
branches in other countries.
They specialize in Banking business pertaining to foreign trade like opening of
letters of credit, providing short-term finance in foreign currency, issue of performance
guarantee, arranging foreign currency credits, etc. They are the main traders in
International Currencies like US 'dollars', Japanese 'Yen', the new-born European
Currency 'Euro', etc.
They also perform Currency Risk Management functions for clients. These banks
are also known as Multinational Banks since, they operate from many countries.
These banks make possible the flow of money/credit from one country to from the
above, it can be understood that the classification of banks cannot be rigid. We find that
banks are providing finance in more than one field that is why, it is rightly said that they
are "Departmental stores of Finance".
Banking system:
The structure of banking differs from country depending upon their economic conditions,
political structure and financial system. Banks can be classified on the basis of volume of
operations, business patterns and areas of operations. They are terminated systems of banking.
The commonly identified systems are,
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Unit banking:
Unit banking has one office. Generally, limited banking services are offered to customers
by unit banking organization. Although unit banking organization has one banking office, it can
spread cash counters in market place such as walk-in windows, automated teller machines, retail
store point-of-sale terminals that are linked to the bank's computer system.
Unit banking is the oldest kind of banking organization most common in the world
banking today. One reason for the comparatively large number of unit banks is the rapid
formation of new banks. It can be established easily even in an age of electronic banking and
mega mergers among industry leaders. Many customers still seem to prefer small banks, which
get to know their customers well and often provide personalized services.
Most new banks start out as unit organization, because their capital, management and
staffs are severely limited until the bank can grow and attract additional resources and
professional staff. Later, they try to convert them into branch banking organization. However,
economic and legal barriers to banks expanding geographically into new territory still exist in
some places. Yet, most banks desire to create multiple service facilities-branch offices, electronic
networks, and other service outlets. In competitive banking market, it is essential to open new
markets and diversify geographically in order to lower risk and cost of banking services. If the
surrounding economy weakens and people move away to other market areas, it becomes very
risky in relying on a single office location, from which to receive customers and income.
Advantages of banking:
1. Local Development:
Unit banking is localized banking. The unit bank has the specialised knowledge of
the local problems and serves the requirements of the local people in a better manner than
branch banking. The funds of the locality are utilised for the local development and are
not transferred to other areas
2. Promotes Regional Balance:
Under unit banking system, there is no transfer of resources from rural and
backward areas to the big industrial commercial centres. This tends to reduce regional in
balance.
3. Easy Management:
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The management and supervision of a unit bank is much easier and more effective
than that under branch banking system. There are less chances of fraud and irregularities
in the financial management of the unit banks.
4. Initiative in Banking Business:
Unit banks have full knowledge of and greater involvement in the local problems.
They are in a position to take initiative to tackle these problems through financial help.
5. No Monopolistic Tendencies:
Unit banks are generally of small size. Thus, there is no possibility of generating
monopolistic tendencies under unit banking system.
6. No Inefficient Branches:
Under unit banking system, weak and inefficient branches are automatically
eliminated. No protection is provided to such banks.
7. No diseconomies of Large Scale Operations:
Unit banking is free from the diseconomies and problems of large-scale
operations which are generally experienced by the branch banks.
Disadvantages of Unit Banking

The following are the disadvantages of unit banking system:
1. No. Distribution of Risks:
Under unit banking, the bank operations are highly localised. Therefore, there is
little possibility of distribution and diversification of risks in various areas and industries.
2. Inability to Face Crisis:
Limited resources of the unit banks also restrict their ability to face financial
crisis. These banks are not in a position to stand a sudden rush of withdrawals.
3. No Banking Development in Backward Areas:
Unit banks, because of their limits resources, cannot afford to open uneconomic
banking business is smaller towns and rural area. As such, these area remain unbanked.
4. Lack of Specialization:
Unit banks, because of their small size, are not able to introduce, and get
advantages of, division of labor and specialization. Such banks cannot afford to employ
highly trained and specialized staff.
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5. Costly Remittance of Funds:
A unit bank has no branches at other place. As a result, it has to depend upon the
correspondent banks for transfer of funds which is very expensive.
6. Disparity in Interest Rates:
Since easy and cheap movement of does not exist under the unit banking system,
interest rates vary considerably at different places.
7. Local Pressures:
Since unit banks are highly localised in their business, local pressures and
interferences generally disrupt their normal functioning.
8. Undesirable Competition:
Unit banks are independently run by different managements. This results in
undesirable competition among different unit banks.
Branch banking:
Advantages of Branch Banking
Rapid growth and wide popularity of branch banking system in the 20th century are due
to various advantages as discussed below.
1. Economies of Large Scale Operations:
Under the branch banking system, the bank with a number of branches possesses
huge financial resources and enjoys the benefits of large-scale operations,
a. Highly trained and experienced staff is appointed which increases the efficiency of
management
b. Division of labour is introduced in the banking operation which ensures greater economy
in the working of the bank. Right persons are appointed at the right place and
specialisation increases,
c. Funds are made available liberally and at cheaper rates,
d. Foreign exchange business is done economically,
e. Large financial resources and wider geographical coverage increases public confidence
in the banking system.
2. Spreading of Risk:
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Another advantage of the branch banking system is the lesser risk and greater
capacity to meet risks,
a. Since there is geographical spreading and diversification of risks, the
possibility of the failure of the of the bank is remote,
b. The losses incurred by some branches may be offset by the profits
earned by other branches,
c. Large resources of branch banks increase their ability to face any crisis.
3. Economy in Cash Reserves:
Under the branch banking system, a particular branch can operate without keeping
large amounts of idle reserves. In time of the need, resources can be transferred from one
branch to another.
4. Diversification on Deposits and Assets:
There is greater diversification of both deposits and assets under branch banking
system because of wider geographical coverage,
a. Deposits are received from the areas where savings are in plenty,
b. Loans are extended in those areas where funds are scarce and interest rates
are high. The choice of securities and investments is larger in this system
which increases the. Safety and liquidity of funds.
5. Cheap Remittance Facilities:
Since bank branches are spread over the whole country, it is easier and cheaper to
transfer funds from one place to another. Inter-branch indebtedness is more easily
adjusted than inter-bank indebtedness.
6. Uniform Interest Rates:
Under branch banking system, mobility of capital increases, which in turn, brings
about equality in interest rates. Funds are transferred from areas with excessive demand
for money to areas with deficit demand for money. As a result, the uniform rate of
interest prevails in the whole area; it is prevented from rising in the excessive demand
area and from falling in the deficit demand area.
7. Proper Use of Capital:
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There is proper use of capital under the branch banking system. If a branch has
excess reserves, but no opportunities for investment, it can transfer the resources to other
branches which can make most profitable use of these resources.
8. Better Facilities to Customers:
The customers get better and greater facilities under the branch banking system. It
is because of the small number of customers per branch and the increased efficiency
achieved through large scale operations.
9. Banking Facilities in Backward Areas:
Under the branch banking system, the banking facilities are not restricted to big
cities. They can be extended to small towns and rural as well as underdeveloped areas,.
Thus, this system helps in the development of backward regions of the country.
10. Effective Control:
Under the branch banking system, The Central bank than have a more efficient
control over the banks because it has to deal only with few big banks and nor with each
individual branch. This ensures better implementation of monetary policy.
Branch banking
Engaging in banking activities such as accepting deposits or making loans at facilities
away from a bank's home office. Branch banking has gone through significant changes since the
1980s in response to a more competitive nationwide financial services market. Financial
innovation such as internet banking will greatly influence the future of branch banking by
potentially reducing the need to maintain extensive branch networks to service consumers
Disadvantages of Branch Banking
Following are the main disadvantages and limitations of branch banking system:
1. Problem of Management:
Under the branch banking system a number of difficulties as regards management,
supervision and control arise:
a. Since the management of the bank gets concentrated at the head office, the
managers can afford to be lax and indulgent in their duties and are often
involved in serious irregularities while using the funds.
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b. Since the branch manager has to seek permission from the head office on
each and every matter, this results in unnecessary delay and red- tapism in
the banking business.
2. Monopolistic Tendencies:
Branch banking encourages monopolistic tendencies in the banking system. A
few big banks dominate and control the whole banking system of the country through
their branches. This can lead to the concentration of resources into a few hands.
3. Lack of Initiative:
Branch managers generally lack initiative on all-important matters; they cannot
take independent decisions and have to wait for. The clearance signal from the head
office.
4. Regional Imbalances:
Under branch banking system, the financial resources collected in the smaller and
backward regions are transferred to the bigger industrial centres. This encourages
regional imbalances in the country.
5. Adverse Linkage Effect:
Under branch banking system, the losses and weaknesses of some branches also
have their effect on other branches of the bank.
6. Inefficient Branches:
In this system, the weak and unprofitable branches continue to operate under the
protection cover of the large and more profitable branches.
7. Other Defects:
Other defects of branch banking system arc as follows:
a. Preferential treatment is given to the branches near the head office,
b. Higher interest rates are charged in the developed area to compensate for the
lower rates charged in the backward area,
c. There is concentration and unhealthy competition among the branches of
different banks in big cities,
d. Many difficulties are faced when a bank opens branches. In foreign countries.
Correspondent banking
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A financial institution that provides services on behalf of another, equal or unequal,
financial institution. A correspondent bank can conduct business transactions, accept deposits
and gather documents on behalf of the other financial institution. Correspondent banks are more
likely to be used to conduct business in foreign countries, and act as a domestic bank's agent
abroad.
Correspondent banks are used by domestic banks in order to service transactions
originating in foreign countries, and act as a domestic bank's agent abroad. This is done because
the domestic bank may have limited access to foreign financial markets, and cannot service its
client accounts without opening up a branch in another country.
Group banking:
Group Banking is the system in which two or more independently incorporated banks are
brought under the control of a holding company. The holding company may or may not be a
banking company. Under group banking, the individual banks may be unit banks, or banks
operating branches or a combination of the two.
Participating banks retain their own boards of directors which are responsible to the
supervising and regulatory authority and depositors for the proper operation of the bank. That is,
each bank in the group has got a separate entity.
This system has developed in United States in 1900. It was popular and extensively
developed in 1920's.
Advantages of Group Banking

The following are the advantages of the Group Banking System:
(i) Centralized Administration:
The participating banks enjoy the benefits of centralized administration.
(ii) Enhancement of operational efficiency:
Because of Group banking system, the operational efficiency of
participant banks is enhanced through shared knowledge and experience.
(iii) Broader market:
Group Banking offers broader market to the small banks for their excess
resources. Thus, their earning capacity and network improved.
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(iv) -Mobility and transfer of resources:
In the case of crisis, the funds are transferred among participating banks.
This helps them to face the financial crisis if any, more effectively
(v) Large scale operation:
Group banking paves the way for large scale operation. The member
banks can get the economies of large scale operation.
(vi) Other Benefits:
The holding company offers the following services to the participating
banks:
(i) Guidance of experts
(ii) Auditing
(iii) Investment counselling
(iv) Combined Purchase of stationery and office equipments
(v) Insurance cover on deposits
(vi) Advertising and publicity
(vii) Tax guidance
(viii) Other advisory services.
Disadvantages
The disadvantages of the Group Banking System are as follows:
(i) Lack of effective management and control:
Under Group banking system the control and management is not effective
because the control is indirect and more flexible. It cannot offer specialised
management.
(ii) Inefficiency of member banks protected:
The inefficiency of one participating bank affects the other participating
banks.
(iii) Less facilities:
This system cannot provide all the facilities offered by branch banking.
(iv) Cannot mobilize funds:
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Group banking does not have the capacity to mobilise funds as in the case
with branch banking. Hence, it cannot offer the same economy of operations as
are offered by branch banking.
Chain banking:
Chain banking is a situation in which three or more banks that are independently
chartered are controlled by a small group of people. The mechanisms used to establish this type
of arrangement normally involve securing enough stock between the individuals to have a
controlling interest in each of the bank corporations involved. The arrangement can also be
managed with the establishment of interlocking directorates or boards of directors that
effectively create a network between the banks without the need for some type of central holding
company.
The concept of chain banking is different from group banking, in that the entities
involved in the chain bank arrangement remain autonomous and are not owned by a single
holding company. By contrast, the group banking model requires a holding company to own all
the banks involved, effectively creating an umbrella under which all the banks operate. Chain
banking is also different from branch banking, a situation where all local branches of a bank are
owned by a single banking institution.
Pure and mixed banking:

a. Pure Banking:
Under pure Banking, the commercial banks give only short-term loans to
industry, trade and commerce. They specialise in short-term finance only.
This type of banking is popular in U.K. In U.K., Special institutions like
investment houses, finance corporations were established for providing long-term
finance. Hence, it is argued that commercial banks should provide only short-term loans.
It is stressed on the lines of safety and liquidity.
b. Mixed Banking:
Mixed banking is that system of banking under which the commercial banks
perform the dual function of commercial banking and investment banking, i.e., it
combines deposit and lending activity with investment banking.
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Commercial banks usually offer both short-term as well as medium term loans.
The German banking system is the best example of mixed Banking where banks are
permitted besides, lending activity, investment functioning also.
In India, Banks are permitted to undertake limited investment activity. In USA
commercial or credit banks are not permitted to undertake investment activity. Banks in
Switzerland, Denmark, Japan also provide long-term loans.
Advantages of Mixed Banking:

Mixed Banking has the following advantages:
(i) Credit requirements are fully satisfied.
(ii) Banking resources are utilized for industrial development.
(iii) Industries can mobilize greater finance resources through these banks.
(iv) Investment guidance to general public.
(v) Expert guidance and advice to industries.
(vi) Direct contact with industries.
(vii) Promote rapid industrial development through investment banking.
Disadvantages of Mixed Banking:

a. Threat to stability of Banks- the stability of the bank may be affected if the prices of
Securities in which banks have invested depreciate.
b. Liquidity of banks may be affected, if the securities are not traded in the market.
c. Possibility of engaging in speculative business
d. Scope for over lending.
After the Second World War, underdeveloped countries began to show much interest
on mixed banking. In recent years, there has been a favourable trend towards mixed banking
in India because of the following reasons:
a. Increase in the volume of deposits
b. Increase in time deposits than demand deposits
c. RBI initiative to strengthen the banking system.
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d. After nationalisation, the Government encouraged the public sector banks to grant
long-term loans to small scale industries and entrepreneurs. It is made on the grounds of
rapid industrialisation in the country.
e. A realisation that overall growth depends upon development of capital market
also.
Relationship banking:
Relationship banking is multi-dimensional, and is maintained over cycles of corporate
growth and profitability. It is also supported by various institutions that provide the concerned
parties with incentives to build and foster the relationships, as is clear for Japanese main banks
(MBs) and German universal banks. However, relationship banking involves both promises and
perils. The desirability of relationship banking should not be taken for granted, since it ultimately
depends on whether the merits can be maximized without being caught in traps.
Relationship banking may be defined as the provision of financial services by a financial
intermediary on the basis of long-term investment in obtaining firm-specific information through
multiple interactions with diverse financial services (Boot, 2000). Banks have advantages in
gathering/producing information about their clients, thanks mainly to the nature of information
production. First, there are economies of scale: the cost of information gathering/production is
reduced by learning through repeated transactions. Second, there may also be economies of
scope: banks can utilize the information obtained on a type of service for other services (Petersen
and Rajan, 1994). Third, financial contracts are typically incomplete: banks and customers can
build commitment and reputation through repeated transactions across services, often allowing
the low-cost renegotiation of debt contracts (Lehmann and Neuberger, 2001). This characteristic
of information production makes it natural for banks to be interested in relationship-based
banking (see Box 1 for literature on bank debt and equilibrium financing pattern; see also
Yoshitomi and Shirai, 2001 for a more comprehensive discussion of the inherent features of the
banking system compared with those of corporate bond markets).
Narrow banking:
A ‘Narrow Bank’ in its narrow sense, can be defined as the system of banking under
which a bank places its funds in risk-free assets with maturity period matching its liability
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maturity profile, so that there is no problem relating to asset liability mismatch and the quality of
assets remains intact without leading to emergence of sub-standard assets.
Universal banking:
Universal banking is a combination of Commercial banking, Investment banking,
Development banking, Insurance and many other financial activities. It is a place where all
financial products are available under one roof. So, a universal bank is a bank which offers
commercial bank functions plus other functions such as Merchant Banking, Mutual Funds,
Factoring, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc. Universal
banking is done by very large banks. These banks provide a lot of finance to many companies.
So, they take part in the Corporate Governance (management) of these companies. These banks
have a large network of branches all over the country and all over the world. They provide many
different financial services to their clients.
In India, two reports in 1998 mentioned the concept of universal banking. They are, the
Narasimham Committee Report and the S.H. Khan Committee Report. Both these reports
advised to consolidate (bring together) the banking industry through mergers and integration of
financial activities. That is, they advised a combination of all banking and financial activities.
That is, they suggested a Universal banking.
In 2000, ICICI asked permission from RBI to become a universal bank. RBI wants some
big domestic financial institutions to become universal banks.
Regional banking:
A regional bank is a depository institution, i.e. a bank, savings and loan, or credit union,
which is larger than a community bank, which operates below the state level, but smaller than a
money centre bank, which operates either nationally or internationally. A regional bank is one
that operates in one region of a country, such as a state or within a group of states. The definition
of what constitutes a regional bank is not precise. They generally provide, with some limitations,
the same services as larger banks, such as deposits; loans, leases, mortgages, and credit cards;
ATM networks; securities brokerage; investment banking; insurance sales; and mutual funds and
pension funds management. The term is often used in stock trading, when referring to investing
in different bank types, usually referred to as regional bank ETF's (exchange-traded funds).
19
Local area bank:
In some cases, the Regional banks set up by the governments are not being run profitably
for various reasons. Secondly, these banks are not meeting fully the credit requirements of
regional borrowers.
With a view to bring about a competitive environment and to overcome the deficiencies
of Regional banks, Government has permitted establishment of a new type of regional banks in
rural and semi-urban centres under private sector known as 'Local Area Banks'.
These banks require a low Capital base of Rs. 5 crore only. The entire share capital has to
be mobilized from private sector. They will be permitted to operate only within a region of 2 or 3
districts. Local Area Banks are yet to become operational in India as of June 1999.
Retail banking:
Retail banking refers to the division of a bank that deals directly with retail customers.
Also known as consumer banking or personal banking, retail banking is the visible face of
banking to the general public, with bank branches located in abundance in most major cities.
Banks that focus purely on retail clientele are relatively few, and most retail banking is
conducted by separate divisions of banks, large and small. Customer deposits garnered by retail
banking represent an extremely important source of funding for most banks.
Wholesale banking:
Wholesale banking is the provision of services by banks to organisations such as
Mortgage Brokers, large corporate clients, mid-sized companies, real estate developers and
investors, international trade finance businesses, institutional customers (such as pension funds
and government entities/agencies), and services offered to other banks or other financial
institutions.
(Wholesale finance means financial services, which are conducted between financial
services companies and institutions such as banks, insurers, fund managers, and stockbrokers.)
Modern wholesale banks are engaged in: finance wholesaling, underwriting, market
making, consultancy, mergers and acquisitions, fund management
20
Private banking:
Private banking is banking, investment and other financial services provided by banks to
private individuals who enjoy high levels of income or invest sizable assets. The term "private"
refers to customer service rendered on a more personal basis than in mass-market retail banking,
usually via dedicated bank advisers. It does not refer to a private bank, which is a non-
incorporated banking institution.
Private banking forms an important, high-level and more exclusive (for the especially
affluent) subset of wealth management. At least until recently, it largely consisted of banking
services (deposit taking and payments), discretionary asset management, brokerage, limited tax
advisory services and some basic concierge-type services, offered by a single designated
relationship manager. Taking a largely passive approach to financial decision making, most
clients trust their private banking relationship manager to ‘get on with it.’
Bank and economic development:

Banks plays a very important roll in the economic development of every nation. They
have control over a large part of the supply of money in circulation. Through their influence over
the volume of bank money, they can influence the nature and character of production in any
country.
Economic development is a dynamic and continuous process. Banks are the main stay of
the economic progress of a country. Because the economic development highly depends upon the
extent of mobilisation of resource and investment and on the operations efficient of the various
segments of the economy of a country can be summarised as follows
Importance of banking and economic development:

The Banking Sector has for centuries now formed one of the pillars of economic
prosperity. Indeed history provides us with some starting information regarding how banks
provided finance for imperialist ventures in newly acquired colonies. Over time banks have
formed an important part in providing an avenue for both savings and investments.
Land, Labor, capital and entrepreneurs are the basic economic resources available to
business. However, to make the use of these resources, a business requires finance to purchase of
21
the land, hire labor, pay for capital goods and pay for individuals with specialized skills. Detail
role of commercial banks in economic development is given below:
a. Trade Development
The commercial banks provide capital, technical assistance and other facilities to
businessmen according to their need, which leads to development in trade.
b. Agriculture Development
Commercial banks finance the most important sector of the developing economics
i.e. agriculture, short, medium and long-term loans are provided for the purchase of seeds
and fertilizer, installation of tube wells, construction of warehouses, purchase of tractor
and thresher etc.
c. Industrial Development
The countries, which concentrated on industrial sector made rapid economic
development. South Korea, Malaysia, Taiwan, Hong Kong and Indonesia have recently
developed their industrial sector with the help of commercial banks.
d. Capital Formation
Commercial banks help in increasing the rate of capital formation in a country.
Capital formation means increase in number of production units, technology, plant and
machinery. They finance the projects responsible for increasing the rate of capital
formation.
e. Development of Foreign Trade
Commercial banks help the traders of two different countries to undertake
business. Letter of credit is issued by the importer’s bank to the exporters to ensure the
payment. The banks also arrange foreign exchange.
f. Transfer of Money
Commercial banks provide the facility of transferring funds from one place to
another which leads to the growth of trade.
g. More Production
A good banking system ensures more production in all sectors of the economy. It
increases the production capabilities of the economy by strengthening capital structure
and division of labor
h. Development of Transport
22
The commercial banks financed the transport sector. It has reduced
unemployment on one hand and increased the transport facility on the other hand.
Remote areas are linked to main markets through developed transport system.
i. Safe Custody
The business concerns and individuals can make themselves tension free by
depositing their surplus money in banks. The banks also provide them the facility of
lockers to keep their precious articles and necessary documents safe.
j. Increase in Saving
Commercial banks persuade the people to save more. Different saving schemes
with attractive interest rates are introduced for this purpose. Number of bank branches is
opened in urban and rural areas.
k. Construction of Houses
Commercial banks provide credit facilities to their customers for the purchase or
construction of houses.
l. Assistance to Government
By providing funds to government for development programs, the commercial
banks share the government for economic stability.
m. Increase in Employment
A country’s economic prosperity depends on the development of trade, commerce
industry, agriculture, transport and communication etc. These sectors are financed by the
commercial banks and employment opportunities are increasing.
n. Saving in Metallic Reserve
Cheques and drafts etc works like money. In this way the need of precious metals
to make coins reduces and metallic reserve of the country can be utilized on other
important matters
o. Credit Creation
Commercial banks are called the factories of credit. They advance much more
than what the collect from people in the form of deposits. Through the process of credit
creation, commercial banks provide finance to all sectors of the economy thus making
them more developed than before.
p. Proper use of Money
23
People deposit their saving in the banks, so the scattered money becomes a huge
amount in the way, which can be used for different projects in a proper way.
q. Financial Advices
Commercial banks also give useful financial advices to promote the business of
their customers, besides credit facilities.
r. Increase in Investment
Commercial banks mobilize savings of the people. They make them available to
the farmers, traders and industrialists for the development of agriculture, trade and
industry.
s. Success of Monetary Policy
Under the supervision of central bank, all scheduled commercial banks make
effort for the success and objectives of monetary policy. This joined effort of commercial
banks makes the economic development possible.
t. Use of Modern Technology
The use of modern technology in less developed countries is only possible in the
presence of developed commercial banking as it can be the main source of their funds.
These funds are utilized for the import of modern technology from developed countries.
(i) Export Promotion Cells
In order to boost the exports of the country, the banks have established export
promotion cells for the information and guidance to the exporters.
(ii) Economic Prosperity
Economic prosperity of a country depends on number of factors including the
development of commercial banking. A sound banking system promotes the
economic status of the people by providing them short, medium and long-term loans.
(iii) Training Center
Commercial banks established many trading centers for their employees to
modernize the banking system of a country. In this way the banking experts enhance
their abilities and contribute towards the development of country.
Functions of commercial banks:
I. Primary / Banking Functions:-
24
Commercial banks have two important banking functions. One is accepting
deposits and other is advancing loans.
1. Deposits:-
One of the main functions of a bank is to accept deposits from the public.
Deposits are accepted by the banks in various forms.
a. Current Account Deposits:-
Current Accounts are usually opened by businessmen who
have a number of regular transactions with the bank, both deposits and
withdrawals. There is no restriction on number and amount of deposits.
There is also no restriction on withdrawals. No interest is paid on current
deposits. Banks may even charge interest for providing this facility. These
accounts are also known as demand deposits as amount can be withdrawn
on demand.
b. Saving Account Deposits :-
Saving Accounts are opened by salaried and other less income
people. There is no restriction on number and amount of deposits.
Withdrawals are subject to certain restrictions. It earns Interest but less
than fixed deposits. It encourages saving habit among salary earners and
others. Saving deposits are an important source of funds for banks.
c. Fixed Account Deposits :-
Deposits in fixed account are time deposits. Money under this
account is deposited for a certain fixed period of time varying from 15
days to several years. A high rate of interest is paid. If money is
withdrawn before expiry date, the depositor receives lower rate of interest.
Deposits can be renewed for further period. Many banks sanction loans
against security of fixed deposits.
d. Recurring Account Deposits :-
In Recurring deposit, a specified amount is regularly deposited by
account holder, at an internal of usually a month. This is to form the habit
of small savings among the people. At the end of maturity period, the
25
account holder gets a substantial amount. Interest on this type of deposit is
almost equal to fixed deposits.
Thus by creating variety of deposits, banks motivate people in a
variety of ways and encourage savings in the economy.
2. Loans And Advances :-
Banks not only mobilize money but also lend to its credit worthy
customers for maximizing profits. Loans and Advances are granted To :-
a. Business And Trade :-
Commercial banks grant short-term loans to business and trade
activities in following forms:-
(i) Overdraft
Commercial banks grant overdraft facility to current account holders
Under this system a borrower is allowed to draw more than what is
deposited in his account. The borrower is granted to a fixed additional
amount against collateral security. Interest is charged for actual amount
drawn.
(ii) Cash Credit
Cash credit is given by the bank to any businessman to meet regular
working capital needs, against the security of goods or personal security. Interest
is charged on actual amount drawn by the customer.
(iii) Discounting Of Bills :-
When the holder of the bill is not in a position to wait till the maturity of
the bill and requires cash urgently, he sells the bill of exchange to bank. Bank
advance credit by discounting bills of exchange, government securities or any
other approved financial instruments. The bank purchases the instruments at a
discount.
(iv) Money At Call :-
Banks also grant loans for a very short period, generally not exceeding 7
days. Such advances are repayable immediately at a short notice hence they are
called as Money at Call or Call money. These loans are given to dealers or
brokers in stock market against Collateral Securities.
26
b. Direct Loans :-
Loans are given to customers against the security of moveable
properties. Their maturity varies from 1 to 10 years. Interest has to be paid
on entire loan amount sanctioned. Loans are of many types like personal
loans, term loans, call loans, participative loans, collateral loans etc.
(i) Loans to Agriculture
Banks grant short-term credit to agriculture at a lower rate of
interest. Loans are granted for irrigation, purchase of equipments, inputs,
cattle etc.
(ii) Loans To Industries
Banks grant secured loans to small and medium scale industries to
meet their working capital needs. The time period may be from one to five
years. It may be in the form of Overdraft, cash credit or direct loan.
(iii) Loans To Foreign Trade
Loans are granted to export and import in the form of direct loans,
discounting of bills, guarantee for deferred payments etc. Here the rate of
interest is low.
(iv) Consumer Credit / Personal loans :-
Banks also grant credit to household in a limited amount to buy
some durable consumer goods like television sets, refrigerators, washing
machine etc. Such consumer credit is repayable in installments. Under 20-
point programme, the scope of consumer credit has been extended to cover
expenses on marriage, funeral etc., as well.
(v) Miscellaneous Advances
Banks also gives advances like packing credits to exporters, export
bill purchased or discounted, import finance, finance to self-employed,
credit to weaker sections of society at concessional rates etc.
II. Secondary / Non-banking Functions:-
Banks gives various forms of services to public. Such services are termed as non-
banking or secondary functions:-
1. Agency Services:
27
Banks perform certain functions on behalf of their customers.
While performing these services, banks act as agents to their customers,
hence these are called as agency services. Important agency functions are
a. Collection
Commercial banks collect cheques, drafts, bills, promissory notes,
dividends, subscriptions, rents and any other receipts which are to be
received by the customer. For these services banks charge a nominal
amount.
b.Payment :-
Banks also makes payments on behalf of their customers like
paying insurance premium, rent, taxes, electricity and telephone bills etc
for such services commission is charged.
c.Income – Tax Consultant :-
Commercial banks acts as income-tax consultants. They prepare
and finalise the income tax returns of their clients.
a. Sale And Purchase Of Financial Assets
As per the customers instruction banks undertake sale and purchase of securities,
shares and any other financial assets. Nominal charges are charged by a bank.
b. Trustee, Executor And Attorney :-
As a trustee, banks becomes the custodian and manager of customer funds.
Bank also acts as executor of deceased customer’s will. As an Attorney the banks sign
the documents on behalf of customer.
c. E- Banking :-
Through Electronic Banking, a customer can operate his bank account through
internet. He can make payments of various bills. He can even transfer money from one
place to another.
d. Utility Services :-
Modern Commercial banks also performs certain general utility services for the
community, such as :-
a. Letter Of Credit :-
28
Banks also deal in foreign trade. They issue letter of credit and provide guarantee
to foreign traders for the soundness of their customers.
b. Transfer Of Funds :-
Banks arrange transfer of funds cheaply and safely from one place to another.
Transfer can be in the form of Demand draft, Mail transfer Travellers cheques etc.
c. Guarantor
Banks offer a guarantee of payment on behalf of importer to facilitate imports
with deferred payments.
d. Underwriting
This facility is provided to Joint Stock Companies and to government to enable
them to raise funds. Banks guarantee the purchase of certain proportion of shares, if
not sold in the market.
e. Locker Facility
Safe Lockers are provided to the customers. So that they can deposit their
valuables like Jewellary, Securities, Shares and otherdocuments.
f. Referee :-
Banks may act as referee with respect to financial standing, business reputation
and respectability of customers.
g. Credit Cards :-
Credit card facility have been introduced by commercial banks. It enables the
holder to minimize the use of hard cash. Credit card is a convenient medium of
exchange which enables its holder to buy goods and services from member –
establishment without using money.
III. Subsidiary Activities :-
Many commercial banks also undertakes subsidiary activities such as :-
1) Housing Finance :-
Housing finance is provided against the security of immoveable property of land
and buildings. Many banks such as SBI, Bank of India etc. have set up housing finance
subsidiaries.
2) Mutual Funds :-
29
A Mutual fund is a financial intermediary that pools the savings of investors for
collective investment in diversified portfolio securities Many banks like SBI, Indian
Bank etc. have set up mutual fund subsidiaries.
3) Merchant Banking :-
A variety of services are offered by merchant banking like Management,
Marketing and Underwriting of new issues, project promotion, corporate advisory
services, investment advisory services etc.
4) Venture Capital Fund :-
Venture capital fund provides start-up share capital to new ventures of little
known, unregistered, risky, young and small private business, especially in technology
oriented and knowledge intensive business. Many commercial banks like SBI, Canara
Bank etc. have set up venture Capital Fund Subsidiaries.
5) Factoring :-
Factoring is a continuing arrangement between a financial intermediary (factor)
and a business concern (client) where by the factor purchases the clients accounts
receivable. Banks like SBI and Canara Bank have established subsidiaries to provide
factoring services.
Thus various services are provided by commercial Banks.
Credit creation by Commercial Banks:-

Creation of credit is an important function of a commercial bank. Prof. Sayers said
“Banks are not merely purveyors of money but, also in an important sense manufacturer of
money”. In a modern economy Bank’s deposits form a major proportion of total money supply.
A bank’s demand deposits arise mainly from Cash deposits by customers and Bank
Loans and Investments.
1. Cash Deposits By Customers :-
These are termed as primary deposits as they arise from the actual deposits of
cash in a bank made by its customers. In receiving such deposits, the bank plays a
passive role. The creation of primary deposits however is nothing but transforming the
currency money in to deposit money.
2. Bank Loans And Investments :-
30
These are termed as derivative or active deposits. The derivative deposits are
lent in the form of loans or advances, discounting of bills or used for purchasing
securities or other assets.
Deposit account in the name of the customer or seller, credits him with the
amount of loan granted or value of security purchased, subject to withdrawal by cheque,
as required. Hence loans advanced or a purchase of securities creates deposits.
Thus every loan creates a deposit. They increase the quantity of bank money.
The size of derivative demand deposits is determined by the banks lending and
investment activities. There will be a constant inflow and outflow of cash with the banks.
For the sake of liquidity and safety some proportion of total deposit must be maintained
in cash, for e.g. :- 10% to 20% to meet the demand for cash at the counter. This is known
as Cash Reserve Ratio.
Primary deposits serve as a basis for creating derivative deposits, that is credit
creation, and for increasing money supply. Commercial banks are profit seeking
institutions and when they find that large volume of cash received lies Idle, they use
these resources for advancing loans or for making investment in securities, shares etc.
there by earning high rate of interest. The creation of credit also depends on excess cash
reserves or cash reserve ratio. The derivative deposits are used as working capital.
When the borrower withdraws money from his loan account by cheque it is
deposited by the payee in some other bank. Those banks again create deposit on the basis
of fresh deposits received after keeping required reserves. Ultimately, the total volume of
credit or derivative deposits or bank money created by all banks would be a multiple of
the original amount of new cash reserves in the system. Thus multiple expansion of
credit takes place.
Example :-
Suppose the Cash Reserve Ratio is 20% and a person deposits Rs. 10,000/- with
Bank of India. This is primary deposit. The bank keeps Rs. 2000 as CRR and balance of Rs.
8000 is used for granting credit.
Now suppose Bank of India lends Rs. 8000 to Mr. A and Mr. A pays a cheque of Rs.
8000 to Mr. B, who has an account in Bank Of baroda. Then Bank Of Baroda receives Rs. 8000
as primary deposit. It keeps Rs. 1,600 (20%) as CRR and excess amount of Rs. 6,400 is used for
31
giving credit. Now if, Mr. C is granted this loan and Mr.C gives a cheque of Rs. 6,400 to another
person who may deposit it in Bank of Maharashtra. Bank of Maharashtra will keep Rs. 1,280 as
CRR and issue a loan of Rs. 5,120. This process continues until the original excess reserves of
Rs. 8000 with the first Bank of India, have been parceled out among various banks and have
been required resources. As a result, the aggregate of derivative deposits in the entire banking
system, approximates 5 times the initial derivative deposit over a period of time.
Process of multiple expansion of credit
BANKS PRIMARY CRR Credit Creation or

DEPOSIT 20% Creation of
Derivative Deposits
Bank of India 10,000 2000 8000
Bank of Baroda 8,000 1,600 6,400
Bank of 6,400 1,280 5,120
Maharashtra
Total of all 50,000 10,000 40,000
Banks
In the above Eg., the credit expansion is five times the initial excess reserve of Rs. 8,000
when CRR is 20%.
PD – PCR
TC = X 100
CRR
Symbolically,
Where TC = Total Credit
PD = Primary Deposit.
PCR = Primary cash Reserve.
CCR = Cash Reserve Ratio.
Cash Creation = 10000 – 2000 = 8000
X 100 X 100 = ` 40,000
20 20
32
The Credit Multiplier depends on CRR.
r = CRR
If CRR is 20 % then, credit multiplier will be
The Multiple expansion of credit is the inverse of CRR maintained by banks. Higher
the CRR,
Lower the expansion of credit and vice versa.
Assumptions:-
The bank deposit multiplier, discussed above, is based on the following assumptions:-
1. There is no leakage from the banking system. All the money should remain with banking
system.
2. The banks must receive new deposits.
3. They must be willing to make loans or buy securities.
4. The CRR remains constant through all the stages.
5. People must be willing to borrow.
6. The business conditions are normal.
7. There is no credit control policy of central bank.
8. There should be popular banking habit in the country and a well developed banking
system.
Limitations of credit creation

Commercial banks do not have unlimited powers of deposit or credit creation, because
their activities in this direction are subject to a number of restrictions, such as:-
1. Amount of Cash
The larger the amount of cash with banking system, the greater will be the excess
funds, and that larger will be the credit creation power of the bank. The banks power of
creating money or credit is thus limited by cash it can get in its hands on, primarily
through primary deposits.
2. Cash Reserve Ratio
Higher the cash reserve ratio, smaller the volume of credit creation and vice versa.
If CRR falls to a certain minimum, then power of the banks to create credit is limited.
33
3. External Drain
External drain refers to the withdrawal of cash from the banking system by public.
Every rupee in cash that is withdrawn from the banking system lowers the reserves of the
banks and thus checks further deposit expansion.
4. Willingness to Borrow:-
Credit creation will be larger during a period of business prosperity and smaller
during a depression. Bankers cannot create credit at will. The amount of credit is
conditioned by the needs and will of the borrowers.
5. Supply of Collateral Securities:-
The availability of good securities places one more limitation on the power of banks
to create money. If approved securities are not available, the bank cannot create credit
without inviting trouble. “The bank does not create money out of thin air, it transmutes
other forms of wealth in to money.
6. Banking Habits And Banking System:-
In the absence of banking habits and banking system, credit creation will be
impossible. The banking habit will become popular only if there is a sound, developed
banking system.
7. Monetary Policy of Control Bank:-
The Central bank has the power to influence the volume of money in the country
and from time to time, use various methods of credit control and thus its influences the
banks to expand or contract credit.
Balance sheet of commercial banks:

Form of consolidated balance sheet of a bank and its Subsidiaries engaged in financial
activities
Balance Sheet of ________________________ (here enter name of the banking group)
(000’s omitted)
Balance Sheet as on March 31 (Year)
Schedule As on 31.3.__ As on 31.3.
(current year) (previous
34
year)
CAPITAL &
LIABILITIES
Capital 1
Reserves & 2
Surplus
Minorities 2A
Interest
Deposits 3
Borrowings 4
Sundry
Payables1
Other Liabilities 5
and Provisions
Total
ASSETS
Cash and 6
Balances with
Reserve Bank
of India
Balances with 7
banks and
money at call
and short notice
Investments 8
Loans & 9
Advances
Sundry
Receivables2
Fixed Assets 10
35
Other Assets 11
Goodwill on
Consolidation3
Debit Balance
of Profit and
Loss A/C
Total
Contingent 12
liabilities
Bills for
collection
SCHEDULE 1 – CAPITAL
As on 31.3.__ As on 31.3.__
(current year) (previous year)
Authorised Capital
(.... Shares of Rs ... each)
Issued Capital
Subscribed Capital
Called-up Capital
Less: Calls unpaid
Add: Forfeited shares
Total
SCHEDULE 2 – RESERVES & SURPLUS

As on 31.3.__ As on 31.3.__
36
Statutory Reserves
Capital Reserves
Capital Reserve on
Consolidation2
Share Premium
Other Reserves (specify
nature)
Revenue and other Reserves
Balance in Profit and Loss
Account
Total
SCHEDULE 2A-MINORITIES INTEREST

Equity (… Shares of Rs. …
..each)
… ..% in pre-acquisition
Reserves & Surplus
… ..% in post-acquisition
Reserves & Surplus3
Balance in Profit and Loss
Account
Total
SCHEDULE 3 – DEPOSITS
As on 31.3.__ As on 31.3.__
A. I. Demand Deposits
(i) From banks
(ii) From others
37
II. Savings Bank Deposits
III. Term Deposits
(i) From banks
(ii) From others
Total (I, II and III)
B. (i) Deposits of
subsidiaries in India
including foreign offices,
if any*
(ii) Deposits of
subsidiaries outside India
including Indian offices,
if any*
(iii) Deposits of Parent
Total (I, II and II
C. (i) Deposits of parent
in India
(ii) Deposits of
subsidiaries in India
(iii) Total Deposits in
India (I +ii)
(iv) Deposits of parent
outside India
(v) Deposits of
subsidiaries outside India
(vi) Total Deposits
outside India
Total (iii + vi)
SCHEDULE 4 – BORROWINGS
As on 31.3.__ As on 31.3.__
38
year)
I. Borrowings in India
(i) From the Reserve Bank of
India
(ii) From other banks
(iii) From other institutions
and agencies
(iv) Debentures
(v) Other Long-term
borrowings (indicate
source of borrowing)
II. Borrowings outside India
Total (I & II)
(Secured borrowings included in I & II above – Rs.____ from
India and Rs.___ from
outside India)
SCHEDULE 5 – OTHER LIABILITIES AND PROVISIONS

As on 31.3.__ As on 31.3.__
II Subordinated Debt for Tier
II Capital
II. Bills payable
III. Inter-office (Inter-
branch)adjustments (net)
a) Parent
b) Subsidiaries
39
IV. Intra-Group Adjustment
(net)
V. Interest accrued
VI. Tax Liabilities
a) Current tax liabilities
b) Deferred tax liabilities
V. Others (including
provisions, give details)
Total
Note: The net debits of each subsidiary should be aggregated.
SCHEDULE 6 – CASH AND BALANCES WITH RESERVE BANK OF INDIA

As on 31.3.__ As on 31.3.__
year)
I. Cash in hand (including
foreign currency
notes)
II. Balances with Reserve
Bank of India
(i) in Current Account
(ii) in other Accounts
Total (I & II)
SCHEDULE 7 – BALANCES WITH BANKS AND MONEY AT

CALL & SHORT NOTICE
As on 31.3.__ As on 31.3.__
year)
I. In India
40
(i) Balances with banks
(a)in Current accounts
(b)in other Deposit accounts
(ii) Money at call and short
notice
(a) with banks
(b) with other institutions
Total (I & II)
II. Outside India
(i) in Current accounts
(ii) in other Deposit accounts
(iii) Money at call and short
notice
Total
Grand Total (I & II)
SCHEDULE 8 – INVESTMENTS
As on 31.3.__ As on 31.3.__
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Others (to be specified)
Total
II. Investments outside India
in
(i) Government securities
(including local
41
authorities)
(ii) Other investments (to be
specified)
Total
Grand Total (I & II)
III. Gross value of
Investments
Aggregate of Provisions for
Depreciation
Net Investment
Classification of Investments as per RBI Guidelines
I. Held for Trading
II. Held to Maturity
III. Available for Sale
Total
Details of investments
I. Investments in associates
(disclose
goodwill/ capital reserves
separately as per
AS 23)
II. Other investments
Total
SCHEDULE 9 – LOANS & ADVANCES

As on 31.3.__ As on 31.3.__
A. (i) Bills purchased and
discounted
42
(ii) Cash credits, overdrafts
and loans
repayable on demand
(iii)Term loans
(iv) Lease Receivables
Total
B. (i) Secured by tangible
assets
(ii) Covered by
Bank/Government
Guarantees
(iii) Unsecured
Total
C.IAdvances in India
(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
Total
C.II Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and
discounted
(b) Syndicated loans
(c) Others
Total
Grand Total (C.I. & C.II)
SCHEDULE 10 – FIXED ASSETS
43
As on 31.3.__ As on 31.3.__
I. Premises
At cost as on 31st March of
the preceding year
Additions during the year
Deductions during the year
Depreciation to date
IA. Premises under
construction
II. Other Fixed Assets
(including furniture
and fixtures)
At cost (as on 31 March of the
preceding year
IIA. Leased Assets
At cost as on 31st March of
the preceding
year
Total (I, IA,II &IIA)
III. Capital-Work-in progress
(Leased Assets) net
provisions
Total (I, IA, II, IIA & III)
44
SCHEDULE 11 – OTHER ASSETS
As on 31.3.__ As on 31.3.__
I. Inter-office (Inter-branch)
adjustments (net)*
a) Parent
b) Subsidiaries
II. Intra-Group Adjustments
(net)
III. Interest accrued
IV.Tax paid in advance/tax
deducted at source
V. Stationery and stamps
VI. Non-banking assets
acquired in satisfaction of
claims
VI. Prepaid expenses
VII. Deferred Tax assets
VIII. Others
Total
Note: *The net credits of each subsidiary should be aggregated.
SCHEDULE 12 – CONTINGENT LIABILITIES
As on 31.3.__ As on 31.3.__
I. Claims against the bank not
acknowledged
as debts
II. Liability for partly paid
investments
III. Liability on account of
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outstanding
forward exchange contracts
IV.Guarantees given on behalf
of constituents
(a)In India
(b)Outside India
V. Acceptances, endorsements
and other
obligations (give details)
VI.Other items for which the
Group is
contingently liable
Total
SCHEDULE 13 – INTEREST AND DIVIDENDS EARNED

Year ended Year ended
31.3.__ 31.3.__
I. Interest/discount on
advances/bills
II. Interest and dividends on
investments
III. Interest on balances with
Reserve Bank of India
and other inter-bank funds
IV.Others (give details)
Total
SCHEDULE 14 – OTHER INCOME

46
31.3.__ 31.3.__
I. Commission, exchange and
brokerage
II. Profit on sale of land,
buildings and
other assets
Less: Loss on sale of land,
buildings and
other assets
III. Profit on exchange
transactions
Less: Loss on exchange
transactions
IV. Profit on sale of
investments(net)
Less: Loss on sale of
investments
V. Profit on revaluation of
investments
Less: Loss on revaluation of
investments
VI. a) Lease finance income
b) Lease management fee
c) Overdue charges
d) Interest on lease rent
receivables
VII Miscellaneous income
Total
SCHEDULE 15 – INTEREST EXPENDED
47
31.3.__ 31.3.__
I. Interest on deposits
II. Interest on Reserve Bank of
India/
inter-bank borrowings
III. Others (give details)
Total
SCHEDULE 16 – OPERATING EXPENSES

Year ended 31.3.__ Year ended
(current year) 31.3.__
(previous year)
I. Employees' costs
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and
publicity
V. Depreciation on bank’s
property
a)Other than Leased Assets
b)Leased Assets
VI. Directors’ fees,
allowances and expenses
VII. Auditors’ fees and
expenses (including branch
auditors’ fees and expenses)
VIII. Law charges
IX. Postage, telegrams,
48
telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII Amortisation of Goodwill,
if any
XIII Other expenditure (give
details)
Total
Notes:
1. Additional line items, headings and sub-headings should be presented in the consolidated
balance sheet and consolidated profit and loss account and schedules thereto when required by a
statute, Accounting Standards or when such a presentation is necessary to present the true and
fair view of the group’s financial position and operating results. In the preparation and
presentation of consolidated financial statements Accounting Standards issued by the ICAI, to
the extent applicable to banks, should be followed.
2. In case of joint ventures, separate disclosures of line items as per proportionate consolidation
should be made both in the consolidated balance sheet and consolidated profit and loss account.
Question Banks
Section A
1. Primary deposit is otherwise known as_______
2. The primary function of Commercial Bank is ______
3. The most liquid asset from banker point of view is___________
4. Unit banking system is famous in___________
5. Branch banking system was first followed in____________
6. Derivative Deposit is otherwise called as___________
7. Commercial Banks in India is Governed by________
8. The bank in Greek word Banque which means _________
9. Time deposit repayable after certain ___________ period.
10. The Co-operative Principles is __________ and assistance.
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Section B
1. State the definition of Banking Write a short note on Unit Banking
2. Write a short note on Branch Banking?
3. What are the primary functions of Commercial Banks?
4. Enumerate the recent trends in the banking industry in India.
5. Enumerate the recent trends in the banking industry in India.
6. Write the short note on Universal Banking?
7. State the types of Banks.
8. State the various advantages of Branch Banking.
9. Analyze the role of commercial banks in rural financing.
10. State the various advantages of Unit Banking.
Section – C
1. Explain the main items of the assets appearing in the Balance Sheet of a Commercial
Bank?
2. Explain the role of Commercial banks in economic?
3. Explain the classifications of Banks?
4. Explain the various functions of Commercial Banks?
5. State the meaning of Banking and its Features?
6. Explain the Banking System in India in detail?
7. What are the advantages and disadvantages of Unit Banking?
8. What are the advantages and disadvantages of Branch Banking?
9. Give format for the balance sheet.
10. Explain in detail credit creation.
50
UNIT II
Recent Trades in Indian Banking – Automated teller Machines – Merchant Banking – Mutual
Fund – Factoring Services – Customer Services – Credit Cards – E-banking – Privatization of
commercial banks – Place of Private Sector Banks in India.
Recent Trends in Indian Banking Sector

Today, we are having a fairly well developed banking system with different classes of
banks – public sector banks, foreign banks, private sector banks, regional rural banks and co-
operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks.
The RBI’s most important goal is to maintain monetary stability (moderate and stable
inflation) in India. The RBI uses monetary policy to maintain price stability and an adequate
flow of credit. The rates used by RBI to achieve this are the bank rate, repo rate, reverse repo rate
and the cash reserve ratio. Reducing inflation has been one of the most important goals for some
time.
Growth and diversification in banking sector has transcended limits all over the world. In
1991, the Government opened the doors for foreign banks to start their operations in India and
provide their wide range of facilities, thereby providing a strong competition to the domestic
banks, and helping the customers in availing the best of the services. The Reserve Bank in its bid
to move towards the best international banking practices will further sharpen the prudential
norms and strengthen its supervisor mechanism.
There has been considerable innovation and diversification in the business of major
commercial banks. Some of them have engaged in the areas of consumer credit, credit cards,
merchant banking, internet and phone banking, leasing, mutual funds etc. A few banks have
already set up subsidiaries for merchant banking, leasing and mutual funds and many more are in
the process of doing so. Some banks have commenced factoring business.
Role of Information Technology (IT) and Customer Relationship Management (CRM) in

Banking
IT plays an important role in the banking sector as it would not only ensure smooth
passage of interrelated transactions over the electric medium but will also facilitate complex
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financial product innovation and product development. The application of IT and e-banking is
becoming the order of the day with the banking system heading towards virtual banking.
Banks, who strongly rely on the merits of ‘relationship was banking’ as a time tested way
of targeting & servicing clients, have readily embraced CRM, with sharp focus on customer
centricity, facilitated by the availability of superior technology. CRM, therefore, has become a
new mantra in service management, both relationship & information wise.
Foreign Direct Investment (FDI) in India

Definition of FDI:
Investment made to acquire lasting interest in enterprises operating outside of the
economy of the investor. Maximum FDI permitted in Indian private sector banks – 74 percent,
under the automatic route which includes Portfolio Investment i.e. FII’s and NRI’s, Initial Public
Issue (IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing
shareholders; Maximum FDI permitted in Indian public / nationalized banks – 20 percent;
Automatic route is not applicable to transfer of existing shares in a banking company from
residents to non-residents. This category of investors require approval of FIPB, followed by “in
principle” approval by Exchange Control Department of the RBI.
The “fair price” for transfer of existing shares is determined by RBI, broadly on the basis
of the Securities and Exchange Board of India guidelines for listed shares and erstwhile CCI
guidelines for unlisted shares. After receipt of “in principle” approval, the resident seller can
receive funds and apply to RBI, for obtaining final permission for transfer of shares.
A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in
the host country can now invest up to 100% in an Indian private sector bank. This option of
100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and
not any investment companies.
Benefits of FDI:
1. Transfer of technology from overseas countries to the domestic market Ensure better and
improved risk management in the banking sector
2. Assures better capitalization
3. Offers financial stability in the banking sector in India.
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Voting Rights of Foreign Investor
Private Sector Banks Not more than 10% of the total voting rights of all the shareholders
Nationalized Banks Not more than 1% of the total voting rights of all the shareholders of
4. Major challenges faced by banks
5. Increased competition from domestic and international markets;
6. Transaction costs of carrying non-performing assets and substandard assets in its books;
7. Frequent changes in key policy rates and reserve requirements by the RBI;
8. Maintaining sufficient liquidity.
Conclusion:
In the days to come, banks are expected to play a very useful role in the economic
development and the emerging market will provide ample business opportunities to harness.
Human Resources Management is assuming to be of greater importance. As banking in India
will become more and more knowledge supported, human capital will emerge as the finest assets
of the banking system. Ultimately banking is people and not just figures.
To conclude it all, the banking sector in India is progressing with the increased growth in
customer base, due to the newly improved and innovative facilities offered by banks. FDI has
provided a great fillip to the whole of banking sector industry as banks are now competing at a
global level.
Take out financing

Take-out financing is a method of providing finance for longer duration projects (say of
15 years) by banks by sanctioning medium term loans (say 5-7 years). It is understanding that the
loan will be taken out of books of the financing bank within pre-fixed period, by another
institution thus preventing any possible asset-liability mismatch. After taking out the loans from
the banks, the institution could off-load them to another bank or keep it.
Under this process, the institutions engaged in long term financing such as IDFC, agree to take
out the loan from books of the banks financing such projects after the fixed time period, say of 5
years, when the project reaches certain previously defined milestones. On the basis of such
understanding, the bank concerned agrees to provide a medium term loan with phased
redemption beginning after, say 5 years. At the end of five years, the bank could sell the loans to
the institution and get it off its books.
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Revolving credit facility:
Revolving credit is a type of credit that does not have a fixed number of payments, in
contrast to instalment credit. Credit cards are an example of revolving credit used by consumers.
Corporate revolving credit facilities are typically used to provide liquidity for a company's day-
to-day operations. They were first introduced by the Strawbridge and Clothier Department Store.
It is basically an arrangement which allows for the loan amount to be withdrawn, repaid,
and redrawn again in any manner and any number of times, until the arrangement expires. Credit
card loans and overdrafts are revolving loans. Also called evergreen loan.
Evergreen of loan:
An evergreen loan is also known as a revolving loan. This means you can use it, pay the
money back and use it again. The loan is reviewed by the lender annually. If you meet the
criteria for renewal, the loan is continued. This can go on indefinitely until you or the banks
decide to cancel the loan. As long as you pay and can support the loan, the bank won’t take any
action to close it.
Syndicate loan:
Syndicated loan is a loan provided by a group of lenders, usually commercial or
investment banks. Syndicated loan deals are typically structured and administered by a lead
arranger that initially underwrites the transaction and guarantees the total commitment, and later
subscribes a given amount of the commitment to other banks in the syndicate.
Bridge loan:
A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3
years pending the arrangement of larger or longer-term financing. It is usually called a bridging
loan in the United Kingdom, also known as a "caveat loan," and also known in some applications
as a swing loan. In South African usage, the term bridging finance is more common, but is used
in a more restricted sense than is common elsewhere.
Consortium financing:
54
Short-term arrangement in which several firms (from the same or different industry
sectors or countries) pool their financial and human resources to undertake a large project that
benefits all members of the group. A consortium lasts for a period that is usually shorter than that
for a syndicate.
Guarantee service:
A service guarantee is a marketing tool service firms have increasingly been using to
reduce consumer risk perceptions, signal quality, differentiate a service offering, and to
institutionalize and professionalize their internal management of customer complaint and service
recovery. By delivering service guarantees, companies entitle customers with one or more forms
of compensation, namely easy-to-claim replacement, refund or credit, under the circumstances of
service delivery failure. Conditions are often put on these compensations; however, some
companies provide them unconditionally
Repayment method:
1. Bullet payment system:
Under this method of borrowing and lending, the borrower will not be required to
pay back the loan and interest payments periodically like every 6 months or so. The full
loan amount together with interest payments will be made at a single time on maturity of
loan.
This system of lending is rare in India as there are no regular cash flows for the
bank. This method of payment is adopted in term loans.
2. Balloon payment system:
Under this system, the repayment of a term-loan facility will be so arranged that
the installment value will be smaller in the beginning and as the repayment progresses
towards maturity value of installments will be larger and larger. In other words, under
Balloon Payment System, the borrower's repayments are higher at end and smaller in the
beginning.
This type of arrangement will be helpful to borrower who expects smaller returns
in the beginning and higher returns later out of his investments. You will notice that
bullet and Balloon payments systems refer to repayment of term loans. These methods
are not common in Indian Banking.
55
3. Venture capital:
Among the various financing options entrepreneurs can turn to when starting a
new company is venture capital. Venture capital is money that is given to help build new
start-up firms that often are considered to have both high-growth and high-risk potential.
These companies generally centre on health care or new technology, including things
such as software, the Internet and networking. In addition, a new breed of venture capital
firms has recently formed to focus solely on investing in socially responsible companies.
Entrepreneurs often turn to venture capitalists for money because their company
is so new, unproven and risky that more traditional forms of financing, such as through
banks, aren't readily available. Unlike other forms of financing where entrepreneurs are
only required to pay back the loan amount plus interest, venture capital investments most
commonly come in exchange for ownership shares in the company to ensure they have a
say in its future direction.
Not all venture capital investments take place when a company is first being
founded. Venture capitalists can provide funding throughout the various stages of a
company's progression. Research from the National Venture Capital Association revealed
that in 2010, venture capitalists invested approximately $22 billion into nearly 2,749
companies, including 1,000 of which received funding for the first time. Among the more
famous companies to receive venture capital during their start-up periods are Apple,
Compaq, Microsoft and Google.
Factoring service:
Factoring is a service that covers the financing and collection of account receivables in
domestic and international trade. It is an ongoing arrangement between the client and Factor,
where invoices raised on open account sales of goods and services are regularly assigned to "the
Factor" for financing, collection and sales ledger administration. The buyer and the seller usually
have long term relationships. The client sells invoiced receivables at a discount to the factor to
raise finance for working capital requirement. The factor may or may not accept the incumbent
credit risk. Factoring enables companies to sell their outstanding book debts for cash. The factor
operates by buying from the selling company their invoiced debts. These are purchased, usually
with credit protection, by the factor who then will be responsible for all credit control, collection
56
and sales accounting work. Thus the management of the company may concentrate on
production and sales and need not concern itself with non-profitable control and sales accounting
matters. By obtaining payment of the invoices immediately from the factor, usually up to 80% of
their value the company's cash flow is improved. The factor charges service fees that vary with
interest rates in force in the money market.
Bank net:
Internet banking, sometimes called online banking, is an outgrowth of PC banking.
Internet banking uses the Internet as the delivery channel by which to conduct banking activity,
for example, transferring funds, paying bills, viewing checking and savings account balances,
paying mortgages, and purchasing financial instruments and certificates of deposit. An Internet
banking customer accesses his or her accounts from a browser— software that runs Internet
banking programs resident on the bank’s World Wide Web server, not on the user’s PC. Net
Banker defines a “ true Internet bank” as one that provides account balances and some
transactional capabilities to retail customers over the World Wide Web. Internet banks are also
known as virtual, cyber, net, interactive, or web banks.
Automated teller machine:

ATM machine is one of them. Now the question that arises is what was the necessity,
what called for the invention of a round the clock cash dispenser? Who invented it- a broke
student or a shopaholic lady, a businessman or a banker, too tired of cashing the cheques? Also
known as Cash point or Hole-in-the-Wall Machine (Britain), ABM or Automatic Banking
Machine (USA), All-time Money (India), and Mini bank (Norway) and so much more, the
history of ATM is full of interesting facts, some we know, some we don’t.
Let’s tear through the pages of history to know more. An Armenian named Luther
George Simjian was forced to move to USA in the year 1920, under the account of Armenian
Genocide. He owned to his credit the invention of a portrait camera and then rolled out the
formulated idea of ATM, the Automated Teller Machine.
Confident of his invention, he persuaded Citibank to run his product on a six month trial
basis. Soon enough, he was disappointed with the performance and the lack of users and
concluded that ATM was a wasteful addition to personal banking. And lack of demand for the
57
ATM finally forced him to take a back seat. Clear enough; the time was not right for this concept
to have been accepted generously. Simjian clearly lost out on the success and fame and the same
was passed on to two other gentlemen, John Shepherd-Barron and Don Wetzel.
John Shepherd-Barron was a Scottish national born in India. Later he relocated to Britain
and pursued his education from the University of Edinburgh, and at Trinity College, Cambridge.
After returning empty handed from the bank, Shepherd-Barron was disappointed to have no
other solution to wait till the bank would open next. And thus in a similar fashion like
Archimedes, Shepherd-Barron claims to have hit his Eureka moment while taking a bath. A self-
sufficient cash dispensing machine was what he was thinking about. And soon the ATM was
invented in the early 1960s. The invention of a self-sufficient cash dispensing machine was his
second and successful attempt at inventions. Earlier he had invented an instrument to scare away
seals at his Scottish Salmon farms. Unfortunately, this device instead of deterring the seals
attracted them, and was a failure.
The ATM machine gained Shepherd-Barron an ever-lasting recognition in the banking
world and paved the way for hi-tech banking techniques, online bank accounts and PIN and chip
security technology. The four-digit internationally accepted standard PIN was also invented by
him. Earlier, he had a six-digit Army serial number in his mind but later his wife suggested for a
shorter PIN as it would be easy to remember. Finally in 1967 that the first ATM that dispensed
paper currency round the clock, was unveiled. The ATM machine installed outside a Barclay’s
bank in North London started dispensing cash on a 24 hour basis.
As the plastic cards were still to have come into existence, this machine accepted and
generated money through cheques impregnated with certain chemicals. Majorly a mild
radioactive substance, Carbon 14 was used for detection by the machine. Once the PIN was
given, the machine gave out the cash. This radioactive substance had no ill effects on the health
of users and Shepherd-Barron claimed that a user would have to eat about 136,000 cheques to
suffer any kind of ill-effects. Reg Varney, a famous TV sitcom popular became the first person
to use the ATM in the year 1967 and withdrew about 10 dollars. The amount seems too less for
us, but this money was enough for a complete night out spent on the tiles in London, inclusive of
dinner, drinks, a show and a taxi-ride back to home, in short enough cash for a “Wild Weekend”.
While this prototype device originated by Shepherd-Barron had started functioning,
various parallel developments were happening in different parts of the world. An American
58
Engineer Donald Wetzel of Docutel engineered the Docuteller ATM which was declared as the
first modern magstripe machine. It recognized magnetically encoded plastic (credit cards) and
not the usual paper cheques.
And there have been a lot of efforts gone into final development of the ATM, the ones we
see today, the ones we use so frequently, and the ones which have made our lives revolve around
plastic money. The development of ATM ever since its baby steps in the late 1930s and then
gearing up for longer runs in the 1960s, and finally a matured and stable stage that we see the
ATMs in today. Undoubtedly, most of the ideas and patents contributed for makeover of the
ATM from time to time form the backbone of what was initiated as “holes in the wall”.
Today, ATMs hold a strong foothold in the world, offering everyone a better access to
their money, be it in any corner of the world. Let’s put figures to assumptions, there are about 1.8
million ATMs in use around the world with ATMs on cruise and navy ships, airports,
newsagents and petrol stations. ATMs too have been categorized as on and off premise ATMs.
On Premise ATMs are capable to connect the users to the bank with multi-function capabilities.
Off premise, ATM machines on the other hand are the "white label ATMs" and are limited to
cash dispense, no balance enquiries, no statement print-out.
The developments have not stopped; the contactless technology is on its rise. Shepherd-
Barron continued to take inimitable and lively interest in technology well even in his old age and
had foreseen a future where plastic cards too would be numbered. For his excellent and
unforgettable contributions to financial technologies, he was also offered the OBE in the year
2005. And in the year 2010, he took his last breath and left behind his legacy of technological
advancements which would refuses to end. Many more inventions are in process and many will
be successful too. The time is just right to bring in the glorious inventions rolling in.
Phone banking:
Phone Banking is yet another banking service offered by banks. Under this system, like
in ATM card, a secret code number is provided to each account holder. A customer wanting to
know his bank balance or any other information relating to his bank account should dial up a
particular phone number indicated by the bank.
When the number is dialled, a recorded voice will ask you to identify yourself with your
account number and code number.
59
If the numbers are tallied, you will get all the information you want to know about your
account. Presently many foreign banks provide this service. You cannot draw cash or deposit
cash through phone banking. It is basically an information service.
Net banking:
Net banking, also called internet or online banking, is the process of conducting banking
transactions over the Internet. Viewing bank statements and the status of a bank account online
also comes under the definition of net banking. The bank updates accounts and records of
transactions almost instantly on the Internet. This form of banking comes with both benefits and
scams. Banks need to use enhanced security measures to ensure the safety and privacy of Internet
transactions.
Deposit insurance scheme:

Second country in the world to introduce such a scheme - the first being the United States
in 1933. Banking crises and bank failures in the 19th as well as the early 20th Century (1913-14)
had, from time to time, underscored the need for depositor protection in India. After the setting
up of the Reserve Bank of India, the issue came to the fore in 1938 when the Travancore
National and Quilon Bank, the largest bank in the Travancore region, failed. As a result, interim
measures relating to banking legislation and reform were instituted in the early 1940s. The
banking crisis in Bengal between 1946 and 1948, once again revived the issue of deposit
insurance. It was, however, felt that the measures be held in abeyance till the Banking
Companies Act, 1949 came into force and comprehensive arrangements were made for the
supervision and inspection of banks by the Reserve Bank.
It was in 1960 that the failure of Laxmi Bank and the subsequent failure of the Palai
Central Bank catalyzed the introduction of deposit insurance in India. The Deposit Insurance
Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961 and received the
assent of the President on December 7, 1961. The Deposit Insurance Corporation commenced
functioning on January 1, 1962.
The Deposit Insurance Scheme was initially extended to functioning commercial banks.
Deposit insurance was seen as a measure of protection to depositors, particularly small
depositors, from the risk of loss of their savings arising from bank failures. The purpose was to
avoid panic and to promote greater stability and growth of the banking system - what in today’s
60
argot are termed financial stability concerns. In the 1960s, it was also felt that an additional the
purpose of the scheme was to increase the confidence of the depositors in the banking system
and facilitate the mobilisation of deposits to catalyst growth and development.
When the DIC commenced operations in the early 1960s, 287 banks registered with it as
insured banks. By the end of 1967, this number was reduced to 100, largely as a result of the
Reserve Bank of India’s policy of the reconstruction and amalgamation of small and financially
weak banks so as to make the banking sector more viable. In 1968, the Deposit Insurance
Corporation Act was amended to extend deposit insurance to 'eligible co-operative banks'. The
process of extension to cooperative banks, however took a while it was necessary for state
governments to amend their cooperative laws. The amended laws would enable the Reserve
Bank to order the Registrar of Co-operative Societies of a State to wind up a co-operative bank
or to supersede its Committee of Management and to require the Registrar not to take any action
for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in
writing from the Reserve Bank of India. Enfolding the cooperative banks had implications for
the DIC - in 1968 there were over 1000 cooperative banks as against the 83 commercial banks
that were in its fold. As a result, the DIC had to expand its operations very considerably.
The 1960s and 1970s were a period of institution building. 1971 witnessed the
establishment of another institution, the Credit Guarantee Corporation of India Ltd. (CGCI).
While Deposit Insurance had been introduced in India out of concerns to protect depositors,
ensure financial stability, instil confidence in the banking system and help mobilise deposits, the
establishment of the Credit Guarantee Corporation was essentially in the realm of affirmative
action to ensure that the credit needs of the hitherto neglected sectors and weaker sections were
met. The essential concern was to persuade banks to make available credit to not so creditworthy
clients.
In 1978, the DIC and the CGCI were merged to form the Deposit Insurance and Credit
Guarantee Corporation (DICGC). Consequently, the title of Deposit Insurance Act, 1961 was
changed to the Deposit Insurance and Credit Guarantee Corporation Act, 1961. The merger was
with a view to integrating the functions of deposit insurance and credit guarantee prompted in no
small measure by the financial needs of the erstwhile CGCI.
After the merger, the focus of the DICGC had shifted onto credit guarantees. This owed
in part to the fact that most large banks were nationalised. With the financial sector reforms
61
undertaken in the 1990s, credit guarantees have been gradually phased out and the focus of the
Corporation is veering back to its core function of Deposit Insurance with the objective of
averting panics, reducing systemic risk, and ensuring financial stability.
Gold deposit scheme:

The Government of India has proposed a new Gold Deposit Scheme in its Budget for
1999-2000. The purpose of the Scheme was to mobilize idle gold lying with people/institutions
like temple in India and utilize the same for productive purposes through the banking system.
As per the scheme announced in September/October 1999 selected commercial banks are
permitted to accept gold deposits from individuals, trusts and companies in the form of gold
coin, jeweller, ornaments, gold bars, etc.
The banks after ascertaining their gold content through the process of assaying will issue
interest bearing gold bonds or pass books to the depositors. The depositors at the maturity of the
bond will get back same quantity of gold or its equivalent value in rupees.
Interest amount will be paid separately and it is exempted from income tax. Gold value is
exempted from Wealth Tax. One of the purposes of the scheme is to reduce the import of gold
from abroad.
In 1998-99 India imported 540 tonnes of gold through official channels. Non-Resident
Indians are also permitted to bring with them 10 kgs of gold subject to certain conditions when
they come to India.
The scheme is beneficial to holders of gold as it provides safety and security to their gold
holdings besides a regular interest income thereon. The deposit will be for a period between 3
and 7 years. The Gold Deposit Bond is transferable by endorsement and delivery as in the case
with Negotiable instruments.
Nomination facility is also available as in the case with bank deposit accounts. Specific
approvals from Reserve Bank are required for banks to operate the scheme.
The rate of interest, repayment period of deposit and other operational details will be
decided by each designated bank. State Bank of India is the first designated bank for this
purpose. Some more nationalized banks like Canara Bank may also seek RBI permission to
operate the scheme.
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The banks mobilizing gold deposit under the Scheme may utilize such gold for the
following purposes:
Indian Banking (Theory)
a. Gold loans to domestic jewellery industry
b. Gold loans to jewellery exporters
c. For sale in domestic market
Multi dimensional development:

SBI s the Largest and the Oldest Commercial Bank in India. SBI originated in the year
1806 as the "Imperial Bank of India" and it is the "First Commercial Bank", nationalized in India
in the year 1955 which is of and for the Government of India.
Nationalized Commercial Banks in India:
The following 7 commercial banks were nationalized and made the Subsidiaries of State
Bank of India (4 in the year on 19th July 1960 and 3 on 19th July 1969) :
1. State Bank of Hyderabad (SBH)-Founded by the last Nizam of Hyderabad in the year
1941-(Nationalized in 1960),
2. State Bank of Mysore (SBM)-Established in 1913 as by (late) Dr. M. Visvesvaraya under
the sponsorship of the then Government of Mysore- (Nationalized in 1960),
3. State Bank of Patiala (SBP)-Founded on 17th of November, 1917 by His Highness
Bhupindar Singh, the Maharaja of the princely state of Patiala- (Nationalized in 1960),
4. State Bank of Saurashtra (SBS),
5. State Bank of Travancore (SBT)-Founded in the year 1945- (Nationalized in 1960),
6. State Bank of Bikaner and Jaipur (SBBJ)-Founded in 1963 at Jaipur- (State Bank of
Bikaner founded in 1944 took over the State Bank of Jaipur founded in 1943)-
(Nationalized in 1969) and State Bank of Indore (SBIR)-Founded in the year 1963-
(Nationalized in 1969)
The following 14 Major Commercial Banks were nationalized on 19th July 1969 during the then
Prime Minister of India, Mrs.Indira Gandhi:
1. Allahabad Bank-Founded by a Group of Europeans on 24th April 1865 at Allahabad
2. Bank of Baroda-Founded in the year 1908 in Baroda
3. Bank of Maharashtra-Founded on 16th September 1935 at Pune
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4. Bank of India-Founded in September 1906 at Mumbai
5. Canara Bank-Founded on 1st July 1906 at Bangalore
6. Central Bank of India-Founded by Sir Sorabji Pochkhanawala at Mumbai in the year
1911.
7. Dena Bank-Founded on 26th May 1938 by Devkaran Nanjee family
8. Indian Bank-Founded on 15th August 1907 as a part of Indian Swadeshi Movement at
Chennai (then Madras)
9. Indian Overseas Bank-Founded in the year 1937 at Chennai (then Madras)
10. Punjab National Bank-Founded in Lahore in the year 1894
11. Syndicate Bank -Founded in Udipi in Karnataka in the year 1925
12. UCO Bank-Founded in 1943 by Birla at Kolkata (the then Calcutta)
13. Union Bank of India-Inaugurated by Mahatma Gandhi in November 1919.
14. United Bank of India-Inaugurated by Mahatma Gandhi in November 1919 – nationalized
in 1975
IDBI Bank Ltd:

IDBI-Industrial Development Bank of India was established as a subsidiary of Reserve
Bank of India-RBI on 1st July 1964. From 1st October 2004 IDBI Bank Ltd started commencing
as a Full Service Commercial Bank.
The following 6 Commercial Banks were nationalized in the year 1980:
1. Andhra Bank -Founded in the year 1923
2. Corporation Bank-Founded in the year 1906 at Udupi in Karnataka
3. New Bank of India- Established in the year 1968/Renamed as New India Bank in the year
1977
4. Oriental Bank of Commerce-founded in Februray 1943 at Lahore
5. Punjab and Sind Bank-Founded at Amritsar in the year 1908
6. Vijaya Bank -established by Mr.A.B.Shetty on 23rd October 1931
The following are the Private Sector Scheduled Banks in India:
 Vysya Bank Ltd
 Axis Bank Ltd
 Indusind Bank Ltd
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 ICICI Banking Corporation Bank Ltd
 Global Trust Bank Ltd
 HDFC Bank Ltd
 Centurion Bank Ltd
 Bank of Punjab Ltd
The following are the Scheduled Foreign Banks in India:
 American Express Bank Ltd.
 ANZ Gridlays Bank Plc.
 Bank of America NT & SA
 Bank of Tokyo Ltd.
 Banquc Nationale de Paris
 Barclays Bank Plc
 Citi Bank N.C.
 Deutsche Bank A.G.
 Hongkong and Shanghai Banking Corporation
 Standard Chartered Bank.
 The Chase Manhattan Bank Ltd.
 Dresdner Bank AG.
Merchant banking:
Merchant Banking is a combination of Banking and consultancy services. It provides
consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy
means to provide advice, guidance and service for a fee. It helps a businessman to start a
business. It helps to raise (collect) finance. It helps to expand and modernize the business. It
helps in restructuring of a business. It helps to revive sick business units. It also helps companies
to register, buy and sell shares at the stock exchange.
Functions of Merchant Banking

1. Raising Finance for Clients :
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Merchant Banking helps its clients to raise finance through issue of shares,
debentures, bank loans, etc. It helps its clients to raise finance from the domestic and
international market. This finance is used for starting a new business or project or for
modernization or expansion of the business.
2. Broker in Stock Exchange :
Merchant bankers act as brokers in the stock exchange. They buy and sell shares
on behalf of their clients. They conduct research on equity shares. They also advise their
clients about which shares to buy, when to buy, how much to buy and when to sell. Large
brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant
banking services.
3. Project Management :
Merchant bankers help their clients in the many ways. For e.g. Advising about
location of a project, preparing a project report, conducting feasibility studies, making a
plan for financing the project, finding out sources of finance, advising about concessions
and incentives from the government.
4. Advice on Expansion and Modernization :
Merchant bankers give advice for expansion and modernization of the business
units. They give expert advice on mergers and amalgamations, acquisition and takeovers,
diversification of business, foreign collaborations and joint-ventures, technology up-
gradation, etc.
5. Managing Public Issue of Companies :
Merchant bank advice and manage the public issue of companies. They provide
following services:
a. Advise on the timing of the public issue.
b. Advise on the size and price of the issue.
c. Acting as manager to the issue, and helping in accepting applications and
allotment of securities.
d. Help in appointing underwriters and brokers to the issue.
e. Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects :
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A businessman has to get government permission for starting of the project.
Similarly, a company requires permission for expansion or modernization activities. For
this, many formalities have to be completed. Merchant banks do all this work for their
clients.
7. Special Assistance to Small Companies and Entrepreneurs :
Merchant banks advise small companies about business opportunities,
government policies, incentives and concessions available. It also helps them to take
advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units :
Merchant banks offer many services to public sector units and public utilities.
They help in raising long-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term lending institutions.
9. Revival of Sick Industrial Units :
Merchant banks help to revive (cure) sick industrial units. It negotiates with
different agencies like banks, term lending institutions, and BIFR (Board for Industrial
and Financial Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management :
A merchant bank manages the portfolios (investments) of its clients. This makes
investments safe, liquid and profitable for the client. It offers expert guidance to its
clients for taking investment decisions.
11. Corporate Restructuring :
It includes mergers or acquisitions of existing business units, sale of existing unit
or disinvestment. This requires proper negotiations, preparation of documents and
completion of legal formalities. Merchant bankers offer all these services to their clients.
12. Money Market Operation :
Merchant bankers deal with and underwrite short-term money market instruments,
such as:
a. Government Bonds.
b. Certificate of deposit issued by banks and financial institutions.
c. Commercial paper issued by large corporate firms.
d. Treasury bills issued by the Government (Here in India by RBI).
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13. Leasing Services :
Merchant bankers also help in leasing services. Lease is a contract between the
lessor and lessee, whereby the lessor allows the use of his specific asset such as
equipment by the lessee for a certain period. The lessor charges a fee called rentals.
14. Management of Interest and Dividend :
Merchant bankers help their clients in the management of interest on debentures /
loans, and dividend on shares. They also advise their client about the timing (interim /
yearly) and rate of dividend.
Assistance provided by merchant bankers:

The merchant bankers provide assistance to corporate houses on the following lines.
1. Project counselling.
2. Loan Syndication.
3. Issue Management.
4. Management of fixed deposits of Joint Stock Companies.
5. Portfolio Management.
6. Corporate Counselling.
7. Assistance in floating new companies.
8. Bought out Deals
9. Venture Capital.
1. Project Counselling
a. Assist corporate houses for incorporation and obtain certificate of commencement of
business. Assist to obtain letter of intent/industrial licence.
b. Obtain permission if required, of joint controller of imports and exports for import of
capital goods.
c. Merchant Banking Division assists in introducing/selecting and appointing outside
technical consultancy organization(s), if considered necessary, for preparation of a
detailed project report, market survey report, feasibility study, etc.
d. Where the company has already prepared a project report, the Division would review the
same and advice on the viability of the project and scrutinizes the same from financial
angle.
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e. For effective implementation of the project, the Division would advise/guide the
company the steps to be taken with regard to procedural matters, viz., obtaining consents
of the Government agencies such as Ministry of Industry, SEBI, Reserve Bank of India,
etc.
2. Loan Syndication
The division would help in drawing a financial plan setting out the means of
financing the project to conform to the requirements of financial institutions/banks,
government agencies as also stock exchange authorities after studying/finalizing the
project assistance in preparing detailed applications for term loans from financial
institutions/banks.
The detailed project report and term loan applications would thereafter be
submitted to financial institutions/banks to secure their participation in term loans and
necessary follow-up action would be initiated. It includes the following assistance:
a. Assist promoters to raise finance from Financial Institutions/banks for
modernization/expansion.
b. Arrange consortium meetings.
c. Prepare necessary documents.
d. Execution of necessary documents, registration of charges, etc.
e. Arrange Syndication of Euro-currency Loans/guarantees whenever
required. (Euro currency loans are foreign currency loans raised outside
the country of the currency)
3. Issue Management
The merchant Banking Division would render the following:
a. Public Issue
b. Rights Issue
c. Debenture Issue
d. Advisors to Non-Resident Issues
e. Private placement deals
a. Public Issue
a. Advising the company on planning and timing of the issue.
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b. Obtaining the consent of the SEBI including their approval for reservation of
shares for non-residents (on repatriation basis) employees and business associates.
c. Making necessary arrangements for underwriting the issue by financial institu-
tions, banks and/or brokers.
d. Selection and appointment of a principal broker, brokers and bankers to the issue.
e. Selection and appointment of an issue house and fixing their remuneration.
i. Selection and appointment of advertising consultants/agencies for
organising the necessary publicity campaign including press and
brokers/investors' conferences at important centres.
ii. Preparing the draft prospectus, where necessary, 'having it approved by
solicitors.
iii. Obtaining the clearance of financial institutions, bankers, other
underwriters and stock exchanges for the draft prospectus.
iv. Arranging for designing and printing of draft prospectus as well as
dispatch of the final prospectus.
v. Filing a copy of the prospectus along with the other necessary documents
under Section 60 of the Companies Act, with the Registrar of Companies.
f. Making an application to stock exchanges(s) to have the shares listed and comply
with all the listing requirements.
i. Obtaining written consents from auditors, solicitors and advocates bankers
to the company, bankers and brokers to the issue, etc. to act in their
respective capacities.
ii. Obtaining permission from Reserve Bank of India for offering shares to
non-residents and opening Foreign Currency Collection Accounts at our
overseas branches.
iii. Monitoring the progress and furnishing information to the company on the
response to the issue.
b. Rights Issue
i. Advising the company on planning and timing of the issue.
ii. Obtaining consent of the SEBI.
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iii. Assisting in underwriting/making standby arrangement with financial
institutions, banks brokers.
iv. Drafting and finalizing the letter of offer and getting the same approved by
the stock exchanges wherever the shares are listed.
v. Selection and appointment of principal broker, broker and banker to the
issue.
vi. Selection and appointment of an issue house and advertising
consultant/agency.
vii. Designing, printing and mailing of letters of offers, application forms, etc.
viii. Where the shares are held by non-residents of Indian Nationality/origin,
assisting the company in obtaining necessary permission from Reserve
Bank of India where required.
c. Debenture Issue
i. Computation of amount of debentures that can be raised as per the
prevailing Government guidelines.
ii. All other services mentioned above for public and right issues as
applicable.
iii. Advisors to Non-Resident Issues
iv. Obtaining approval of the Securities and Exchange Board of India (SEBI)
for reservation of a part of the issue for non-residents of Indian
Nationality/origin.
v. Obtaining permission from the Reserve Bank of India for offering
shares/debentures to non-residents and for opening Foreign Currency
Collection Accounts at overseas branches, if applicable.
vi. Advising the strategy of marketing the issue amongst non-residents.
vii. Arranging investors' conferences and publicity campaigns abroad.
viii. Arranging Collection of application moneys at overseas branches and
monitoring the day-to-day progress of the issue.
4. Management of Fixed Deposits of Joint Stock Companies
i. Computation of amount that a company can raise by way of deposits from public
and deposits/loans from shareholders.
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ii. Advising the company on terms and conditions for acceptance of fixed deposits
and the rate of interest to be paid thereon keeping in view the prevailing
conditions in capital and money markets.
iii. Drafting of an advertisement to be issued inviting deposits from public.
iv. Filing a copy of the advertisement with the Registrar of companies for
registration.
v. Arranging for issue of advertisement in newspapers as required under the
Companies Act.
vi. Drafting of application form and arranging printing thereof.
vii. Arranging for collection of deposits at various branches of the Bank.
viii. Submitting periodical statements to the company.
ix. Arranging the company for payment of interest warrants.
x. Assisting the company in observing all the rules and regulations in this
connection.
xi. Maintaining of records/registers for the purpose.
5. Portfolio Management
Portfolio Management includes the following:
i. Advise on right mix of securities for maximum returns with minimum risk.
ii. Undertake to sell / buy securities on authorization.
6. Corporate Counseling
It includes identifying the cause of problems like tight liquidity, over/under
capacity utilization, product mix, etc.
7. Bought out Deals
Under the scheme, a portion of equity to be offered to the investing public is taken
up in the first instance by the merchant banker. At an appropriate later time these shares
are placed with the public at a price which will fetch reasonable and adequate return to
them.
8. Venture Capital
Providing long-term start up funds for high risk ventures promoted by unknown
technocrats/entrepreneurs, which suffer from capital deficiencies but have a high profit
potential.
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Funding an emerging high risk, hi-tech project based purely on Research and
Development efforts is termed as venture capital financing. It is a long-term financial
arrangement and oriented towards capital gains. It is a source of financing for hi-tech
industries which use new technology to produce new products.
SEBI guidelines on merchant banking:

1. Those with minimum net worth of Rs.1crore are authorised to act as lead
managers, managers to the issue
a. Minimum net worth of Rs.50 lakhs as co-managers to the issue
b. Minimum net worth of Rs.25lakhs as consultants advisers to the
issue
2. The number of lead mangers to the issue is restricted to 2 for issue less than
Rs.50crore, 3 for less than Rs.100 crore and 4 for above 100 crore
3. Prior permission from SEBI is needed for carrying out merchant banking
activities.
Merchant banking facilities provide various benefits to the business houses. It also
provides the bankers additional income by way of fees, commission and brokerage. It makes
available a large float of funds and provides better corporate image to the bankers. The expertise
and advice on the lines of merchant banking need to be extended to small scale industries. It is
also essentials to try to develop cultivators market on par with the capital market. There is also a
further need for trained personnel to handled new challenge in the field of innovation banking in
this country”.
Merchant banking activities are now being controlled by SEBI because it pertains to
capital market function. Accordingly SEBI license is required to undertake merchant banking
activity. Banks cannot act as Merchant bankers now. They can carry on such activity only
through a subsidy.
Factoring service:
The term factor has its origin in the Latin word facere meaning to make or do i.e. to get
things done. During the 15th and 16th centuries factors were appointed by manufactures in
England, france and spain to arrange for thee sale and distribution of their goods and to collect
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the proceeds thereof. Factors never received title but were responsible for the safe keeping of the
goods as well as the proceeds of sale.
Characterstics features of factoring service:

1. Factoring is different from bill discounting.
2. It is a financial service product
3. Factors takes care of the collection of sales bills of client
4. It offers a continuous relationship between factor and his client
5. It also includes a package of service like collection and follow-up of each invoice,
credit insurance MIS support etc.,
6. It aims at replacing high cost market credit
7. Lesser service charge
8. It is classified as other current liability
9. Its rate of interest is comparable to that of banks.
10. Its service are available to all sectors, viz., manufacturing trading and service
11. It substitute sundry creditors
Factoring: conceptual frame work

Factoring is a new financial service that is presently being developed in India. It is not
just a single service rather a portfolio of complimentary financial service available to clients i.e.,
sellers. The sellers are free to avail of any combination of service offered by the factoring
organisation according to their individual requirements.
Factoring is a mechanism under which a financial organisation called factors purchase the
accounts receivable of a party called client and makes cash payments to the client debtors. For
the service rendered and the risk assumed by the factor he collects fees known as factor age.
The international institute for the unification of private law in 1998 defined “factoring
means an arrangement between a factor and his client which includes at least two of the
following service to be provided by the factors: (1) finance (2) Maintenance of accounts, (3)
Collection of debts and (4) protection against credit risks
Types of credit sales
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1. Backed by letter of credit:
a. Cost of establishment of LC is high and buyer has to keep with his bank cash
margin up to 25%.
b. Original documents routed through banks
c. Product for sellers market
d. Discounting charges recovered upfront.
e. Entire bill amount to be drawn
2. Backed by acceptance of bills
a. DA/DP terms
b. Original documents routed trough banks
c. Product for sellers market
d. Discounting charge recovered upfront
e. Entire bill amount to be drawn
3. Open Accounting sales
a. Open A/C refers to the contract of sales wherein
b. The goods and documents of title are sent directly to the buyer
c. Buyer takes delivery and deals with them
d. The seller agrees to allow the buyer a certain period of credit and the buyer has
agreed to pay the seller at the end of the period
e. Original documents directly sent to buyer
f. Product for buyer market
g. Continuous relationship/ arrangement
h. Monthly recovery on daily products
Factoring Mechanism
Factoring is a receivables management and financing mechanism which is designed to
improve cash flows and cover the credit risk of the seller. Unlike other forms of receivables
financing, like bills discounting and forfeiting; factoring involves a continuous relationship
between a factor and a seller, to finance and administer the receivables of the latter. Factors are
financial companies which pay cash against the credit sales of the client, and obtain the right to
receive the future payments on those invoices from the debtors of the client.
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Functions of a factor
Factoring constitutes a suite of financial services offered under a factoring agreement,
which includes receivables financing, credit protection, accounts receivables collection and
management, sales ledger administration and advisory services.
1. Receivables financing:
The factoring institution advances a proportion of the value of the book debts
immediately to the client and the balance is paid on maturity of the book debts. This
improves the cash flow position of the client, by replacing the credit sales for cash.
2. Credit protection:
The factoring institution takes over the credit risk of the client, and agrees to bear the
loss in case of default by the debtor. Credit protection is provided by the factor only in
case of non-recourse factoring.
3. Accounts receivables collection and management:
The factoring company collects the receivables of the client and also manages the
credit collection schedule. By reducing the time invested by the client in such activities, it
allows the client to focus on business development.
4. Sales Ledger management:
The factor undertakes sales ledger management, including maintenance of credit
records, collection schedules, discounts allowed and ascertainment of balance due from
all debtors.
5. Advisory Services:
A factoring company advises the client on its export and import potential, and
also helps the client in identification and selection of potential trade debtors, based on the
credit information available with it. The factor also advises on the prevailing business
trends, policies, impending developments in the commercial and industrial sector etc.
Factoring mechanism
Mechanics of Factoring shown in figure is explained below:
1. Firstly, the customer places an order with the Client. (It may be noted that the client is the
seller and customer is the buyer of goods).
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2. Then the client enters into Factoring arrangement with the Factor. The pre-payment limit,
service charges, and discount charges and other terms and conditions of the arrangement
are agreed upon. The Client has to obtain a "LETTER OF DISCLAIMER "from the bank
holding charge on his receivable.
a. This is required because in many cases the receivables may have been assigned to
the bank for credit facility extended by it. After obtaining this letter, the Client
executes the Factoring documentation.
3. The client dispatches the goods or services to the customer on credit on open account
basis and then sends the corresponding invoice to the customer directly. From then
onwards, the client passes all credit sales invoices to the Factor. While the original
invoice and document of title to goods like lorry receipt to the Customer, copies of these
documents are handed over to Factor for Purchase.
4. The original as well as copies of invoices sent to customer, contain a printed Notice of
Assignment addressed to the customer, directing the customer to make all payments to
the Factor.
5. On receiving a copy of the invoice, the Factor purchases the invoice subject to the overall
limit and the Customer limit. The Factor arrives at a sub-limit for each customer of the
client within the overall limit.
a. The drawing power is calculated taking into account the prescribed margin
(usually around 20%). The prepayment limit is generally around 80%-85% of the
eligible debt. The Client is now free to draw any amount up to the drawing power.
b. For the Client to draw money, the Factor issues a cheque favoring the Client's
Bank A/c. Realization are handled by the Factor directly under advice to the
client. Outstation cheques are also collected/ discounted by the Factor.
6. Periodical statements and MIS (Management Information System) reports are furnished
to the Client and the Customer.
7. If monthly instalments are not paid within the due date, follow-up letters are sent.W
8. When the payment is cleared by the Customer to Factor, a notice is sent by the Factor to
the Client.
9. This is followed by the release of retention margin held by the Factor to the Client.
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a. For rendering the services of collection and maintenance of sales Ledgers, the
service charges usually vary between 0.4% to 1% of the invoice value, depending
on the volume of operations. This service charge is collected at the time of
purchase of invoices by the Factor.
b. For making an immediate part payment to the Client, the Factor collects discount
charges from the Client. The discount charges are comparable to bank interest
rates at these charges are collected monthly.
Factoring and Services

Factoring has three key elements; the Client has the option to select a combination of
these components to suit his financial needs.
Difference between factoring and bills discounting
S.No Bills discounting Factoring
1 Under bills discounting it is Factoring may be both with recourse and without
always offered with recourse to recourse to the client
the client.
2 In bills discounting the notice of Under factoring notice of assignment is given by
assignment is not given to the pre-printed invoices
debtors
3 It is purely a financial It provides a package of service including finance
accommodation collection of invoices credit protection sales ledger
administration etc., that is factoring is financial and
service agreement
4 It is a advances against bills It is a purchase of debt of assignment
5 It cannot be an off balance sheet Off balance sheet finically is possible under
financially factoring
6 Charges recovered upfront and In factoring there is no upfront recovery of charges
this increase total effective cost
7 In bills discounting entire In factoring amount can be drawn as and when
amount of the bills is to be recovered charge is lessed only on actual drawings
drawn on the rate of discount
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8 Under bills discounting penalty Under factoring no penal interest is charged till the
is charged if payment is not paid expiry of grace period
on due date
9 In bills discounting the grace Under factoring the grace period is allowed to the
period is allowed to the maximum of 75 days under certain circumstances it
maximum of 3 days can be extended up to 150 days
10 The procedures to be followed The procedure to be followed in factoring is very
in bills discounting is difficulty easy
11 It is individual transaction It is whole turn over oriented and the amount of
oriented and the amount of finance is bullet
finance extended is usually a
leseer amount
Types of factoring
The different types of Factoring are as follows:
For International Trade
1. Full Factoring
2. Recourse Factoring
3. Maturity Factoring
4. Advance Factoring
5. Undisclosed Factoring
6. Invoice Discounting
7. Bulk Factoring
8. Agency Factoring
1. Domestic Factoring:
Factoring can be both domestic and for exports. In domestic Factoring, the client
sells goods and services to the customer and delivers the invoices, order, etc., to the
Factor and informs the customer of the same. In return, the Factor makes a cash advance
and forwards a statement to the client. The Factor then sends a copy of all the statements
of accounts, remittances, receipts, etc., to the customer. On receiving them the customer
sends the payment to the Factor.
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Different types of Domestic Factoring are as follows:
1. Full Factoring
This is also known as "Without Recourse Factoring ". It is the most
comprehensive type of facility offering all types of services namely finance sales ledger
administration, collection, debt protection and customer information.
2. Recourse Factoring
The Factoring provides all types of facilities except debt protection. This type of
service is offered in India. As discussed earlier, under Recourse Factoring, the client's
liability to Factor is not discharged until the customer pays in full.
3. Maturity Factoring
It is also known as "Collection Factoring ". Under this arrangement, except pro-
viding finance, all other basic characteristics of Factoring are present. The payment is ef-
fected to the client at the end of collection period or the day of collecting accounts which-
ever is earlier.
4. Advance Factoring
This could be with or without recourse. Under this arrangement, the Factor pro-
vides advance at an agreed rate of interest to the client on uncollected and non-due
receivables. This is only a pre-payment and not an advance.
Under this method, the customer is not notified about the arrangement between
the client and the Factor. Hence the buyer is unaware of factoring arrangement. Debt col-
lection is organized by the client who makes payment of each invoice to the Factor, if ad-
vance payment had been received earlier.
5. Invoice Discounting
In this arrangement, the only facility provided by the Factor is finance. In this
method the client is a reputed company who would like to deal with its customers
directly, including collection, and keep this Factoring arrangement confidential.
The client collects payments from customer and hands it over to Factor. The risk
involved in invoice discounting is much higher than in any other methods.
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The Factor has liberty to convert the facility by notifying all the clients to protect
his interest. This service is becoming quite popular in Europe and nearly one third of
Factoring business comprises this facility.
6. Bulk Factoring
It is a modified version of Involve discounting wherein notification of assignment
of debts is given to the customers. However, the client is subject to full recourse and he
carries out his own administration and collection.
7. Agency Factoring
Under this arrangement, the facilities of finance and protection against bad debts
are provided by the Factor whereas the sales ledger administration and collection of debts
are carried out by the client.
2. International Factoring
Traditionally international trade is based on Letters of Credit. When the exporter
knows the importer well with repetitive transactions, he may be willing to export on '
Open Account ' basis. On open account the exporter ships the goods without letter of
credit or advance payment.
Hence, it is credit risky for exporter. If credit is extended (say 90 days since), the
exporter will be quite reluctant as he encounters a credit risk and hence invariably insists
on L/C.
In advanced countries bankers do not make much of a distinction between fund-
based and non-fund based facilities and hence if they have to open L/C's it may be at the
cost of a reduced overdraft or bills limit for the importer.
The system of L/C's operates on the "Doctrine of Strict Compliance " which
means the Letter of Credit opening bank will pay money to the exporter only when all the
conditions listed in the Letter of Credit document are satisfied by the exporter/shipper of
goods.
In many cases, the documents fail to pass the grade which means the exporter has
simply lost the security available to him under the L/C. Further, now-a-days, goods move
very fast and hence if documents are held up in banks for processing, it causes delay and
inconvenience to the importer.
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In the light of the above, international trade has slowly started moving from cash
to credit, and from L/C's to open account sales. International Factoring is a service which
helps the exporter and importer to trade on open account terms.
Types of International Factoring
The following are the important types of International Factoring. The client can choose
any type of international factoring depending upon exporter - client needs and his price bearing
capacity.
Two Factor Systems
This is the most common system of international factoring and involves four parties i.e.,
Exporter, Importer, Export Factor in exporter's country and Import Factor in Importer's country.
The functions of the export Factor are:
a. Assessment of the financial strength of the exporter
b. Prepayment to the exporter
c. Follow-up with the Import Factor
d. Sharing of commission with the import Factor
The functions of the Import Factor are:
i. Maintaining the books of the exporter in respect of sales to the debtors in his country
ii. Collection of debts from the importer and remitting the proceeds to the exporter's Factor
iii. Providing credit protection in case of financial inability on the part of any of the debtors
1. Single / Direct Factoring System
In this system, a special agreement is signed between two Factoring companies
for single Factoring. Whereas in Two Factor System, credit is provided by import Factor
and pre-payment, book keeping and collection responsibilities remain with export Factor.
For this system to be effective there should be strong co-ordination and co-
operation between two Factoring companies. Pricing is lower when compared to Two
Factor System.
2. Direct Export Factoring
Here only one Factoring company is involved, i.e., export Factor, which provides
all services including finance to the exporter.
3. Direct Import Factoring
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Under this system, the seller chooses to work directly with Factor of the importing
country. The Factoring agreement is executed between the exporter and the import
Factor. The import Factor is responsible for sales ledger administration, collection of
debts and providing bad debt protection up to the agreed level of risk cover.
4. Back to Back Factoring
It is a very specialized form of International Factoring, used when suppliers are
selling large volumes to a few debtors for which it is difficult to cover the credit risk in
International Factoring.
In this case, International Factor can sign a domestic Factoring agreement with
the debtor whereby it will be getting the receivables as security for the credit risk taken in
favour of Export Factor.
Benefits of factoring Service

Factoring provides various benefits to the clients, banks and customers. We shall discuss
the benefits of factoring hereunder:
1. Benefits to the Clients
The following are the advantages of factoring service to the clients:
a. The client or seller can convert accounts receivables into cash without
bothering about sales ledger administration even repayment in some cases.
b. Factoring ensures a definite pattern of cash inflows.
c. Continuous Factoring virtually eliminates the need for the credit
department. That is why receivable financing through Factoring is gaining
popularity as useful source of financing short term fund requirements of
business enterprises because of the inherent advantage of flexibility it
affords to the borrowing firm.
d. The seller firm may continue to get finance on its receivables on a more or
less automatic basis. If its sales expand or contract, it can vary the
financing proportionately.
e. Unlike an unsecured loan, compensating balances are not required in this
case. Another advantage consists of relieving the borrowing firm of
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substantial credit and collection costs and further to certain extent from a
considerable part of cash management.
f. In export sales, difficulties of credit assessment and debt collection are
more pronounced. Availing of Professional factoring services is more
advantageous.
g. Under factoring arrangement, regular cash inflow at periodical intervals is
assured. This helps, short term fund flow and availing of discounts from
suppliers.
h. Firms engaged in a highly seasonal business may submit the peak loan of
receivables to the Factor for credit review and approval as a cheaper
alternative to expanding its own credit department.
i. Finally, when credit is necessary and cannot be obtained elsewhere either
because of tight money conditions or poor financial position, the Factoring
of receivables will be more appropriate.
2. Benefits to the Customers
The following are the advantages of Factoring service to the customers:
a. The customer is relieved of maintaining record relating to credit sales
customers a/c, reminders to debtors, initiating recovery measures, etc. This
saves substantial administration expenditure.
b. Factoring as a professional approach in collection of debts inculcates
discipline in cash management among customers.
c. Buyers have no need to accept any bill.
d. Buyers will have adequate credit period for payment.
e. Factoring will facilitate credit purchases.
f. Saving on bank charges and expenses.
g. No documentation problems; only a simple undertaking agreeing to make
payment directly to factor is required.
h. Factor furnishes periodical statement of outstanding invoices drawn on the
buyers.
3. Benefits to the Banks
The following are the advantages of Factoring service to the banks:
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a. Factoring provides the banks an integrated receivables management.
b. Factoring improves the service efficiency of the banks through closer
follow up of credit sales.
c. Factoring provides increasing cash flow and liquidity to the banks.
d. Factoring improves the quality of the advances made by the banks by
reducing the turnover of receivables and by increasing operating cycles.
e. Factoring enhances the profits through cash discounts on purchase.
f. Factoring safeguards as insurance against non-performing assets of the
banks. In this, all proceeds of factored bills are credited to bank; hence
bank account will not become non-performing assets for shortage of
credits.
Factoring service suffers from the following limitations:

1. Factoring is a high risk prone area:
It may possibly result in over dependence on Factoring, mismanagement, over
trading or even dishonesty on the client's part.
2. Factoring as a costly source of financing:
The cost of financing being higher than the normal lending rate, Factoring is an
expensive way of financing.
Factoring in India
Factoring is new financial concept in India. In keeping pace with the growing need of
credit, the necessary to develop more and more based financing agencies has become imperative.
Especially for SSI units which have serious liquidity problems on account of non – payment
from public sector undertakings. Factoring service provide good relief in such cases. For ssi
sector alone the potential for factoring business is estimated
Suggestions of C.S. KalayanaSundaram Committee Jan 28, 1988

1. Introduction of Factoring services in India to complement the services provided by banks.
Export Factoring can also be launched.
2. Factors should cover wide range of industries embracing all sectors of economy.
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3. The cost of funds should not be more than 13.5% per annum. Factors will have to charge
the price for services at a rate not higher than banks. The price for administrative services
may not exceed 2.5 to 3 % of debt services.
4. Factoring agencies may be promoted on zonal basis. One each for North, South, East and
West
5. Banks have considerable experience in financing and collection of receivables. Besides
they have access to credit information regarding both seller and buyers. An additional
advantage is the large network of branches. At present only two factoring subsidiaries of
state bank of India and canara bank are functioning namely SBI factors lted and can bank
factors ltd covering wesr and south zones. They are also permitted to operate in other
zones as the Punjab national banks and Allahabad bank have not come forward to set up
subsidiaries for north and east zones
6. The Committee has recommended that the Government may enact a suitable leg-isolation
for the levy of penal interest for delayed payment from the debtors beyond specified
period. It has also recommended that the Government should exempt assignment of
factored debts from stamp duty. The companies which provide factoring in India are Can
bank Factors Limited, SBI Factors and Commercial Services Pvt. Ltd, The Hong Kong
and Shanghai Banking Corporation Ltd. Global Trade Finance Limited, Export Credit
Guarantee Corporation of India Ltd, Citibank NA, India and Small Industries
Development Bank of India (SIDBI): It is quite implied that factoring is a very easy and
fast method. Still, it has not seen a substantial growth in India, as compared to China and
Vietnam. There are certain hiccups that have come up in the way of realizing the full
potential of factoring in India. One of the main reasons for it is the legal framework of
India. Generally factoring companies need legal protection as all advances are
uncollateralized, protection for the same is not provided. Government of India enacted
the Factoring Act, 2011 to bring in the much needed legal framework for the factoring
business in the country.
Mutual Fund:
Meaning
A mutual fund is a type of professionally managed collective investment scheme that
pools money from many investors to purchase securities. While there is no legal definition of the
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term mutual fund, it is most commonly applied only to those collective investment vehicles that
are regulated and sold to the general public. They are sometimes referred to as "investment
companies" or "registered investment companies". Most mutual funds are open-ended, meaning
stockholders can buy or sell shares of the fund at any time by redeeming them from the fund
itself, rather than on an exchange. Hedge funds are not considered a type of mutual fund,
primarily because they are not sold publicly.
In the United States, mutual funds must be registered with the Securities and Exchange
Commission, overseen by a board of directors (or board of trustees if organized as a trust rather
than a corporation or partnership) and managed by a registered investment adviser. Mutual
funds, like other registered investment companies, are also subject to an extensive and detailed
regulatory regime set forth in the Investment Company Act of 1940.[3] Mutual funds are not
taxed on their income and profits if they comply with certain requirements under the U.S.
Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in
individual securities. They have a long history in the United States. Today they play an important
role in household finances, most notably in retirement planning.
Concept of mutual funds:

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market instruments
such as shares, debentures and other securities. The income earned through these investments
and the capital appreciation realised are shared by its unit holders in proportion to the number of
units owned by them. Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.
Types of mutual fund scheme:
1. Open ended scheme

2. Close ended scheme
Open ended scheme:
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These funds buy and sell units on a continuous basis and, hence, allow investors to enter
and exit as per their convenience. The units can be purchased and sold even after the initial
offering (NFO) period (in case of new funds). The units are bought and sold at the net asset value
(NAV) declared by the fund.
The number of outstanding units goes up or down every time the fund house sells or
repurchases the existing units. This is the reason that the unit capital of an open-ended mutual
fund keeps varying. The fund expands in size when the fund house sells more units than it
repurchases as more money is flowing in. On the other hand, the fund's size reduces when the
fund house repurchases more units than it sells. An open-ended fund is not obliged to keep
selling new units all the time. For instance, if the management thinks that it cannot manage a
large-sized fund optimally, it can stop accepting new subscription requests from investors.
However, it has to repurchase the units at all times.
Features of open ended funds:

1. Regular investment plan:
Some open ended funds offer a regular investment plan wherein a fixed amount
can be invested every month subject to a minimum of Rs1000 and in multiples of Rs.100
thereafter. The investor is such a case gives 12 post dated cheques dated first of every
month. The amount so invested is converted into units at the day’s sale price. The same is
added to the unit balance of the unit holder. Certain class of investors who go in for
recurring monthly deposit scheme can avail this plan to maximise returns with easy
liquidity.
2. Regular withdrawal plan:
Open ended fund also offers regular withdrawal plan wherein in a fixed amount
can be withdrawn every month subject to a minimum of Rs.500, for a minimum period of
12 months. The amount so withdrawn by sale is converted as NAV of the 15th /30th
working day of every month and the same is substracted from the unit balance of the unit
holder. Investors wanting monthly income to manage their affairs can withdraw every
month with easy liquidity. Certain open ended fund offer the option of Dividend
Reinvestment Plan, in which any dividend, if declared is automatically reinvested and
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adequate numbers of units based on the day’s sale price are credited to the unit holders’
account.
3. Instant liquidity:
As the unit can be sold on any working day at the repurchase price, the investors
is offered instant liquidity all through the year. Instant liquidity means, the fund operates
like a bank account wherein the investors is able to get cash across the counter for the
units sold
4. Free Entry:
There is free entry and exist of investors in a open ended fund. The investor can
join in and come out from the fund as and when he desires. Often he enters when the
NAV is at a low price and comes out when the NAV is quoted at a higher rate thereby
making cash profits.
Close ended scheme:

Close-ended mutual fund Schemes have a stipulated maturity period wherein the investor
can invest directly in the scheme at the time of the initial issue and thereafter units of the scheme
can be bought or sold on the stock exchanges where the scheme is listed. The market price at the
stock exchange could vary from the schemes NAV on account of demand and supply situation,
unit holders’ expectations and other market factors. Usually a characteristic of close-ended
schemes is that they are generally traded at a discount to NAV; but closer to maturity, the
discount narrows.
Classification of close ended scheme:

1. Growth/Equity oriented schemes
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a major part of their corpus in equities. Such
funds have comparatively high risks. These schemes provide different options to the
investors like dividend option, capital appreciation, etc and the investors may choose an
option depending on their preferences. The investors must indicate the option in the
application form. The mutual funds also allow the investors to change the options at a
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later date. Growth schemes are good for investors having a long-term outlook seeking
appreciation over a period of time.
2. Income/Debt oriented scheme
The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are less
risky compared to equity schemes. These funds are not affected because of fluctuations in
equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these fluctuations.
3. Balanced scheme
The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking for
moderate growth. They generally invest 40-60 per cent in equity and debt
instruments. These funds are also affected because of fluctuations in share prices
in the stock markets. However, NAVs of such funds are likely to be less volatile
compared to pure equity fund.
4. T ax saving schemes
These schemes offer tax rebates to the investors under specific provisions of the
Income Tax Act, 1961 as the Government offers tax incentives for investment in
specified avenues. Eg Equity Linked Savings Schemes (ELSS). Pension schemes
launched by the mutual funds also offer tax benefits. These schemes are growth oriented
and invest pre-dominantly in equities. Their growth opportunities and risks associated are
like any equity-oriented scheme.
Advantages of Mutual Funds

One of the main reasons for the creation of mutual funds was to give investors who
wanted to make smaller investments access to professional management. However, mutual funds
offer many advantages to investors of all types, such as:
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1. Diversification:
Investing in a single stock or bond is very risky, but owning a mutual fund that
holds numerous securities reduces risk significantly. Mutual funds provide
diversification, which is crucial to a well-balanced portfolio. Diversification is
particularly crucial in small accounts.
2. Professional management:
It is difficult and time consuming to pick the best stocks and bonds for your
portfolio and to try to beat the benchmarks on these stocks and bonds. Allowing a
professional mutual fund manager to make decisions about stocks and bonds for you can
save you time and frustration.
3. Minimal transaction costs:
Buying individual stocks and bonds is expensive in terms of transaction costs.
Mutual funds offer the advantage of economies of scale in purchases because mutual
fund transactions are typically large. Economies of scale refers to the fact that mutual
fund costs may decrease as the mutual fund’s asset size increases, since brokers may
charge lower fees to try to get more of the mutual fund’s business.
4. Liquidity:
Money invested in mutual funds is generally liquid. You can sell your shares and
collect money from open-ended funds (funds that can create and redeem shares on
demand), usually within two business days. If the open-end funds are no-load funds,
investors are not required to pay transaction costs when they buy or redeem shares.
5. Flexibility:
Owning individual stocks and bonds does not allow for much flexibility in terms
of liquidity, or the ability to access your money. You cannot write checks on the value of
individual stocks and bonds. However, many mutual funds allow for more flexibility by
allowing you to write checks on your account.
6. Low up-front costs:
Certain types of mutual funds have financial benefits that make them less
expensive than individual stocks and bonds. For example, no-load mutual funds can be
sold and redeemed without incurring any sales charges, and open-ended mutual funds can
be purchased at the fund’s net asset value (NAV). A fund’s NAV is calculated daily by
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subtracting the fund’s liabilities from its assets and dividing the resulting amount by the
number of outstanding shares. The benefit of open-ended funds is that you do not need to
pay a premium or a sales charge to purchase or sell the shares.
7. Service:
Mutual fund companies generally have good customer service representatives
who can answer your questions and help you open accounts, purchase funds, and transfer
funds. Mutual fund companies may also offer other services, including automatic
investment and withdrawal plans; automatic reinvestment of interest, dividends, and
capital gains; wiring funds to and from your accounts; account access via phone; optional
retirement plans; check-writing privileges; bookkeeping services; and help with taxes.
Risks involved in mutual funds:

1. Call risk –
This is one of the types of the risks that is involved with the mutual funds. When
the rate of interest falls the person who has issued bonds will redeem or otherwise known
as go for the call option. The issuer has the right to redeem it before the maturity rate. So
when the interest rate is low they will redeem at the best value.
2. Country risk –
This is another risk which rises because of the political events like war or change
in the government leading to change in policies,, natural disasters like earthquake or
floods or financial issue like issues due to inflation. All these will definitely reduce the
investments as well as the value of the investments.
3. Credit Risk –
There is small possibility that the person who has issued the bond might not return
the interest or the capital as well.
4. Currency Risk –
There can be fluctuations in the market because of the fluctuations in the
currency.
5. Income Risk –
When there is a fall in the interest rate there are chances the dividend income
from the fixed income funds may reduce.
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6. Industry risk –
When there is a development in the industry there are chances that the value of
the stock that is associated with that industry will reduce.
7. Inflation risk –
When the cost of living increases then the funds that have returns after the
inflation adjustment is done will face a lot of risks.
8. Interest rate risk –
When the rate of interest increases then the value of the bond will reduce. This
again is a risk which is associated with the funds.
9. Manager Risk –
There are some chances that the person who is managing the funds might not
invest it wisely. This is a very big risk so choosing an advisor has to be done carefully.
10. Principal risk –
There are remote chances that of losing the principal.
Organisation of mutual funds:

The Organization of a Mutual Fund is how the mutual funds are controlled. A number of
entities are involved in the Organization of a Mutual Fund. This helps in the proper management
of the mutual fund portfolio.
The Organization of a Mutual Fund contains entities such as
1. Mutual Fund Shareholders:
The Mutual Fund Shareholders, like the other share holders have the right to vote.
The voting rights include, the right to elect directors during the directorial elections,
voting right to approve the alterations investment advisory contract pertaining to the fund
and provide approval for changing investment objectives or policies.
2. Board of directors:
The Board of directors supervise the functional activities, which include approval
of the contract Asset Management Company and other various service providers.
3. Investment management company or Asset Management Company:
This body handles the mutual fund portfolio as per the objectives and policies
mentioned in the prospectus of the mutual funds.
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4. Custodians:
The custodians protect the portfolio securities. Mostly qualified bank custodians
are used for mutual funds.
5. Transfer Agents:
The transfer agent for the purpose of maintaining records and similar functions.
The maintenance of the shareholder's accounts, calculation of dividends to the be
disbursed, sending information to the shareholders about the account statements, notices,
and income tax information. Some of the transfer agent sends information to the share
holders about the shareholder transactions and account balances. They also maintain
customer service departments in order the cater to the queries of the shareholders.
SEBI:
The primary aim of the Securities Exchange Board of India is to protect the
interest of the mutual fund investors. The SEBI has formulated several policies for better
functioning and controls the mutual funds. In the year 1993, SEBI issued guidelines
pertaining to the mutual funds. All mutual funds, private sector and public sector are
regulated by the guidelines of the SEBI. The Asset Management Company managing the
funds has to be approved by the SEBI.
Operation of mutual fund:

A mutual fund invests the money received from investors in instruments which are in line
with the objectives of the respective schemes. Regular expenses like custodial fee, cost of
dividend warrants, registrar fee, the asset management fee are born by the respective schemes.
These expenses however cannot exceed 3% of the assets in the respective schemes every year as
per SEBI guidelines. The balance is distributed to the investors in full.
Charges for managing the funds:

This is one question which disturbs every investor. If the funds is going to distribute all
its income minus expenses to unit holder as dividend then what does the mutual fund gain by
running the scheme? Well, the answer is very simple and very straight forward. A mutual funds
gets an annual fee for managing the funds. This fee is fixed by SEBI at a maximum of 1.2% of
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funds managed ad in fact, at a maximum of only 1% for funds managed in excess of Rs.100
crore. Besides this, the mutual fund does not take anything for managing funds that are entrusted
to it.
Repurchase and Reissue prices:

In India listing of the close ended scheme units on a recognised stock exchange is
mandatory. A mutual fund may in addition to listing the unit, also offer repurchase facilities
which will enable the investor to sell the units back to the mutual fund at the repurchase price
determined by the fund. The repurchase is always linked to the NAV and is normally at a small
discount to the NAV to cover the transaction costs.
Repurchase and reissue prices are particularly relevant for open ended scheme. This is
because units of open ended schemes are not listed on the stock exchange. Investors can buy or
sell these units only from and to the Mutual Fund at the reissue and repurchase prices
SEBI and mutual fund industry

The rights of investor under SEBI(MF) regulation 1993
1. Purchasing Proceedings-
Schemes other than ELSS need to be allotted with 5 working days of closure of
NFO. Open-ended schemes, other than ELSS, have to re-open for ongoing sale / re-
purchase within 5 business days of allotment.
2. Delay in dispatch of redemption or repurchase proceedings-
As per rule, mutual fund companies need to process requests within 10 working
days. If delay occurs then they are liable to pay investor interest of 15% PA as delay cost.
3. Unclaimed redemption amount-
Any unclaimed redemption amount shall be invested in money market
instruments. If investor claims within 3 years then payment should be made according to
prevailing NAV. But if investors failed to claim within 3 years then the money will be
pool account. Whenever investor claims for this amount NAV of 3rd year end will be
payable. Amount earned by mutual fund companies from that pool account will
be utilized for investor education.
4. Account Statement dispatch-
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Mutual Funds shall dispatch Statement of Accounts within 5 business days from
the closure of the NFO. But for transactions such as SIP (Systematic Investment Plan),
STP (Systematic Transfer Plan) and SWP (Systematic Withdrawal Plan) they need to
send you account statement on a quarterly base (March, June, September and December).
However the first investment statement should be issued within 10 working days of
initial transactions. Also whenever investor request for account statement, they need to
provide it within 5 working days without any charges. If so desired by investor then they
need to send soft copies on monthly base.
5. Change of distributor or Adviser-
In case investor requested to change distributor or want to go directly then mutual
funds need to do so without compelling investor to taken “No Objection Certificate” from
existing distributor.
6. Mailing of Annual Reports-
Mutual Funds need to send their annual reports to your registered mail id. If mail
id not available then they need to send you physical copy to your registered address.
7. Appointment of AMC and Termination of Scheme-
The appointment of the AMC for a mutual fund can be terminated by a majority
of the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the
Scheme.75% of the Unit-holders (in practice, Unit-holding) can pass a resolution to
wind-up a scheme
8. NAV Publishing-
NAV need to be publishing daily within 9 PM on Mutual Funds site and AMFI
site. But for Funds of Funds (FOF) 10 AM of the following day.
9. Nominee-
Investor can appoint up to 3 nominees and need to mention % of share in the
event of his demise. If % of share not mentioned then equal distribution will be done.
10. Dematerialised form-
Investor has option to keep investments either in DMAT form or in physical form.
So according to his wish Mutual Funds has to co-ordinate with depository to facilitate
this.
11. Scheme Portfolio-
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The mutual fund has to publish a complete statement of the scheme portfolio and
the unaudited financial results, within 1 month from the close of each half
year. The advertisement has to appear in one National English daily, and one
newspaper published in the language of the region where the head office of the mutual
fund is situated. n lieu of the advertisement, the mutual fund may choose to send the
portfolio statement to all Unit-holders.
Debt-oriented, close-ended / interval, schemes /plans need to disclose their
portfolio in their website every month, by the 3rd working day of the succeeding month.
Unit-holders have the right to inspect key documents such as the Trust Deed, Investment
Management Agreement, Custodial Services Agreement, R&T agent agreement and
Memorandum &Articles of Association of the AMC Scheme-wise Annual Report, or an
abridged summary has to be mailed to all unit-holders within 6 months of the close of the
financial year. The Annual Report of the AMC has to be displayed on the web site of the
mutual fund. The Scheme-wise Annual Report will mention that Unit-holders can ask for
a copy of the AMC’s Annual Report.
12. Dividend and Warrants-
Declared dividend and warrants need to be dispatched to investors within 30 days
of declaration. In case delay they need to pay investor 15% PA interest as delay cost.
13. Change in Fundamental Attributes of Scheme-
A written communication about the proposed change is sent to each Unit-holder,
and an advertisement is issued in an English daily Newspaper having nationwide
circulation, and in a newspaper published in the language of the region where the head
office of the mutual fund is located. Dissenting unit-holders are given the option to exit at
the prevailing Net Asset Value, without any exit load. This exit window has to be open
for at least 30 days. These are the few rights investor have towards mutual fund
companies. If you found any breach then you can approach Mutual Fund’s Investor
Service Centre. If your complaints not heed properly then you can approach to SEBI.
Net asset value of mutual fund:

NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the
Asset Management Company (AMC) at the end of every business day. Net asset value on a
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particular date reflects the realisable value that the investor will get for each unit that he his
holding if the scheme is liquidated on that date.
Guidelines for Mutual funds:

1. Formation:
Certain structural changes have also been made in the mutual fund industry, as
part of which mutual funds are required to set up asset management companies with fifty
percent independent directors, separate board of trustee companies, consisting of a
minimum fifty percent of independent trustees and to appoint independent custodians.
This is to ensure an arm’s length relationship between trustees, fund managers
and custodians, and is in contrast with the situation prevailing earlier in which all three
functions were often performed by one body which was usually the sponsor of the fund
or a subsidiary of the sponsor.
Thus, the process of forming and floating mutual funds has been made a tripartite
exercise by authorities. The trustees, the asset management companies (AMCs) and the
mutual fund shareholders form the three legs. SEBI guidelines provide for the trustees to
maintain an arm’s length relationship with the AMCs and do all those things that would
secure the right of investors.
With funds being managed by AMCs and custody of assets remaining with
trustees, an element of counter-balancing of risks exists as both can keep tabs on each
other.
2. Registration:
In January 1993, SEBI prescribed registration of mutual funds taking into account
track record of a sponsor, integrity in business transactions and financial soundness while
granting permission.
This will curb excessive growth of the mutual funds and protect investor’s interest
by registering only the sound promoters with a proven track record and financial strength.
In February 1993, SEBI cleared six private sector mutual funds viz. 20th Century Finance
Corporation, Industrial Credit & Investment Corporation of India, Tata Sons, Credit
Capital Finance Corporation, Ceat Financial Services and Apple Industries.
3. Documents:
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The offer documents of schemes launched by mutual funds and the scheme
particulars are required to be vetted by SEBI. A standard format for mutual fund
prospectuses is being formulated.
4. Code of advertisement:
Mutual funds have been required to adhere to a code of advertisement.
a. Assurance on returns:
SEBI has introduced a change in the Securities Control and Regulations
Act governing the mutual funds. Now the mutual funds were prevented from
giving any assurance on the land of returns they would be providing. However,
under pressure from the mutual funds, SEBI revised the guidelines allowing
assurances on return subject to certain conditions.
Hence, only those mutual funds which have been in the market for at least
five years are allowed to assure a maximum return of 12 per cent only, for one
year. With this, SEBI, by default, allowed public sector mutual funds an
advantage against the newly set up private mutual funds.
As per basic tenets of investment, it can be justifiably argued that
investments in the capital market carried a certain amount of risk, and any
investor investing in the markets with an aim of making profit from capital
appreciation, or otherwise, should also be prepared to bear the risks of loss.
c. Minimum corpus:
The current SEBI guidelines on mutual funds prescribe a minimum start-
up corpus of Rs.50 crore for a open-ended scheme, and Rs.20 crore corpus for
closed-ended scheme, failing which application money has to be refunded.
The idea behind forwarding such a proposal to SEBI is that in the past, the
minimum corpus requirements have forced AMCs to solicit funds from corporate
bodies, thus reducing mutual funds into quasi-portfolio management outfits. In
fact, the Association of Mutual Funds in India (AMFI) has repeatedly appealed to
the regulatory authorities for scrapping the minimum corpus requirements.
d. Institutionalisation:
The efforts of SEBI have, in the last few years, been to institutionalise the
market by introducing proportionate allotment and increasing the minimum
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deposit amount to Rs.5000 etc. These efforts are to channel the investment of
individual investors into the mutual funds.
e. Investment of funds mobilised:
In November 1992, SEBI increased the time limit from six months to nine
months within which the mutual funds have to invest resources raised from the
latest tax saving schemes. The guideline was issued to protect the mutual funds
from the disadvantage of investing funds in the bullish market at very high prices
and suffering from poor NAV thereafter.
f. Investment in money market:
SEBI guidelines say that mutual funds can invest a maximum of 25 per
cent of resources mobilised into money-market instruments in the first six months
after closing the funds and a maximum of 15 per cent of the corpus after six
months to meet short term liquidity requirements.
Private sector mutual funds, for the first time, were allowed to invest in
the call money market after this year’s budget. However, as SEBI regulations
limit their exposure to money markets, mutual funds are not major players in the
call money market. Thus, mutual funds do not have a significant impact on the
call money market.
g. Valuation of investment:
The transparent and well understood declaration or Net Asset Values
(NAVs) of mutual fund schemes is an important issue in providing investors with
information as to the performance of the fund. SEBI has warned some mutual
funds earlier of unhealthy market
h. Inspection:
SEBI inspect mutual funds every year. A full SEBI inspection of all the 27
mutual funds was proposed to be done by the March 1996 to streamline their
operations and protect the investor’s interests. Mutual funds are monitored and
inspected by SEBI to ensure compliance with the regulations.
i. Underwriting:
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In July 1994, SEBI permitted mutual funds to take up underwriting of
primary issues as a part of their investment activity. This step may assist the
mutual funds in diversifying their business.
j. Conduct:
In September 1994, it was clarified by SEBI that mutual funds shall not
offer buy back schemes or assured returns to corporate investors. The Regulations
governing Mutual Funds and Portfolio Managers ensure transparency in their
functioning.
k. Voting rights:
In September 1993, mutual funds were allowed to exercise their voting
rights. Department of Company Affairs has reportedly granted mutual funds the
right to vote as full-fledged shareholders in companies where they have equity
investments.
Mutual Fund Industry in India: Recent trends & Progress

Mutual Funds play vital role in resource mobilization and its efficient allocation to the
productive sources of the economic system. Throughout the world, these funds have worked as a
reliable instrument of change in financial intermediation, development of capital markets and
growth of the corporate sector. The process of Liberalization, de regulation and reconstruction of
the Indian economy has created necessity for efficient allocation of scarce financial resources. In
this process of development, Mutual Funds have emerged as strong financial intermediaries and
are playing an important role in bringing stability to the financial system and efficiency to the
resource allocation process. Mutual Fund is an institutional arrangement where in savings of
millions of investors are pooled together for investment in a diversified portfolio of securities to
spread risk and to ensure steady returns. These funds bring a wide variety of securities within the
reach of the most modest of investors. It is essentially a mechanism of pooling together savings
of large number of investors for collective investment with an approved objective of attractive
yield and appreciation in value. The Mutual Funds offers different investment objectives such as
growth, income and Tax planning.
In the recent times the Indian Capital Market has witnessed new trends, one of them
being the spectacular growth of Mutual Funds. There are more than 600 schemes offered by
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Mutual Funds, and these funds have mobilized substantial amount of the household savings. The
present paper focuses on the growth of Mutual Fund Industry in India over the past few years.
Customer service:
Customer orientation:
A customer-oriented organization places customer satisfaction at the core of each of its
business decisions. Customer orientation is defined as an approach to sales and customer-
relations in which staff focus on helping customers to meet their long-term needs and wants.
Here, management and employees align their individual and team objectives around satisfying
and retaining customers. This contrasts, in part, with a sales orientation, which is a strategic
approach where the needs and wants of the firm or salesperson are valued over the customer.
Types of service provided by the bank:

Bank provides their customers with a number of services. With a checking account you
can pay your bills. A check is a slip of paper that tells the bank how much money it should
withdraw from your account and pay to someone else. Today, more and more people use the
internet, also a banking service, to pay their bills. Banks also give their customers plastic cards
with which they can get money from their account everywhere and whenever they want. They
can also use them to pay without cash at shops, gas stations and other stores. Checking accounts
are a comfortable way for customers to handle their money.
For people who want to save money banks offer savings accounts. Usually, banks pay
more interest for savings accounts than they do for checking accounts. They hope that the
customers will leave their money in the bank for a long time, which is why the bank can work
with this money and offer it as loans. Banks, however, cannot give all of their money as loans. In
most countries the government limits the amount of money that banks can use as loans. They
must always keep back a certain percentage in the form of cash.
People who need money for certain things like buying a house or a car need a lot of
money quickly. The money they borrow from a bank is called a loan. In most cases they do not
pay back all of the money at once but a small part of it, with interest, every month. If someone
cannot pay back a loan the bank usually can take away valuable objects like cars or houses.
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Modern banks offer their customers many other services as well. They tell them how they
can make money with investments in stocks and bonds. Credit cards are given to customers as a
cash-free way of buying things. Almost all banks have automatic teller machines (ATM) at
which customers receive money from their account. Telephone banking is an easy way to pay
your bills by calling a special telephone number and typing in a certain sequence of digits. Some
banks even deal with insurance. cash-free way of buying things. Almost all banks have automatic
teller machines (ATM) at which customers receive money from their account. Telephone
banking is an easy way to pay your bills by calling a special telephone number and typing in a
certain sequence of digits. Some banks even deal with insurance.
Credit cards:
A credit card is a payment card issued to users as a system of payment. It allows the
cardholder to pay for goods and services based on the holder's promise to pay for them. The
issuer of the card creates a revolving account and grants a line of credit to the consumer (or the
user) from which the user can borrow money for payment to a merchant or as a cash advance to
the user.
Credit card:
A credit card is different from a charge card: a charge card requires the balance to be paid
in full each month.[2] In contrast, credit cards allow the consumers a continuing balance of debt,
subject to interest being charged. A credit card also differs from a cash card, which can be used
like currency by the owner of the card. A credit card differs from a charge card also in that a
credit card typically involves a third-party entity that pays the seller and is reimbursed by the
buyer, whereas a charge card simply defers payment by the buyer until a later date.
The size of most credit cards is 3 3⁄8 × 2 1⁄8 in (85.60 × 53.98 mm), conforming to the
ISO/IEC 7810 ID-1 standard. Credit cards have a printed or embossed bank card number
complying with the ISO/IEC 7812 numbering standard. Both of these standards are maintained
and further developed by ISO/IEC JTC 1/SC 17/WG 1. Before magnetic stripe readers came into
widespread use, plastic credit cards issued by many department stores were produced on stock
("Princess" or "CR-50") slightly longer and narrower than 7810.
1. Cash card:
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A cash card can be any card that you can insert into an ATM or other cash
dispenser, or a pre-paid credit card, or a card with a preset cash value from a particular
store (Costco or Subway), which is read by a cash card reader and used to pay for
products or services at that retailer.
2. Debit card:
A debit card (also known as a bank card or check card) is a plastic payment card
that provides the cardholder electronic access to his or her bank account(s) at a financial
institution. Some cards may bear a stored value with which a payment is made, while
most relay a message to the cardholder's bank to withdraw funds from a payer's
designated bank account. The card, where accepted, can be used instead of cash when
making purchases. In some cases, the primary account number is assigned exclusively for
use on the Internet and there is no physical card.
3. Charge card:
A charge card is a card that provides a payment method enabling the cardholder to
make purchases which are paid for by the card issuer, to whom the cardholder becomes
indebted. The cardholder is obligated to repay the debt to the card issuer in full by the due
date, usually on a monthly basis, or be subject to late fees and restrictions on further card
use.
Though the terms charge card and credit card are sometimes used
interchangeably, they are distinct protocols of financial transactions. Credit cards are
revolving credit instruments that do not need to be paid in full every month. There is no
late fee payable so long as the minimum payment is made at specified intervals (usually
every thirty days). The balance of the account accrues interest, which may be backdated
to the date of initial purchase. Charge cards are typically issued without spending limits,
whereas credit cards usually have a specified credit limit that the cardholder may not
exceed.
4. Smart card:
A smart card is a plastic card about the size of a credit card, with an embedded
microchip that can be loaded with data, used for telephone calling, electronic cash
payments, and other applications, and then periodically refreshed for additional use.
Currently or soon, you may be able to use a smart card to:
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 Dial a connection on a mobile telephone and be charged on a per-call basis
 Establish your identity when logging on to an Internet access provider or to an
online bank
 Pay for parking at parking meters or to get on subways, trains, or buses
 Give hospitals or doctors personal data without filling out a form
 Make small purchases at electronic stores on the Web (a kind of cyber cash)
 Buy gasoline at a gasoline station
Over a billion smart cards are already in use. Currently, Europe is the region
where they are most used. Ovum, a research firm, predicts that 2.7 billion smart cards
will be shipped annually by 2003. Another study forecasts a $26.5 billion market for
recharging smart cards by 2005. Compaq and Hewlett-Packard are reportedly working on
keyboards that include smart card slots that can be read like bank credit cards. The
hardware for making the cards and the devices that can read them is currently made
principally by Bull, Gemplus, and Schlumberger
Operation of credit card:

Plastic payment cards have been with us for nearly sixty years and counting, representing
an amazing achievement in banking circles that has permitted consumers the world over to gain
easy access to their financial assets, no matter where or when the inclination strikes them.
Whether at home or travelling domestically or abroad, one can simply walk up to an ATM, to
banking branch, or visit millions of merchants, both “brick-and-mortar” and online, to gain quick
recognition, temporary cash, or extended purchasing power for goods and services like never
before. Convenience has been the key, and the phenomenon has spread and touched every corner
of the planet. With a money-access service so ubiquitous and widespread, one would expect the
inner workings of this system to be self evident, but, in actuality, the “electronics” of this modern
day form of convenience is hidden behind a maze of banks, networks, and third-party processing
agents. Visa, MasterCard, and American Express are the primary players in this industry,
accounting for 97% of the total annual turnover of nearly $7.5 trillion. Visa dominates with 53%
market share, followed by MasterCard at 33%, and Amex at 11%.When you have been issued a
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credit card you are given a line of credit. You can make purchases or receive cash advances up to
that amount with your card. When you make a purchase, the merchant gives proof of your
purchase to the credit card company and they pay the merchant on your behalf; in effect granting
you a loan. The credit card issuer then bills you for reimbursement of the purchase or cash
advance amount. You can either pay the balance in full or make payments. The issuer must send
you periodic billing statements giving you information on your account which includes the
minimum payment due, date it is due, and the periodic interest rate on unpaid balances.
Mechanism of credit card:

1. Customer applied and got the credit card.
2. Arrangement are complete between the bankers and seller
3. The customer makes the actual purchase and signs on the sales vouchers
4. The seller sends the detailed vouchers to the banks
5. The banks settles the claims of the seller
6. The customer receives the intimation from the bank in this regard.
7. The customer makes the payment for the purchase made by him.
Diagrammatic representation of credit card:
7 BANKER 5
1 2
6 4
CUSTOMER SELLER
Advantages of credit card

1. Benefits to the bank
2. Befits to the customer(card holder)
3. Benefits to the retailer
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Benefits to the bank:
1. A credit card is an integral part of bank major service these days. The credit card
provides the following advantages to the bank
2. The system provides an opportunity to the bank to attract new potential customer
3. To get new customer the bank has to employ special trained staff. This gives the bank an
opportunity to find the latent from among existing staff that would have been otherwise
wasted.
4. The more important function of a credit card however is simply to yield direct profit for
the bank. There is scope and potential for better profitability out of income/commission
earned from the traders turnover
5. This also provides additional customer service to the existing clients. It enhances the
customer satisfaction.
6. More use by the card holder and consequently increased turnover improves national
business growth and consequently the growth of banking habits in general.
7. Better network of card holder and increased use of cards means higher popularity and
images for the banks.
8. Savings of expenses on cash holdings i.e., stationery, orienting and manpower to handle
clearing transaction will considerably be reduced.
9. It increase customer base of the bank.
10. It brings into banks fold net worth customer by introducing various types of credit cards
like gold card, executive card
11. It brings in new customer from various merchant outlets which accepts credit card against
sale of their goods/service
12. It creates a brand name and popular images for the bank
13. Large scale uses of credit cards and shops etc., accepting them help to increase deposits
base of the banks
14. It increases interest income of the banks as most of the cardholder availing of credit
facility must have been financially screened by the bank.
15. It minimise credit risk of the banks as most of the card holders availing of credit facility
must have been financially screened by the bank.
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16. This may increase the chances of relationship banking and thereby retaining the
customer.
Benefits to the card holder:
1. He can purchase goods and service at a large number of outlets without cash or cheque.
This card is useful in emerging can save embracement.
2. The risk factor of carrying and storing cash is avoided it is convenient for him top carry a
credit card and he has trouble free travel and make purchase without carrying cash or
cheques.
3. A month’s purchases can be settled with a single remittance thus tending to reduce bank
and handling charges.
4. The card holder has a period of free credit usually between 30-50 days a of purchase.
5. Cash can usually be obtained with the card, either on card account or by using it as
identification when enchasing a cheque at a bank.
6. Availing credit card saves trouble and paper work to travelling businessmen.
7. The cardholder has the option of taking extended credit up to a pre-arranged limit without
reference to anyone in addition to initial credit and interest free period. Further revolving
credit becomes automatically available as the outstanding balance is reduced.
8. It also induces a sense of financial discipline in a card holder by allowing him to analyses
the statement of expenses incurred which are supplied by card organisation. Cash
expenses are often without record and can therefore result in unplanned spending
9. It provides a proof of spending through banking channels to strength his position in case
of disputes with sellers.
10. It also gives him exposure to banking operations since systematic accounting for
spending and payments is routed through banking channels.
11. He has the convenience for making a single payments for the purchase made during the
month rather than many payments by various means.
12. It also allows him to delegate spending power to add on members (with Additional cards)
13. It also extends additional facilities like free insurance coverage, discount on purchase,
free travel booking.
14. Credit cards are considered as a status symbol.
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15. It provides preferential rates on hotel stay etc., depending upon the arrangement of the
card issuing bank/agency
Advantages to the merchant establishment:
1. This will carry prestigious weight to the outlets
2. Increase in sales because of increased purchasing power of the card holder due to
unbilled credit available to the cardholder
3. The retailers gain for the impulses buying and trading up the tendency to buy the bigger
or better article. This argument has little appeal to service established but much to seller
of goods.
4. He can offer credit without the botheration of cost or booking and bad debts
5. Credit card ensures timely and certainty payments
6. Suppliers/ sellers no longer have to send reminders of outstanding debts.
7. Systematic accounting since sales receipts are routed through banking channels
8. Advertising and promotional support on national scale.
9. Development of prestigious clientele base
10. Avoids all the cost and security problems involved in handling cash
11. Less need for merchant establishment to provides customers with extended credit
facilities which are likely to be costly burdens on them.
12. The losses through bad debts are reduced and additional liquidity is achieved.
13. As customers are well educated and understanding, less customer problems.
Profitability:
Profitability of the banks depends principally on the following factors:
a. Value of the average transaction
b. Rate of merchant discount
c. Cost of the bank money
d. Cost of processing
e. Rate of cardholders’ service charge
f. Average pattern of repayment
g. Loss form bad debts and fraud
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Disadvantages of credit card
1. Only few outlets accept the card. It is the duty of the bank to set up or seek many outlets
to service the customer in order to ease out the difficulties.
2. Some credit card transaction takes longer time than cash transaction because of various
formalities.
3. The customer tends to overspend out of immense happiness
4. Discounts and rebate can rarely be obtained
5. The cardholder is responsible for charge due to loss or theft of the card and then bank
may not be a party for loss due to fraud or collusion of staff etc.,
6. Customer may be denied cash discount for payments through card.
7. It might lead to spending habits and cardholders may end up in big debts
New scheme of farmers’ credit card

Kissan Credit Cards scheme (KCC)
Union Finance Minister in his budget speech for the year 1998-99 had desired that the
banks should issue Kissan Credit Cards to farmers on the basis of their land holdingsd so that the
farmers may use for ready purchase of agricultural inputs such as seeds, fertilisers, pesticides,
etc., and draw cash for their production needs NABARD was asked to formulate a model scheme
in this regard for uniform adoption by banks.
Accordingly, NABARD has since formulated a model Kissan Credit Card Scheme in
consultation with major banks. The scheme has been recommended to banks for adoption. The
salient features of the scheme are as under:
1. Kissan credit card scheme aims at adequate and timely support from the banking system
to the farmers for their cultivation needs including purchase of inputs in a flexible and
cost effective manner. The scheme is to be implemented by commercial banks, RRBs and
Co-operative Banks.
2. The scheme would primarily cater to the short term requirements of the farmers. Under
the scheme banks may be provided the Kissan Credit Card to farmers who are eligible for
production credit of Rs.5000/- and above. The credit extended under the KCC scheme
would be in the nature of a revolving cash credit and provide for any numbers of
withdrawals and repayments within the limit.
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3. While fixing the limit the bank may take into account the entire production credit
requirements of the farmers for the full year including the credit requirements of the
farmer for the ancillary activities related to crop production such as maintenance of
agricultural machinery/ implements electricity charges etc.,
4. The credit card should normally be valid for 3 years subject to an annual review. The
credit limit under the card will be fixed on the basis of the operational land holding,
cropping pattern and scales of finance as recommended by the District Level Technical
Committee (DLTC)/ State Level Technical Committee(SLTC).
5. Banks may apply the same rates of interest as are applicable to crop loans and the
security/margin norms, etc., should be in the conformity with the instruction issued by
RBI/NABARD from time to time
6. The KCC facility being in the nature of cash credit accommodation for agricultural
purpose the prudential norms as applicable to such facilities would apply to KCC
accounts.
Repayments:
The amount drawn or outside against the card should be repaid to the bank by the farmers
within 12months of drawl of money.
Progress of the Scheme:

As in March 1999, a total of 7,83,000 KCC cards with credit facility covering a sum of
Rs.2310 crore have been insured by all banks to farmers throughout India. The banks are fact
popularising the scheme among farmers.
Credit card scheme is still in its infancy in India. It is now for the bank managements to
seize the opportunities offered by the huge populace and growing number of working class/
fixed income earners. The bank cards are, however, becoming popular in India. Various
banks have introduced credit cards either jointly with other banks or independently. For
examples, Bank of Baroda has introduced its credit card known as “BOBCARD”. Similarly
central bank of India has introduced” Central Card” about State Bank of India, the SBI Card.
It may also be told that as per current income tax regulation all persons holding credit card
must file their annual income tax returns.
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Disadvantages of credit card:
1. Overuse
Revolving credit makes it easy to spend beyond your means.
2. Paperwork—
You'll need to save your receipts and check them against your statement each month.
This is a good way to ensure that you haven't been overcharged.
3. High-cost fees—
Your purchase will suddenly become much more expensive if you carry a balance or miss
a payment.
4. Unexpected fees—
Typically, you'll pay between 2 and 4 percent just to get the cash advance; also cash
advances usually carry high interest rates.
5. No free lunch—
The high interest rates and annual fees associated with credit cards often outweigh the
benefits received. Savings offered by credit cards can often be obtained elsewhere.
6. Deepening your debt—
Consumers are using credit more than ever before. If you charge freely, you may quickly
find yourself in over your head--as your balance increases, so do your monthly minimum
payments.
7. Homework—
It's up to you to make sure you receive proper credit for incorrect or fraudulent charges.
8. Teaser rates—
Low introductory rates may be an attractive option, but they last only for a limited time.
When the teaser rate expires, the interest rate charged on your balance can jump
dramatically.
Meaning and definition of debit card:

Debit card can be defined either in a simple way or detailed manner depending on how it
is perceived with respect to different senses of finance. Following statements are few selected
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ones that lucidly express the definition of debit card within their individual perspectives. These
definitions of debit card will help to get its overall understanding.
In a General sense:
“Debit card is a facility or utility provided by banking companies to their customers to
help them execute (carry on, perform) different financial transactions anytime and anywhere that
too with ease, comfort, speed and safety. Such a customer-friendly facility gives debit
cardholders (users) a smarter and secured way to make quick payments while purchasing (i.e.
during a sale transaction) various goods and/or services from any merchant (one that accepts a
debit card) either from a traditional market or an online market.”
Features of debit card:

i. It is combination of a cheque and ATM card. Therefore, there are no fees for using the
ATM for cash withdrawal, or as a debit card for purchase.
ii. The Debit card service is meant for with drawls against the balance already available in
the designated account.
iii. It is the card holder obligations to maintain sufficient balance in the designated account to
meet withdrawals and service charges.
iv. A debit card is more affordable than a credit card. We just use our bank account for all
our transactions.
v. No credit period. Our bank account is debited immediately
vi. No credit check is required to get a Debit card
vii. Use of the card is terminated without notice, upon the death, bankruptcy or insolvency of
the cardholder or for other valid reason
viii. Spending is limited to our bank balance.
Operating conditions of the Debit card

1. Personal Identification Number(PIN)
The Personal Identification Number is used for withdrawing cash or for
purchasing goods and service at a merchant establishment. The PIN should be
safeguarded carefully.
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2. Loss of card
The card holder should immediately notify the customer branch by letter or by a
phone call followed by confirmation in writing, if the card is lost/stolen. Any financial
loss arising out of authorised use of the card till such time as the bank hotlist the card will
be to the cardholder account.
3. Debits to customers account:
The bank has the authority to debit the designated of the card holders for all
withdrawals affected by the card holder by using the card as evidence by banks records
which will be conclusive and binding on the card holder.The card holders authorize the
banks to debit the designated account with service charges(if any) notified by the bank
from time to time.
4. Transaction:
The transaction record generated by the bank will be binding and conclusive
unless verified otherwise and corrected by the bank. The verified and corrected amount
will be binding on the cardholders.
5. Closing account:
If the cardholder wishes to close the designated account and surrender the debit
card, he can give the bank a notice in writing and surrender the card along with the
notice.
Benefits of debit card:

1. Free with our bank account:
Obtaining a debit card is easy. If we qualify to open account, we usually get a
debit card, if our bank offers the service
2. No background check:
When we are applying for a debit card, the bank does not need to look into our
credit history. All we need is the documentation to open a bank account, and money in
our bank when we use our debit card.
3. Cash withdrawals:
The customer can withdraw a minimum of Rs.100 and a maximum Rs.10,000/-
per day
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4. Convenience:
A debit card fees us from carrying a lot of cash or a cheque book. In case we are
an international traveller we don’t need to stock up on Traveller’s cheque or cash. We can
use our debit card to withdraw cash from over 5,00,000 ATMs around the world in over
100 countries. We can withdraw in the local currency of the country we are in limited
only by the money we have back home in our account and our Business Travel Quota
(BTQ) limit availability
5. Fair Exchange:
If we return merchandise or cancel service paid for with a debit card the
transaction is treated as if it were made with cash or a check. Cutomers usually get cash
back for offline purchases for on-line transaction the amount is credited to our account.
6. Statement of Account:
A statement of transaction can be obtained from the customer branch. For
example a mini statement containing the last four transactions and balance can be
obtained at a state bank group during the working hours of the customer’s branch.
E-banking:
Impact of E-banking on traditional services
E-banking transactions are much cheaper than branch or even phone transactions. This
could turn yesterday’s competitive advantage -a large branch network -into a comparative
disadvantage, allowing e-banks to undercut bricks-and-mortar banks. This is commonly known
as the “beached dinosaur” theory’s-banks are easy to set up, so lots of new entrants will arrive.
„Old-world‟ systems, cultures and structures will not encumber these new entrants. Instead, they
will be adaptable and responsive. E-banking gives consumers much more choice. Consumers
will be less inclined to remain loyal. Portal providers are likely to attract the most significant
share of banking profits. Indeed banks could become glorified marriage brokers. They would
simply bring two parties together e.g. buyer and seller, payer and payee. The products will be
provided by monoclines, experts in their field. Traditional banks may simply be left with
Introduction of E-banking
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The world is changing at a staggering rate and technology is considered to be the key
driver for these changes around us. An analysis of technology and its uses show that it has
permeated in almost every aspect of our life. Many activities are handled electronically due to
the acceptance of information technology at home as well as at work place. Slowly but steadily,
the Indian customer is moving towards the internet banking. The ATM and the Net transactions
are becoming popular. But the customer is clear on one thing that he wants net-banking to be
simple and the banking sector is matching its steps to the march of technology. E-banking or
Online banking is a generic term for the delivery of banking services and products through the
electronic channels such as the telephone, the internet, the cell phone etc. The concept and scope
of e-banking is still evolving. It facilitates an effective payment and accounting system thereby
enhancing the speed of delivery of banking services considerably .Several initiatives have been
taken by the Government of India as well as the RBI (Reserve Bank of India); have facilitated
the development of e-banking in India. The government of India enacted the IT Act, 2000, which
provides legal recognition to electronic transactions and other means of electronic commerce.
The RBI has been preparing to upgrade itself as regulator and supervisor of the technologically
dominated financial system. It issued guidelines on the risks and controls in computer and
telecommunication systems to all banks, advising them to evaluate the risks inherent in the
systems and put in place adequate control mechanisms to address these risks.
Internet banking (or E-banking) means any user with a personal computer and a browser can get
connected to his bank’s website to perform any of the virtual banking functions. In internet
banking system the bank has a centralized database that is web-enabled. All the services that the
bank has permitted on the internet are displayed in menu. Once the branch offices of bank are
interconnected through terrestrial or satellite links, there would be no physical identity for any
branch.
It would be borderless entity permitting anytime, anywhere and anyhow banking.
The network which connects the various locations and gives connectivity to the central office
within the organization is called intranet. These networks are limited to organizations for which
they are set up. SWIFT is a live example of intranet application’s-banking provides enormous
benefits to consumers in terms of ease and cost of transactions, either through Internet, telephone
or other electronic delivery. Electronic finance (E-finance) has become one of the most essential
technological changes in the financial industry. E-finance as the provision of financial services
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and markets using electronic communication and computation. In practice, e-finance includes e-
payment, e-trading, and e-banking.
Meaning of E-banking
E-bank is the electronic bank that provides the financial service for the individual client
by means of Internet.
What is E-banking?
Electronic banking is one of the truly widespread avatars of E-commerce the world over.
Various authors define E-Banking differently but the most definition depicting the meaning and
features of E-Banking are as follows:
1. Banking is a combination of two, Electronic technology and Banking Electronic
2. Banking is a process by which a customer performs banking Transactions electronically
Without visiting a brick-and-mortar institutions.
3. E-Banking denotes the provision of banking and related service through Extensive use of
information technology without direct recourse to the bank by the customer.
Need for E-banking

One has to approach the branch in person, to withdraw cash or deposit a cheque or
request a statement of accounts. In true Internet banking, any inquiry or transaction is processed
online without any reference to the branch (anywhere banking) at any time. Providing Internet
banking is increasingly becoming a "need to have" than a "nice to have" service. The net
banking, thus, now is more of a norm rather than an exception in many developed countries due
to the fact that it is the cheapest way of providing banking services. Banks have traditionally
been in the forefront of harnessing technology to improve their products, services and efficiency.
They have, over a long time, been using electronic and telecommunication networks for
delivering a wide range of value added products and services. The delivery channels include
direct dial – up connections, private networks, public networks etc and the devices include
telephone, Personal Computers including the Automated Teller Machines, etc. With the
popularity of PCs, easy access to Internet and World Wide Web (WWW), Internet is increasingly
used by banks as a channel for receiving instructions and delivering their products and services
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to their customers. This form of banking is generally referred to as Internet Banking, although
the range of products and services offered by different banks vary widely both in their content
and sophistication.
History of E- banking
The precursor for the modern home online banking services were the distance banking
services over electronic media from the early '80s. The term online became popular in the late
'80s and refers to the use of a terminal, keyboard and TV (or monitor) to access the banking
system using a phone line. ‘Home banking’ can also refer to the use of a numeric keypad to send
tones down a phone line with instructions to the bank. Online services started in New York in
1981 when four of the city’s major banks (Citibank, Chase Manhattan, Chemical and
Manufacturers Hanover) offered home banking services using the video tex system. Because of
the commercial failure of video tex these banking services never became popular except in
France where the use of video tex (Minitel) was subsidized by the telecom provider and the UK,
where the Prestel system was used.
The UK’s first home online banking services were set up by the Nottingham Building
Society (NBS) in 1983 ("History of the Nottingham" Retrieved on 2007-12-14.). The system
used was based on the UK's Prestel system and used a computer, such as the BBC Micro, or
keyboard (Tandata Td1400) connected to the telephone system and television set. The system
(known as 'Home link') allowed on-line viewing of statements, bank transfers and bill payments.
In order to make bank transfers and bill payments, a written instruction giving details of the
intended recipient had to be sent to the NBS who set the details up on the Home link system.
Typical recipients were gas, electricity and telephone companies and accounts with other banks.
Details of payments to be made were input into the NBS system by the account holder via
Prestel. A cheque was then sent by NBS to the payee and an advice giving details of the
payment was sent to the account holder. BACS was later used to transfer the payment directly.
Stanford Federal Credit Union was the first financial institution to offer online internet banking
services to all of its members in Oct, 1994.
Evolution of E-banking
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The story of technology in banking started with the use of punched card machines like
Accounting Machines or Ledger Posting Machines. The use of technology, at that time, was
limited to keeping books of the bank. It further developed with the birth of online real time
system and vast improvement in telecommunications during late1970’s and 1980’s.it resulted in
a revolution in the field of banking with “convenience banking” as a buzzword. Through
Convenience banking, the bank is carried to the doorstep of the customer. The 1990’s saw the
birth of distributed computing technologies and Relational Data Base Management System. The
banking industry was simply waiting for these technologies. Now with distribution technologies,
one could configure dedicated machines called front-end machines for customer service and risk
control while communication in the batch mode without hampering the response time on the
front-end machine. Intense competition has forced banks to rethink the way they operated their
business. They had to reinvent and improve their products and services to make them more
beneficial and cost effective. Technology in the form of E-banking has made it possible to find
alternate banking practices at lower costs
More and more people are using electronic banking products and services because large
section of the banks future customer base will be made up of computer literate customer, the
banks must be able to offer these customer products and services that allow them to do their
banking by electronic means. If they fail to do this will, simply, not survive. New products and
services are emerging that are set to change the way we look at money and the monetary system.
Usage of E-banking
The rise in the e-commerce and the use of internet in its facilitation along with the
enhanced online security of transactions and sensitive information has been the core reason for
the penetration of online banking in everyday life. According to the latest official figures from
the office of National Statistics ( ONS 2007) indicate that subscriptions to the internet has grown
more than 50% from 25 million in 2005 to 45million in 2007 in India. It has also been estimated
that 60% of the population in India use internet in their daily lives. The fundamental shift
towards the involvement of the customer in the financial service provision with the help of the
technology especially internet has helped to reduce the costs of financial institutions as well as
helped client to use the service at anytime and from virtually anywhere with access to an internet
connection. The use of electronic banking has removed personnel that facilitate the transactions
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and has placed additional responsibilities on the customers to transact with the service. The
computerization of the banking operations has made maximum impact on:-
 Internal Accounting System
 Customer service
 Diversification of system
Internet banking versus traditional banking

In spite of so many facilities that Internet banking offers us, we still seem to trust our
traditional method of banking and is reluctant to use online banking. But here are few cases
where Internet banking will turn out to be a better option in terms of saving your money. Stop
payment' done through Internet banking will not cost any extra fees but when done through the
branch, the bank may charge you Rs 50 per cheque plus the service tax. Through Internet
banking, you can check your transactions at any time of the day, and as many times as you want
to. On the other hand, in a traditional method, you get quarterly statements from the bank and if
you request for a statement at your required time, it may turn out to be an expensive affair. The
branch may charge you Rs 25 per page, which includes only 30 transactions. Moreover, the bank
branch would take eight days to deliver it at your door step. If the fund transfer has to be made
outstation, where the bank does not have a branch, the bank would demand outstation charges.
Whereas with the help of online banking it will be absolutely free for you. As per the Internet
and Mobile Association of India's report on online banking 2006, "There are many advantages of
online banking. It is convenient, it isn't bound by operational timings, there are no geographical
barriers and the services can be offered at a miniscule cost."
Impact of E-banking on traditional services

One of the issues currently being addressed is the impact of e-banking on traditional
banking players. After all, if there are risks inherent in going into e-banking there are other risks
in not doing so. It is too early to have a firm view on this yet. Even topractitioners the future of
e-banking and its implications are unclear. It might be convenient nevertheless to outline briefly
two views that are prevalent in the market. The view that the Internet is a revolution that will
sweep away the old order holds much sway. Arguments in favor are as follows:
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E-banking transactions are much cheaper than branch or even phone transactions. This
could turn yesterday’s competitive advantage - a large branch network - into a comparative
disadvantage, allowing e-banks to undercut bricks-and-mortar banks. This is commonly known
as the "beached dinosaur" theory.
E-banks are easy to set up so lots of new entrants will arrive. ‘Old-world’ systems,
cultures and structures will not encumber these new entrants. Instead, they will be adaptable and
responsive. E-banking gives consumers much more choice. Consumers will be less inclined to
remain loyal. E-banking will lead to an erosion of the ‘endowment effect’ currently enjoyed by
the major UK banks. Deposits will go elsewhere with the consequence that these banks will have
to fight to regain and retain their customer base. This will increase their cost of funds, possibly
making their business less viable. Lost revenue may even result in these banks taking more risks
to breach the gap. Portal providers are likely to attract the most significant share of banking
profits. Indeed banks could become glorified marriage brokers. They would simply bring two
parties together – e.g. buyer and seller, payer and payee. The products will be provided by
monolines, experts in their field. Traditional banks may simply be left with payment and
settlement business – even this could be cast into doubt. Traditional banks will find it difficult to
evolve. Not only will they be unable to make acquisitions for cash as opposed to being able to
offer shares, they will be unable to obtain additional capital from the stock market. This is in
contrast to the situation for Internet firms for whom it seems relatively easy to attract investment.
There is of course another view which sees e-banking more as an evolution than a revolution. E-
banking is just banking offered via a new delivery channel. It simply gives consumers another
service (just as ATMs did). Like ATMs, e-banking will impact on the nature of branches but will
not remove their value. Experience in Scandinavia (arguably the most advanced e-banking area
in the world) appears to confirm that the future is ‘clicks and mortar’ banking. Customers want
full service banking via a number of delivery channels. The future is therefore ‘Martini Banking’
(any time, any place, anywhere, anyhow).Traditional banks are starting to fight back. The start-
up costs of an e-bank are high. Establishing a trusted brand is very costly as it requires
significant advertising expenditure in addition to the purchase of expensive technology (as
security and privacy are key to gaining customer approval). E-banks have already found that
retail banking only becomes profitable once a large critical mass is achieved. Consequently many
e-banks are limiting themselves to providing a tailored service to the better off. Nobody really
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knows which of these versions will triumph. This is something that the market will determine.
However, supervisors will need to pay close attention to the impact of e-banks on the traditional
banks, for example by surveillance of:
 Strategy
 Customer levels
 Earnings and costs
 Advertising spending
 Margins
 Funding costs
 Merger opportunities and threats, both in the UK and abroad
E-banking products
Automated Teller Machine (ATM) these are cash dispensing machine, which are
frequently seen at banks and other locations such as shopping centers and building societies.
Their main purpose is to allow customer to draw cash at any time and to provide banking
services where it would not have been viable to open another branch e.g. on university campus.
An automated teller machine or automatic teller machine (ATM) is a computerized
telecommunications device that provides a financial institution's customers a method of
financial\ transactions in a public space without the need for a human clerk or bank teller. On
most modern ATMs, the customer identifies him or herself by inserting a plastic ATM card with
a magnetic stripe or a plastic smartcard with a chip that contains his or her card number and
some security information, such as an expiration date or CVC (CVV). Security is provided by
the customer entering a personal identification number (PIN).Using an ATM, customers can
access their bank accounts in order to make cash withdrawals (or credit card cash advances) and
check their account balances. Many ATMs also allow people to deposit cash or checks, transfer
money between their bank accounts, pay bills, or purchase goods and services. Some of the
advantages of ATM to customers are:-
 Ability to draw cash after normal banking hours
 Quicker than normal cashier service
 Complete security as only the card holder knows the PIN
 Does not just operate as a medium of obtaining cash.
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 Customer can sometimes use the services of other bank ATM’s.
How E-banking can ease your life

1. Indian banks are trying to make your life easier. Not just bill payment, you can make
investments, shop or buy tickets and plan a holiday at your fingertips. In fact, sources
from ICICI Bank tell us, "Our Internet banking base has been growing at an exponential
pace over the last few years. Currently around 78 per cent of the bank's customer base is
registered for Internet banking." To get started, all you need is a computer with a modem
or other dial-up device, a checking account with a bank that offers online service and the
patience to complete about a one-page application which can usually be done online. You
can avail the following services.
2. Bill payment service
Each bank has tie-ups with various utility companies, service providers and
insurance companies, across the country. It facilitates the payment of electricity and
telephone bills, mobile phone, credit card and insurance premium bills. To pay bills, a
simple one-time registration for each biller is to be completed. Standing instructions can
be set, online to pay recurring bills, automatically. One-time standing instruction will
ensure that bill payments do not get delayed due to lack of time. Most interestingly, the
bank does not charge customers for online bill payment.
3. Fund transfer
Any amount can be transferred from one account to another of the same or any
another bank. Customers can send money anywhere in India. Payee’s account number,
his bank and the branch is needed to be mentioned after logging inthe account. The
transfer will take place in a day or so, whereas in a traditional method, it takes about three
working days. ICICI Bank says that online bill payment service and fund transfer facility
have been their most popular online services.
4. Credit card customers
Credit card users have a lot in store. With Internet banking, customers can not
only pay their credit card bills online but also get a loan on their cards. Not just this, they
can also apply for an additional card, request a credit line increase and God forbid if you
lose your credit card, you can report lost card online.
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5. Railway pass
This is something that would interest all. Indian Railways has tied up with ICICI
bank and you can now make your railway pass for local trains online. The pass will be
delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nasik,
Surat and Pune. The bank would just charge Rs10 + 12.24 percent of service tax.
6. Investing through Internet banking
Opening a fixed deposit account cannot get easier than this. An FD can be opened
online through funds transfer. Online banking can also be a great friend for lazy
investors. Now investors with interlinked demat account and bank account can easily
trade in the stock market and the amount will be automatically debited from their
respective bank accounts and the shares will be credited in their demat account.
Moreover, some banks even give the facility to purchase mutual funds directly from the
online banking system. So it removes the worry about filling those big forms for mutual
funds, they will now be just a few clicks away. Nowadays, most leading banks offer both
online banking and demat account. However if the customer have their demat account
with independent share brokers, then need to sign a special form, which will link your
two accounts.
7. Recharging your prepaid phone
Now there is no need to rush to the vendor to recharge the prepaid phone, every
time the talk time runs out. Just top-up the prepaid mobile cards by logging in to Internet
banking. By just selecting the operator's name, entering the mobile number and the
amount for recharge, the phone is again back inaction within few minutes.
8. Shopping at your fingertips
Leading banks have tie ups with various shopping websites. With a range of all
kind of products, one can shop online and the payment is also made conveniently through
the account. One can also buy railway and air tickets through Internet banking.
Functions of E-banking
a. Inquiry about the information of account
The client inquires about the details of his own account information such as the card’s /
account’s balance and the detailed historical records of the account and downloads the report list.
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b. Card accounts’ transfer
The client can achieve the fund to another person’s Credit Card in the same city.
c. Bank-securities accounts transfer
The client can achieve the fund transfer between his own bank savings accounts of his
own Credit Card account and his own capital account in the securities company.
Moreover, the client can inquire about the present balance at real time.
d. The transaction of foreign exchange
The client can trade the foreign exchange, cancel orders and inquire about the
information of the transaction of foreign exchange according to the exchange rate given by our
bank on net.
e. The b2c disbursement on net
The client can do the real-time transfer and get the feedback information about payment
from our bank when the client does shopping in the appointed web-site.
f. Client service
The client can modify the login password, information of the Credit Card and the client
information in e-bank on net.
g. Account management
The client can modify his own limits of right and state of the registered account in the
personal e-bank, such as modifying his own login password, freezing or deleting some cards and
so on.
h. Reporting the loss if the account
The client can report the loss in the local area (not nationwide) when the client‟s Credit
Card or passbook is missing or stolen.
Types of E-banking
a. Deposits, withdrawals, inter-account transfer and payment of linked accounts at an ATM;
b. Buying and paying for goods and services using debit cards or smart cards without
having to carry cash or a cheque book;
c. Using a telephone to perform direct banking-make a balance enquiry, inter-account
transfers and pay linked accounts;
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d. Using a computer to perform direct banking-make a balance enquiry, inter-account
transfers and pay linked
Advantages of E-banking
a. Account Information:
Real time balance information and summary of day‟s transaction.
b. Fund Transfer:
Manage your Supply-Chain network, effectively by using our online hand transfer
mechanism. We can affect fund transfer on a real time basis across the bank locations.
c. Request:
Make a banking request online.
d. Downloading of account statements as an excel file or text file.
e. Customers can also submit the following requests online:
Registration for account statements by e-mail daily / weekly / fortnightly / monthly basis.
 Stop payment or cheques
 Cheque book replenishment
 Demand Draft / Pay-order
 Opening of fixed deposit account
 Opening of Letter of credit
f. Customers can integrate the System with his own ERP
g. Bill Payment through Electronic Banking
h. The Electronic Shopping Mall
i. Effecting Personal Investments through Electronic Banking
j. Investing in Mutual funds
k. Initial Public Offers Online
Limitation of E-banking
a. Safety situations around ATMs.
b. Abuse of bank cards by fraudsters at ATMs.
c. Danger of giving your card number when buying on-line.
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Privatisation of commercial banks:
Privatisation has become a popular measure for solving the organisational problems of
governments by reducing the role of the state and encouraging the growth of the privates sector
enterprises. However, privatisation takes a number of forms and has been approached in various
ways during the move away from government control to other forms of ownership in developing
countries. In 1969 on 19th july an event of great political significance took palce when the then
Governement headed by Smt.Indira Gandhi, nationalised 14 major Indian banks. On 15 th April
1980 six more private banks were nationalised. Beginning 2nd October 1975, 196 Regional Rural
Banks have been established in the country. After 31 years the Government of India, introduced
a Bill in the parliament on 31th December, 2000 providing for reduction in Government equity
will be around 33%. This intent was no doubt in continuation of the process of liberalisation of
the banking industry that began in the early 1990’s. After the deregulation of interest rates,
issuing of license to new private banks liberalising of branch licensing policy, lending policy,
even with recruitment policies of banks it was natural to progress towards de-nationalisation.
Privatisation is a political process and has important economic and social implications that
not only affect enterprise performance, but also social welfare and stability. The social effects
have to be considered in any impact assessment particularly those related to employment, social
safety net measures, social privatisation that results from the extension of share ownership to
small investors and employees and the role of public utilities and services in economic and social
development. It is therefore important that the framework for evaluating policy development,
including all forms of privatisation, is clearly set in advances.
In course of banking liberalisation, Reserve bank has so far granted licenses to 9 private
sector banks upto March 2003. This apart many foreign banks are allowed to setup
branches/office in India. Simultaneously banks were encouraged to go for mergers as in the case
with Times Bank Ltd with HDFC bank and Bank of Madura Ltd with ICICI Bank.
Importance of private sector banks in India:

The private sector banks play a vital role in the Indian economy. They indirectly motivate
the public sector banks by offering a healthy competition to them. The following are their
importance:
a. Offering high degree of Professional Management:
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The private sector banks help in introducing a high degree of professional
management and marketing concept into banking. It helps the public sector banks as well
to develop similar skill and technology.
b. Creates healthy competition:
The private sector banks provide a healthy competition on general efficiency
levels in the banking system.
c. Encourages Foreign Investment:
The private sector banks especially the foreign banks have much influence on the
foreign investment in the country.
d. Helps to access foreign capital markets:
The foreign banks in the private sector help the Indian companies and the
government agencies to meet out their financial requirements from international capital
markets. This service becomes easier for them because of the presence of their head
offices/other branches in important foreign centres. In this way they help a large extent in
the promotion of trade and industry in the country.
e. Helps to develop innovation and achieve expertise:
The private sector banks are always trying to innovate new products avenues
(new schemes, services, etc.) and make the industries to achieve expertise in their
respective fields by offering quality service and guidance. They introduce new
technology in the banking service. Thus, they lead the other banks in various new fields.
For example, introduction of computerised operations, credit card business, ATM service,
etc.
Indigenous bankers and money lenders:
Indigenous Bankers
According to the Indian Central Banking Enquiry Committee, "an indigenous banker is
any individual or private firm receiving deposits and dealing in Hundies or lending money".
Their area of operation is limited, they know their customers intimately. They can watch whether
the loan granted is used for the purpose or not. Therefore these types of bankers are existing even
now. The Shroffs, the Marwaris, the Multanis, the Jains, the Sowcars, the Mahajans, Kharties,
Seths and Banias are some of leading indigenous bankers.
The indigenous bankers can be classified into the following three categories:
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i. Those whose main business is banking
ii. Those who combine their banking business with trading activities and
iii. Those who act as commission agents. (For them the banking business is a side business).
In India the majority of the indigenous bankers belong to the second category. The
number of villages in India is too large, while the size of each village is so small that any
comprehensive scheme for opening branches of commercial banks to cover all the villages is not
possible. Therefore, the indigenous bankers have to continue to play a unique part mainly in rural
finance. The indigenous bankers do not normally have contacts with other banking institutions in
the country. Because, they are operating mostly with their own funds and not depend upon
deposits. But during the busy seasons, they rediscount the bills with the commercial banks and
thus, the funds from the organised sector of the money market pass into the indigenous or the
unorganized sector of the money market. Presently, they do not have such facility from the
banking system.
Functions of Indigenous Bankers

Indigenous banking is mostly conducted as the family business. The banker inherits his
banking business from his great grandfathers. His area of operation is limited and he knows his
customers intimately. He knows all the details of his customers. Even after granting the loan, he
can watch that it is actually utilized for the purpose for which it is obtained.
Therefore, these types of bankers are existing even now and there is no other system which can
replace indigenous banking system. However, their importance has come down recently.
The indigenous bankers are functioning independently of each other. But in India, there are some
organisations of these bankers to protect their common interest, viz., Multani, Shikarpuri
Bankers' Association and Marwari Chamber of Commerce in Mumbai, Shroffs' Association in
Ahmedabad, Calcutta and Mumbai, etc.
These organisations are the indigenous bankers. These organisations are in the form of guilds
and help in settling disputes among themselves without recourse to courts.
The main functions of the indigenous bankers can be summarised as follows:
1. In India they are operating mainly in rural areas besides towns and cities.
2. They maintain branches in important towns and cities with small establishment and are
managed by their agents called 'gumastas'.
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3. They borrow funds by accepting deposits from the people (not permissible now by RBI).
4. They provide credit facilities flexibly.
5. They lend to the rural people against securing of land, jewellery, etc. or sometimes on
mere promissory notes.
6. They provide loans to small traders and industrialists who cannot offer security
acceptable to commercial banks.
7. They provide remittance facilities to their customers.
8. They draw and discount bills (known as Hundies) for their customers.
9. They have close contact with their customers and their business. Hence they extend
financial facilities according to their needs.
10. They are the advisors and consultants to their customers.
Indigenous Bankers and Commercial Banks

The indigenous bankers do not normally have contacts with other joint stock banking
institutions in the country. Because, they are operating mostly on their own funds and not depend
upon deposits from the others. Previously, during the busy seasons, they used to rediscount the
bills with commercial banks and thus, the funds from the original sector of the money market
pass into the indigenous or unorganized sector of the money market.
They also borrow from the commercial banks against demand promissory notes. The
banks extend credit facilities to the approved indigenous bankers and the banks fix limits for the
loan amount. Such facilities are not extended to them now because of RBI restrictions.
Indigenous Bankers and the RBI

Despite the predominant role played by the indigenous bankers in India's economic life'
they have always remained outside the pale of organised banking. As early as 1931, the Banking
Enquiry Committee emphasised the necessity to unify the two sectors of the Indian money
market and recommended the linking of the indigenous bankers to RBI control.
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The committee especially recommended that appropriate steps should be taken to evolve
a modern bill market on the western type in which the hundi, the traditional bill of exchange used
by the indigenous bankers would figure actively.
Since 1935, when RBI was established many attempts were made by the Bank to bring
the indigenous bankers under its orbit. RBI issued a draft scheme for direct linking of these
bankers.
RBI suggested that the indigenous bankers should give up their trading and commission
business, switch over to western system of accounting, develop the deposit side of banking
activities, submit to RBI periodical statements of their affairs, etc. RBI desired that the
ambiguous characters of the hundi should cease and that it should become a negotiable
instrument always representing a genuine trade transaction.
Besides, the Bank desired the most important of the indigenous banks to play the role of
discount houses as in London. An against these obligations, RBI promised to provide them with
all the privileges enjoyed by the scheduled banks.
In other words, indigenous bankers would be entitled to borrow from or rediscount bills
of exchange at RBI on the same terms and conditions as those available to the scheduled banks.
The indigenous bankers with their age-old traditions of independence, declined to accept the
restrictions as well as the compensating benefits of securing accommodation from RBI on
favourable terms. They disagreed with the suggestions regarding accepting deposits and giving
wide publicity to their accounts and their state of affairs.
They were unwilling to give up their trading and commission business and confine
themselves to banking business only. Besides, they did not consider that the privileges offered by
RBI were adequate enough to compensate for the loss of their non-banking business. As a result,
the scheme proposed by RBI to bring the indigenous bankers under its direct influence failed.
In 1954, the Shroff Committee recommended that RBI should take steps to encourage the
rediscounting of hundies of the indigenous bankers by RBI through the scheduled banks. Similar
proposals for the linking of the indigenous bankers with RBI and organised money market have
been put forward among others by the Bombay Shroffs Association. But RBI has decided not to
do anything further in this matter.
The Banking Enquiry Commission, 1972 believed that the best way to control indigenous
bankers is through commercial banks. The RBI should exercise indirect influence over the
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business of indigenous bankers through the medium of commercial banks by laying down certain
guidelines for their dealings with indigenous bankers.
The commercial banks, in their turn, should also call for regular returns from the
indigenous bankers and require them to maintain adequate internal inspection procedures and be
subject to external audit.
In the course of development of Banking Industry and Co-operative banking, the role of
indigenous bankers has now, been relegated to the level of 'pawn brokers'.
Soon after nationalization of major commercial banks in July 1969 and ever since the
establishment of Regional Rural Banks from 1975, Government and RBI have followed a policy
of rural banking by telling these banks to open up as many rural branches as possible.
Thanks to this policy, today around 33,500 bank branches are operating from rural areas. The
access of banking facility to rural masses made the indigenous bankers a non-entity in rural
banking. They are now moneylenders for drunkards and lazy. The decent among have converted
into Finance Companies and the more decent, into Registered Finance Companies.
Thus, the indigenous bankers have no role to play in today's rural India except in certain parts of
the country where the level of education is very poor.
Defects of Indigenous Bankers

The indigenous bankers suffer from the following defects:
1. Combining banking and non-banking business:
In India, the indigenous Bankers combine their banking business with their
commission and other non-banking business. Hence, they cannot concentrate more on the
banking business.
2. Un integrated system:
In India, they are unorganised and un integrated. They do not have proper link
with commercial banks and RBI. They operate independently.
3. Lack of sufficient capital:
In India, most of them operate mainly on their own funds. Hence, they run their
business with inadequate capital and are not able to cater to the financial needs of the
borrowers.
4. Conservative approach:
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The majority of the indigenous bankers is conservative, lack adaptability and
continues ancient methods of business. They follow the methods that they learnt from
their forefathers without any improvement in time to time.
5. Do not follow the sound policy of lending:
While lending the indigenous banker does not follow the sound principles of
lending, viz., safety, liquidity, feasibility, etc. Sometimes they grant loans against
insufficient securities or even personnel securities.
6. Less importance to discounting of handiest:
While financing to trade, they directly make cash advances and the volume of
bills discounted is small.
7. Secrecy of accounts:
The indigenous bankers maintain undue secrecy of their business. They do not
publish their trading results and activities. Their operations were shrouded with utmost
secrecy.
8. Not controlled by RBI:
The indigenous bankers are not controlled by the RBI and thus forming part of the
unorganised sector of the money market.
9. Higher rate of interest:
The rate of interest charged by indigenous bankers is high when compared with
the commercial banks.
Suggestions for Improvement

The following are the suggestions given by various committees for reforming indigenous
bankers and to link them with the organised structure of banking.
a. The indigenous bankers should give up their side trade and confine themselves to
banking properly.
b. They should modernise their methods of working and run their business like commercial
banks.
c. They should maintain their accounts properly and get them audited.
d. They should concentrate more on deposit business and encourage deposits made by rural
people.
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e. Wherever possible, they should be amalgamated into economic units which can maintain
adequate capital.
f. They should be directly linked with Reserve Bank of India.
g. There should not be any unhealthy competition between the indigenous banks and
commercial banks.
h. The facilities provided by the commercial bankers should be made available to the
indigenous bankers also the Commercial banks should freely advance funds to in-
digenous bankers on Hundies discounted by them.
i. With their close contact to intimate knowledge of the traders, they can function on par
with that of London bill brokers.
j. The Bankers Books Evidence Act may be extended to indigenous bankers also.
It may, however, be stated as a matter of caution that indigenous bankers do not
have any role to play in the modern banking which require great deal of sophistication,
computerization, large capital, greater control and regulation from RBI. Hence, the
historical facts are stated only for academic interest.
Moneylenders
Moneylenders play an important role in rural financing. The moneylenders in the villages
are of two types. They are,
a. Professional moneylenders, and
b. Non-Professional moneylenders.
The professional moneylenders are the persons whose main occupation is money lending.
They are known as Banias, Mahajans, Sowkers, etc. But, the non-professional moneylenders do
the business of money lending as a side occupation. The rate of interest charged by
moneylenders is very high and they indulge in many objectionable trade practices.
Indigenous Bankers vs. Moneylenders

The following are the important differences between Indigenous Bankers and money-
lenders:
1. Business of banking
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The Indigenous bankers practice their Moneylenders business cannot be banking business
in its true meaning. Considered as banking business.
2. Acceptance of Deposits
The Indigenous banker used to accept Moneylenders do not accept deposits on current
accounts as well as deposits but they simply fixed deposits (not permissible now). lend money
(own funds)
3. Dealing in Hundies
They do not deal in hundies.
4. Purpose of lending
They generally provide finance to agriculture and tn.de and do not finance for
consumption.
5. Security sought
They supply finance only for productive purposes on a proper security such as
agricultural goods, lands, etc.
They are prepared to lend money even without a proper security. They do not distinguish
between productive and unproductive expenditure.
6. Area of operation
They are largely based on rural areas.
7. Rate of Interest
The rates of interest charged by indigenous bankers are moderate and consistent with the
market conditions. The rates of interest charged by the moneylenders are very high.
8. Nature of Practice
They practice their business with accurate accounts and straight dealing with their
customers. They are known for their objectionable practices such as failure to issue receipts for
part payments, maintaining false accounts, etc.
9. Relationship with customers
The relationship between indigenous bankers and their customers is always cordial. They
include Shroffs, Seths, Chettis, Kothiwalas, Marwaris, etc.The moneylenders quarrel, harass and
threaten their customers and in most of the cases they do not maintain friendly relations with
their customers.
10. Examples
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They include Banias, Mahajans, Sowkars, etc. According to Dr. M. Muranjan, "The
moneylenders and indigenous bankers still continue to be the backbone of Indian rural finance.
Their part in rural finance is predominant in spite of the good progress made by the co-operative
societies and commercial banks in rural areas. The system is well suited to rural areas.
Question Banks:
Section A
1. Merchant Banking concept was first introduced by _____________
2. Commercial Banks in India is Governed by___________
3. The Factor has been derived from the Latin word _____________
4. Factoring includes management of _____________
5. In India the major 14 banks were nationalized in the year_________
6. Reserve Bank of India was started as a bank owned by _______________
7. Rationing of credit is ____________
8. E-Banking means__________
9. Give any two types of Mutual Funds
10. Customer orientation comprises of two factors ___________ and __________.
Section – B
1. Write a short note on Merchant Banking?
2. Write about Automated Teller Machine.
3. What is the importance of Mutual Funds.
4. Mention the different types of Mutual Funds.
5. What is the meaning of credit card?
6. State the different types of credit cards and their uses.
7. Write a short note on Factoring services
8. Explain the merits of E-Banking?
9. Explain the role of ATM in E-Banking.
10. What are the services rendered by Merchant Banking?
Section – C
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1. Explain the advantages and disadvantages of Credit Cards?
2. State the advantages of investing funds in a Mutual Fund?
3. Explain the importance of better customer service in banks Comment the recent trends in
Commercial banking in India?
4. Explain the following: a) Mutual Fund b) Credit card c) Customer Service
5. Explain the different types of Factoring?
6. What is E-Banking? State its advantages and disadvantages in detail?
7. Explain - Privatization of Commercial banks in detail?
8. Explain the different types of Factoring?
9. Explain - Privatization of Commercial banks in detail.
10. Explain the advantages and disadvantages of Credit Cards.
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Unit – III
Central Banks – Functions – Credit Control Measures – Quantitative and selective credit
control measures – Role of RBI in regulating and controlling banks
Central Bank
Meaning of central bank:
Central bank is the supreme monetary institution, which is at the apex of the monetary
and banking structure of a country. It is the leader of money market and as such controls,
regulates and supervises the activities of commercial banks. It is the central monetary authority,
which manages the currency and credit policy of the country and functions as a banker to the
government as well as to the commercial banks. It is difficult to define central bank accurately.
However, different definitions have been given emphasizing one or more functions of the
central bank. De Kock defined central as "a bank which constitutes the apex of the monetary and
banking structure of the country."
According to Vera Smith, "the primary definition of central bank is a banking system in
which a single bank has either a complete or a residuary monopoly of note issue.”
According to the Bank for International Settlements, a central bank is defined as "the
bank in any country to which has been entrusted the duty of regulating the volume of currency
and credit in that country."
In the words of Kent, a Central bank is an "institution charged with the responsibility of
managing the expansion and contraction of the volume of money in the interest of general public
welfare."
Nature of central bank:

The basic nature of Central Banking can be enumerated as follows:
1. The Central Bank does not aim at profits but aims at national welfare.
2. The Central Bank does not compete with the member banks.
3. The Central Bank has special relationship with government and with commercial banks.
4. The Central Bank is generally free from political influence.
5. The Central Bank is the apex body of the banking structure of the country.
6. The Central Bank should have overall control over the financial system.
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Functions of central bank:
The central bank generally performs the following functions:
1. Bank of Note Issue:
The central bank has the sole monopoly of note issue in almost every country. The
currency notes printed and issued by the central bank become unlimited legal tender throughout
the country.
In the words of De Kock, "The privilege of note-issue was almost everywhere associated
with the origin and development of central banks."
However, the monopoly of central bank to issue the currency notes may be partial in
certain countries. For example, in India, one rupee notes are issued by the Ministry of Finance
and all other notes are issued by the Reserve Bank of India.
The main advantages of giving the monopoly right of note issue to the central bank are
given below:
a. It brings uniformity in the monetary system of note issue and note circulation.
b. The central bank can exercise better control over the money supply in the country.
It increases public confidence in the monetary system of the country.
c. Monetary management of the paper currency becomes easier. Being the supreme
bank of the country, the central bank has full information about the monetary
requirements of the economy and, therefore, can change the quantity of currency
accordingly.
d. It enables the central bank to exercise control over the creation of credit by the
commercial banks.
e. The central bank also earns profit from the issue of paper currency.
f. Granting of monopoly right of note issue to the central bank avoids the political
interference in the matter of note issue.
2. Banker, Agent and Adviser to the Government:
The central bank functions as a banker, agent and financial adviser to the government,
a. As a banker to government, the central bank performs the same functions for the
government as a commercial bank performs for its customers. It maintains the
accounts of the central as well as state government; it receives deposits from
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government; it makes short-term advances to the government; it collects cheques
and drafts deposited in the government account; it provides foreign exchange
resources to the government for repaying external debt or purchasing foreign
goods or making other payments,
b. As an Agent to the government, the central bank collects taxes and other
payments on behalf of the government. It raises loans from the public and thus
manages public debt. It also represents the government in the international
financial institutions and conferences,
c. As a financial adviser to the lent, the central bank gives advise to the government
on economic, monetary, financial and fiscal ^natters such as deficit financing,
devaluation, trade policy, foreign exchange policy, etc.
3. Bankers' Bank:
The central bank acts as the bankers' bank in three capacities:
a. Custodian of the cash preserves of the commercial banks;
b. As the lender of the last resort; and
c. As clearing agent. In this way, the central bank acts as a friend, philosopher and
guide to the commercial banks
As a custodian of the cash reserves of the commercial banks the central bank maintains the cash
reserves of the commercial banks. Every commercial bank has to keep a certain percentage of its
cash balances as deposits with the central banks. These cash reserves can be utilised by the
commercial banks in times of emergency.
The centralization of cash reserves in the central bank has the following advantages:
1. Centralised cash reserves inspire confidence of the public in the banking system of the
country.
2. Centralised cash reserves provide the basis of a larger and more elastic credit structure
than if these amounts were scattered among the individual banks.
3. Centralised reserves can be used to the fullest possible extent and in the most effective
manner during the periods of seasonal strains and financial emergencies.
4. Centralised reserves enable the central bank to provide financial accommodation to the
commercial banks which are in temporary difficulties. In fact the central bank functions
as the lender of the last resort on the basis of the centralised cash reserves.
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5. The system of centralised cash reserves enables the central bank to influence the creation
of credit by the commercial banks by increasing or decreasing the cash reserves through
the technique of variable cash-reserve ratio.
6. The cash reserves with the central bank can be used to promote national welfare.
4. Lender of Last Resort:
As the supreme bank of the country and the bankers' bank, the central bank acts as the
lender of the last resort. In other words, in case the commercial banks are not able to meet their
financial requirements from other sources, they can, as a last resort, approach the central bank for
financial accommodation. The central bank provides financial accommodation to the commercial
banks by rediscounting their eligible securities and exchange bills.
The main advantages of the central bank's functioning as the lender of the last resort are :
1. It increases the elasticity and liquidity of the whole credit structure of the economy.
2. It enables the commercial banks to carry on their activities even with their limited cash
reserves.
3. It provides financial help to the commercial banks in times of emergency.
4. It enables the central bank to exercise its control over banking system of the country.
5. Clearing Agent:
As the custodian of the cash reserves of the commercial banks, the central bank acts as
the clearing house for these banks. Since all banks have their accounts with the central bank, the
central bank can easily settle the claims of various banks against each other with least use of
cash. The clearing house function of the central bank has the following advantages:
a. It economies the use of cash by banks while settling their claims and counter-claims.
b. It reduces the withdrawals of cash and these enable the commercial banks to create credit
on a large scale.
c. It keeps the central bank fully informed about the liquidity position of the commercial
banks.
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1. Custodian of Cash Reserves of Commercial Banks:
Commercial banks are required by law to keep reserves equal to a certain percentage of
both time and demand deposits liabilities with the central banks. It is on the basis of these
reserves that the central bank transfers funds from one bank to another to facilitate the clearing of
cheques.
Thus the central bank acts as the custodian of the cash reserves of commercial banks and
helps in facilitating their transactions. There are many advantages of keeping the cash reserves of
the commercial banks with the central bank, according to De Kock.
In the first place, the centralisation of cash reserves in the central bank is a source of great
strength to the banking system of a country. Secondly, centralised cash reserves can serve as the
basis of a large and more elastic credit structure than if the same amount were scattered among
the individual banks.
Thirdly, centralised cash reserves can be utilised fully and most effectively during periods of
seasonal strains and in financial crises or emergencies. Fourthly, by varying these cash reserves
the central bank can control the credit creation by commercial banks. Lastly, the central bank can
provide additional funds on a temporary and short term basis to commercial banks to overcome
their financial difficulties.
2. Controller of Credit:
The most important function of the central bank is to control the credit creation power of
commercial bank in order to control inflationary and deflationary pressures within this economy.
For this purpose, it adopts quantitative methods and qualitative methods. Quantitative methods
aim at controlling the cost and quantity of credit by adopting bank rate policy, open market
operations, and by variations in reserve ratios of commercial banks.
Qualitative methods control the use and direction of credit. These involve selective credit
controls and direct action. By adopting such methods, the central bank tries to influence and
control credit creation by commercial banks in order to stabilise economic activity in the
country.
Besides the above noted functions, the central banks in a number of developing countries
have been entrusted with the responsibility of developing a strong banking system to meet the
expanding requirements of agriculture, industry, trade and commerce.
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Accordingly, the central banks possess some additional powers of supervision and control over
the commercial banks. They are the issuing of licences; the regulation of branch expansion; to
see that every bank maintains the minimum paid up capital and reserves as provided by law;
inspecting or auditing the accounts of banks; to approve the appointment of chairmen and
directors of such banks in accordance with the rules and qualifications; to control and
recommend merger of weak banks in order to avoid their failures and to protect the interest of
depositors; to recommend nationalisation of certain banks to the government in public interest; to
publish periodical reports relating to different aspects of monetary and economic policies for the
benefit of banks and the public; and to engage in research and train banking personnel etc..
Meaning of credit control:

Credit control' is the system used by a business to make certain that it gives credit only to
customers who are able to pay, and that customers pay on time.Credit control is part of the
Financial controls that are employed by businesses particularly in manufacturing to ensure that
once sales are made they are realised as cash or liquid resources.
Credit Control is a critical system of control that prevents the business from becoming
illiquid due to improper and un-coordinated issuance of credit to customers or even lending in a
Financial institution. Credit control has a number of sections that include - credit approval, credit
limit approval, dispatch approvals and well as collection process.
In a large business a credit process will be run by a senior manager and will include
processes as such as Know Your Customer(KYC), Account Opening, Approval of credit and
credit limits (both in terms of the amounts and the terms e.g. 30 Days, 30 Days net), Extension of
Credit and effecting collection action.
Credit Control will normally report to the Finance Director or Risk Management Committee!
Methods of credit control

The various methods or instruments of credit control used by the central bank can be
broadly classified into two categories: (a) quantitative or general methods, and (b) qualitative or
selective methods.
1. Quantitative or General Methods:
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The methods used by the central bank to influence the total volume of credit in the banking
system, without any regard for the use to which it is put, are called quantitative or general
methods of credit control. These methods regulate the lending ability of the financial sector of
the whole economy and do not discriminate among the various sectors of the economy. The
important quantitative methods of credit control are:
a. bank rate,
b. open market operations, and
c. Cash-reserve ratio.
Bank Rate or Discount Rate Policy:

The bank rate or the discount rate is the rate fixed by the central bank at which it
rediscounts first class bills of exchange and government securities held by the commercial banks.
The bank rate is the interest rate charged by the central bank at which it provides rediscount to
banks through the discount window. The central bank controls credit by making variations in the
bank rate. f the need of the economy is to expand credit, the central bank lowers the bank rate.
Borrowing from the central bank becomes cheap and easy. So the commercial banks will borrow
more. They will, in turn, advance loans to customers at a lower rate. The market rate of interest
will be reduced.
This encourages business activity, and expansion of credit follows which encourages the
rise in prices. The opposite happens when credit is to be contracted in the economy. The central
bank raises the bank rate which makes borrowing costly from it. So the banks borrow less. They,
in turn, raise their lending rates to customers.
The market rate of interest also rises because of the tight money market. This discourages
fresh loans and puts pressure on borrowers to pay their past debts. This discourages business
activity. There is contraction of credit which depresses the rise in price. Thus lowering the bank
rate offsets deflationary tendencies and raising the bank rate controls inflation.
Limitations of Bank Rate Policy:
The efficacy of the bank rate policy as an instrument of controlling credit is limited by
the following factors:
1. Market Rates do not change with Bank Rate:
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The success of the bank rate policy depends upon the extent to which other market rates
of interest change along with the bank rate. The theory of bank rate policy pre-supposes that
other rates of interest prevailing in the money market change in the direction of the change in the
bank rate. If this condition is not satisfied, the bank rate policy will be totally ineffective as an
instrument of credit control.
2. Wages, Costs and Prices not Elastic:
The success of the bank rate policy requires elasticity not only in interest rates but also in
wages, costs and prices. It implies that when suppose the bank rate is raised wages, costs and
prices should automatically adjust themselves to a lower level. But this was possible only under
gold standard. Now-a-days the emergence of strong trade unions has made wages rigid during
deflationary trends. And they also lag behind when there are inflationary tendencies because it
takes time for unions to get a wage rise from employers. So the bank rate policy cannot be a
success in a rigid society.
3. Banks do not approach Central Bank:
The effectiveness of the bank rate policy as a tool of credit control is also limited by the
behaviour of the commercial banks. It is only if the commercial banks approach the central bank
for rediscounting facilities that this policy can be a success. But the banks keep with them large
amounts of liquid assets and do not find it necessary to approach the central bank for financial
help.
4. Bills of Exchange not used:
As a corollary to the above, the effectiveness of the bank rate policy depends on the
existence of eligible bills of exchange. In recent years, the bill of exchange as an instrument of
financing commerce and trade has fallen into disuse. Businessmen and banks prefer cash credit
and overdrafts. This makes the bank rate policy less effective for controlling credit in the
country.
5. Pessimism or Optimism:
The efficacy of the bank rate policy also depends on waves of pessimism or optimism
among businessmen. If the bank rate is raised, they will continue to borrow even at a higher rate
of interest if there are boom conditions in the economy, and prices are expected to rise further.
On the other hand, a reduction in the bank rate will not induce them to borrow during periods of
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falling prices. Thus businessmen are not very sensitive to changes in interest rates and they are
influenced more by business expectations.
6. Power to Control Deflation Limited:
Another limitation of the bank rate policy is that the power of a central bank to force a
reduction in the market rates of interest is limited. For instance, a lowering of bank rate below 3
per cent will not lead to a decline in the market rates of interest below 3 per cent. So the bank
rate policy is ineffective in controlling deflation. It may, however, control inflationary tendencies
by forcing an increase in the market rates of interest.
7. Level of Bank Rate in relation to Market Rate:
The efficacy of the discount rate policy as an instrument of credit control depends upon
its level in relation to the market rate. If in a boom the bank rate is not raised to such an extent as
to make borrowing costly from the central bank, and it is not lowered during a recession so as to
make borrowing cheaper from it, it would have a destabilising effect on economic activity.
8. Non-Discriminatory:
The bank rate policy is non-discriminatory because it does not distinguish between
productive and unproductive activities in the country.
9. Not Successful in Controlling BOP Disequilibrium:
The bank rate policy is not effective in controlling balance of payments disequilibrium in
a country because it requires the removal of all restrictions on foreign exchange and movements
of international capital.
On the other hand, when the central bank aims at an expansionary policy during a
recessionary period, it purchases government securities from the commercial banks and
institution dealing with such securities. The central bank pays the sellers its cheques drawn
against itself which are deposited into their accounts with the commercial banks. The reserves of
the latter increase with the central bank which are just like cash. As a result the supply curve of
bank money shifts to the right from S to S2 showing an increase in the supply of bank money
from В to C, as shown in Figure 2. The banks will now lend more at the given rate of interest, r.
Another aspect of the open market policy is that when the supply of money changes as a result of
open market operations, the market rates of interest also change. A decrease in the supply of
bank money through the sale of securities will have the effect of raising the market interest rates.
On the other hand, an increase in the supply of bank money through the purchase of securities
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will reduce the market interest rates. Thus open market operations have a direct influence on the
market rates of interest also.
Limitations of Open Market Operations:
The effectiveness of open market operations as a method of credit control is dependent
upon the existence of a number of conditions the absence of which limits the full working of this
policy.
1. Lack of Securities Market:
The first condition is the existence of a large and well-organised security market. This
condition is very essential for open market operations because without a well developed security
market the central bank will not be able to buy and sell securities on a large scale, and thereby
influence the reserves of the commercial banks. Further, the central bank must have enough
saleable securities with it.
2. Cash Reserve Ratio not Stable:
The success of open market operations also requires the maintenance of a stable cash-
reserve ratio by the commercial bank. It implies that when the central bank sells or buys
securities, the reserves of the commercial banks decrease or increase accordingly to maintain the
fixed ratio. But usually the banks do not stick to the legal minimum reserve ratio and keep a
higher ratio than this. This makes open market operations less effective in controlling the volume
of credit.
3. Penal Bank Rate:
According to Prof. Aschheim, one of the necessary conditions for the success of open
market operations is a penal bank rate. If there is no penal discount rate fixed by the central bank,
the commercial banks can increase their borrowings from it when the demand for credit is strong
on the part of the latter. In this situation, the scale of securities by the central bank to restrict
monetary expansion will be unsuccessful. But if there is a penal rate of discount, which is a rate
higher than the market rates of interest, the banks will be reluctant to approach the central bank
for additional financial help easily.
4. Banks Act Differently:
Open market operations are successful only if the people also act the way the central
bank expects them. When the central bank sells securities, it expects the business community and
financial institutions to restrict the use of credit. If they simultaneously start dishoarding money,
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the act of selling securities by the central banks will not be a success in restricting credit.
Similarly, the purchase of securities by the central bank will not be effective if people start
hoarding money.
5. Pessimistic or Optimistic Attitude:
Pessimistic or optimistic attitude of the business community also limits the operation of
open market policy. When the central bank purchases securities and increases the supply of bank
money, businessmen may be unwilling to take loans during a depression because of the
prevailing pessimism among them.
As aptly put by Crowther, banks may place plenty of water before the public horse, but
the horse cannot be forced to drink, if it is afraid of loss through drinking water. On the other
hand, if businessmen are optimistic during a boom, the sale of securities by the central bank to
contract the supply of bank money and even the rise in market rates cannot discourage them from
getting loans from the banks. On the whole, this policy is more successful in controlling booms
than depressions.
6. Velocity of Credit Money not Constant:
The success of open market operations depends upon a constant velocity of circulation of
bank money. But the velocity of credit money is not constant. It increases during periods of brisk
business activity and decreases in periods of falling prices. Thus a policy of contracting credit by
the sale of securities by the central bank may not be successful by increased velocity of
circulation of bank credit.
Despite these limitations, open market operations are more effective than the other
instruments of credit control available with the central bank. This method is being successfully
used for controlling credit in developed countries where the securities market is highly
developed.
Variable Reserve Ratio:

Variable reserve ratio (or required reserve ratio or legal minimum requirements), as a
method of credit control was first suggested by Keynes in his Treatise on Money (1930) and was
adopted by the Federal Reserve System of the United States in 1935.
Every commercial bank is required by law to maintain a minimum percentage of its deposits
with the central bank. The minimum amount of reserve with the central bank may be either a
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percentage of its time and demand deposits separately or of total deposits. Whatever the amount
of money remains with the commercial bank over and above these minimum reserves is known
as the excess reserves.
It is on the basis of these excess reserves that the commercial bank is able to create credit. The
larger the size of the excess reserves, the greater is the power of a bank to create credit, and vice
versa. It can also be said that the larger the required reserve ratio, the lower the power of a bank
to create credit, and vice versa.
When the central bank raises the reserve ratio of the commercial banks, it means that the
latter are required to keep more money with the former. Consequently, the excess reserves with
the commercial banks are reduced and they can lend less than before.
This can be explained with the help of the deposit multiplier formula. If a commercial
bank has Rs 100 crores as deposits and 10 per cent is the required reserve ratio, then it will have
to keep Rs 10 crores with the central bank. Its excess reserves will be Rs 90 crores. It can thus
create credit to the extent of Rs 900 crores in this way ER/RRr where ER is the excess reserves,
and RRr the required reserve ratio… 90×1/10% = 90 x 100/10 = Rs 900 crores. When the central
bank raises the required reserve ratio to 20 per cent, the bank’s power to create credit will be
reduced to Rs 400 crores = 80 x 100/20.
On the contrary, if the central bank wants to expand credit, it lowers the reserve ratio so as to
increase the credit creation power of the commercial banks. Thus by varying the reserve ratio of
the commercial banks the central bank influences their power of credit creation and thereby
controls credit in the economy.
Limitations of Variable Reserve Ratio:

The variable reserve ratio as a method of credit control has a number of limitations.
1. Excess Reserves:
The commercial banks usually possess large excessive reserves which make the policy of
variable reserve ratio ineffective. When the banks keep excessive reserves, an increase in the
reserve ratio will not affect their lending operations. They will stick to the legal minimum
requirements of cash to deposits and at the same time continue to create credit on the strength of
the excessive reserves.
2. Clumsy Method:
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It is a clumsy method of credit control as compared with open market operations. This is
because it lacks definiteness in the sense that it is inexact and uncertain as regards changes not
only in the amounts of reserves but also the place where these changes can be made effective. It
is not possible to tell “how much of active or potential reserve base” has been affected by
changes in the reserve ratio. Moreover, the changes in reserves involve far larger sums than in
the case of open market operations.
3. Discriminatory:
It is discriminatory and affects different banks differently. A rise in the required reserve
ratio will not affect those banks which have large excess reserves. On the other hand, it will hit
hard the banks with little or no excess reserves. This policy is also discriminatory in the sense
that non-banking financial intermediaries like co-operative societies, insurance companies,
building societies, development banks, etc. are not affected by variations in reserve requirements,
though they compete with the commercial banks for lending purposes.
4. Inflexible:
This policy is inflexible because the minimum reserve ratio fixed by the central banks is
applicable to banks located in all regions of the country. More credit may be needed in one
region where there is monetary stringency, and it may be superfluous in the other region. Raising
the reserve ratio for all banks is not justified in the former region though it is appropriate for the
latter region.
5. Business Climate:
The success of the method of credit control also depends on the business climate in the
economy. If the businessmen are pessimistic about the future, as under a depression, even a
sizable lowering of the reserve ratio will not encourage them to ask for loan. Similarly, if they
are optimistic about profit expectations, a considerable rise in the variable ratio will not prevent
them from asking for more loans from the banks.
6. Stability of Reserve Ratio:
The effectiveness of this technique depends upon the degree of stability of the reserve
ratio. If the commercial banks are authorised to keep widely fluctuating ratio, say between 10 per
cent to 17 per cent and change in the upper or lower limit will have no effect on the credit
creation power of the banks.
7. Other Factors:
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The reserve ratio held by the commercial banks is determined not only by legal
requirements but also by how much they want to hold in relation to their deposits in addition to
such requirements. This, in turn, will depend upon their expectations about future developments,
their competition with other banks, and so on.
8. Depressive Effect:
The variable reserve ratio has been criticised for exercising a depressive effect on the
securities market. When the central bank suddenly directs the commercial banks to increase their
reserve ratios, they may be forced to sell securities to maintain that ratio. This widespread selling
of securities will bring down the prices of securities and may even lead to an utter collapse of the
bond market.
9. Rigid:
It is rigid in its operations because it does not distinguish between desired and undesired
credit flows and can affect them equally.
10. Not for Small Changes:
This method is more like an axe than a scalpel. It cannot be used for day-today and
week-to-week adjustments but can be used to bring about large changes in the reserve positions
of the commercial banks. Thus it cannot help in ‘fine tuning’ of the money and credit systems by
making small changes.
Variable Reserve Ratio vs. Open Market Operations:

There are divergent views about the superiority of variable reserve ratio over open market
operations. To those who consider the former as a superior instrument of credit control, it is “a
battery of the most improved type that a central bank can add to its armoury.” They give the
following arguments.
The variable reserve ratio affects the power of credit creation of the commercial banks
more directly, immediately, and simultaneously than open market operations. The central bank
has simply to make a declaration for changing the reserve requirements of the banks and they
have to implement it immediately. But open market operations require sale or purchase of
securities which is a time consuming process.
When the central bank sells securities to the banks to control inflation, they are forced to buy
them. They are, therefore, prevented from giving more loans to the private credit market. On the
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other hand, if the reserve ratio is raised, the banks will be required to keep larger balances with
the central bank.
They will also be faced with reduced earnings. They will, therefore, be induced to sell
government securities and give more loans to the private credit market. Thus open market
operations are more effective for controlling inflation than the change in reserve ratio.
In another sense, open market operations are more effective as an instrument of credit control
than variations in the reserve ratio. In every country there are non-banking financial
intermediaries which deal in securities, bonds, etc. and also advance loans and accept deposits
from the public.
But they are outside the legal control of the central bank. Since they also deal in
government securities, open market sale and purchase of such securities by the central bank also
affect their liquidity position. But they are not required to keep any reserves with the central
bank, unlike the commercial banks.
Again, variations in the reserve ratio are meant for making major and long-run
adjustments in the liquidity position of the commercial banks. They are, therefore, not suited for
making short-run adjustments in the volume of available bank reserves, as are done under open
market operations.
The effectiveness of open market operations depends upon the existence of a broad and
well-organised market for securities. Thus this instrument of credit control cannot be operative in
countries which lack such a market. On the other hand, the method of variable reserve ratio does
not require any such market for its operation and is applicable equally in developed and
underdeveloped markets, and is thus superior to open market operations.
Further, since open market operations involve the sale and purchase of securities on a
day-to-day and week-to-week basis, the commercial banks and the central bank which deal in
them are likely to incur losses. But variations in the reserve ratio do not involve any tosses.
Despite the superiority of variable reserve ratio over open market operations, economists
like Prof. Aschheim have argued that open market operations are more effective as a tool in
controlling credit than variable reserve ratio. Therefore, changes in the reserve ratio do not have
any effect on their lending power. Thus open market operations are superior to variable ratio
because they also influence non-banking financial institutions.
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Further, as a technique, reserve ratio can only influence the volume of reserves of the
commercial banks. On the other hand, open market operations can influence not only the
reserves of the commercial banks but also the pattern of the interest rate structure. Thus open
market operations are more effective in influencing the reserves and the credit creation power of
the banks than variations in reserve ratio.
Last but not the least, the technique of variations in reserve ratio is clumsy, inflexible,
and discriminatory whereas that of open market operations is simple, flexible and non-
discriminatory in its effects.
It can be concluded from the above discussion of the relative merits and demerits of the
two techniques that in order to have the best of the two, they should be used jointly rather than
independently. If the central bank raises the reserve ratio, it should simultaneously start
purchasing, and not selling, securities in those areas of the country where there is monetary
stringency. On the contrary, when the central bank lowers the reserve requirements of the banks,
it should also sell securities to those banks which already have excess reserves with them, and
have been engaged in excessive lending. The joint application of the two policies will not be
contradictory but complementary to each other.
2. Qualitative or Selective Methods:

The methods used by the central bank to regulate the flows of credit into particular directions of
the economy are called qualitative or selective methods of credit control. Unlike the quantitative
methods, which affect the total volume of credit, the qualitative methods affect the types of
credit extended by the commercial banks; they affect the composition rather than the size of
credit in the economy. The important qualitative or selective methods of credit control are;
 Marginal requirements,
 Regulation of consumer credit,
 Control through directives,
 Credit rationing,
 Moral suasion and publicity, and
 Direct action.
1. Regulation of Margin Requirements:
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This method is employed to prevent excessive use of credit to purchase or carry
securities by speculators. The central bank fixes minimum margin requirements on loans
for purchasing or carrying securities. They are, in fact, the percentage of the value of the
security that cannot be borrowed or lent. In other words, it is the maximum value of loan
which a borrower can have from the banks on the basis of the security (or collateral).
For example, if the central bank fixes a 10 per cent margin on the value of a
security worth Rs 1.0, then the commercial bank can lend only Rs 900 to the holder of the
security and keep Rs 100 with it. If the central bank raises the margin to 25 per cent, the
bank can lend only Rs 750 against a security of Rs 1.0. If the central bank wants to curb
speculative activities, it will raise the margin requirements. On the other hand, if it wants
to expand credit, it reduces the margin requirements.
It’s Merits:
This method of selective credit control has certain merits which make it unique.
1. It is non-discriminatory because it applies equally to borrowers and lenders. Thus it limits
both the supply and demand for credit simultaneously.
2. It is equally applicable to commercial banks and non-banking financial intermediaries.
3. It increases the supply of credit for more productive uses.
4. It is a very effective anti-inflationary device because it controls the expansion of credit in
those sectors of the economy which breed inflation.
5. It is simple and easy to administer since this device is meant to regulate the use of credit
for specific purposes.
6. But the success of this technique requires that there are no leakages of bank credit for
non-purpose loans to speculators.
It’s Weaknesses:
However, a number of leakages have appeared in this method over the years.
1. A borrower may not show any intention of purchasing stocks with his borrowed funds
and pledge other assets as security for the loan. But it may purchase stocks through some
other source.
2. The borrower may purchase stocks with cash which he would normally use to purchase
materials and supplies and then borrow money to finance the materials and supplies
already purchased, pledging the stocks he already has as security for the loan.
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3. Lenders, other than commercial banks and brokers, who are not subject to margin
requirements, may increase their security loans when commercial banks and brokers are
being controlled by high margin requirements. Further, some of these non-regulated
lenders may be getting the funds they lent to finance the purchase of securities from
commercial banks themselves.
4. Despite these weaknesses in practice, margin requirements are a useful device of credit
control.
2. Regulation of Consumer Credit:
This is another method of selective credit control which aims at the regulation of
consumer instalment credit or hire-purchase finance. The main objective of this
instrument is to regulate the demand for durable consumer goods in the interest of
economic stability. The central bank regulates the use of bank credit by consumers in
order to buy durable consumer goods on instalments and hire-purchase. For this purpose,
it employs two devices: minimum down payments, and maximum periods of repayment.
Suppose a bicycle costs Rs 500 and credit is available from the commercial bank
for its purchase. The central bank may fix the minimum down payment to 50 per cent of
the price, and the maximum period of repayment to 10 months. So Rs 250 will be the
minimum which the consumer will have to pay to the bank at the time of purchase of the
bicycle and the remaining amount in ten equal instalments of Rs 25 each. This facility
will create demand tor bicycles.
The bicycle industry would expand along with the related industries such as tyres,
tubes, spare parts, etc. and thus lead to inflationary situation in this and other sectors of
the economy. To control it, the central bank raises the minimum down payment to 70 per
cent and the maximum period of repayment to three instalements. So the buyer of a
bicycle will have to pay Rs 350 in the beginning and remaining amount in three
installments of Rs 50 each. Thus if the central bank finds slump in particular industries of
the economy, it reduces the amount of down payments and increases the maximum
periods of repayment.
Reducing the down payments tends to increase the demand for credit for
particular durable consumer goods on which the central bank regulation is applied.
Increasing the maximum period of repayment, which reduces monthly payments, tends to
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increase the demand for loans, thereby encouraging consumer credit. On the other hand,
the central bank raises the amount of down payments and reduces the maximum periods
of repayment in boom.
The regulation of consumer credit is more effective in controlling credit in the
case of durable consumer goods during both booms and slumps, whereas general credit
controls fail in this area. The reason is that the latter operate with a time lag. Moreover,
the demand for consumer credit in the case of durable consumer goods is interest
inelastic. Consumers are motivated to buy such goods under the influence of the
demonstration effect and the rate of interest has little consideration for them.
Its drawbacks.
It is cumbersome, technically defective and difficult to administer because it has a narrow
base. In other words, it is applicable to a particular class of borrowers whose demand for credit
forms an insignificant part of the total credit requirements. It, therefore, discriminates between
different types of borrowers. This method affects only persons with limited incomes and leaves
out higher income groups. Finally, it tends to malallocate resources by shifting them away from
industries which are covered by credit regulations and lead to the expansion of other industries
which do not have any credit restrictions.
3. Rationing of Credit:
Rationing of credit is another selective method of controlling and regulating the
purpose for which credit is granted by the commercial banks. It is generally of four types.
The first is the variable portfolio ceiling. According to this method, the central bank fixes
a ceiling on the aggregate portfolios of the commercial banks and they cannot advance
loans beyond this ceiling. The second method is known as the variable capital assets
ratio. This is the ratio which the central bank fixes in relation to the capital of a
commercial bank to its total assets. In keeping with the economic exigencies, the central
bank may raise or lower the portfolio ceiling, and also vary the capital assets ratio.
Rationing of credit has been used very effectively in Russia and Mexico. It is,
therefore, ‘a logical concomitant of the intensive and extensive planning adopted in
regimented economies.’ The technique also involves discrimination against larger banks
because it restricts their lending power more than the smaller banks. Lastly, by rationing
of credit for selective purposes, the central bank ceases to be the lender of the last resort.
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Therefore, central banks in mixed economies do not use this technique except under
extreme inflationary situations and emergencies.
4. Direct Action:
Central banks in all countries frequently resort to direction action against
commercial banks. Direction action is in the form of “directives” issued from time to
time to the commercial banks to follow a particular policy which the central bank wants
to enforce immediately. This policy may not be used against all banks but against erring
banks.
For example, the central bank refuses rediscounting facilities to certain banks
which may be granting too much credit for speculative purposes, or in excess of their
capital and reserves, or restrains them from granting advances against the collateral of
certain commodities, etc. It may also charge a penal rate of interest from those banks
which want to borrow from it beyond the prescribed limit. The central bank may even
threaten a commercial bank to be taken over by it in case it fails to follow its policies and
instructions.
But this method of credit suffers from several limitations which have been
enumerated by De Kock as “the difficulty for both central and commercial bank to make
clear-cut distinctions at all times and in all cases between essential and non-essential
industries, productive and unproductive activities, investment and speculation, or
between legitimate and excessive speculation or consumption; the further difficulty of
controlling the ultimate use of credit by second, third or fourth parties; the dangers
involved in the division of responsibility between the central bank and commercial bank
for the soundness of the lending operations of the latter; and the possibility of forfeiting
the whole-hearted and active co-operations of the commercial banks as a result of undue
control and intervention.”
5. Moral Suasion:
Moral suasion in the method of persuasion, of request, of informal suggestion,
and of advice to the commercial bank usually adopted by the central bank. The executive
head of the central bank calls a meeting of the heads of the commercial banks wherein he
explains them the need for the adoption of a particular monetary policy in the context of
the current economic situation, and then appeals to them to follow it. This “jawbone
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control” or “slaps on the wrist” method has been found to be highly effective as a
selective method of credit control in India, New Zealand, Canada and Australia, though it
failed in the USA.
It’s Limitations:
Moral suasion is a method “without any teeth” and hence its effectiveness is limited.
1. Its success depends upon the extent to which the commercial banks accept the central
bank as their leader and need accommodation from it.
2. If the banks possess excessive reserves they may not follow the advice of the central
bank, as is the case with the commercial banks in the USA.
3. Further, moral suasion may not be successful during booms and depressions when the
economy is passing through waves of optimism and pessimism respectively. The bank
may not heed to the advice of the central bank in such a situation.
4. In fact, moral suasion is not a control device at all, as it involves cooperation by the
commercial banks rather than their coercion.
5. It may, however, be a success where the central bank commands prestige on the strength
of the wide statutory powers vested in it by the government of the country.
6. Publicity:
The central bank also uses publicity as an instrument of credit control. It publishes
weekly or monthly statements of the assets and liabilities of the commercial bank for the
information of the public. It also publishes statistical data relating to money supply,
prices, production and employment, and of capital and money market, etc. This is another
way of exerting moral pressure on the commercial bank. The aim is to make the public
aware of the policies being adopted by the commercial bank vis-a-vis the central bank in
the light of the prevailing economic conditions in the country.
It cannot be said with definiteness about the success of this method. It
presupposes the existence of an educated and knowledgeable public about the monetary
phenomena. But even in advanced countries, the percentage of such persons is negligible.
It is, therefore, highly doubtful if they can exert any moral pressure on the banks to
strictly follow the policies of the central bank. Hence, publicity as an instrument of
selective credit control is only of academic interest.
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Limitations of Selective Credit Controls:
Though regarded superior to quantitative credit controls, yet selective credit controls are
not free from certain limitations.
1. Limited Coverage:
Like general credit controls, selective credit controls have a limited coverage.
They are only applicable to the commercial banks but not to non-banking financial
institutions. But in the case of the regulation of consumer credit which is applicable both
to banking and non-banking institutions, it becomes cumbersome to administer this
technique.
2. No Specificity:
Selective credit controls fail to fulfill the specificity function. There is no
guarantee that the bank loans would be used for the specific purpose for which they are
sanctioned.
3. Difficult to distinguish between Essential and Non-essential Factors:
It may be difficult for the central bank to distinguish precisely between essential
and non-essential sectors and between speculative and productive investment for the
purpose of enforcing selective credit controls. The same reasoning applies to the
commercial banks for the purpose of advancing loans unless they are specifically laid
down by the central bank.
4. Require Large Staff:
The commercial banks, for the purpose of earning large profits, may advance
loans for purposes other than laid down by the central bank. This is particularly so if the
central bank does not have a large staff to check minutely the accounts of the commercial
banks. As a matter of fact, no central bank can afford to check their accounts. Hence
selective credit controls are liable to be ineffective in the case of unscrupulous banks.
5. Discriminatory:
Selective controls unnecessarily restrict the freedom of borrowers and lenders.
They also discriminate between different types of borrowers and banks. Often small
borrowers and small banks are hit harder by selective control than big borrowers and
large banks.
6. Malallocation of Resources:
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Selective credit controls also lead to malallocation of resources when they are
applied to selected sectors, areas and industries while leaving others to operate freely.
They place undue restrictions on the freedom of the former and affect their production.
7. Not Successful in Unit Banking:
Unit banks being independent one-office banks in the USA operate on a small
scale in small towns and meet the financial needs of the local people. Such banks are not
affected by the selective credit controls of the FRS (central bank of the USA) because
they are able to finance their activities by borrowing from big banks. So this policy is not
effective in unit banking.
Reserve bank of India

Introduction
The Reserve Bank of India is India's central bank. It is the apex monetary institution
which supervise, regulates controls and develops the monetary and financial system of the
country. The Reserve bank was established on April 1, 1935 under the Reserve Bank of India
Act, 1934. Initially, it was constituted as a private shareholders* bank with a fully paid-up
capital of Rs. 5 crore. But, it was nationalised on January 1, 1949.
Management
The management of the Reserve Bank is under the control of Central Board of Directors
consisting of 20 members:
 The executive head of the Bank is called Governor who is assisted by four Deputy
Governors. They are appointed by the Government of India for a period of five years.
The head office of the Reserve Bank is at Bombay,
 There are four local boards at Delhi, Kolkata, Chennai and Mumbai representing four
regional areas, i.e., northern, eastern, southern and western respectively. These local
boards are advisory in nature and the Government of India nominates one member each
from these boards to the Central Board.
 There are ten directors from various fields and one government official from the Ministry
of Finance.
 The Reserve Bank of India Act, 1934 requires that there must be at least six meetings in a
year and the gap between two meetings must not exceed three months. The Governor of
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the Reserve Bank can call a meeting of the Central Board whenever he feels it necessary.
The Governor and the Deputy Governors are full-time officials of the Reserve Bank and
are paid prescribed salaries and allowances. Other directors are part-time officials and are
given fare and allowance to participate in the meetings.
Organisation
Organisationally, the Reserve Bank operates through various departments. They are:
1. Issue Department:
Its main function is to issue and distribute the paper currency.
2. Banking Department:
This department (a) deals with the government transactions, manages public debt
and arranges for the transfer of government funds; (b) maintains the cash reserves of the
scheduled banks, provides financial accommodation to the banks and functions as a
clearing house.
3. Department of Banking Development:
It aims at expanding banking facilities in unbanked and rural areas.
4. Department of Banking Operations:
Its function is to supervise, regulate and control the working of the banking
institutions in the country. It grants licences for opening new banks or the new branches
of the existing banks.
5. Agricultural Credit Department:
It deals with the problems of agricultural credit and provides facilities of rural
credit to state governments and state cooperatives.
6. Industrial Finance Department:
Its main objective is to provide financial help to the small and medium scale
industries.
7. Non-Banking Companies Department:
It supervises the activities of non-banking companies and financial institutions in
the country
8. Exchange Control Department:
It conducts the business of sale and purchase of foreign exchange.
9. Legal Department:
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It provides advice to various departments on legal issues. It also gives legal advice
on the implementation of banking laws in the country.
10. Department of Research and Statistics:
The objective of this department is (a) to conduct research on problems relating to
money, credit, finance, production, etc., (b) to collect important statistics relating to
various aspects of the economy; and (c) publish these statistics.
11. Department of Planning and Reorganisation:
It deals with the formulation of new plans or reorganisation of existing policies
for making them more effective.
12. Economic Department:
It is concerned with framing proper banking policies for better implementation of
economic policies of the government.
13. Inspection Department:
It undertakes the function of inspecting various offices of the commercial banks.
14. Department of Accounts and Expenditure:
It keeps proper records of all receipts and expenditures of the Reserve Bank.
15. RBI Services Board:
It deals with the selection of new employees, for different posts in the Reserve
Bank.
16. Department of Supervision:
A new department, i.e., Department of Supervision, was set up on December 22,
1993 for the supervision of commercial banks.
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ORGANISATION STRUCTURE
The central board consist of following members:

The organization and management of RBI is vested on the Central Board of Directors. It is
responsible for the management of RBI.Central Board of Directors consist of 20 members. It is
constituted as follows.
a. One Governor: it is the highest authority of RBI. He is appointed by the Government of
India for a term of 5 years. He can be re-appointed for another term.
b. Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a
term of 5 years
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c. Fifteen Directors: Other fifteen members of the Central Board are appointed by the
Central Government. Out of these, four directors, one each from the four local Boards is
nominated by the Government separately by the Central Government.
Ten directors nominated by the Central Government are among the experts of commerce,
industries, finance, economics and cooperation. The finance secretary of the Government of
India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of
4 years. The Governor acts as the Chief Executive officer and Chirman of the Central Board of
Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chirman of
the Central Board. The deputy governors and government’s officer nominee are not entitled to
vote at the meetings of the Board. The Governor and four deputy Governors are full time officers
of the Bank.
Besides the central board, there are local boards for four regional areas of the country with
their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five
members each, appointed by the central Government for a term of 4 years to represent territorial
and economic interests and the interests of co-operatives and indigenous banks. The function of
the local boards is to advise the central board on general and specific issues referred to them and
to perform duties which the central board delegates.
The Head office of the bank is situated in Mumbai and the offices of local boards are situated in
Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking system, RBI
has opened local offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar,
Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram,
Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission of the
Government of India. In places where there are no offices of the bank, it is represented by the
state Bank of India and its associate banks as the agents of RBI.
List of the Departments of RBI
 Human Resource Management Department
 Department of Banking Supervision
 Issue Department
 Cash Department
 Department of Non Banking Supervision
 Department of Information Technology
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 Central Establishment Section
 Banking Department
 National Clearing Cell
 Foreign Exchange Department
 Urban Banks Department
 Rural Planning & Credit Department
 Estate Department
 Department of Economic & Policy Research
 Department of Statistics and Information Management
 Rajbhasha Cell
 Protocol & Security Cell
Functions of RBI:
A. Traditional Functions
B. Monopoly of Note Issue.
 Banker to the Government Agent and adviser to the Government
 Banker to the Banks. Acts as the clearing
 House of the country Lender of last resort Controller of credit and fore Custodian of
foreign
 Exchange reserves maintaining the external value of domestic currency.
 Ensures the internal value of currency.
 Publishers the Economics Statistics and other.
The following are the important functions of RBI. They can be explained with the help of the
following chart:
Functions of Reserve Bank of India

 Information. Fights against economic crisis and ensures economic and price stability in
the country
 Promotional Functions
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 Promotional of banking habit and expansion of banking systems. Provides refinance for
export promotion. Expansion of facilities for the provision of agricultural credit through
NABARD
 Extension of facilities for the Small Scale Industries.
 Helping the co-operative sector.
 Prescription of minimum statutory requirements. Innovations in banking business.
C. Supervisory Functions
1. Granting license to banks.
2. Inspect and make enquiry or determine position in respect of matters under various
sections of RBI and Banking Regulation Act.
3. Implementation of Deposit Insurance Scheme.
4. Review of review of the work of commercial banks.
5. Giving directives to commercial banks.
6. Control the non- banking finance corporations.
7. Ensuring the health of financial system through on-site and off-site verifications.
A. Traditional Functions
The RBI functions on the traditional lines regarding the following activities.
1. Monopoly of Note Issue
In terms of Section 22 of the Reserve Bank of India Act, the RBI has been given the
statutory function of note issue on a monopoly basis. The note issue in India was originally based
upon "Proportional Reserve System".
When it became difficult to maintain the reserve proportionately, it was replaced by "Minimum
Reserve System ". According to the RBI Amendment Act of 1957, the bank should now maintain
a minimum reserve of Rs.200 crore worth of gold coins, gold bullion and foreign securities of
which the value of gold coin and bullion should be not less than Rs.115 crore.
The Government of India issues rupee coins in the denomination of Rs.1, 2, and 5 topublic.
These coins are required to be circulated to public only through Reserve Bank under Section 38
of the RBI Act. The RBI presently issues notes of denominations Rs.10 and above.
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RBI manages circulation of money through currency chests. Originally RBI issued currency
notes of Rs.2 and above. However, due to higher cost of printing small denomination notes these
denominations are now coincides and issued by Government.
The value of currency with public as on June 1991 was only to the extent of Rs.53048 crore.
However, this value went up to Rs.145182 crore in June 1998 and further to Rs.169382 crore in
March, 1999.
Currency Chests Currency Chests are receptacles in which stocks of issuable and new notes are
stored along with rupee coins. Currency Chests are repositories run by RBI, SBI, subsidiaries of
SBI, public sector banks, Government Treasuries and Sub treasuries.
Currency Chests help in expansion and contraction of currency in the country. The advantages
for a bank having currency chest are:
1. The bank can draw funds whenever it is required for its use and deposit funds when
found surplus.
2. Exchange old and mutilated notes for new notes and coins
3. Enjoy remittance facilities
4. Cash remitted to currency chests by banks can be taken into account for maintenance of
CRR.
The currency chests maintained by public sector and few private sector banks are the property of
RBI. The value of currency held in the chest belongs to RBI. There are as many as 4150 currency
chests with banks in India.
2. Banker to the Government
The RBI acts as banker to the Government under Section 20 of RBI Act. Section 21
provides that Government should entrust its money remittance, exchange and banking
transactions in India to RBI. Under Section 21A RBI has to conduct similar transactions for State
Governments also.
RBI earns no income by conducting those functions but earns commissions for managing
the government's public debt. Where RBI has no branch, SBI or its subsidiaries are appointed as
agents and sub-agents under Section 45 of the RBI Act. Agency Banks receive commission on
all transactions conducted on turnover basis.
The RBI extends ' ways and means ' advances to Central and State Governments.
Ways and Means Advances:
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"Ways and Means Advances" (WMA) is not a commercial bank credit. It is a system
under which the RBI provides credit to Central and State Governments for meeting temporary
shortfall in government revenues as compared to the monthly expenditures.
In other words, this facility is provided to meet temporary mismatches between revenue
collections and revenue expenditures of governments. The maximum volume and period of such
advances are governed by agreements between RBI and the concerned government. To the State
Governments, this facility is extended under three categories known as
 Normal WMA
 Special WMA and
 As an overdraft facility.
It also acts as adviser to Government on economic and financial matters. In brief, as a banker to
the Government the RBI renders the following functions:
 Collects taxes and makes payments on behalf of the Government
 Accepts deposits from the Government
 Collects cheques and drafts deposited in the Government accounts.
 Provides short-term loans to the Government
 Provides foreign exchange resources to the Government.
 Keep the accounts of various Government Department.
 Maintains currency chests in treasuries at some importance places for the convenience of
the government.
 Advises governments on their borrowing programmes.
 Maintains and operates Central Government's IMF accounts.
3. Agent and Adviser of the Government
The RBI acts, as the financial agent and adviser to the Government. It renders the following
functions:
a. As an agent to the Government, it accepts loans and manages public debts on behalf of
the Government.
b. It issues Government bonds, treasury bills, etc.
c. Acts as the financial adviser to the Government in all important economic and financial
matters.
4. Banker to the Banks
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The RBI acts as banker to all scheduled banks. Commercial banks including foreign
banks, co-operative banks and RRBs are eligible to be included in the second schedule of RBI
Act subject to fulfilling conditions laid down under Section 42 (6) of RBI Act.
RBI has powers to delete a bank from the second schedule if the bank concerned fails to fulfill
the laid down conditions such as erosion in paid up capital below the prescribed limits and the
banks' activities became detrimental to the interest of depositors, etc.
All banks in India, should keep certain percentage of their demand and time liabilities as reserves
with the RBI. This is known as Cash Reserve Ratio or CRR. At end November 1999, it is 3 per
cent for RRBs and co-operative banks; 9 per cent for commercial banks.
They also maintain Current Account with RBI for various banking transactions. This
centralization of reserves and accounts enables the RBI to achieve the following:
a. Regulation of money supply credit.
b. Acts as custodian of cash reserves of commercial banks.
c. Strengthen the banking system of the country
d. Exercises effective control over banks in Liquidity Management.
e. Ensures timely financial assistance to the Banks in difficulties.
f. Gives directions to the Banks in their lending policies in the public interest.
g. Ensures elasticity in the credit structure of the country.
h. Quick transfer of funds between member banks.
5. Acts as National Clearing House
In India RBI acts as the clearing house for settlement of banking transactions. This
function of clearing house enables the other banks to settle their interbank claims easily. Further
it facilitates the settlement economically.
Where the RBI has no offices of its own, the function of clearing house is carried out in
the premises of the State Bank of India. The entire clearing house operations carried on by RBI
are computerized. The inter-bank cheque clearing settlement is done twice a day.
There is a separate route for clearing high value cheques of Rs.1.00 lakh and above.
Cheques drawn on banks in metropolitan cities are cleared on the same day.
The RBI carries out this function through a cell known as National Clearing Cell. In
1998, there were in all 860 clearing houses in operation of which 14 were run by RBI, 578 by
SBI and others by public sector banks.
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The RBI acts as a lender of last resort or emergency fund provider to the other member
banks. As such, if the commercial banks are not able to get financial assistance from any other
sources, then as a last resort, they can approach the RBI for the necessary financial assistance.
In such situations, the RBI provides credit facilities to the commercial banks on eligible
securities including genuine trade bills which are usually made available at Bank Rate. RBI
rediscounts bills under Section 17 (2) and 17 (3) and grants advances against securities under
Section 17 (4) of RBI Act. However, many of these transactions are practically carried out
through separate agencies like DHFI, Securities Trading Corporation of India, primary dealers.
The RBI now mainly provides refinance facilities as direct assistance. Rediscounting of bills fall
under the following categories:
 Commercial Bill:
A bill arising out of bonfire commercial or trade transaction drawn and payable in
India and mature within 90 days from the date of purchase or discount is eligible for
rediscount.
 Bills for Financing Agricultural Operations:
A bill issued for purpose of financing seasonal agricultural operations or the
marketing of crops and maturing within 15 months from the date of purchase or
rediscount.
 Bills for Financing Cottage and Small Scale Industries:
Bills drawn or issued for the purpose of financing the production and marketing
of products of cottage and small industries approved by RBI and mature within 12
months from the date of discount.
Refinance under agricultural and small scale industries activities are now
provided by NABARD by obtaining financial assistance from RBI. Bill for holding or
trading in Government securities: Such a bill should mature within 90 days from the date
of purchase or rediscounting and be drawn and payable in India,
 Foreign bills:
Bonfire bill arising out of export of goods from India and which mature within
180 days from the date of shipment of goods are eligible. As lender of last resort the RBI
facilitates the following:
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a. Provides financial assistance to commercial banks at the time of financial
needs.
b. It helps the commercial banks in maintaining liquidity of their financial
resources.
c. Enables the commercial banks to carry out their activities with minimum
cash reserves.
d. As a lender of last resort, the RBI can exercise full control over the
commercial banks.
7. Acts as the Controller of Credit
The RBI controls the credit creation by commercial banks. For this, the RBI uses both
quantitative and qualitative methods. The important methods used by RBI are,
 Bank Rate Policy
 Open Market Operation
 Variation of Cash Reserve Ratio
 Fixing Margin Requirements
 Moral Suasion
 Issue of Directives
 Direct Action
By controlling credit, the RBI achieves the following:
a. Maintains the desired level of circulation of money in the economy.
b. Maintains the stability in the price level prevailing in the economy.
c. Controls the effects of trade cycles
d. Controls the fluctuations in the foreign exchange rate
e. Channelize credit to the productive sectors of the economy
8. Custodian of Foreign Exchange Reserves
The RBI acts as the custodian of foreign exchange reserves. Adequate reserves may help
maintain foreign exchange rates. In order to minimize the undue fluctuations in the rates it may
buy and sell foreign currencies depending upon the situations. Its purchase and sale of foreign
currencies from the market is done like commercial banks. However, the objective of the RBI
will not be profit booking. It may buy the foreign currency to build up adequate reserves or to
arrest unwarranted rise in the value of rupee which may be due to sudden inflow of foreign
171
currencies into India. It may also buy and sell foreign currencies in international market to switch
the portfolio of investments denominated in different international currencies depending upon
circumstances and needs.
The value of India's Foreign Exchange reserves held by RBI as on June 1998 amounted
to Rs.115001 crore. This amount comprises of gold Rs.12826 crore, foreign currency assets and
value of IMF currency, viz., SDR (Special Drawing Rights).
These reserves are increased to Rs. 1, 38,005 crore in March 1999. The value of foreign currency
assets of RBI, which form the largest portion in India's Foreign Currency reserves, is subject to
changes even on daily basis depending upon ruling exchange rates, inflow and outflow of
currencies, intervention policy of the RBI, etc.
9. Exchange Control
When a country faces Balance of Payment of problems usually when its foreign exchange
payments exceed foreign exchange receipts it controls the whole gamut of fore (foreign
exchange) transactions and regulates payment system for its advantage.
Ever since the beginning of Second World War in 1939 India faced shortage of forex for its
development and growth. A Foreign Exchange Regulation Act was originally put in operation
from March 1947 and later a new act known as Foreign Exchange Regulation Act (FERA) 1973
was introduced from 1st January 1974.
Under this Act, RBI is empowered to regulate foreign exchange outgo and inflow, for
example, we cannot buy everything we need from abroad and pay for it in forex.
Trade side imports, i.e., merchandise imports are regulated by Director General Foreign Trade in
the Ministry of Commerce. Payment for invisible transactions like tourism, foreign visit,
dividend/interest payment, etc. is regulated by RBI.
Similarly, all forex received or earned by residents in India, like exporters and relatives of
NRIs [Non-resident Indian] should be surrendered to banks having license from RBI to deal in
forex. However, since 1992, the receivers of forex are permitted to retain certain part of this
forex in a separate foreign currency account if they so desire. Such account is known as
Exchange Earners' Foreign Currency Account or EEFC Account.
Further, since 1994 many controls exercised by RBI on forex payments were relaxed.
These days the RBI regulates forex transactions only to a minimum level and soon the Act,
FERA may be replaced by a new Foreign Exchange Management Act.
172
While the purchase and sale of forex, maintenance of foreign exchange reserves/gold, are
handled in the Department of External Investment and operations the control and regulations of
various other forex transactions are handled in the Exchange Control Department of Reserve
Bank of India.
The RBI by its operation of credit control and price stability maintains the internal value
of domestic currency and ensures its stability
External Value of Rupee
In terms of preamble to RBI Act, the Bank is also required to maintain external, value of
the Rupee. It, however, depends upon many factors like inflation levels, interest rates Balance of
payments situation, etc., ruling in different countries on which RBI does not have control.
Earlier, till 1993 the RBI uses to prescribe the Exchange Rate of Rupee.
The external value of rupee is now determined by market forces. RBI by virtue of its
position as the Central Bank of the country and custodian of large forex reserves can influence
the level of External Value in the short run.
Publishes the Economic Statistics and Other Information
The RBI collects statistics on economic and financial matters. It publishes periodically an
analytical account of the operations of joint stock and co-operative banks. It presents the genuine
financial position of the government and companies.
The publications like the report on currency and finance, the report on the trend and
progress of banking in India, the review of co-operative movement present a critical account and
a balanced review of banking developments commercial, economic and financial conditions of
the country.
Fights against Economic Crisis
The RBI aims at economic stability in the country whenever, there is a danger to the
economic stability, it takes immediate measures to put the economy on proper course by
effective policy changes and implementation thereof.
Promotional Functions
These are non-monetary functions. They include the following:
1. Promotion of Banking Habits
The RBI institutionalizes saving through the promotion of banking habit and expansion
of the banking system territorially and functionally.
173
Accordingly RBI has set up Deposit Insurance Corporation in 1962, Unit Trust of India in 1964,
the IDBI in 1964, the Agricultural Refinance Corporation in 1963, Industrial Reconstruction
Corporation of India in 1972, NABARD in 1982 and the National Housing Bank in 1988, etc.
It has helped to bring into existence several industrial finance corporations such as Industrial
Finance Corporation of India, Industrial Credit and Investment Corporation of India for
industrialization of the country. Similarly sector specific corporations took care of development
in their respective spheres of activity.
2. Provides Refinance for Export Promotion
The RBI takes the initiative for widening facilities for the provision of finance for foreign
trade particularly of exports.
The Export Credit and Guarantee Corporation (ECGC) and Exam Banks render useful functions
on this line. To encourage exports the RBI is providing refinance facilities for export credit given
by commercial banks. Further the rate of interest on export credits continues to be prescribed by
RBI at a lower rate.
The ECGC provides an insurance cover on Export receivables. EXIM Bank extends long term
finance to project exporters and foreign currency credit for promotion of Indian exports. Students
should know that many of these institutions were part of Reserve Bank earlier although they are
currently functioning as separate financial institutions.
3. Facilities for Agriculture
The RBI extends indirect financial facilities to agriculture regularly. Through NABARD
it provides short-term and long-term financial facilities to agriculture and allied activities. It
established NABARD for the overall administration of agricultural and rural credit. Indian
agriculture would have starved of a cheap credit but for the institutionalization of rural credit by
RBI.
The Reserve Bank was extending financial assistance to the rural sector mainly through
contributions to the National Rural Credit Funds being operated by NABARD. RBI presently
makes only a symbolic contribution of Rs.1.00 crore.
It, however, extends cheap indirect financial assistance to the agricultural sector by providing
large sums of money through General Line of Credit to NABARD. The loans and advances
extended to NABARD by RBI and outstanding as on June 1999 amounted to Rs.5073 crore.
4. Facilities to Small Scale Industries
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The RBI takes active steps to increase the supply of credit to small industries. It gives
directives to the commercial banks regarding the extension of credit facilities to small scale
industries. It encourages commercial banks to provide guarantee services to SSI sector. Banks
advances to SSI sector are classified under priority sector advances.
SSI sector contributes to a very great extent to employment opportunities and for Indian
Exports. Keeping this in view, RBI has directed commercial banks to open specialized SSI bank
branches to provide adequate financial and technical assistance to SSI branches. There are
around 30 lakh SSI units operating in India. Meeting their financial needs is one of the prime
concerns of RBI.
5. Helps Co-operative Sector
RBI extends indirect financing to State Co-operative Banks thereby connects the co-
operative sector with the main banking system of the country. The finance is mostly, is routed
through NABARD. This way the financial needs of agricultural sector are taken care of by RBI.
6. Prescription of Minimum Statutory Requirements for Banks
The RBI prescribes the minimum statutory requirements such as, paid up capital, re-
serves, cash reserves, liquid assets, etc. RBI prescribes reserves requirements both under
Banking Regulation Act and RBI Act to ensure different objectives.
For example, SLR prescription is done to ensure liquidity position of the bank. CRR prescription
is done to have effective monetary control and money supply. Statutory Reserves Appropriation
is done to ensure sound banking system, etc.
It also asks banks to set aside provisions against possible bad loans. With these functions,
it exercises control over the monetary and banking systems of the country to ensure growth, price
stability and sound banking practices.
C. Supervisory Functions
The Reserve Bank of India performs the following supervisory functions. By these
functions it controls and administers the entire financial and banking systems of the country.
1. Granting License to Banks
The RBI grants license to the banks, which like to commence their business in India.
Licenses are also required to open new branches or closure of branches. With this power
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RBI can ensure avoidance of unnecessary competitions among banks in particular location
evenly growth of banks in different regions, adequate banking facility to various regions, etc.
This power also helps RBI to weed out undesirable people from starting banking business.
2. Function of Inspection and Enquiry
RBI inspects and makes enquiry in respect of various matters covered under Banking
Regulations Act and RBI Act. The inspection of commercial banks and financial institutions are
conducted in terms of the provisions contained in Banking Regulation Act.
These refer to their banking operations like loans and advances, deposits, investment functions
and other banking services. Under such inspection RBI ensures that the banks and financial
institutions carry on their operations in a prudential manner, without taking undue risk but
aiming at profit maximization within the existing rules and regulations.
This type of inspection is carried on periodically once a year or two covering all branches
of banks. Banks are obliged to take remedial measures on the lapses / deficiencies pointed out
during inspection. In addition RBI also calls for periodical information concerning certain assets
and liabilities of the banks to verify that the banks continue to remain in good health.
This type of inspection / verification is known as off- site inspection. The RBI team visiting bank
offices to conduct verification of books and records is known as on- site inspection. RBI inspects
banks under RBI Act only when there is a threat to close down a bank for mismanagement and
there is a need to verify the fulfillment of conditions for the status of 'scheduled bank'.
RBI presently conducts inspection of commercial banks, Development Financial Institutions like
IDBI, NABARD, etc. Urban Co- operative Banks and non banking financial companies like
Lease Financing Companies, Loan Companies.
3. Implementing the Deposit Insurance Scheme
RBI Implements the Deposit Insurance Scheme for the benefit of bank depositors. This
supervisory function has improved the standard of banking in India due to this confidence
building exercise. Under this system, deposits up to Rs.1.00 lakh with the bank branch are
guaranteed for payment. Deposits with the banking system alone are covered under the scheme.
For this purpose banking system include accounts maintained with commercial banks, co-
operative banks and RRBs. Fixed Deposits with other financial institutions like ICICI, IDBI, etc.
and those with financial companies are not covered under the scheme. ICICI is since merged
with ICICI Bank Ltd. and IDBI is getting converted into a bank.
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4. Periodical Review of the Working of the Commercial Banks
The RBI periodically reviews the work done by commercial banks. It takes suitable steps
to enhance the efficiency of the banks and make various policy changes and implement
programmes for the well-being of the nation and for improving the banking system as a whole.
5. Controls the Non-Banking Financial Corporations
RBI issues necessary directions to the Non-Banking financial corporations and conducts
inspections through which it exercises control over such institutions. Deposit taking NBFCs
require permission from RBI for their operations.
Sections banking regulation Act Particulars
(1949)
11. Requirement as to minimum paid-up capital and
reserves
12. Regulation of paid-up capital, subscribed capital

and authorized capital and voting rights of share
holders
14 Prohibition of charge on unpaid capital

15. Restrictions as to payment of dividend
17 Reserve fund
18 Cash reserve
19. Restriction on nature of subsidiary companies
20 Restriction on loans and advances
21 Power of Reserve Bank to control advances by banking
companies
22. Licensing of banking companies
23. Restrictions on opening of new, and transfer of existing
places of business
24. Maintenance of a percentage of assets
25 Assets in India
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26. Return of unclaimed deposits
27 Monthly returns and power to call for other returns and
information
28. Power to publish information
29 Accounts and balance-sheet
30 Audi
31. Submission of returns
35 Inspection
35-A Power of the Reserve Bank to give directions
35-B Amendments of provisions relating to appointments of

managing directors, etc., to be subject to previous
approval of the Reserve Bank
36-AA. Power of Reserve Bank to remove managerial and
other persons from office
36-AB Power of Reserve Bank to appoint additional directors
38 to 44 Winding up by High Court

44-A. Procedure for amalgamation of banking companies
45 Power of Reserve Bank to apply to Central

Government for suspension of business by a banking
company and to prepare scheme of reconstitution or
amalgamation
45-P Reserve Bank to tender advice in winding-up
proceedings
45-Q Power to inspect
45-R power to call for returns and information
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49-B Change of name by a banking company
49-C Alteration of memorandum of a banking company
52. Power of Central Government to make rules

53 Powers to exempt in certain cases
11. Requirement as to minimum paid-up capital and reserves.––

(1) Notwithstanding anything contained in 6[Sec. 149 of the Companies Act, 1956 (1 of 1956)J,
no banking company in existence on the commencement of this Act, shall after the expiry of
three years from such commencement or of such further period not exceeding one year as the
Reserve Bank, having regard to the interests of the depositors of the company may think fit in
any particular case to allow, to carry on business 1[in India], and no other banking company shall
after the commencement of this Act, commence or carry on business 3[in India] 2[unless it
complies with such of the requirements of this section as are applicable to it.]3[(2) In the case of
a banking company incorporated outside India
The aggregate value of its paid-up capital and reserves shall not be less than fifteen lakhs
of rupees and if it has a place or places of business in city of Bombay or Calcutta or both, twenty
lakhs of rupees; and4[(b) the banking company shall deposit and keep deposited with the
Reserve Bank either in cash or in the form of unencumbered approved securities, or partly
in cash and partly in the form of such securities––(i) an amount which shall not be less than the
minimum requirement by Cl.(a); and(ii) as soon as may be after expiration of each
5[* * *) year, an amount calculated at twenty per cent. of its profit for that year in respect of all
business transacted through its branches in India, as disclosed in the profit and loss account
prepared with reference to that year under Sec. 29:] Provided that any such banking company
may at any time replace––(i) any securities so deposited by cash or by any other unencumbered
approved securities or partly by cash and partly by other such securities, so however, that the
total amount deposited is not affected; (ii) any cash so deposited by unencumbered approved
securities of an equal value.)6[(2-A) Notwithstanding anything contained in sub-section (2), the
Central Government may, on the recommendation of the Reserve Bank, and having regard to the
adequacy of the amounts already deposited and kept deposited by a banking company under sub
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-section (2), in relation to its deposit liabilities in India, declare by order in writing that the
provisions of sub-clause (ii) of Cl.(b) of sub-section (2) shall not apply to such banking company
for such period as may be specified in the order.](3) In the case of any banking company to
which the provisions of sub-section (2) do not apply, the aggregate value of its paid-up capital
and reserves shall not be less than––
 if it has places of business in more than one State, five lakhs of rupees, and if any such
place or places of business is or are situated in the city of Bombay or Calcutta or both, ten
lakhs of rupees;
 if it has all its places of business in one State none of which is situated in the city of
Bombay or Calcutta, one lakh of rupees in respect of its principal place of business, plus
ten thousand rupees in respect of each of its other places of business situated in the same
district in which it has its principal place of business, plus twenty-five thousand rupees in
respect of each place of business situated elsewhere in the State otherwise than in the
same district: Provided that no banking company to which this clause applies shall be
required to have paid -up capital and reserves exceeding an aggregate value of five lakhs
of rupees: Provided further that no banking company to which this clause applies and
which has only one place of business, shall be required to have paid-up capital and
reserves exceeding an aggregate value of fifty thousand rupees:1[Provided further that in
the case of every banking company to which this clause applies and which commences
banking business for the first time after the commencement of the Banking Companies
(Amendment) Act, 1962 (36 of 1962), the value of its paid-up capital shall not be less
than five lakhs of rupees;]
 if it has all its places of business in one State, one or more of which is or are situated in
the city of Bombay or Calcutta, five lakhs of rupees, plus twenty-five thousand rupees in
respect of each place of business situated outside the city of Bombay or Calcutta, as the
case may be: Provided that no banking company to which this clause applies shall be
required to have paid-up capital and reserves exceeding in aggregate value of ten lakhs of
rupees. Explanation.––For the purpose of this sub-section, a place of business situated
2[in a State] other than that in which the principal place of business of the banking
company is situated shall, if it is not more than twenty-five miles distant from such
principal place of business, be deemed to be situated within the same State as such
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principal place of business.(4) Any amount deposited and kept deposited with the
Reserve Bank under 3[* * *] sub-section(2) by any banking company incorporated
4[outside India] shall, in the event of the company ceasing for any reason to carry on
banking business 5[in India], be an asset of the company on which the claims of all the
creditors of the company 3[in India] shall be a first charge.6[(5) For the purposes of this
section,—(a) "place of business" means any office, sub-office, sub-pay office and any
place of business at which deposits are received, cheques cashed or moneys lent;(b)
"value" means the real or exchangeable value, and not the nominal value which may be
shown in the books of the banking company concerned.](6) If any dispute arises in
computing the aggregate value of the paid-up capital and reserves of any banking
company, a determination thereof by the Reserve Bank shall be final for the purposes of
this section.
12.Regulation of paid-up capital, subscribed capital and authorized capital and voting
rights of shareholder
1. No banking company shall carry it satisfies the following conditions, namely:
(a) That the subscribed capital if the company is not less than one-half of the
authorized capital, and paid-up capital is not less than one-half of the
subscribed capital and that, if the capital increased, it complies with the
conditions prescribed in this clause within such period not exceeding two
years as the Reserve Bank may allow;
(b) That the capital of the company consists of ordinary shares only or of
ordinary shares or equity shares and such preferential shares as may have
been issued prior to the 1st day of July, 1944:Provided that nothing
contained in this sub-section shall apply to any banking company
incorporated before the 15th day of January, 1937.
2. No person holding shares in a banking company shall, in respect of any shares held by
him, exercise voting right 2[n Poll] 3[in excess of 4[ten per cent.]] of the total voting
rights of all the shareholders of the banking company.
3. Notwithstanding anything contained in any law for the time being in force or in contract
or instrument no suit or other proceeding shall be maintained against any person
181
registered as the holder of a share in a banking company on the ground that title to the
said share vests in a person other than the registered holder: Provided that nothing
contained in this sub-section shall bar a suit or other proceeding––(a) by a transferee of
the share on the ground that he has obtained from the registered holder a transfer of the
share in accordance with any law relating to such transfer; or(b) on behalf of a minor or a
lunatic on the ground that the registered holder holds the share on behalf of the minor or
lunatic.
4. Every Chairman, Managing Director or Chief Executive Officer by whatever name called
of a banking company shall furnish to the Reserve Bank through that banking company
returns containing full particulars of the extent and value of his holding of shares,
whether directly or indirectly, in the banking company and of any change in the extent of
such holding or any variation in the rights attaching thereto and such other information
relating to those shares as the Reserve Bank may, by order, require and in such form and
at such time as may be specified in the order.
14. Prohibition of charge on unpaid capital

Nonbanking Company shall create any charge upon any unpaid capital of the
company, and any such charge shall be invalid.
15. Restrictions as to payment of dividend
5[(1)No banking company shall pay any dividend on its shares until all its
capitalized expenses (including preliminary expenses, organization expenses, share-
selling commission, brokerage, amounts of losses incurred and any other item of
expenditure not represented by tangible assets) have been completely written off.1[(2)
notwithstanding anything to the contrary contained in sub-section (1) or in the Companies
Act, 1956 (1 of 1956), a banking company may pay dividends on its shares without
writing off
 The depreciation, if any, in the value of its investments in approved securities in
any case where such depreciation has not actually been capitalized or otherwise
accounted for as a loss;
 The depreciation, if any, in the value of its investments in shares, debenture or
bonds (other than approved securities) in any case where adequate provision for
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such depreciation has been made to the satisfaction of the auditor of the banking
company;
 The bad debts, if any, in any case where adequate provision for such debts has
been made to the satisfaction of the auditor of the banking company.]
17. Reserve Fund.
Every banking company incorporated in India shall create a reserve fund and 6[* * *]
shall, out of the balance of profit of each year as disclosed in the profit and loss account prepared
under Sec. 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent
to not less than twenty per cent. of such profit.1[(1-A) Notwithstanding anything contained in
sub-section (1), the Central Government may, on the recommendation of the Reserve Bank and
having regard to the adequacy of the paid-up capital and reserves of a banking company in
relation to its deposit liabilities, declared by order in writing that the provisions of sub-section (1)
shall not apply to the banking company for such period as may be specified in the order:
Provided that no such order shall be made unless, at the time it is made, the amount in the
reserve fund under sub-section (1), together with the amount in the share premium account is not
less than the paid-up capital of the banking company.]
Where a banking company appropriates any sum or sums from the reserve fund of the
share premium account, it shall, within twenty-one days from the date of such appropriation,
report the fact to the Reserve Bank explaining the circumstances relatingto such appropriation
Provided that the Reserve Bank may, in any particular case, extend the said period of twenty
-one days by such period as it thinks fit or condone any delay in the making of such report
18. Cash reserve
Every banking company, not being a scheduled bank, shall maintain in India by way
of cash reserve with itself or byway of balance in a current account with the Reserve Bank or by
way of net balance in current accounts or in one or more of the aforesaid ways, a sum equivalent,
to at least three per cent. of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight and shall submit to the Reserve Bank before the
twentieth day of every month a return showing the amount so held on alternate Fridays during a
month with particulars of its demand and time liabilities in India on such rides or if any such
Friday is a public holiday under the Negotiable Instruments Act, 1881(26 of 1881), at the close
of business on the preceding working day.
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19. Restriction on nature of subsidiary companies
4[(1) A banking company shall not form any subsidiary company except a
subsidiary company formed for one or more of the following purposes, namely:(a) the
undertaking of any business which, under Cls. (a) to (o) of subsection (1) of Sec. 6, is
permissible for a banking company to undertake, or(b) with the previous permission in writing of
the Reserve Bank, the carrying on of the business of banking exclusively outside India, or(c) the
undertaking of such other business, which the Reserve Bank may, with the prior approval of the
Central Government, consider to be conducive to the spread of banking in India or to be
otherwise useful or necessary in the public interest
For the purposes of Sec. 8, a banking company shall not be deemed, by reason of its
forming or having a subsidiary company, to be engaged indirectly in the business carried on by
such subsidiary company.](2) Save as provided in sub-section (1), no banking company shall
hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount
exceeding thirty per cent. of the paid-up share capital of that company or thirty per cent. of its
own paid-up share capital and reserves, whichever is less: Provided that any banking company
which is on the date of the commencement of this Act holding any shares in contravention of the
provisions of this sub-section shall not be liable to any penalty therefore if it reports the matter
without delay to the Reserve Bank and if it brings its holding of shares into conformity with the
said provisions within such period, not exceeding two years, as the Reserve Bank may think fit to
allow.(3) Save as provided in sub-section (1), and notwithstanding anything contained in sub-
section (2), a banking company shall not, after the expiry of one year from the date of the
commencement of this Act, hold shares, whether as pledgee, mortgagee or absolute owner, in
any company in the management of which any Managing Director or manager of the banking
company is in any manner concerned or interested
20. Restrictions on loans and advances
Notwithstanding anything to the contrary contained in Sec. 77 ofthe Companies Act,
1956 (1 of 1956), no banking company shall,––(a)grant any loans or advances on the security of
its own shares, or(b) enter into any commitment for granting any loan or advance or advance to
or on behalf of––(i) any of its directors,(ii) any firm in which any of its directors is interested as
partner, manager, employee or guarantor, or(iii) any company (not being a subsidiary of the
banking company or a company registered under Sec. 25 of the Companies Act, 1956 (1 of
184
1956), or a Government company)] of which 2[or the subsidiary or the holding company of
which] any of the directors of the banking company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial interest, or(iv) any individual in respect
of whom any of its directors is a partner or guarantor.(2) Where any loan or advance granted by a
banking company is such that a commitment for granting it could not have been made if Cl.(b) of
sub-section (1) had been in force on the date on which the loan or advance was made, or is
granted by a banking company after the commencement of Sec. 5 of the Banking Laws
(Amendment) Act, 1968 (58 of 1968), but in pursuance of a commencement of Sec. 5 of the
Banking Laws (Amendment) Act, 1968 (58 of 1968), but in pursuance of a commitment entered
into before such commencement, steps shall be taken to recover the amounts due to the banking
company on account of the loan or advance together with interest, if any, due thereon within the
period stipulated at the time of the grant of the loan or advance, or where no such period has
been stipulated, before the expiry of one year from the commencement of the said Sec.
5:Provided that the Reserve Bank may, in any case on an application in writing made to it by the
banking company in this behalf, extend the period for the recovery of the loan or advance until
such date, not being a date beyond the period of three years from the commencement of the said
Sec. 5, and subject to such terms and conditions, as the Reserve Bank may deem fit: Provided
further that this sub-section shall not apply if and when the director concerned vacates the office
of the director of the banking company, whether by death, retirement, resignation or
otherwise.(3) No loan or advance, referred to in sub-section (2), or any part thereof shall be
remitted without the previous approval of the Reserve Bank, and any remission without such
approval shall be void and of no effect. (4) Where any loaner advance referred to in sub-section
(2), payable by any person, has not been repaid to the banking company within the period
specified in that sub-section, then such person shall, if he is a director of such banking company
on the date of the expiry of the said period, be deemed to have vacated his office as such on the
said date.
21. Power of Reserve Bank to control advances by banking companies
Where the Reserve bank is satisfied that it is necessary or expedient in the public interest
3[or in the interests of depositors] 4[or banking policy] so to do it may determine the policy in
relation to advances to be followed by banking companies generally or by any banking
185
companies or the banking company concerned, as the case may be, shall be bound to follow the
policy as so determined.
Without prejudice to the generality of the power vested in the Reserve Bank under sub-
section (1), the Reserve Bank may give directions to banking companies, either generally or to
any banking company or group of banking companies in particular, 5[as to—(a) the purposes or
which advance may or may not be made,(b)the margins to be maintained in respect of secured
advances,(c) the maximum amount of advances or other financial accommodation which, having
regard to the paid-up capital, reserves any deposits of a banking company and relevant
considerations, may be made by that banking company, to any one company, firm, association of
persons or individual,(d) the maximum amount up to which, having regard to the considerations
referred to in Cl.(c), guarantees may be given by a banking company on behalf of any one
company, firm, association of persons or individual, and(e) the rate of interest and other terms
and conditions on which advances or other financial accommodation may be made or guarantees
may be given.]6[(3) every banking company shall be bound to comply with any directions given
to it under this section.]
22. Licensing of banking companies
6[(1)Save as hereinafter provided no company shall carry on banking business in India
unless it holds a license issued in that behalf by the Reserve Bank and any such license may be
issued subject to such conditions as the Reserve Bank may think fit to impose.] (2) Every
banking company in existence on the commencement of this Act, before the expiry of six months
from such commencement, and every other company before commencing banking business 7[in
India], shall apply in writing to the Reserve Bank for a licence under this section: Provided that
in the case of banking company in existence on the commencement of this Act, nothing in sub-
section (1) shall be deemed to prohibit the company from carrying on banking business until it is
granted licence in pursuance of 8 [this section] or is by notice in writing informed by the Reserve
Bank that a licence cannot be granted to it: Provided further that the Reserve Bank shall not give
a notice as aforesaid to a banking company in existence on the commencement of this Act before
the expiry of the three years referred to in sub-section (1) of Sec. 11 or of such further period as
the Reserve Bank may under that sub-section think fit to allow.(3) Before granting any licence
under this section the Reserve Bank may require to be satisfied by an inspection of the books of
the company or otherwise that 1[* * *] the following conditions are fulfilled, namely:2[(a) that
186
the company is or will be in position to pay its present or future depositors in full as their claims
accrue;(b) that the affairs of the company are not being, or are not likely to be conducted in a
manner detrimental to the interests of its present or future depositors;] 3[(c) that the general char
cater of the proposed management of the company will not be prejudicial to the public interest of
its present or future depositors;(d) that the company has adequate capital structure and earning
prospects;(e) that the public interest will be served by the grant of a licence to the company to
carry on banking business in India; (f) that having regard to the banking facilities available in the
proposed principal area of operations of the company, the potential scope for expansion of banks
already in existence in the area and other relevant factors the grant of the licence would not be
prejudicial to the operation and consolidation of the banking system consistent with monetary
stability and economic growth; (g) any other condition, the fulfilment of which would, in the
opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in
India by the company will not be prejudicial to the public interest or the interests of the
depositors.]4[(3-A) Before granting any licence under this section to a company incorporated
outside India, the Reserve Bank may require to be satisfied by an inspection of the books of the
company or otherwise that the conditions specified in sub-section (3) are fulfilled and that the
carrying on of banking business by such company in India will be in the public interest and that
the Government or law of the country in which it is incorporated does not discriminate in any
way against companies registered in India and that the company complies with all the provisions
of this Act applicable to banking companies incorporated outside India.]5[(4) The Reserve Bank
may cancel a licence granted to a banking company under this section(i) if the company ceases to
carry on banking business in India; or(ii) if the company at any time fails to comply with any of
the condition imposed upon it under sub-section (1); or(iii) if at any time, any of the conditions
referred to in sub-section (3) 1(and sub-section (3-A) is not fulfilled Provided that before
cancelling a licence under Cl. (ii) or Cl (iii)of s sub-section on the ground that the banking
company has failed to comply with or has failed to fulfil any of the conditions referred to therein,
the Reserve Bank unless it is of opinion that the delay will be prejudicial to the interests of the
company`: depositors or the public, shall grant to the company on such terms as it may specify,
an opportunity of taking the necessary steps for complying with or fulfilling such condition.(5)
Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under
this section may, within thirty days from the date on which such decision is communicated to it,
187
appeal to the Central Government.(6) The decision of the Central Government where an appeal
has been preferred to it under sub-section (5) or of the Reserve Bank where no such appeal has
been preferred shall be final.]23. Restrictions on opening of new, and transfer of existing places
of business
.
––
(1
)
Without obtaining the prior permission of the Reserve Bank
––
(a)
no banking company shall open a new place of business in India or change
otherwise than within the same city, town or village, the location
of an existing place of
business situated in India; and
(b) no banking company incorporated in India shall opera a new place of business
outside India or change, otherwise than within the same city, town or village in any
country or area outside India, t
he location of an existing place of business situated in that
country or area:
Provided that nothing in this sub
-
section shall apply to the opening for a period not
exceeding one month of a temporary place of business within a city, town or village or the
environs thereof within which the banking company already has a place of business, for the
purpose of affording banking facilities to the public on the occasion of an exhibition, a
conference or
mela
or any other like occasion.
(2) Before granting any pe
rmission under this section, the Reserve Bank may require to
188
be satisfied by an inspection under Sec. 35 or otherwise as to the financial condition and history
of the company, the general character of its management, the adequacy of its capital structure
and earning prospects and that public interest will be served by the opening or, as the case may
be, change of location, of the place of business.(3) The Reserve Bank may grant permission
under sub-section (1) subject to such conditions as it may think fit to impose either generally or
with reference to any particular case.(4) Where in the opinion of the Reserve Bank, a banking
company has, at any time, failed to comply with any of the conditions imposed on it under this
section, the Reserve Bank may, by order in writing and after affording reasonable opportunity to
the banking company for showing cause against the action proposed to be taken against it,
revoke any permission granted under this section.3[(4-A) Any regional rural bank requiring the
permission of the Reserve Bank under this section shall forward its application to the Reserve
Bank through the National Bank which shall give its comments on the merits of the application
and send it to the Reserve Bank Provided that the regional rural bank shall also send an advance
copy of the application directly to the Reserve Bank. (5) For the purposes of this section "place
of business" includes any sub-office, pay office, sub-pay office, and any place of business at
which deposits are received, cheques cashed or moneys lent.]
24. Maintenance of a percentage of assets
After the expiry of two years from the commencement of this Act, every banking
company shall maintain 1[in India] in cash, gold or unencumbered approved securities, value at a
price not exceeding the current market price, an amount which shall not at the close of business
on any day be less than 20 per cent. of the total of its 2 [demand and time liabilities] 3[in
India].4[Explanation.–– For the purposes of this section, "unencumbered approved securities" of
banking company shall include its approved securities lodged with another institution for an
advance or any other credit arrangement to the extent to which such securities have not been
drawn against or availed of.] 5[(2) In computing the amount for the purposes of sub-section (1)
the deposit required under sub-section (2) of Sec. 11 to be made with the Reserve Bank by a
banking company incorporated outside India and any balance maintained in India by a banking
company in current account with the Reserve Bank or the State Bank of India or with any other
bank which may be notified in this behalf by the Central Government, including in the case of a
scheduled bank the balance required under Sec. 42 of the Reserve Bank of India Act, 1934 (2 of
1934), to be so maintained, shall be deemed to be cash maintained in India.]6[(2-A) (a)
189
Notwithstanding anything contained in sub-section (1) or in sub-section (2), after expiry of two
years from the commencement of the Banking Companies (Amendment) Act, 1962 (36 of 1962),
(i)a scheduled bank, in addition to the average daily balance which it is, or may be, required to
maintain under Sec. 42 of the Reserve Bank of India Act, 1934 (2 of 1934), and(ii)every other
banking company, in addition to the cash reserve which it is required to maintain under Sec. 18.
2 [shall maintain in India,–(A) in cash, or (B) in gold valued at a price not exceeding the current
market price or in unencumbered approved securities valued at a price determined in accordance
with such one or more of, or combination of, the following methods of valuation, namely,
valuation with reference to cost price, market price, book value or face value, as may be
specified by the Reserve Bank from time to time, an amount which shall not, at the close of
business on any day, be less than twenty-five per cent, or such other percentage not exceeding
forty per cent. as the Reserve Bank may, from time to time, by notification in the Official
Gazette, specify, of the total of its demand and time liabilities
25. Assets in India
3[(1) The assets in India of every banking company at the close of business on the last
Friday of every quarter or, if that Friday is a public holiday under the Negotiable Instruments
Act, 1881 (26 of 1881), at the close of the business on the preceding working day, shall not be
less than seventy-five per cent. of its demand and time liabilities in India.(2) Every banking
company shall, within one month from the end of every quarter, submit to the Reserve Bank a
return in the prescribed form and manner of the assets and liabilities referred to in sub-section (1)
as at the close of business on the last Friday of the previous quarter, or if that Friday is a public
holiday under the Negotiable Instruments Act, 1881 (26 of 1881), at the close of business on the
preceding working day.
26. Return of unclaimed deposits
.
––
Every banking company shall, within thirty days
after the close of ea
ch calendar year, submit a return in the prescribed form and manner to the
Reserve Bank at the end of such calendar year of all accounts
4
190
[in India] which have not been
operated upon for ten years
5
[* * *]:
Provided that in the case of money deposited fora fixed period the said term of ten years shall be
reckoned from the date of the expiry of such fixed period. The accounts which have not been
operated for ten years shall be submitted as a return in the prescribed form to the Reserve Bank
by every banking company within thirty days after the close of each calendar year but the fixed
deposits are exempted1 [Provided further that every regional rural bank shall also furnish a copy
of the said return to the National Bank.]
27. Monthly returns and power to call for other returns and information
Every banking company shall, before the close of the month succeeding that to which it
relates, submit to the Reserve Bank a return in the prescribed form and manner showing its assets
liabilities 5[in India] as at the close to business on the last Friday of every month or if that Friday
is a public holiday under the Negotiable Instruments Act, 1881(26 of 1881), at the close of
business on the preceding working day.[(2) The Reserve Bank may at any time direct a banking
company to furnish it within such time as may be specified by the Reserve Bank, with such
statements and information relating to the business or affairs of the banking company (including
any business or affairs with which such banking company is concerned) as the Reserve Bank
may consider necessary or expedient to obtain for the purposes of this Act, and without prejudice
to the generality of the foregoing power may call for information every half-year regarding 7[the
investments of a banking company and the classification of its advances in respect of industry
commerce and agriculture.] (3)Every regional rural bank shall submit a copy of the return which
it submits to the Reserve Bank under sub-section (1) also to the National Bank and the powers
exercisable by the Reserve Bank under sub-section (2) may also be exercised by National Bank
in relation to regional rural banks.
28. Power to publish information
The Reserve Bank or the National Bank, or both, if they consider it in the public interest
so to do, may publish any information obtained by them under this Act in such consolidated form
as they think fit. Accounts and balance-sheet–– (1) At the expiration of each calendar year 3[or
at the expiration of a period of twelve months ending with such date as the Central Government
191
may, by notification in the Official Gazette, specify in this behalf,] every banking company
incorporated 4[in India], in respect to all business transacted by it, and every banking company
incorporated 5 [outside India], in respect of all business transacted through its branches 4 [in
India], shall prepare with reference to 6 [that year or period as the case may be,] a balance-sheet
and profit and loss account, as on the last working day of 7 that year or the period, as the case
may be,] in the forms set out in the Third Schedule or as near thereto as circumstances admit:8
[Provided that with a view to facilitating the transition from one period of accounting to another
period of accounting colder this sub-section, the Central Government may, by order published in
the Official Gazette, make. such provisions as it considers necessary or expedient for the
preparation of, or for other matters relating to, the balance-sheet or profit and loss account in
respect of the concerned year or period, as the case may be Audit.––3[ (1)The balance-sheet and
profit and loss account prepared in accordance with Sec. 29 shall be audited by a person duly
qualified under any law for the time being in force to be an auditor of companies.) 4[(1-A)
Notwithstanding anything contained in any law for the time being in force or in any contract to
the contrary, every banking company shall, before appointing, re-appointing or removing any
auditor or auditors, obtain the previous approval of the Reserve Bank.(1-B) Without prejudice to
anything contained in the Companies Act, 1956 (1 of 1956), or any other law for the time being
in force, where the Reserve Bank is of opinion that it is necessary in the public interest or in the
interests of the banking company or its depositors so to do 5[it may at any time by order direct
that a special audit of the banking company's accounts, for any such transaction or class of
transactions or for such period or periods as may be specified in the order, shall be conducted
and may by the same or a different order either appoint person duly qualified under any law for
the time being in force to be an auditor of companies or direct the auditor of the banking
company himself to conduct such special audit], and the auditor shall comply with such
directions and make a report of such audit to the Reserve Bank and forward a copy thereof to the
company.(1-
C) The expenses of, or incidental to,
6
[the special audit] specified in the order made by
the
Reserve Bank shall be borne by the banking company.]
192
(2) The auditor shall have the powers of, exercise the functions vested in, and discharge
the duties and be subject to the liabilities and penalties imposed on, auditors of companies by
Sec. 227 of the Companies Act, 1956 (1 of 1956)]
2
[and auditors, if any, appointed by the law
establishing, constituting or forming the banking company concerned.]
(3) In addition to the matters which under the aforesaid Ac
t the auditor is required to state
in his report, he shall, in case of a banking company incorporated
3
[in India], state in his report
—
(a)
whether or not the information and explanation required by him have been found
to be satisfactory;
(b)
whether or n
ot the transactions of the company which came to his notice have
been with the powers of the company;
(c) whether or not the returns received from branch offices of the company have
been found adequate for the purposes of his audit;(d) whether the profit and loss account shows a
true balance 4[or profit or loss] for the period covered by such account; (e) any other matter
which he considers should be brought to the notice of the shareholders of the company
31. Submission of returns
The accounts and balance-sheet referred to in Sec. 29 together with auditor's report shall
be published in the prescribed manner and three copies thereof shall be furnished as returns to
the Reserve Bank within three months from the end of period to which they refer Provided that
the Reserve Bank may in any case extend the said period of three months for the furnishing of
such returns by a further period not exceeding three months6[Provided further that a regional
rural bank shall furnish such return also to the National Bank.
35-A. Power of the Reserve Bank to give directions
193
Where the Reserve Bank is satisfied that––(a) in the 3[public interest]; or4[ (aa) in the
interest of banking policy; or](a) to prevent the affairs of any banking company being conducted
in a manner detrimental to the interests of the depositors or in a manner prejudicial to the
interests of the banking company; or (c) to secure the proper management of any banking
company generally; it is necessary to issue directions to banking companies generally or to any
banking company in particular, it may, from time to time, issue such directions as it deems fit,
and the banking companies or the banking company, as the case may be, shall be bound to
comply with such directions (2) The Reserve Bank may, on representation made to it or on its
own motion, modify or cancel any directions issued under sub-section (1) and in so modifying or
cancelling any direction may impose such conditions as it thinks fit, subject to which the
modification or cancellation shall have effect.]
37. Suspension of business
The 3[High Court] may, on the application of a banking company which is temporarily
unable to meet its obligations, make an order (a copy of which it shall cause to be forwarded to
the Reserve Bank) staying the commencement or continuance of all actions and proceedings
against the company for a fixed period of time on such terms and conditions as it shall think fit
and proper, and may from time to time extend the period, so however that the total period of
moratorium shall not exceed six months.(2) No such application shall be maintainable unless it is
accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank
the banking company will be able to pay its debts if the application is granted Provided that the
4[High Court] may for sufficient reasons, grant relief under this section even if the application is
not accompanied by such report, and where such relief is granted, the 1[High Court] shall call for
a report from the Reserve Bank on the affairs of banking company, on receipt of which it may
either rescind any order already passed or pass such further orders thereon as may be just and
proper in the circumstances.5[(3) When an application is made under sub-section (1), the High
Court may appoint a special officer who shall forthwith take into his custody or under his control
all the assets, books, documents, effects and actionable claims to which the banking company is
or appears to be entitled and shall also exercise such other powers as the High Court may deem
fit to confer on him, having regard to the interests of the depositors of the banking
company.]6[(4) where the Reserve Bank is satisfied that the affairs of a banking company in
respect of which an order under sub-section (1) has been made, are being conducted in a manner
194
Detrimental to the interests of the depositors it may make an application to the High Court for
the winding up of the company, and where any such application is made, the High Court shall
not make any order extending the period for which the commencement or continuance of all
actions and proceedings against the company were stayed under that sub-section.
38. Winding up by High Court
Notwithstanding anything contained in Secs. 391, 392, 433 and 583 of the Companies
Act, 1956 (1 of 1956), but without prejudice to its power under sub-section (1) of Sec. 37 of this
Act, the High Court shall order the winding up of a banking company––(a) if the banking
company is unable to pay its debts; or(b) if an application for its winding up has been made by
the Reserve Bank under Sec. 37 of this section.(2) The Reserve Bank shall make an application
under this section for the winding up of a banking company if it is directed so to do by an order
under Cl. (b)of sub-
section (4) of Sec. 35.
(3) The Reserve Bank may make an application under this section for the winding up of a
banking company
––
(a) if the banking company
––
(i) has failed
to comply with the requirements specified in Sec. 11;or(ii) has by reason of the provisions of
Sec. 22 become disentitled to carry on banking business in India; or (iii) has been prohibited
from receiving fresh deposits by an order
Under Cl. (a) of sub-section (4) of Sec. 35 or under Cl. (b) of sub-section (3-A) of Sec. 42 of the
Reserve Bank of India Act, 1934 (2 of 1934); or (iv) having failed to comply with the
requirement of this Act other than requirements laid down in Sec. 11, has continued such failure,
or, having contravened any provision of this Act has continued such contravention beyond such
period or periods as may be specified in that behalf by the Reserve Bank from time to time, after
notice in writing of such failure or contravention has been conveyed to the banking company;
or(b) if in the opinion of the Reserve Bank,––(i) a compromise or arrangement sanctioned by a
Court in respect of the banking company cannot be worked satisfactorily with or without
modifications; or(ii) the returns, statements or information furnished to it under or in pursuance
195
of the provisions of this Act disclose that the banking company is unable to pay its debts; or(iii)
the continuance of the banking company is prejudicial to the interest of its depositors.(4) Without
prejudice to the provisions contained in Sec. 434 of the Companies Act, 1956 (1 of 1956), a
banking company shall be deemed to be unable to pay its debts if it has refused to meet any
lawful demand made at any of its offices or branches within two working days, if such demand is
made at a place where there is an office, branch or agency of the Reserve Bank, or within five
working days, if such demand is made elsewhere, and if the Reserve Bank certifies in writing
that the banking company is unable to pay its debts.(5) A copy of every application made by the
Reserve Bank under sub-section (1) shall be sent by the Reserve Bank to the Registrar.
44. Powers of High Court in voluntary winding up
Notwithstanding anything to the contrary contained in Sec. 484 of the Companies Act,
1956 (1 of 1956), no banking company
44-A. Procedure for amalgamation of banking companies
Notwithstanding anything contained in any law for the time being in force, no banking
company shall be amalgamated with another banking company, unless a scheme containing the
terms of such amalgamation has been placed in draft before the shareholders of each of the
banking companies concerned separately, and approved by a resolution passed by a majority in
number representing two-thirds in value of the shareholders of each of the said companies,
present either in person or by proxy at a meeting called for the purpose.(2) Notice of every such
meeting as is referred to in sub-section (1) shall be given to every shareholder of each of the
banking companies concerned in accordance with the relevant articles of association indicating
the time, place and object of the meeting, and shall also be published at least once a week for
three consecutive weeks in not less than two newspapers which circulate in the locality or
localities where the registered offices of the banking companies concerned are situated one of
such newspapers being in a language commonly understood in the locality or localities.(3) Any
shareholder, who has voted against the scheme of amalgamation at the meeting or has given
notice in writing at or prior to the meeting of the company concerned or to the presiding officer
of the meeting that he dissents from the scheme of amalgamation, shall be entitled, in the event
of the scheme being sanctioned by the Reserve Bank to claim from banking company concerned,
in respect of the shares held by him in that company, their value as determined by the Reserve
Bank when sanctioning the scheme and such determination by the Reserve Bank as to the value
196
of the shares to be paid to the dissenting shareholder shall be final for all purposes.(4) if the
scheme of amalgamation is approved by requisite majority of shareholders in accordance with
the provisions of this section, it shall be submitted to the Reserve Bank for sanction and shall, if
sanctioned by the Reserve Bank by an order in voting passed in his behalf, be binding on the
banking companies concerned and also on all the shareholders thereof.1[ * * * * ](6) On the
sanctioning of a scheme of amalgamation by the Reserve Bank the property of the amalgamated
banking company shall, by virtue of the order of sanction, be transferred to and vest in, and the
liabilities of the said company shall, by virtue of the said order be transferred to, and become the
liabilities of the banking company which under the scheme of amalgamation is to acquire the
business of the amalgamated banking company, subject in all cases to 2[the provisions of the
scheme as sanctioned.][ 3(6-A) Where a scheme of amalgamation is sanctioned by the Reserve
Bank under the provisions of this section, the Reserve Bank may, by a further order in writing,
rect, that on such date as may be specified therein the banking company (hereinafter in this
section referred to as the amalgamated banking company) which by reason of the amalgamation
will cease to function, shall stand dissolved and any such direction shall take effect
notwithstanding anything to the contrary contained in any other law.(6-
B) Where the Reserve Bank directs a dissolution of the
amalgamated banking
company, it shall transmit a copy of the order directing such dissolution to the Registrar before
whom the banking company has been registered and on receipt of such order the Registrar shall
strike off the name of the company.
(6
-
C)
An order under sub
-
section (4) whether made before or after the commencement of
Sec. 19 of the Banking Laws (Miscellaneous Provisions) Act, 1963 (55 of 1963), shall be
conclusive evidence that all the requirements of this section relating to amalgamation h
ave been
complied with, and a copy of the said order certified in writing by an officer of the Reserve Bank
197
to be a true copy of such order and a copy of the scheme certified in the like manner to be a true
copy thereof shall, in all legal proceedings (whe
ther in appeal or otherwise and whether
instituted before or after commencement of the said Sec. 19), be admitted as evidence to the
same extent as the original order and the original scheme.] '4[(7) Nothing in the foregoing
provisions of this section shall affect the power of the Central Government to provide for the
amalgamation of two or more banking companies 5[* * *] under Sec. 396 of the Companies Act,
1956 (1 of 1956)Provided that no such power shall be exercised by the Central Government
except after consultation with the Reserve Bank
45. Power of Reserve Bank to apply to Central Government for suspension of business by a
banking company and to prepare scheme of reconstitution or amalgamation
Notwithstanding anything contained in the foregoing provisions of this Part or in another
law or 8[any agreement or other instrument], for the time being in force, where it appears to the
Reserve Bank that there is good reason so to do; the Reserve Bank may apply to the Central
Government for an order of moratorium in respect of 9[a banking company].(2) The Central
Government, after considering the application made by the Reserve Bank under sub-section (1),
may make an order of moratorium staying the commencement or continuance of all actions and
proceedings against the company for a fixed period of time on such terms and conditions as it
thinks fit and proper and may from time to time extend the period, so however that the total
period of moratorium shall not exceed six months.(3) Except as otherwise provided by any
direction given by the Central Government in the order made by it under sub-section (2) or at
any time thereafter, the banking company shall not during the period of moratorium make any
payment to any depositors or discharge any liabilities or obligation to any other creditors:10 [(4)
During the period of moratorium, if the Reserve Bank is satisfied that (a) in the public interest; or
(b) In the interests of the depositors; or(c) in order to secure the proper management of the
banking company; or (d) in the interests of the banking system of the country as a whole, it is
necessary so to do, the Reserve Bank may prepare a scheme—(i)for the reconstruction of the
banking company, or(ii)for the amalgamation of the banking company with any other banking
institution in this section referred to as "the transferee bank".](5) The scheme aforesaid may
contain provisions for all or any of the following matters, namely:(a) interests, authorities and
privileges, the liabilities, duties and obligations, of the banking company on its reconstructions
198
or, as the case may be, of the transferee bank;(b)in the case of amalgamation of the banking
company, the transfer to the transferee bank of the business, properties, assets and liabilities of
the banking company on such terms and conditions as may be specified in the scheme;(c)any
change in the Board of Directors, or the appointment of a new Board of Directors, of the banking
company on its reconstruction or, as the case may be, of the transferee bank and the authority by
whom, the manner in which, and the other terms and conditions on which, such change or
appointment shall be made and in the case of appointment of a new Board of Directors or of any
director, the period for which such appointment shall be made;(d) the alteration of the
memorandum and articles of association of the banking company on its reconstruction or as the
case may be, of the transferee bank for the purpose of altering the capital thereof or for such
other purposes as may be necessary to give effects the reconstruction or amalgamation;(e)subject
to the provisions of the scheme, the continuation by or against the banking company on its
reconstruction or, as the case may be, the transferee bank, of any action or proceedings pending
against the banking company immediately before the date of the order of moratorium;(f)the
reduction of interest or rights which the members, depositors and other creditors have in or
against the banking company before its reconstruction or amalgamation to such extent as the
Reserve Bank considers necessary in the public interest or in the interests of the members,
depositors and other creditors or for the maintenance of the business of the banking
company;(g)the payment in cash or otherwise to depositors and other creditors in full satisfaction
of their claim—(i)in respect of their interest or rights in or against the banking company before
its. Reconstruction or amalgamation; or (ii) where their interest or rights aforesaid in or against
the banking company has or have been reduced under Cl. (f),in respect of such interest or rights
as so reduced; (h)the allotment to the members of the banking company for shares held by them
therein before its reconstruction or amalgamation whether their interest in such shares has been
reduced under Cl. (f)or not, of shares in the banking company on its reconstruction or, as the case
may be, in the transferee bank and where any members claim payment in cash not allotment of
shares,
Supervision of banks:
Prior to 1993, the supervision and regulation of commercial banks was handled by the
Department of Banking Operations & Development (DBOD). In December 1993 the Department
199
of Supervision was carved out of the DBOD with the objective of segregating the supervisory
role from the regulatory functions of RBI.
Globally, increasing financial dis-intermediation has led to an increase in the assets and reach of
non-bank finance companies necessitating enhanced regulatory attention towards these non-bank
and near-bank entities. The merger of Financial Institutions Cell with the Department of
Supervision in June 1997 led to the formation of an exclusive Financial Institutions Division
within the DoS which was entrusted with both supervision and regulation over all India
development financial institutions. Later, the Department of Supervision was split into
Department of Banking Supervision (DBS) and Department of Non-Banking Supervision
(DNBS) on July 29, 1997 with the latter being entrusted with the task of focussed regulatory and
supervisory attention towards the NBFC segment
Methods of supervision
On-site inspection
i. Banks
In terms of the new approach adopted for the on-site inspection of banks, the Inspecting Officers
concentrate on core assessments based on the CAMELS model (Capital adequacy, Asset quality,
Management, Earnings appraisal, Liquidity and Systems & controls). This approach eschews
aspects which do not have a direct bearing on the evaluation of the bank as a whole or which
should essentially concern the internal management of the bank. The new approach to Annual
Financial Inspections was put in practice from the cycle of inspections commencing in July
1997.
A rating system for domestic and foreign banks based on the international CAMELS model
combining financial management and systems and control elements was introduced for the
inspection cycle commencing from July 1998. The review of the supervisory rating system has
been completed so as to make it more consistent as a measure of evaluation of bank’s standing
and performance as per on-site review. The improved rating framework is expected to come into
effect from the on-site inspection cycle commencing from April 2001.
A model to rate the level of customer service in banks was developed and forwarded to
Indian Banks’ Association for conducting appropriate surveys on customer satisfaction at
periodical intervals. During the course of annual financial inspections ‘customer audit’ is carried
out to evaluate quality of customer service at branches of commercial banks
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A Quarterly Monitoring System through on-site visits to the newly licensed banks in their first
year of operation has been put in place. Old and new private banks displaying systemic
weaknesses are also subjected to quarterly monitoring.
In deference to the desire of the banks (as put forth during an informal feedback session with the
Governor in October 1999) to have an opportunity to meet the supervisor at regular intervals for
discussing compliance related issues and agreeing on regulatory and supervisory requirements in
respect of new business initiatives, a quarterly informal meeting system for banks with the
officials of Department of Banking Supervision has been designed and put in operation from
January 2000.
Some of the public sector banks have also been placed under special monitoring, with a
Senior Officer in the jurisdictional Regional Office of the Bank entrusted with the special
monitoring efforts. The Deputy Governor / Executive Director in-charge of banking supervision
call the CEOs of those banks, wherein serious deficiencies have been reported in the inspection
reports, for a discussion on the specific steps the bank’s top management would need to take to
improve its financial strength and operational soundness.
A new Inspection Manual has been brought out in 1998 taking into account evolving supervisory
needs and shift in approach towards risk based supervision. Another new manual for the use of
inspectors looking at ALM and Treasury operations was prepared with the help of international
consultants under the Technical Assistance Project funded by Department for International
Development (DFID), UK and has been put to use by the RBI inspectors.
Detailed guidelines on risk control systems in computerised banks have been circulated amongst
banks along with the details of electronic records to be maintained for supervisory access.
Specialised training modules along with extensive guidelines for use of RBI Inspectors are in
place for inspection of computerised bank systems. An international consultancy firm, funded by
the DFID (UK), helped the Bank in its aforesaid project.
In order to address the issue of causes of divergence observed with regard to asset classification
etc., provisioning required to be made between the banks/auditors and RBI Inspectors, a
representative group of banks, a chartered accountant and RBI officials was constituted in March
2000 to review and arrive at uniform parameters of assessment of NPAs by banks/auditors and
RBI Inspectors. Guidelines are being issued to the banks and the Inspecting Officers based on the
recommendations of the Group.
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(ii) Supervision of overseas branches of Indian banks
While inspection of the overseas operations of branches of Indian banks is left largely to
the parent banks, a system of evaluation visits covering all branches functioning at different
financial centres has been instituted as a part of the initiatives taken to strengthen cross border
supervision. Besides periodical visits and meetings with overseas supervisors, formal MOUs for
exchange of supervisory information are being worked out as part of the process of
implementation of Basel Committee’s core principles on cross border supervisory cooperation.
Portfolio appraisals of the International Divisions of Indian banks having foreign branches are
also conducted by the Department of Banking Supervision annually. In these appraisal exercises
conducted at the bank’s corporate offices and controlling divisions of foreign operations, asset
quality, operating results, etc. of the foreign branches and the host country regulators’
perceptions are also assessed and periodically discussed with the banks’ International Divisions
for rectification of the functional gaps.
(iii) Financial Institutions
All India financial institutions are being covered by on-site supervisory process
(CAMELS standards) on the lines in vogue for banks since 1995. Taking into account the
developmental functions and supervisory function exercised by some of these institutions –
NABARD supervises state/central cooperative banks and regional rural banks, National Housing
Bank (NHB) regulates and inspects housing finance companies, and IDBI inspects state financial
corporations – a modified approach for supervisory assessment of these institutions has been
introduced. A Working Group under the chairmanship of Shri Y.H.Malegam, a Member of the
BFS, has come out with guidelines that will become operative shortly.
(iv) Non-Banking Financial Companies
The system of on-site examination is structured on the basis of CAMELS approach and
the same is akin to the supervisory model adopted for the banking system. A comprehensive
Inspection Manual has been brought out for the use of Inspecting Officers. Appropriate
supervisory framework, wherever necessary with the assistance of external chartered accountant
firms, has been evolved for on-site inspection of all NBFCs holding public deposits
Off-site Monitoring & Surveillance System

(i) Banks
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As a part of the new supervisory strategy, an off-site monitoring system for surveillance
over banks was put in place in RBI in March 1996. The first tranche of OSMOS returns require
quarterly reporting on assets, liabilities and off balance-sheet exposures, CRAR, operating results
for the quarter, asset quality and large credit exposures in respect of domestic operations by all
banks in India. Data on connected and related lending and profile of ownership, control and
management are also obtained in respect of Indian banks.
Bank profiles containing bank-wide database on all important aspects of bank functioning
including global operations were obtained for the years commencing from 1994 and are being
updated annually on an on-going basis. The database provides information on managerial and
staff productivity areas besides furnishing important ratios on certain financial growth and
supervisory aspects of the bank’s functioning.
Analysis of financial and managerial aspects under the reporting system is done on
quarterly basis in a computerised environment in respect of banks and reviews are placed before
BFS for its perusal and further directions. The second tranche of returns covering liquidity and
interest rate risk exposures were introduced in June 1999. To accommodate the increased data
and analysis required by the second tranche of returns, a project to upgrade the OSMOS database
has been completed and the new processing system has been put in place for the Returns
commencing from the quarter ended September 2000.
Trend analysis reports based on certain important macro level growth/performance
indicators are placed before BFS at periodical intervals. Some of the important reports generated
by the Department include half-yearly review of the performance of banks, half-yearly key
banking statistics, analysis of impaired credits, analysis of large credits, analysis of call money
borrowings, analysis of non SLR investments, etc.
Bank also provides details of peer group performance under various parameters of
growth and operations for the banks of a comparative business size to motivate them to do self
assessment and strive for excellence.
The Indian banks conducting overseas operations report the assets and liabilities, problem
credits, maturity mismatches, large exposures, currency position on quarterly basis and country
exposure, operating results etc. on an annual basis. The reporting system has been reviewed and
rationalised in 1999 in consultation with the banks and the revised system put in place in June
2000. The revised off-site returns focus on information relating to quality and performance of
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overseas investment and credit portfolio, implementation of risk management processes, earning
trends, and viability of the branches.
(ii) All India Development Financial Institutions
Quarterly returns have been designed based on data on the liabilities and assets as well as
data on sources and deployment of funds.
(iii) Non-Banking Financial Companies
Off-site surveillance of NBFCs involves scrutiny of various statutory returns
(quarterly/half yearly/annual), balance sheets, profit and loss account, auditors’ reports, etc. A
format for conducting the off-site surveillance of the companies with asset size of Rs.100 crore
and above has also been devised.
Board for Financial Supervision: Constitution
The Committee on Financial System set up by the Government of India had suggested
that the supervisory functions of RBI should be separated from the more traditional central
banking functions and that a separate agency, which could pay undivided attention to
supervision, should be set up under the aegis of RBI. A complete severance of supervision from
central banking was not considered necessary or desirable in the Indian context. So, based on this
recommendation, the first Board for Financial Supervision (BFS) was constituted on November
16, 1994 by the Governor as a committee of the Central Board of Directors of the Reserve Bank
of India (RBI). It functions under the RBI (BFS) Regulations, 1994 exclusively framed for the
purpose in consultation with the Government of India. The Board is chaired by the Governor and
is constituted by co-opting four non-official Directors from the Central Board as Members for a
term of two years. The Deputy Governors of the Bank are ex-officio Members. One of the
Deputy Governors is nominated as Vice-Chairman. The Department of Banking Supervision
serves as the Secretariat for the BFS.
Shri S P Talwar, Deputy Governor holding charge of the Bank's regulation and supervision
function has been the Vice-Chairman of the BFS since its inception. Dr. Y. Venugopal Reddy
and Shri Jagdish Capoor, Deputy Governors, are other ex-officio Members as on date. Shri Y H
Malegam, Shri E A Reddy, Dr. S S Johl, and Dr. (Ms) Amrita Patel, who were members on the
Central Board of Directors of the Reserve Bank, were the non-official members of the first
Board. The Board has since been reconstituted for a term of two years in consultation with the
Central Board in its meeting held on 21 December 2000, with Dr. Ashok S. Ganguly and Shri K.
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Madhava Rao nominated in the place of Dr. S. S. Johl and Shri E. A. Reddy, who ceased to be
members of the reconstituted Central Board. Shri Y H Malegam and Dr. (Ms) Amrita Patel have
been nominated to continue as Members of the reconstituted BFS. Executive Directors in-charge
of Department of Banking Operations & Development, Department of Banking Supervision and
Department of Non-Banking Supervision participate in the BFS meetings by invitation. In-
charges of these departments are also to be in attendance for the meetings.
The Chairman, Vice-Chairman and Members of the Board jointly and severally exercise the
powers of the Board. The Board is at present required to meet ordinarily at least once a month.
Three Members, of whom one shall be Chairman or the Vice-Chairman, form the quorum for the
meeting.
Advisory Council to BFS

For tendering advice to the BFS in its initial years on policy matters relating to the
supervision of the financial system an Advisory Council was constituted on November 16, 1994
and was in place till March 27, 1998. The Council consisting of five members, eminent in the
fields of law, accountancy, banking, finance and management met normally once a quarter
during the period of its tenure.
Sub Committee (Audit) to BFS

The BFS also constituted an Audit Sub-Committee in January 1995 with the Vice
Chairman of BFS as Chairman of the sub-Committee and two non-official members of BFS as
other Members. Representatives of the Institute of Chartered Accountants are also invited to the
meetings of the Sub Committee depending on the nature of the agenda. The Sub Committee’s
main focus is on up-gradation of the quality of the statutory audit and concurrent audit / internal
audit functions in banks, NBFCs and financial institutions, fixing of remuneration, approval of
the panel of statutory auditors and branch auditors as also the accounting and disclosure
standards
Legal Framework
Umbrella Acts
 Reserve Bank of India Act, 1934: governs the Reserve Bank functions
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 Banking Regulation Act, 1949: governs the financial sector Acts governing specific
functions
 Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt
market
 Securities Contract (Regulation) Act, 1956: Regulates government securities market
 Indian Coinage Act, 1906:Governs currency and coins
 Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999:
Governs trade and foreign exchange market
 "Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of
payment systems in India"
Acts governing Banking Operations

 Companies Act, 1956:Governs banks as companies
 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates
to nationalisation of banks
 Bankers' Books Evidence Act
 Banking Secrecy Act
 Negotiable Instruments Act, 1881
Acts governing Individual Institutions

 State Bank of India Act, 1954
 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
 National Bank for Agriculture and Rural Development Act
 National Housing Bank Act
 Deposit Insurance and Credit Guarantee Corporation Act
Question Bank:
Section – A
1. Central bank as lender of ___________
2. Interest rate given by banks on deposits is determine by ________
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3. RBI is governed by _____________
4. Commercial Banks in India is Governed by_________
5. Ten rupee currrency notes of India is issued by ___________
6. In India Monopoly of Note issue is in the hands of ___________
7. Qualitative credit control measures is otherwise called as ___________
8. The functions of RBI are ____________,___________ and ______________
9. Expand NABARD ?
10. Repo Stands for _________
Section – B
1. What are the features of Central Bank?
2. What is the role of Central Bank in promoting financial services in India?
3. Write in detail the functions of Central Bank?
4. Bring out the objectives of Credit control measures.
5. Examine the note issue functions of RBI.
6. How does Central Bank act as a Bankers Bank?
7. Explain the benefits of monetary Policies.
8. What are the quantitative methods of credit control adopted by RBI?
9. Analyse the need for central bank in a country.
10. Mention the difference between the Qualitative and Quantitative measures of credit
control.
Section – C
1. Discuss the different selective credit control methods adopted by central banks.
2. Discuss the role of RBI as a government bank
3. Explain the functions of Central bank
4. How the Quantitative methods control the volume of credit?
5. Explain the supervisory functions of RBI.
6. Explain control and regulation of RBI.
7. Explain the bank rate credit and its Factors.
8. Explain the factors and objectives of monetary policy.
9. Discuss the different selective credit control methods adopted by central banks.
10. Explain the factors and objectives of monetary policy.
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.
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UNIT IV
Indian Money market – Organized and Unorganized Part – Deficiencies of the Indian Money
Market – Comparison with British and American Money Market.
FINANCIAL MARKETS
MONEY MARKETS CAPITAL MARKETS
MONEY MARKET
Investment and Risk Characteristics:
Term : Mostly Short Term i.e. less than a year
Income : Low
Security : Depends upon the issuer
Marketability : Good
Volatility : Low since the term is short
Inflation : Low impact of inflation as term is short
Expected Return : Negotiable/Equivalent to bank deposit
Currency : Available in different currencies
The Six Horses: Why, What, Who, Which, How and Where?
Why : The Need
What : The Definition
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Who : The Players
Which and How : The Product and Process
Where : The Resources
Why: The Need

 Need for short term funds by Banks.
 Outlet for deploying funds on short term basis .
 Optimize the yield on temporary surplus funds
 Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the
broad objective of price stability, efficient allocation of credit and a stable foreign
exchange market
What: The Definition

Money Market is "the centre for dealings, mainly short-term character, in money assets.
It meets the short - term requirements of borrower and provides liquidity or cash to the lenders. It
is the place where short - term surplus investible funds at the disposal of financial and other
institutions and individuals are bid by borrowers, again comprising Institutions, individuals and
also the Government itself"
Money market refers to the market for short term assets that are close substitutes of
money, usually with maturities of less than a year. A well functioning money market provides a
relatively safe and steady income -yielding avenue. Allows the investor institutions to optimize
the yield on temporary surplus funds
Who: The Players

Central Bank (State Bank of Pakistan).Commercial Banks, Co-operative Banks and
Primary Dealers are allowed to borrow and lend.
Specified Pakistani Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders. Individuals, firms, companies,
corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.
Which and How: The Products and Process
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 Treasury Bills
 Certificate of Deposit
 Commercial Paper
 Local Authority Bills
 Bills of Exchange
 Call Deposit
 Term Deposit
 Floating Rate Notes
Money Market is a market for lending and borrowing of short-term loans. It does not deal in
cash or money, but in trade bills promissory notes and government papers drawn for short
periods. These short-term bills are highly liquid and known as near money
A money market is the center for dealing mainly in short terms money assets. It meets the short-
term requirements of the borrowers and provides liquidity or cash to the lenders. It is the place
where individuals, Individuals and Government borrow short-term surplus funds at the disposal
of the financial institutions and individuals. The money market does not refer to a particular
place where money is borrowed and lent by the parties concerned. The organization of the
marker is formal. The transactions between borrowers and lenders and middlemen take place
through telephone, telegraph, mail and agents. Bo personal contact of presence of the parties is
essential However a geographical name may be given to the money market according to its
location For e.g., The London money market operates from Lombard Street and the New York
money market operates from Wall Street and the Bombay money market is the center for Short
term funds not only for Bombay but also the whole of India.
Definition
According to Geoffrey Crowther, “The money market is the collective name governs to
the various firms and Institutions that deal in the various grades of near money ”.
According to RBI Report, “ Money market is the centre for dealings mainly of short term
character, in money assets, it meets short-term requirements of borrowers and vide liquidity or
cash to the lenders”.
So we can define money market as, “the market in which the highly liquid short-term
bills are dealt with mainly by government, business concerns and private individuals.
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Importance of money market
A well-developed money market is essential for a modern economy. Though, historically,
money market has developed as a result of industrial and commercial progress, it also has
important role to play in the process of industrialization and economic development of a country.
Importance of a developed money market are discussed below:
1. Financing Trade:
Money Market plays crucial role in financing both internal as well as international trade.
Commercial finance is made available to the traders through bills of exchange, which are
discounted by the bill market. The acceptance houses and discount markets help in financing
foreign trade.
2. Financing Industry:
Money market contributes to the growth of industries in two ways:
 Money market helps the industries in securing short-term loans to meet their working
capital requirements through the system of finance bills, commercial papers, etc.
 Industries generally need long-term loans, which are provided in the capital market.
However, capital market depends upon the nature of and the conditions in the money
market. The short-term interest rates of the money market influence the long-term interest
rates of the capital market. Thus, money market indirectly helps the industries through its
link with and influence on long-term capital market.
3. Profitable Investment:
Money market enables the commercial banks to use their excess reserves in profitable
investment. The main objective of the commercial banks is to earn income from its reserves as
well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money
market, the excess reserves of the commercial banks are invested in near-money assets (e.g.
short-term bills of exchange) which are highly liquid and can be easily converted into cash.
Thus, the commercial banks earn profits without losing liquidity.
4. Self-Sufficiency of Commercial Bank:
Developed money market helps the commercial banks to become self-sufficient. In the
situation of emergency, when the commercial banks have scarcity of funds, they need not
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approach the central bank and borrow at a higher interest rate. On the other hand, they can meet
their requirements by recalling their old short-run loans from the money market.
5. Help to Central Bank:
Though the central bank can function and influence the banking system in the absence of
a money market, the existence of a developed money market smoothens the functioning and
increases the efficiency of the central bank.
Money market helps the central bank in two ways:
a. The short-run interest rates of the money market serves as an indicator of the monetary
and banking conditions in the country and, in this way, guide the central bank to adopt an
appropriate banking policy,
b. The sensitive and integrated money market helps the central bank to secure quick and
widespread influence on the sub-markets, and thus achieve effective implementation of
its policy.
Functions of money market

The major functions of money market are given below:-
1. To maintain monetary equilibrium. It means to keep a balance between the demand for
and supply of money for short term monetary transactions.
2. To promote economic growth. Money market can do this by making funds available to
various units in the economy such as agriculture, small scale industries, etc.
3. To provide help to Trade and Industry. Money market provides adequate finance to trade
and industry. Similarly it also provides facility of discounting bills of exchange for trade
and industry.
4. To help in implementing Monetary Policy. It provides a mechanism for an effective
implementation of the monetary policy.
5. To help in Capital Formation. Money market makes available investment avenues for
short term period. It helps in generating savings and investments in the economy.
6. Money market provides non-inflationary sources of finance to government. It is possible
by issuing treasury bills in order to raise short loans. However this dose not leads to
increases in the prices.
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Apart from those, money market is an arrangement which accommodates banks and financial
institutions dealing in short term monetary activities such as the demand for and supply of
money.
Characteristic features of a developed money market

The developed money market has the following characteristics:
i. Existence of Central Bank:
In the developed money market, the role of Central Bank is notable. It controls the
entire money market operations by making the availability of funds depending upon the
economic cycles. It can be done through its open market operations.
ii. Highly organised Banking System:
As they are the main dealers in short-term funds, the commercial banks are
considered as nervous system of the money market. Therefore, a well developed money
market will have a highly organised and developed commercial banking system.
iii. Existence of sub-markets:
In developed money market the various sub-markets existed and functioning
smoothly. That is, the money market will have a developed sub- markets such as bill
market, call money market, acceptance market, discount market, etc. It can be said that
the larger the number of sub-markets, the broader and more developed will be the
structure of the money market.
iv. Prevalence of healthy competition:
In each sub-market there should be a reasonable and healthy competition. That is,
in a developed money market, there are a large number of borrowers, lenders and
dealers. Then only each market will be active enough to achieve the purpose of its
existence.
v. Integration of sub-markets:
In the developed money market there will be a perfect integration among various
sub-markets of the money market. Their functioning are interdependent. The funds flow
from one sub-market to another and the activities of one sub- market should create
effects in the other markets also.
vi. Availability of proper credit instruments:
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The developed money market should have the necessary credit instruments such
as treasury bills, promissory notes, bills of exchange, etc. They should be freely
available.
vii. Flexibility and adequacy of funds:
In a developed money market, there must be ample resources. The flow of funds
into the money market should also be flexible enough, i.e., the flow of funds can be
increased or decreased depending upon the demand for funds.
viii. International attraction:
The developed money markets attract funds from foreign countries also. The
dealers, borrowers and lenders of foreign countries are eagerly coming forward to
participate in the activities of developed money market.
ix. Uniformity of interest rates:
Prevalence of uniformity in interest rates in different parts of the country is the
characteristic feature of a developed money market.
x. Stability of prices:
Stability of prices all over the country will be an outcome of the effective
functioning of a developed money market.
xi. Highly developed industrial system:
The money market will function smoothly and can achieve the basic purpose of
its existence only when there is a highly developed industrial system. Developed money
market demands for such a system.
Components of money market:

The various institutions in the money market generally include the following.
1. Central Bank:
It is naturally to be the leader of all the banks. It is the bank; which is
trusted with the task of controlling the issue of money and funds to the market and
regulates the credit facilities provided by various other institutions. The Central
Bank has the supreme authority of the money market. It is the main source of
supply of funds to the market.
2. Commercial Banks:
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They play a vital role in the money market. It forms the most important
part of the money market. They make advances, grant overdraft, discounting of
the Bill of Exchange and lend against promissory notes to the business
community. They also borrow from the Central Bank. They also take help of the
market in solving their liquidity problems.
3. Non-Banking financial intermediaries:
Insurance Companies, Investment Band and financial corporation also
operate by lending surplus funds.
4. Discount Houses.
Discount houses are special institutions for rediscounting the bill of
exchange. They usually deal in three kinds of bills.
a. Domestic bills
b. Foreign bills and
c. The government treasury bills.
The discount houses borrow huge funds for short periods form the commercial banks and
RBI and invest them in discounting bills. But before discounting a trade bill of exchange, the
discount house insists that it should be accepted by an Acceptance House.
4. Acceptance Houses:
These are institutions which specialize in accepting bills of exchange.
Generally they are merchant bankers. They act as second signatories in the bill of
exchange. That is they guarantee the bills of a trader whose financial standing is
not know, for making the bill negotiable. They maintain correspondents in
important towns of various places within and outside the country to collect
information about the creditworthiness and financial position of the customers ,
who seek the assistance of the acceptance houses. For their service, they charge a
small amount of commission but ensure great security for the bills discounted by
the discount houses.
5. Bill Brokers:
The “Bill Brokers” are intimately knowing their customers and act as
intermediaries between the sellers and buyers of bill for a small commission.
Sometimes, these bill brokers discount bills on their own account.
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Indian money market
The Money market in India is the money market for short-term and long-term funds
with maturity ranging from overnight to one year in India including financial instruments that are
deemed to be close substitutes of money. Similar to developed economies the Indian money
market is diversified and has evolved through many stages, from the conventional platform of
treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps
The Indian money market consists of diverse sub-markets, each dealing in a particular
type of short-term credit. The money market fulfills the borrowing and investment requirements
of providers and users of short-term funds, and balances the demand for and supply of short-term
funds by providing an equilibrium mechanism. It also serves as a focal point for the central
bank's intervention in the market.
Components / structure of Indian money market:-

Indian money market is characterized by its dichotomy i.e. there are two sectors of
money market. The organized sector and unorganized sector. The organized sector is within the
direct purview of RBI regulations. The unorganized sector consist of indigenous bankers, money
lenders, non-banking financial institutions etc.
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STRUCTURE OF INDIAN MONEY MARKET
ORGANIZED MONEY MARKET UNORGANIZED MONEY MARKET
Reserve Bank of India Indigeneous Bankers

Scheduled Commercial Banks Lenders Domestic Money
Development Banks Nidhis & Chit funds
Investment Institutions Traders and Friends
Regional Rural Banks Brokers & Dealers
Foreign Banks
Statefinance corporations, etc.,
DFHI
SUB MARKETS
Call Money 364 day Bill

Bill Market CDs CPs
Market Market
Commercial
Bills
Treasury
Bills
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Organized sector of money market
Organized Money Market is not a single market, it consist of number of sub markets. The
most important feature of money market instrument is that it is liquid. It is characterized by high
degree of safety of principal. Following are the instruments which are traded in money market.
The organised sector of Indian money market can be further classified into the following sub-
markets.
1. Call Money Market
The most important component of organised money market is the call money market. It
deals in call loans or call money granted for one day. Since the participants in the call money
market are mostly banks, it is also called interbank call money market. The banks with
temporary deficit of funds form the demand side and the banks with temporary excess of funds
from the supply side of the call money market. The main features of Indian call money market
are as follows:
i. Call money market provides the institutional arrangement for making the
temporary surplus of some banks available to other banks which are temporary in
short of funds.
ii. Mainly the banks participate in the call money market. The State Bank of India is
always on the lenders' side of the market.
iii. The call money market operates through brokers who always keep in touch with
banks and establish a link between the borrowing and lending banks.
iv. The call money market is highly sensitive and competitive market. As such, it acts
as the best indicator of the liquidity position of the organised money market.
v. The rate of interest in the call money market is highly unstable. It quickly rises
under the pressures of excess demand for funds and quickly falls under the
pressures of excess supply of funds.
vi. The call money market plays a vital role in removing the day-to-day fluctuations
in the reserve position of the individual banks and improving the functioning of
the banking system in the country.
2. Treasury Bill Market
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The Treasury bill market deals in treasury bills which are the short-term (i.e., 91, 182 and
364 days) liability of the Government of India. Theoretically these bills are issued to meet the
short-term financial requirements of the government. But, in reality, they have become a
permanent source of funds to the government. Every year, a portion of treasury bills are
converted into long-term bonds. Treasury bills are of two types: ad hoc and regular.
Ad hoc treasury bills are issued to the state governments, semi-government departments
and foreign central banks. They are not sold to the banks and the general public, and are not
marketable. The regular treasury bills are sold to the banks and public and are freely marketable.
Both types of ad hoc and regular treasury bills are sold by Reserve Bank of India on behalf of the
Central Government.
The Treasury bill market in India is underdeveloped as compared to the Treasury bill
markets in the U.S.A. and the U.K. In the U.S.A. and the U.K., the treasury bills are the most
important money market instrument: (a) treasury bills provide a risk-free, profitable and highly
liquid investment outlet for short-term, surpluses of various financial institutions; (b) treasury
bills from an important source of raising fund for the government; and (c) for the central bank
the treasury bills are the main instrument of open market operations.
On the contrary, the Indian Treasury bill market has no dealers expect the Reserve Bank of India.
Besides the Reserve Bank, some treasury bills are held by commercial banks, state government
and semi-government bodies. But, these treasury bills are not popular with the non-bank
financial institutions, corporations, and individuals mainly because of absence of a developed
Treasury bill market.
3. Commercial Bills
Commercial bills are short term, negotiable and self liquidating money market instruments
with low risk. A bill of exchange is drawn by a seller on the buyer to make payment within a
certain period of time. Generally, the maturity period is of three months. Commercial bill can be
resold a number of times during the usance period of bill. The commercial bills are purchased
and discounted by commercial banks and are rediscounted by financial institutions like EXIM
banks, SIDBI, IDBI etc.
Commercial bill market deals in commercial bills issued by the firms engaged in
business. These bills are generally of three months maturity. A commercial bill is a promise to
pay a specified amount in a specified period by the buyer of goods to the seller of the goods. The
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seller, who has sold his goods on credit draws the bill and sends it to the buyer for acceptance.
After the buyer or his bank writes the word 'accepted' on the bill, it becomes a marketable
instrument and is sent to the seller.
The seller can now sell the bill (i.e., get it discounted) to his bank for cash. In times of financial
crisis, the bank can sell the bills to other banks or get them rediscounted from the Reserved
Bank. Commercial bill can be resold a number of times during the usance period of bill. The
commercial bills are purchased and discounted by commercial banks and are rediscounted by
financial institutions like EXIM banks, SIDBI, IDBI etc.
In India, the commercial bill market is very much underdeveloped. RBI is trying to
develop the bill market in our country. RBI have introduced an innovative instrument known as
“Derivative .Usance Promissory Notes, with a view to eliminate movement of papers and to
facilitate multiple rediscounting.There is absence of specialised institutions like acceptance
houses and discount houses, particularly dealing in acceptance and discounting business.
4. Certificate Of Deposits (CDs) :
CDs are issued by Commercial banks and development financial institutions. CDs are
unsecured, negotiable promissory notes issued at a discount to the face value. The scheme of
CDs was introduced in 1989 by RBI. The main purpose was to enable the commercial banks to
raise funds from market. At present, the maturity period of CDs ranges from 3 months to 1 year.
They are issued in multiples of Rs. 25 lakh subject to a minimum size of Rs. 1 crore. CDs can be
issued at discount to face value. They are freely transferable but only after the lock-in-period of
45 days after the date of issue.
In India the size of CDs market is quite small. In 1992, RBI allowed four financial
institutions ICICI, IDBI, IFCI and IRBI to issue CDs with a maturity period of. one year to three
years.
5. Commercial Papers (CP) :-
Commercial Papers wereintroduced in January 1990. The Commercial Papers can be
issued by listed company which have working capital of not less than Rs. 5 crores. They
could be issued in multiple of Rs. 25 lakhs. The minimum size of issue being Rs. 1 crore. At
present the maturity period of CPs ranges between 7 days to 1 year. CPs are issued at a
discount to its face value and redeemed at its face value.
6. Money Market Mutual Funds (MMMFs) :-
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A Scheme of MMMFs was introduced by RBI in 1992. The goal was to provide an
additional short-term avenue to individual investors. In November 1995 RBI made the scheme
more flexible. The existing guidelines allow banks, public financial institutions and also private
sector institutions to set up MMMFs. The ceiling of Rs. 50 cores on the size of MMMFs
stipulated earlier, has been withdrawn. MMMFs are allowed to issue units to corporate
enterprises and others on par with other mutual funds. Resources mobilised by MMMFs are now
required to be invested in call money, CD, CPs, Commercial Bills arising out of genuine trade
transactions, treasury bills and government dated securities having an unexpired maturity upto
one year. Since March 7, 2000 MMMFs have been brought under the purview of SEBI
regulations. At present there are 3 MMMFs in operation.
7. The Repo Market;-
Repo was introduced in December 1992. Repo is a repurchase agreement. It means
selling a security under an agreement to repurchase it at a predetermined date and rate. Repo
transactions are affected between banks and financial institutions and among bank
themselves, RBI also undertake Repo.
In November 1996, RBI introduced Reverse Repo. It means buying a security on a
spot basis with a commitment to resell on a forward basis. Reverse Repo transactions are
affected with scheduled commercial banks and primary dealers.In March 2003, to broaden
the Repo market, RBI allowed NBFCs, Mutual Funds, Housing Finance and Companies and
Insurance Companies to undertake REPO transactions.
8. Discount and Finance House of India (DFHI)
In 1988, DFHI was set up by RBI. It is jointly owned by RBI, public sector banks
and all India financial institutions which have contributed to its paid up capital. It is playing
an important role in developing an active secondary market in Money Market Instruments. In
February 1996, it was accredited as a Primary Dealer (PD). The DFHI deals in treasury bills,
commercial bills, CDs, CPs, short term deposits, call money market and government
securities.
Unorganized sector of money market
The economy on one hand performs through organized sector and on other hand in
rural areas there is continuance of unorganized, informal and indigenous sector. The
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unorganized money market mostly finances short-term financial needs of farmers and small
businessmen. The main constituents of unorganized money market are:-
1. Indigenous Bankers (IBs)
Indigenous bankers are individuals or private firms who receive deposits and give
loans and thereby operate as banks. IBs accept deposits as well as lend money. They mostly
operate in urban areas, especially in western and southern regions of the country. The
volume of their credit operations is however not known. Further their lending operations are
completely unsupervised and unregulated. Over the years, the significance of IBs has
declined due to growing organised banking sector.
2. Money Lenders (MLs)
They are those whose primary business is money lending. Money lending in India is
very popular both in urban and rural areas. Interest rates are generally high. Large amount of
loans are given for unproductive purposes. The operations of money lenders are prompt,
informal and flexible. The borrowers are mostly poor farmers, artisans, petty traders and
manual workers. Over the years the role of money lenders has declined due to the growing
importance of organised banking sector.
3. Non - Banking Financial Companies (NBFCs) : They consist of :-
a. Chit Funds :
Chit funds are savings institutions. It has regular members who make periodic
subscriptions to the fund. The beneficiary may be selected by drawing of lots. Chit fund is more
popular in Kerala and Tamilnadu. Rbi has no control over the lending activities of chit funds
b. Nidhis :
Nidhis operate as a kind of mutual benefit for their members only. The loans are given
to members at a reasonable rate of interest. Nidhis operate particularly in South India.
c. Loan Or Finance Companies:
Loan companies are found in all parts of the country. Their total capital consists of
borrowings, deposits and owned funds. They give loans to retailers, wholesalers, artisans and self
employed persons. They offer a high rate of interest along with other incentives to attract
deposits. They charge high rate of interest varying from 36% to 48% p.a.
d. Finance Brokers:
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They are found in all major urban markets specially in cloth, grain and commodity
markets. They act as middlemen between lenders and borrowers. They charge commission for
their services.
Features of Indian money market

Every money is unique in nature. The money market in developed and developing
countries differ markedly from each other in many senses. Indian money market is not an
exception for this. Though it is not a developed money market, it is a leading money market
among the developing countries.
Indian Money Market has the following major features or characteristics:-

1. Dichotomic Structure
It is a significant aspect of the Indian money market. It has a simultaneous existence of
both the organized money market as well as unorganised money markets. The organized money
market consists of RBI, all scheduled commercial banks and other recognized financial
institutions. However, the unorganized part of the money market comprises domestic money
lenders, indigenous bankers, trader, etc. The organized money market is in full control of the
RBI. However, unorganized money market remains outside the RBI control. Thus both the
organized and unorganized money market exists simultaneously.
2. Seasonality
The demand for money in Indian money market is of a seasonal nature. India being an
agriculture predominant economy, the demand for money is generated from the agricultural
operations. During the busy season i.e. between October and April more agricultural activities
takes place leading to a higher demand for money.
3. Multiplicity of Interest Rates
In Indian money market, we have many levels of interest rates. They differ from bank to
bank from period to period and even from borrower to borrower. Again in both organized and
unorganized segment the interest rates differs. Thus there is an existence of many rates of interest
in the Indian money market.
4. Lack of Organized Bill Market
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In the Indian money market, the organized bill market is not prevalent. Though the RBI
tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still
there is no properly organized bill market in India.
5. Absence of Integration
This is a very important feature of the Indian money market. At the same time it is
divided among several segments or sections which are loosely connected with each other. There
is a lack of coordination among these different components of the money market. RBI has full
control over the components in the organized segment but it cannot control the components in
the unorganized segment.
6. High Volatility in Call Money Market
The call money market is a market for very short term money. Here money is demanded
at the call rate. Basically the demand for call money comes from the commercial banks.
Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly
volatile.
7. Limited Instruments
It is in fact a defect of the Indian money market. In our money market the supply of
various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits,
Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers
and lenders, It is necessary to develop numerous instruments.
Drawbacks of Indian money market

Some of the important defects or drawbacks of Indian money market are :-
1. Absence of Integration
The Indian money market is broadly divided into the Organized and Unorganized
Sectors. The former comprises the legal financial institutions backed by the RBI. The
unorganized statement of it includes various institutions such as indigenous bankers, village
money lenders, traders, etc. There is lack of proper integration between these two segments.
2. Multiple rate of interest:
In the Indian money market, especially the banks, there exists too many rates of interests.
These rates vary for lending, borrowing, government activities, etc. Many rates of interests create
confusion among the investors.
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3. Insufficient Funds or Resources
The Indian economy with its seasonal structure faces frequent shortage of financial
recourse. Lower income, lower savings, and lack of banking habits among people are some of
the reasons for it.
4. Shortage of Investment Instruments
In the Indian money market, various investment instruments such as Treasury Bills,
Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into
account the size of the population and market these instruments are inadequate.
5. Shortage of Commercial Bill
In India, as many banks keep large funds for liquidity purpose, the use of the commercial
bills is very limited. Similarly since a large number of transactions are preferred in the cash form
the scope for commercial bills are limited.
6. Lack of Organized Banking System
In India even through we have a big network of commercial banks, still the banking
system suffers from major weaknesses such as the NPA, huge losses, poor efficiency. The
absence of the organized banking system is major problem for Indian money market.
7. Less number of Dealers
There are poor number of dealers in the short-term assets who can act as mediators
between the government and the banking system. The less number of dealers leads tc the slow
contact between the end lender and end borrowers.
Recent reforms in Indian money market

Indian Government appointed a committee under the chairmanship of Sukhamoy
Chakravarty in 1984 to review the Indian monetary system. Later, Narayanan Vaghul working
group and Narasimham Committee was also set up. As per the recommendations of these study
groups and with the financial sector reforms initiated in the early 1990s, the government has
adopted following major reforms in the Indian money market.
1. Deregulation of the Interest Rate:
In recent period the government has adopted an interest rate policy of liberal nature. It
lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc.
Commercial banks are advised to see the interest rate change that takes place within the limit.
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There was a further deregulation of interest rates during the economic reforms. Currently interest
rates are determined by the working of market forces except for a few regulations.
2. Money Market Mutual Fund (MMMFs):
In order to provide additional short-term investment revenue, the RBI encouraged and
established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to
sell units to corporate and individuals. The upper limit of 50 crore investments has also been
lifted. Financial institutions such as the IDBI and the UTI have set up such funds.
3. Establishment of the DFI:
The Discount and Finance House of India (DFHI) was set up in April 1988 to impart
liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and
Financial Institutions. DFHI has played an important role in stabilizing the Indian money market.
4. Liquidity Adjustment Facility (LAF):
Through the LAF, the RBI remains in the money market on a continue basis through the
repo transaction. LAF adjusts liquidity in the market through absorption and or injection of
financial resources.
5. Electronic Transactions:
In order to impart transparency and efficiency in the money market transaction the
electronic dealing system has been started. It covers all deals in the money market. Similarly it is
useful for the RBI to watchdog the money market.
6. Establishment of the CCIL:
The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL
clears all transactions in government securities, and repose reported on the Negotiated Dealing
System.
7. Development of New Market Instruments:
The government has consistently tried to introduce new short-term investment
instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of
Deposits, MMMFs, etc. have been introduced in the Indian Money Market.
These are major reforms undertaken in the money market in India. Apart from these, the stamp
duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in
India. Thus, at the end we can conclude that the Indian money market is developing at a good
speed.
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Role of money market in economy
Money markets play a key role in banks’ liquidity management and the transmission of
monetary policy. In normal times, money markets are among the most liquid in the financial
sector. By providing the appropriate instruments and partners for liquidity trading, the money
market allows the refinancing of short and medium term positions and facilitates the mitigation
of your business’ liquidity risk. The banking system and the money market represent the
exclusive setting monetary policy operates in. A developed, active and efficient interbank market
enhances the efficiency of central bank’s monetary policy, transmitting its impulses into the
economy best. Thus, the development of the money market smoothes the progress of financial
intermediation and boosts lending to economy, hence improving the country’s Economic and
social welfare. Therefore, the development of the money market is in all stakeholders’ interests:
the banking system elf, the Central Bank and the economy on the whole.
1. Producing information and allocating capital
The information production role of financial systems is explored by Ramakrishnan and
Thakor (1984), Bhattacharya and P fleiderer (1985), Boyd and Prescott (1986), and Allen (1990).
They develop models where financial intermediaries arise to produce information and sell this
information to savers. Financial intermediaries can improve the ex ante assessment of investment
opportunities with positive ramifications on resource allocation by economizing on information
acquisition costs. As Schumpeter (1912) argued, financial systems can enhance growth by
spurring technological innovation by identifying and funding entrepreneurs with the best chance
of successfully implementing innovative procedures. For sustained growth at the frontier of
technology, acquiring information and strengthening incentives for obtaining information to
improve resource allocation become key issues.
2 Risk sharing
One of the most important functions of a financial system is to achieve an optimal
allocation of risk. There are many studies directly analyzing the interaction of the risk sharing
role of financial systems and economic growth. These theoretical analyses clarify the conditions
under which financial development that facilitates risk sharing promotes economic growth and
welfare. Quite often in these studies, however, authors focus on either markets or intermediaries,
or a comparison of the two extreme cases where every financing is conducted by either markets
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or intermediaries. The intermediate case in which markets and institutions co-exist is rarely
analyzed in the context of growth models because the addition of markets can destroy the risk-
sharing opportunities provided by intermediaries. In addition, studies focus on the role of
financial systems that face diversifiable risks. The implications for financial development and
financial structure on economic growth are potentially quite different when markets cannot
diversify away all of the risks inherent in the economic environment. One importance of risk
sharing on economic growth comes from the fact that while avers generally do not like risk,
high-return projects tend to be riskier than low return projects. Thus, financial markets that ease
risk diversification tend to induce a portfolio shift onwards projects with higher expected returns
as pointed out by Greenwood and Jovanovic (1990), Saint Paul (1992), Devereux and Smith
(1994) and Obstfeld (1994). King and Levine (1993a) show that cross section al risk
diversification can stimulate risky innovative activityfor sufficiently risk - averse agents. The
ability to hold a diversified portfolio of innovative projects reduces risk and promotes
investment in growth - enhancing innovative activities.
3. Liquidity
Money market funds provide valuable liquidity by investing in commercial paper,
municipal securities and repurchase agreements: Money market funds are significant participants
in the commercial paper, municipal securities and repurchase agreement (orrepo) markets.
Money market funds hold almost 40% of all outstanding commercial paper, which is now the
primary source for short-term funding for corporations, who issue commercial paper as a lower-
cost alternative to short-term bank loans. The repo market is an important means by which the
federal Reserve conducts monetary policy and provides daily liquidity to global financial
institutions. Quantum of liquidity in the banking system is of paramount importance, as it is an
important determinant of the inflation rate as well as the creation of credit by the banks in the
economy. Market forces generally indicate the need for borrowing or liquidity and the money
market adjusts itself to such calls. RBI facilitates such adjustments with monetary policy tools
available with it. Heavy call for funds overnight indicates that the banks are in need of short term
funds and in case of liquidity crunch, the interest rates would go up.
4. Diversification
For both individual and institutional investors, money market mutual funds provide a
commercially attractive alternative to bank deposits. Money market funds offer greater
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investment diversification, are less susceptible to collapse than banks and offer investors greater
disclosure on the nature of their investments and the underlying assets than traditional bank
deposits. For the financial system generally, money market mutual funds reduce pressure on the
FDIC, reduce systemic risk and provide essential liquidity to capital markets because of the
funds’ investments in commercial paper, municipal securities and repurchase agreements.
5. Encouragements to saving and investment
Money market has encouraged investors to save which results in encouragement to
investment in the economy. The savings and investment equilibrium of demand and supply of
loanable funds helps in the allocation of resources.
6. Controls the price line in economy
Inflation is one of the severe economic problems that all the developing economies have
to face every now and then. Cyclical fluctuations do influence the price level differently
depending upon the demand and supply situation at the given point of time. Money market rates
play a main role in controlling the price line. Higher rates in the money markets decrease the
liquidity in the economy and have the effect of reducing the economic activity in the system.
Reduced rates on the other hand increase the liquidity in the market and bring down the cost of
capital considerably, thereby rising the investment. This function also assists the RBI to control
the general money supply in the economy.
7. Helps in correcting the imbalances in economy.
Financial policy on the other hand, has longer term perspective and aims at correcting the
imbalances in the economy. Credit policy and the financial policy both balance each other to
achieve the long term goals strong - minded by the government. It not only maintains total
control over the credit creation by the banks, but also keeps a close watch over it. The
instruments of financial policy counting the repo rate cash reserve ratio and bank rate are used by
the Central Bank of the country to give the necessary direction to the monetary policy.
8. Regulates the flow of credit and credit rates

Money markets are one of the most significant mechanisms of any developing financial
system. In its place of just ensure that the money market in India regulate the flow of credit and
credit rates, this instrument has emerge as one of the significant policy tools with the government
and the RBI to control the financial policy, money supply, credit creation and control, inflation
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rate and overall economic policy of the State. Therefore the first and the leading function of the
money market mechanism are regulatory in nature. While determining the total volume of credit
plan for the six monthly periods, the credit policy also aims at directing the flow of credit as per
the priorities fixed by the government according to the requirements of the economy. Credit
policy as an instrument is important to ensure the availability of the credit in sufficient volumes;
it also caters to the credit needs of various sectors of the economy. The RBI assist the
government to realize its policies related to the credit plans throughout its statutory control over
the banking system of the country.
9. Transmission of monetary policy
The money market forms the first and foremost link in the transmission of monetary
policy impulses to the real economy. Policy interventions by the central bank along with its
market operations influence the decisions of households and firms through the monetary policy
transmission mechanism. The key to this mechanism is the total claim of the economy on the
central bank, commonly known as the monetary base or high-powered money in the economy.
Among the constituents of the monetary base, the most important constituent is bank reserves, i.e
the claims that banks hold in the form of deposits with the central bank. The banks’ need for
these reserves depends on the overall level of economic activity.
This is governed by several factors:

i. Banks hold such reserves in proportion to the volume of deposits in many countries,
known as reserve requirements, which influence their ability to extend credit and create
deposits, thereby limiting the volume of transactions to be handled by the bank
ii. ability to make loans (asset of the bank) depends on its ability to mobilize deposits
(liability of the bank) as total assets and liabilities of the bank need to match and
expand/contract together; and
iii. Banks’ need to hold balances at the central bank for settlement of claims within the
banking system as these transactions are settled through the accounts of banks maintained
with the central bank. Therefore, the daily functioning of a modern economy and its
financial system creates a demand for central bank reserves which increases along with
an expansion in overall economic activity (Friedman, 2000b).
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Growth of money market in India
While the need for long term financing is met by the capital or financial markets, money
market is a mechanism which deals with lending and borrowing of short term funds. Post
reforms period in India has witnessed tremendous growth of the Indian money markets. Banks
and other financial institutions have been able to meet the high expectations of short term
funding of important sectors like the industry, services and agriculture. Functioning under the
regulation and control of the Reserve Bank of India (RBI), the Indian money markets have also
exhibited the required maturity and resilience over the past about two decades. Decision of the
government to allow the private sector banks to operate has provided much needed healthy
competition in the money markets, resulting in fair amount of improvement in their functioning.
The Indian financial markets remained orderly, notwithstanding the impact of global
developments and tight liquidity conditions in domestic markets. Call rate firmed up in step with
policy rates and tight liquidity conditions. It mostly remained above the upper bound of the LAF
corridor during the third quarter of 2010 - 11. Both commercial paper (CP) and certificate of
deposit (CD) markets remained active as alternative sources of finance. The yield curve for
Government Securities (G-Sec) shifted, reflecting expectation of policy rate changes in an
inflationary environment. The Indian Rupee appreciated moderately against the US dollar and
stock prices rose on the back of strong foreign portfolio inflows. Prices in the housing market in
general continued the rising trend during the second quarter of 2010 - 11.
Inter bank market

Money market denotes inter - bank market where the banks borrow and lend among
themselves to meet the short term credit and deposit needs of the economy. Short term generally
covers the time period upto one year. The money market operations help the banks tide over the
temporary mismatch of funds with them. In case a particular bank needs funds for a few days, it
can borrow from another bank by paying the determined interest rate. The lending bank also
gains, as it is able to earn interest on the funds lying idle with it. In other words, money market
provides avenues to the players in the market to strike equilibrium between the surplus funds
with the lenders and the requirement of funds for the borrowers. An important function of the
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money market is to provide a focal point for interventions of the RBI to influence the liquidity in
the financial system and implement other monetary policy measures.
RBI intervention
Depending on the economic situation and available market trends, the RBI intervenes in
the money market through a host of interventions. In case of liquidity crunch, the RBI has the
option of either reducing the Cash Reserve Ratio (CRR) or pumping in more money supply into
the system. Recently, to overcome the liquidity crunch in the Indian money market, the RBI has
released more than Rs 75,000 crore with two back – to - back reductions in the CRR.
Link with foreign exchange market

In addition to the lending by the banks and the financial institutions, various companies
in the corporate sector also issue fixed deposits to the public for shorter duration and to that
extent become part of the money market mechanism selectively. The maturities of the
instruments issued by the money market as a whole, range from one day to one year. The money
market is also closely linked with the Foreign Exchange Market, through the process of covered
interest arbitrage in which the forward premium acts as a bridge between the domestic and
foreign interest rates.
Determination of appropriate interest for deposits

Determination of appropriate interest for deposits or loans by the banks or the other
financial institutions is a complex mechanism in itself. There are several issues that need to be
resolved before the optimum rates are determined. While the term structure of the interest rate is
a very important determinant, the difference between the existing domestic and international
interest rates also emerges as an important factor. Further, there are several credit instruments
which involve similar maturity but diversely different risk factors. Such distortions are available
only in developing and diverse economies like the Indian economy and need extra care while
handling the issues at the policy levels.
Comparison of London, New York and Indian money markets
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LONDON MONEY ARKET NEW YORK MONEY INDIAN MONEY
MARKET MARKET
1. Period of Development
London money market has It has come into prominence It has become popular after
enjoyed the supreme position only during the second world independence specifically
till the beginning of First war period. after nationalization of banks
world war period. in 1969.
2. Nature of growth
Highly organized and well Organised and well developed Fast catching up woth matured
developed. but next to London Money market since 1992.
Market
3. Control Over the money market
The Bank of England controls The Federal Reserve Banks RBI has control over the
the money market through control the money markets market and regulates liquidity
traditions, conventions and through statutory powers. through DHFL, primary
persuasions. dealers, Open market
operations, (OMO) etc.,
4. Weapons used to control money market
Bank Rate and open market The Federal banks use more CRR, ‘Repo’ transactions,
operations direct weapons of credit Moral suasion, OMO of
controls as variation of cash treasury Bills etc.,
reserve ratios, etc.,
5. Specialized Institutions
The acceptance houses, It does not have such DFHI, Primary Dealers,
Discount houses, etc., are institutions. Commercial Development Financial
playing main role in the banks perform these functions. institutions, Money market ,
money market. mutual fund etc.
6. Competition among Institutions
The functions of the In this market various Healthy competition is gaining
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specialized institutions like institutions function ground. RBI determines the
discount houses, acceptance independently and hence players in the market. The
houses, Bill Brokers, compete for funds in the large number of lenders
commercial banks, etc., are all money market. But the including financial
complementary and these competition is healthy. institutions, mutual funds.
institutions do not compete However borrowers are
among themselves for funds. restricted to commercial banks
and few institutions.
7. System of Banking
Branch banking prevails. The Unit banking prevails, since In India branch banking is
banking system is mainly there are numerous banks of popular. Even then, many
under the control of “Big five small sixe, they do not have private sector banks are small
banks”. their banks in Washington. in size.
8. Number of Central Banks
In England there is only one There are 12”Federal Reserve In India there is only “RBI”
central bank. “The bank of Banks” for different regions. for the entire central banking
England” With Federal Reserve System operations.
at the apex level.
9. Operation of Bill Market
There is a well developed bill There is no well developed Bill market is not developed in
market. Commercial banks do bill market. India.
not directly discount the bills
form customers.
10. Variation of Interest Rates
There is no big variation in No variation in interest rates. Since the control of RBI over
interest rates in the market. There is close relation the money market is not
There is close relation between the Federal bank rates adequate there is no close
between the central bank rates and the markets. relation between the RBI rates
and the markets. and the markets.
11. Attraction of Foreign Funds
Highly developed and attracts More attraction of foreign Underdeveloped due to the
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the foreign funds. funds restrictions over foreign
exchange transactions.
Capital market
A capital market is a component of a financial market that allows long-term trading of
debt and equity-backed securities. Long-term borrowing or lending is done by investors or
corporations that have large amounts of wealth at their disposal. The most popular capital market
is the NYSE or the New York Stock Exchange. Huge financial regulators are responsible for
overseeing the capital market to ensure that companies do not defraud their investors. Trading
can be done by a number of credit instruments such as stocks, shares, equity, debentured, bonds,
and securities. Much of the trading is actually done online using a computer. There is no actual
cash involved in trading.
Investments made in a capital market usually last longer than a year and can even last up to 25-
30 years. Some investments may depend on the life of the company, with the investment ending
if the company shuts down. A benefit of this investment is that if need arises, the investor can
swiftly cash their investment. Capital market can be divided into two divisions: stock markets
and bond markets. In stock markets investors acquire the ownership of the company they are
investing in, while in bond markets investors are considered as creditors. Investment done in
capital markets are usually for acquiring physical capital goods that would help increase its
income. However, generating an income may take anywhere from a couple of months to many
years or could even fall through.
Difference between money market and capital market

Points of Distinction Money Market Capital Market
Is a component of the financial Is a component of financial
Definition
markets where short-term markets where long-term
236
borrowing takes place borrowing takes place
Lasts for more than one year
Lasts anywhere from 1 hour to 90
Maturity Period and can also include life-time of
days.
a company.
Certificate of deposit, Repurchase
agreements, Commercial paper,
Eurodollar deposit, Federal funds, Stocks, Shares, Debentures,
Credit Instruments Municipal notes, Treasury bills, bonds, Securities of the
Money funds, Foreign Exchange Government.
Swaps, short-lived mortgage and
asset-backed securities.
Nature of Credit Homogenous. A lot of variety Heterogeneous. A lot of
Instruments causes problems for investors. varieties are required.
Long-term credit required to
Short-term credit required for establish business, expand
Purpose of Loan
small investments. business or purchase fixed
assets.
Basic Role Liquidity adjustment Putting capital to work
Stock exchanges, Commercial
Central banks, Commercial banks,
banks and Nonbank institutions,
Acceptance houses, Nonbank
Institutions such as Insurance Companies,
financial institutions, Bill brokers,
Mortgage Banks, Building
etc.
Societies, etc.
Risk Risk is small Risk is greater
Commercial banks are closely Institutions are regulated to
Market Regulation regulated to prevent occurrence of keep them from defrauding
a liquidity crisis. customers.
Indirectly related with central
Relation with Central Closely related to the central banks
banks and feels fluctuations
Bank of the country.
depending on the policies of
237
central banks.
QUESTIONS
SECTION-A
1. Money market deals with ________
2. The leader of Indian Money Market is _______
3. The other name of American Money Market is ___
4. The leader of London Money Market is ______
5. London Money Market is a ________
6. Money Market Mutual funds was marketed in the year ______
7. Money Market means ___
8. The components of Money market are
9. Unorganized sector of Indian Money market can be classified into
10. Bills of exchange is an instrument of _________
SECTION-B
1. What is Money Market?

2. What are the features of Money Market?
3. What are the components of Money Markets?
4. What is the importance of Money Market?
5. State the difference of Money Market and Capital Market?
6. Explain the organized and unorganized part of Money Market?
7. What is Call Money Market?
8. What are the Instruments of Money Market?
9. Explain the draw backs of Indian Money Market?
10.Explain the features of Indian Money Market?
SECTION-C
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1. What are the features of Indian Money Market?
2. What are the functions of Money Market?
3. Explain the deficiencies of the Indian Money Market
4. Discuss the features of a developed Money Market
5. Explain the structure of Indian Money Market
6. Compare and contrast the Indian Money Market and London Money Market
7. Explain the components of Money Market
8. Differentiate Money Market with Capital Market
9. State the recent trends in Indian Money Market?
10.Compare and contrast the Indian Money Market and London Money Market and American
money Market/
239
UNIT-V
State Bank of India – its special place in the banking scene – Commercial Banks and rural
financing – Regional Rural Banks – place of Co-operative banks in the Indian Banking scene.
Development Banking – IDBI – ICICI.
State bank of India

The State Bank of India (SBI) is the largest Indian banking and financial services
company (by turnover and total assets) with its headquarters in Mumbai, India. It is state-owned.
The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding
in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian
Subcontinent. Bank of Madras merged into the other two presidency banks, Bank of Calcutta and
Bank of Bombay to form Imperial Bank of India, which in turn became State Bank of India. The
government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank of
India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took
over the stake held by the Reserve Bank of India.
SBI provides a range of banking products through its vast network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with
over 16,000 branches, has the largest banking branch network in India. SBI has 14 Local Head
Offices and 57 Zonal Offices that are located at important cities throughout the country. It also
has around 130 branches overseas.
With an asset base of $352 billion and $285 billion in deposits, SBI is a regional banking
behemoth and is one of the largest financial institutions in the world. It has a market share among
Indian commercial banks of about 20% in deposits and loans. The State Bank of India is the 29th
most reputed company in the world according to Forbes. Also SBI is the only bank featured in
the coveted "top 10 brands of India" list in an annual survey conducted by Brand Finance and
The Economic Times in 2010.
The State Bank of India is the largest of the Big Four banks of India, along with ICICI Bank,
Punjab National Bank and HDFC Bank—its main competitors. It is a statutory institution like the
RBI and is governed by the SBI act of 1955.
Evolution of SBI:
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The evolution of State Bank of India can be traced back to the first decade of the 19th
century. It began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The
bank was redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first
ever joint-stock bank of the British India, established under the sponsorship of the Government
of Bengal. Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of
Madras (established on 1 July 1843) followed the Bank of Bengal. These three banks dominated
the modern banking scenario in India, until when they were amalgamated to form the Imperial
Bank of India, on 27 January 1921.
An important turning point in the history of State Bank of India is the launch of the first
Five Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy in
general and the rural sector of the country, in particular. Until the Plan, the commercial banks of
the country, including the Imperial Bank of India, confined their services to the urban sector.
Moreover, they were not equipped to respond to the growing needs of the economic revival
taking shape in the rural areas of the country. Therefore, in order to serve the economy as a
whole and rural sector in particular, the All India Rural Credit Survey Committee recommended
the formation of a state-partnered and state-sponsored bank.
The All India Rural Credit Survey Committee proposed the take over of the Imperial
Bank of India, and integrating with it, the former state-owned or state-associate banks.
Subsequently, an Act was passed in the Parliament of India in May 1955. As a result, the State
Bank of India (SBI) was established on 1 July 1955. This resulted in making the State Bank of
India more powerful, because as much as a quarter of the resources of the Indian banking system
were controlled directly by the State. Later on, the State Bank of India (Subsidiary Banks) Act
was passed in 1959. The Act enabled the State Bank of India to make the eight former State-
associated banks as its subsidiaries.
The State Bank of India emerged as a pacesetter, with its operations carried out by the
480 offices comprising branches, sub offices and three Local Head Offices, inherited from the
Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to
creditworthy parties, the State Bank of India catered to the needs of the customers, by banking
purposefully. The bank served the heterogeneous financial needs of the planned economic
development.
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Nationalization of the imperial banks
Reasons for Nationalization
1. Already functioning as a semi-government:
The imperial bank from its establishment in 1920, had enjoyed a number of privileges
and was functioning as a semi-government bank. It was established under a separate act of
Parliament, the imperial bank of India act. It enacted as the agent of Reserve Bank of India in
the places where the RBI did not have its branches. Hence it was considered more appropriate to
nationalize the Imperial Bank.
2. Transfer of profits to the Government:
The imperial Bank earned the profits because of the public confidence on it and because
of its association with the government, large amount of government funds are kept with it. Thus
government considered that it was necessary to transfer the profits arising out of government
funds to the government account.
3. Promotion of Agriculture and Rural Development:
After the Second World War, the agricultural prices had gone up, and the rural areas were
not covered by the banking operations. Hence, in order to increase the agricultural produce there
was a need to extend credit facilities to the rural areas. To promote agriculture in all aspects, the
government considered that it was necessary to nationalize the Imperial Bank.
4. Implementation of the Monetary Policy of the Government:
Finally, the government required strong commercial base for the implementation of its
monetary policy and five year plans. IT also became the root cause for the nationalization of the
Imperial bank.
Management of the bank

The Head Office of the SBI is located in Mumbai and the bank has local offices at various
places. The bank is administered by a central board of directors consisting of
 Chairman – Appointed by the central government in consultation with RBI.
 Vice –Chairman - Appointed by the central government in consultation with RBI.
 Managing Directors – appointed by the central board with the approval of the central
government.
 Directors – Elected by the shareholders other than RBI
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 Directors – Nominated by the central government in consultation with RBI to represent
territorial and economic interest having commerce, industry, banking or finance.
 Director – nominated by the central government.
 Director – Nominated by RBI.
The chairman, vice-chairman and managing director shall hold office for such terms not
exceeding five years, as the central government may fix hen appointing them and shall be
eligible for reappointment. The directors elected by the shareholders and nominated by the
central government will hold office for four years and are eligible for re-election or re-
nomination. Other nominated directors will hold office during the pleasure of the authority
appointing them. At each plate where the state bank has a local head office, there is a local
board consisting of the members of the central board residing in that area and not more than 8
directors, of which one will be elected by shareholders whose names appear in the branch
register concerned, 6 will be nominated by the central government and the remaining one will be
filled by the secretary and treasurer.
Further, there can be local committees where there are no head offices. No person who is a
member of the central or state legislature can be a director of the bank. The local boards will be
required to exercise all the powers and perform all functions of the bank in relation to the
specified business that may be carried on under the provisions of sec.32 and 33 of the act. With
a view to enabling the local boards to cater much more effectively and expeditiously to the
banking requirements of their respective regions, their powers and authority have been enhanced.
Organisation structure and management

The management of the State Bank Vests in a Central Board of Directors which consists
of:
 A Chairman and a Vice-Chairman appointed by the Central Government in consultation
with the Reserve Bank of India.
 Two Managing Directors appointed by the Central Board of Directors with the approval
of the Central Government.
 Six directors to be elected in the prescribed manner by the shareholders other than the
Reserve Bank.
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 Eight directors to be nominated by the Central Government in consultation with the
Reserve Bank of India to represent territorial and economic interests in such a manner
that not less than two of them have special knowledge of the working of the cooperative
institutions and of rural economy and the others have experience in commerce, industry,
banking and finance;
 One director to be nominated by the Central Government;
 One director to be nominated by the Reserve Bank; and
 Two directors to be appointed to represent the officers and the staff of the bank.
The Chairman, the Vice-Chairman and the Managing Director shall hold office for such
terms not exceeding five years as the Central Government may fix when appointing them and
shall be eligible for re-appointment. The directors elected by the shareholders and nominated by
the Central Government will hold office for fours years and are eligible for re-election or re-
nomination. The other nominated directors shall hold office as per recommendations of the
authority appointing them. Besides the Central Board, there are Local Boards of Management
established at Calcutta, New Delhi, Kanpur, Ahmedabad, Bhopal and Patna. Each local board
consists of the members of the Central Board residing in the area and directors not exceeding
four elected shareholders whose names appear in the branch register. To keep the management
free from politics, the Act stipulates that no member of the Central or State Legislatures shall be
appointed as directors of the State Bank of India. Structural changes have been introduced by the
bank in order to re-orient the business according to changing conditions in the market. One such
step, for the first time, was initiated in 1971. In the year 1979, for the second time the structural
changes were implemented.
The major organizational change in structure took place in 1995, by the appointment of
Mckinsey Consultants. Through changes were introduced in strategies, structures, systems etc.,
in the organizational set up of SBI, as per recommendations of the consultant committee. The
organization structure of State Bank of India at National Level is shown in Exhibit.3.1. The
Chairman is the Head of the Central Management Committee who is appointed by the
Government of India in consultation with RBI. The Central Management Committee consisting
of two Managing Directors – one belonging to Corporate Banking and the other to National
Banking – and 98 seven Deputy Managing Directors representing the areas such as Banks,
International Banking, Corporate Development, Finance, Credit, Information Technology, and
244
Information and Management Audit. Along with the Committee the Chief Vigilance Officer at
CGM cadre, will also work under the Chairman.
The Managing Director and Group Executive of the Corporate Banking are responsible for
the banking operations relating to big size companies and corporations. The Corporate Account
Group (CAG) under the leadership of the Managing Director and Group Executive caters to a
majority of top 100 companies/Corporations in Indian ranked in the order of turnover and market
capitalization. The credit sanction of Rs.100 crore and above per company will fall under the
jurisdiction of the managing director. The National Banking Group is headed by a Managing
Director and Group Executive. This group consists of two distinct net works namely
Development Banking and Personal Banking Network and Commercial Banking Network.About
90 per cent of the domestic deposits and 84 per cent of the domestic advances account for
National Banking. The State Bank of India has seven Associate Banks and 7 subsidiaries one of
them is Banking Subsidiary and the other six are Non-Banking subsidiaries. One Deputy
Managing Director will monitor the activities of all Associate Banks and Subsidiaries at the
national level. Another Deputy managing Director will co-ordinate and promote International
Banking through a net work of 83 overseas offices spread over in 33 countries covering all time
zones. He is responsible for handling the country’s foreign trade and related business and
providing foreign currency resources to the Indian companies.
The Deputy Managing Director (Corporate Development) is concerned with the development
and growth activities of the bank. He is responsible for developing new products and schemes
from time to time. The Accounting and Finance wing is headed by a Deputy Managing Director.
He is alsocalled Chief Financial Officer. The compilation of financial data, preparation of
financial statement as per the regulations from time to time and monitoring the performance of
the bank on the 99 financial front are his responsibilities. One Deputy Managing Director will
take care of Audit activities. The Deputy Managing Director, Information Technology is
responsible for IT operations in the Bank. Considering the importance of IT to promote
efficiency in banking, this new position is created in the organization system at the top
management level.
There is one Chief Vigilance Officer reporting to the Chairman. The officer will look after the
activities including fraud detection and prevention of frauds. The disciplinary action against
245
errant officials up to the level of DGM will be taken by this office. The Chief Vigilance Officer
will maintain direct relations with Ministry of Finance, Government of India and Vigilance
Committee of Reserve Bank of India. The State Bank of India has 14 Local Head Offices, which
are also called ‘Offices at the Circles’ located at state head quarters. The heads of all LHOs are
directly responsible to the Chairman of the bank. A model organization chart of a circle is shown
in Exhibit No.3.2. The Circle Office has the jurisdiction of all Modules of the bank attached to it.
The sanctions of above Rs.25 lakh and below Rs.100 crore are processed at the Circle Office.
The Chief General Manager will be assisted by four Circle Officers at the DGM cadre in the
areas of bank development, credit, finance and vigilance.
The General Manager Personal and Development Banking is assisted by four Assistant
General Managers (AGMs) in the areas of administration, personal, development and expansion.
The General Manager Commercial and International Banking is assisted by four AGMs in the
areas of premises, computers, accounts and policy and decision making. There are 58 Modules
operated by the bank. Each module will be headed by Deputy General Manager. The Modules
will co-ordinate the activities of the bank through regional offices. The heads of the regional
offices and the branches headed by AGMs will directly report to the DGM of a Module.
Major shareholders of the bank

The major shareholder of the bank is the president of India with 59.41 per cent share
holding (Table 3.1). The other major share holders include Life insurance corporation of India –
Group with (11.83 per cent), the Bank of New York Mellon (3.54 per cent), HSBC global
investment funds a/c HSBC global investment funds Mauritius limited (0.91 per cent),
Europacific growth Fund (0.77 per cent), Goldman SACHS investments (Mauritius) Ltd. (0.65
per cent), Bajaj allianz Life Insurance Co. Ltd. (0.61 per cent), General insurance corporation of
India (0.54 per cent), Janus Overseas Fund (0.41 per cent) and Copthall Mauritius Investments
Ltd. (0.32 per cent). 90
Vision of state bank of India

 My SBI
 My Customer First.
 My SBI: First In Customer Satisfaction.
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Mission of state bank of India
 We will be prompt, polite and proactive with our customers.
 We will speak the language of young India.
 We will create products and services that help our customers achieve their goals.
 We will go beyond the call of duty to make our customers valued.
 We will be of service even in the remotest part of our country.
 We will offer excellence in service to those abroad as much as we do to those in India.
 We will imbibe state of art technology to drive excellence.
Strengths of state bank of India

 Largest commercial bank in the country with presence in all time zones of the world.
 Macro economic proxy for the Indian Economy.
 Has emerged as a Financial Services Supermarket .
 Group holds more than 25 per cent market share in deposits and advances
 Large base of skilled manpower .
 SBI Group has more than 115 million customers – Every tenth Indian is a customer.
Values of SBI
 We will always be honest, transparent and ethical.
 We will respect our customers and fellow associates.
 We will be knowledge driven.
 We will learn and we will share our learning.
 We will never take the early way out.
 We will do everything we can to contribute to the community we work in.
 We will nurture pride in India.
Principal subsidiaries of state bank of India

1. Bank of Bhutan (Bhutan); Indo Nigeria Merchant Bank Ltd. (Nigeria);
2. Nepal SBI Bank Ltd. (Nepal); SBI (U.S.A.);
247
3. SBI (Canada); SBI Capital Market Ltd.;
4. SBI Cards & Payments Services Ltd.;
5. SBI Commercial and International Bank Ltd.;
6. SBI European Bank plc (U.K.); SBI Factors & Commercial Services Ltd.;
7. SBI Funds Management Ltd.;
8. SBI Gilts Ltd.;
9. SBI Home Finance Ltd.;
10. SBI Securities Ltd.;
11. State Bank International Ltd. (Mauritius);
12. State Bank of Bikaner & Jaipur;
13. State Bank of Hyderabad;
14. State Bank of Indore;
15. State Bank of Mysore;
16. State Bank of Patiala;
17. State Bank of Saurastra;
18. State Bank of Travancore.
Principal competitors
 ICICI Bank;
 Bank of Baroda;
 Canara Bank;
 Punjab National Bank;
 Bank of India;
 Union Bank of India;
 Central Bank of India;
 HDFC Bank;
 Oriental Bank of Commerce.
Associate banks
248
SBI has five associate banks that with SBI constitute the State Bank Group. All use the
same logo of a blue keyhole and all the associates use the "State Bank of" name followed by the
regional headquarters' name. Originally, the then seven banks that became the associate banks be
Longed to princely states until the government nationalized them between October, 1959 and
May, 1960. In tune with the first Five Year Plan, emphasizing the development of rural India, the
Government integrated these banks into State Bank of India to expand its rural outreach. There
has been a proposal to merge all the associate banks into SBI to create a "mega bank" and
streamline operations. The first step towards unification occurred on 13 August 2008 when State
Bank of Saurashtra merged with State Bank of India, reducing the number of state banks from
seven to six. Then on 19 June 2009 the SBI board approved the merger of its subsidiary, State
Bank of Indore, with itself. SBI holds 98.3% in the bank, and the balance 1.77% is owned by
Individuals, who held the shares prior to its takeover by the government
The acquisition of State Bank of Indore added 470 branches to SBI's existing network of
12,448 and over 21,000 ATMs. Also, following the acquisition, SBI's total assets will inch very
close to the Rs 10-lakh crore mark. Total assets of SBI and the State Bank of Indore stood at Rs
998,119 crore as on March 2009. The process of merging of State Bank of Indore was completed
by April 2010.
The subsidiaries of SBI are:
™ State Bank of Indore
™ State Bank of Bikaner & Jaipur
™ State Bank of Hyderabad
™ State Bank of Mysore
™ State Bank of Patiala
™ State Bank of Travancore
Non-Banking Subsidiaries of SBI

1. SBI Capital Markets Ltd. (SBI CAP)
2. SBI Funds Management Pvt. Ltd (SBI FUNDS)
3. SBI Factors and Commercial Services Pvt. Ltd.
4. SBI DFHI (Discount & Finance House of India) Ltd.
5. SBI GILTS Ltd.
249
6. SBI Commercial and International Bank Ltd.
7. SBI Mutual Fund (A Trust)
Joint Ventures of SBI

1. SBI Cards and Payment Services Pvt. Ltd.
2. Gt.Capital Business Process Management Service Pvt. Ltd.
3. SBI Life Insurance Co. Ltd.
4. Credit Information Bureau (India) Ltd. (CIBIL)
Functions of state bank of India

The functions of SBI can be grouped under two categories, viz., the Central Banking
functions and ordinary banking functions.
1. Central banking functions:
The SBI acts as agent of the RBI at the places where the RBI has no branch.
Accordingly, it renders the following functions:
 Banker to the government
 Banker to banks in a limited way
 Maintenance of currency chest
 Acts as clearing house
 Renders promotional functions
1. Banker to the Government:
The SBI functions as the banker to the central and state governments. It
receives and pays money on behalf of the governments. Especially it renders the
following functions as directed by the RBI in this regard.
a. Collection of charges on behalf of the government e.g. collection of tax and other
payments
b. Grants loans and advances to the governments
c. provides advises to the government regarding economic conditions, etc.,
2. Banker's Bank:
Commercial Banks have accounts with SBI. When the banks face
financial shortage, the SBI provides assistance to them as it is considered a big
250
brother in the banking industry. It discounts the bills of the other commercial
banks. Due to the functions on this line the SBI is considered in a limited sense as
the banker's bank.
3. Currency Chest:
The RBI maintains currency chests at its own offices. But RBI Offices are
situated only in big cities. SBI, buy its wide network of branches operate in urban
as well as rural areas. RBI therefore, in such places keeps money at currency
chests with SBI. Whenever needs arise, the currency is withdrawn from these
chests under proper accounting and reporting to RBI. Presently RBI entrust
currency chest to other Public Sector Banks and a few Private Sector Banks also.
4. Acts as Clearing House:
In all the places, where RBI has no branch, the SBI renders the functions
of clearing house. Thus, it facilitates the inter bank settlements. Since, all the
banks in such places have accounts with SBI; it is easy for the SBI, to act as
clearing house.
5. Renders Promotional Functions:
State Bank of India also renders various promotional functions. It provides
various facilities to the following priority sectors:
i. Agriculture
ii. Small - Scale Industries
iii. Weaker sections of the society
iv. Co-operative sectors
v. Small – traders
vi. Unemployed Youth
vii. Others.
2. General banking functions
Besides the above specialized functions, the SBI renders the following functions
under Section 33 of the Act.
a. Accepting deposits from the public under current, savings, fixed and recurring
deposit accounts.
251
b. Advancing and lending money and opening cash credits upon the security of
stocks, securities, etc.
c. Drawing, accepting, discounting, buying and selling of bills of exchange and
other negotiable instruments.
d. Investing funds, in specified kinds of securities.
e. Advancing and lending money to court of wards with the previous approval of
State Government.
f. Issuing and circulating letters of credit.
g. Offering remittance facilities such as, demand drafts, mail transfers telegraphic
transfers, etc.
h. Acting as administrator, executor, trustee or otherwise.
i. Selling and realizing the movable or immovable properties that come into the
banks in satisfaction of claims.
j. Transacting pecuniary agency business on commission stocks.
k. Underwriting of the issue of authorized shares debentures, and other securities.
(This function is done through subsidiaries now)
l. Buying and selling of gold and silver.
m. It operates Public Provident Fund Accounts for the general public.
n. It operates Non-Resident External Accounts and Foreign Currency Accounts.
o. Providing Factoring service (through subsidiaries).
p. Provides shipping finance.
q. Promotes Export through Export Credit. Provides Project Export Finance.
r. Provides Merchant Banking Facilities.
s. Provides specialized services like "Global Link Services ".
t. Promotes housing finance through "SBI Home Finance Ltd ".
u. Offers community services Banking. It provides grants to many socially relevant
research projects undertaken by various universities and academic institutions in
the country.
v. Provides Leasing Finance and Project Finance Facilities.
252
w. Participates in Lead Bank Scheme.The State Bank may with the sanction of the
Central Government, enter into negotiations for acquiring the business of any
other Banking Institutions.
Role of SBI in agricultural and rural finance

One of the basic objectives with which the SBI established is to provide banking facilities
to rural areas. The Rural Credit Survey Committee envisaged a dominant part for the State Bank
in rural finance. The SBI provides agricultural and rural finance in the following ways:
1.Expansion of Rural Branches:
Branch expansion is the basic requirement for the economic development of the country.
To gather the scattered savings in villages lying idle and utilizing them for the development of
village economy the SBI has opened branches in rural and semi-urban areas to mobilize rural
savings. Through the rural and semi-urban branches of SBI and associate banks, the SBI
extended credit of Rs.8794 crore to agriculture during 1997-98 the growth is 12.6% over the year
1996-97.
2. Direct Finance to Farmers:
The bank provides the following assistance to the farmers.
3. Loans and Advances to Co-operative Banks:
The SBI provides loans and advances to State and Central Co-operative Banks at
concessional rate of interest against Government securities. It provides such facilities to them at
half per cent below the bank rate because of this facility; the co-operative banks can assist the
co-operative societies in their respective areas.
4. Loans and Advances to Co-operative Marketing and Processing Societies:
The SBI grants short-term advances to co-operative marketing and processing societies.
This in turn helps such societies to provide loans for marketing and processing activities in rural
areas.
5. Small Farmers Scheme:
SBI has introduced various special schemes like Small Farmers Scheme. Through these
schemes the bank provides financial facilities to small farmers. Under this scheme loans given to
individuals or guaranteed by all the farmers in the group. This group borrowing enables small
farmers even without land or with small land to get enough credit for their farming activities.
253
6. Farm Graduates Scheme:
The Farm Graduates Scheme is intended to help graduates in agriculture, dairy science,
veterinary sciences, Agricultural Engineering who have farm development projects but do not
have finance.
7. Agricultural Development Branches:
To assist and develop agricultural activities, the SBI has opened specialized Agricultural
Development Branches. These branches are engaging on agricultural related functions. The basic
purpose of these branches is financing for agricultural development. Such developmental
branches are opened in backward areas.
8. Village Adoption Scheme and Service Area Approach:
The financing of agricultural development requires a close involvement of the bank in
identifying potentiality of the area and formulate the programmes to cater to the credit needs of
agriculturists.
Under this scheme, the backward villages are grouped together and the entire credit requirements
of the farmers in these villages for agricultural and allied activities are provided by the desig-
nated branch of the bank. The SBI also engaging in village adoption scheme to provide the
various credit facilities to the villages adopted.
With the introduction of Service Area Approach, the villages are more benefited on various
aspects. The village adoption scheme is merged with Service Area Approach.
9. Sponsoring Regional Rural Banks:
The bank has sponsored 30 RRBs spread over districts in 16 states. A network of 2343
branches of these RRBs accounts for 16% of all ranches in the country. As on month 2001-02 the
deposits and advances of the RRBs sparred by the bank stood at Rs. 4706.31 crore and Rs.
1876.48 crore respectively
Financial restructuring by way of funding of losses has been initiated in 25 of the RRBs
and the Bank has contributed Rs. 62.94 crore for funding the losses. This is popularly known as
recapitalization of RRBs. The performance of the RRBs sponsored by the bank was closely
monitored with the objective of enabling these RRBs break even by March 1999.
10. Warehousing Finance:
The Rural Credit Survey Committee stresses the need for providing storage facilities in
villages by constructing a network of Warehouses in rural areas. Once the agriculturist can raise
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finance by storing his crop in village god owns he need not sell his produce in haste for a low
price at the time of harvest.
He can increase his income by releasing the stock in the market at the appropriate time
when the prices are high. Banks finances to cultivators against the warehouse receipts can to
some extent eliminate the middlemen between the cultivator and the consumer.
The State Bank helps the development of warehouses by opening its branches in places where
the warehousing corporation have constructed god owns. It lends money to cultivators against
the warehouse receipts.
11. Integrated Rural Development Programme:
The IRDP aims at overall development of the rural areas. As a major partner in the
government sponsored schemes for rural development and poverty alleviation, the bank assisted
2, 50,851 beneficiaries to the extent of Rs. 336.88 crore under the IRDP during the year.
SC/ST and women beneficiaries constituted 35.8% and 24.9% respectively of the total number of
beneficiaries. The pilot project under which the bank identifies its own beneficiaries was
extended to 32 districts in addition to the 13 districts where it was already implemented. Under
the Prime Minister Rojgar Yojana 55,501 beneficiaries have been assisted to the tune of Rs. 360
crore so far.
The banks assistance to weaker sections of including Scheduled Castes and Schedule
Tribes, small and marginal farmers, landless labourers, scavengers, self-help group's ant.
Beneficiaries of IRDP and DRI schemes stood at Rs.7052 crore, constituting 7.05% of net -bank
credit at end March 2002.
State bank of India and Small Scale Industries

Development of small scale industry and small business is another important aim of the
State Bank of India. Before analyzing the facilities offered by the Bank, one should understand
the meaning of small scale industry. In small scale industry the following categories of business
units are included,
(a) Small Scale Industry
Industrial units, engaged in manufacturing, processing, preservation, repairing, or service
operations with original investments in plant and machinery not exceeding Rs.3.00 crore are
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classified as Small Scale Industries. This limit was earlier restricted to Rs.60.00 lakh and was
raised to Rs.3.00 crore in the Union Budget for 1997-98.
The limit of investments in plant and machinery shall also be Rs.3.00 crore even if the industrial
unit undertakes to export annual production. Similarly this limit is applicable to ancillary units
and there is no separate limit for this sector from January 1998.
(b)Tiny Sector
Small scale industrial units with investment in plant and machinery up to Rs.25 lakh are
classified as Tm Sector Industries. Industry related service / business enterprises having
investments up to Rs.25 lakh in fixed assets excluding land and building are eligible to be
classified as Small Scale Service and Business Enterprises. These limits were raised from
January 1998.
(c) Small Business
i. Any business established mainly for the purpose of providing any service other than
professional services.
ii. Original cost price of the equipment used for the purpose of business should not exceed
Rs. 10 lakh.
iii. Working capital limits granted to such an enterprise should not exceed Rs. 5 lakh
iv. The aggregate of term loan and working capital limits should not exceed Rs. 10 lakh.
The SBI offers assistance to all these types of units. The SBI has reoriented its policies and adapt
flexible approach to serve this important sector of the economy. In 1956 the bank initiated a '
Pilot Scheme ' for the provision of co-ordinate finance to small industries. In the light of its
experience the scheme was extended to all the branches with effect from 1st January 1959. The
scheme has been simplified from time to time to overcome various practical difficulties and
make it more broad-based with the objective of helping small units in all possible ways.
The function of SBI on this aspect can be understood with following figures as on 31 March,
1998: It should be remembered that all commercial banks are lending to help developing SSI
Sector. This is one important segment of priority sector. Hence, what is applicable to SBI under
SSI is also relevant to all Commercial Banks. The SBI is also opening specialized branches to
service the SSI sector alone.
SBI Assistance to Small units.
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 Offers working capital
 Medium term loans and installment credit
 Discounting of bills
 Entrepreneur development programme
 Encouraging women entrepreneur
 Promotion of village and cottage industries
 Provides technical and financial consultancy services
 Special village industries division
 Project uptake
Commercial banks and Rural financing

A commercial bank is a financial institution that is authorized by law to receive money
from businesses and individuals and lend money to them. Commercial banks are open to the
public and serve individuals, institutions and businesses. A commercial bank is almost certainly
the type of bank you think of when you think about a bank because it is the type of bank that
most people regularly use.
Banks are regulated by federal and state laws depending on how they are organized and the
services they provide. Commercial banks are also monitored through the Federal Reserve
System.
Commercial Banks: Primary and Secondary Functions of Commercial Banks!
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks. They accept deposits in several
forms according to requirements of different sections of the society.
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks on demand:
1. Such deposits are generally maintained by businessmen with the intention of making
transactions with such deposits.
2). They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose service charges for
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running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with the bank for
a fixed period of time.
1. Such deposits do not enjoy cheque-able facility.
2. These deposits carry a high rate of interest.
(iii) Saving Deposits:
These deposits combine features of both current account deposits and fixed deposits:
The depositors are given cheque facility to withdraw money from their account. But,
some restrictions are imposed on number and amount of withdrawals, in order to discourage
frequent use of saving deposits. They carry a rate of interest which is less than interest rate on
fixed deposits. It must be noted that Current Account deposits and saving deposits are chequable
deposits, whereas, fixed deposit is a non-chequable deposit.
2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping certain
cash reserves, the balance is given to needy borrowers and interest is charged from them, which
is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:

(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like shares,
stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The
borrower may withdraw any amount within his credit limit and interest is charged on the amount
actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the bank at any
time. The entire sum of demand loan is credited to the account and interest is payable on the
entire sum.
(iii) Short-term Loans:
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They are given as personal loans against some collateral security. The money is credited
to the account of borrower and the borrower can withdraw money from his account and interest
is payable on the entire sum of loan granted.
(2) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current account upto
an agreed limit. This facility is generally given to respectable and reliable customers for a short
period. Customers have to pay interest to the bank on the amount overdrawn by them.
2. Discounting Bills of Exchange:
It refers to a facility in which holder of a bill of exchange can get the bill discounted with
bank before the maturity. After deducting the commission, bank pays the balance to the holder.
On maturity, bank gets its payment from the party which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For these
services, banks charge some commission from their clients.
Some of the agency functions are:
(i) Transfer of Funds:
Banks provide the facility of economical and easy remittance of funds from place-to-
place with the help of instruments like demand drafts, mail transfers, etc.
(ii) Collection and Payment of Various Items:
Commercial banks collect cheques, bills,’ interest, dividends, subscriptions, rents and
other periodical receipts on behalf of their customers and also make payments of taxes, insurance
premium, etc. on standing instructions of their clients.
(iii) Purchase and Sale of Foreign Exchange:
Some commercial banks are authorized by the central bank to deal in foreign exchange.
They buy and sell foreign exchange on behalf of their customers and help in promoting
international trade.
(iv) Purchase and Sale of Securities:
Commercial banks buy and sell stocks and shares of private companies as well as
government securities on behalf of their customers.
(v) Income Tax Consultancy:
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They also give advice to their customers on matters relating to income tax and even
prepare their income tax returns.
(vi) Trustee and Executor:
Commercial banks preserve the wills of their customers as trustees and execute them
after their death as executors.
(vii) Letters of Reference:
They give information about the economic position of their customers to traders and
provide the similar information about other traders to their customers.
4. General Utility Functions:
Commercial banks render some general utility services like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or lockers to keep valuable articles of
customers in safe custody.
(ii) Traveller’s Cheques:
Commercial banks issue traveler’s cheques to their customers to avoid risk of taking cash
during their journey.
(iii) Letter of Credit:
They also issue letters of credit to their customers to certify their creditworthiness.
(iv) Underwriting Securities:
Commercial banks also undertake the task of underwriting securities. As public has full
faith in the creditworthiness of banks, public do not hesitate in buying the securities underwritten
by banks.
(v) Collection of Statistics:
Banks collect and publish statistics relating to trade, commerce and industry. Hence, they
advice customers on financial matters. Commercial banks receive deposits from the public and
use these deposits to give loans. However, loans offered are many times more than the deposits
received by banks. This function of banks is known as ‘Money Creation’.
Role of commercial banks in a developing country are as follows:

Besides performing the usual commercial banking functions, banks in developing
countries play an effective role in their economic development. The majority of people in such
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countries are poor, unemployed and engaged in traditional agriculture.There is acute shortage of
capital. People lack initiative and enterprise. Means of transport are undeveloped. Industry is
depressed. The commercial banks help in overcoming these obstacles and promoting economic
development. The role of a commercial bank in a developing country is discussed as under.
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through network of branch banking.
People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs of individual depositors. They also
mobilise idle savings of the few rich. By mobilising savings, the banks channelise them into
productive investments. Thus they help in the capital formation of a developing country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways. They provide
short-term, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to industry.
In India, the commercial banks undertake short-term and medium-term financing of small scale
industries, and also provide hire- purchase finance. Besides, they underwrite the shares and
debentures of large scale industries. Thus they not only provide finance for industry but also help
in developing the capital market which is undeveloped in such countries.
3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks
provide loans to retailers and wholesalers to stock goods in which they deal. They also help in
the movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing foreign
exchange facilities to importers and exporters of goods.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They open a network
of branches in rural areas to provide agricultural credit. They provide finance directly to
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agriculturists for the marketing of their produce, for the modernisation and mechanisation of
their farms, for providing irrigation facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy farming, sheep breeding,
poultry farming, pisciculture and horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas are provided financial
assistance through the regional rural banks in India. These regional rural banks operate under a
commercial bank. Thus the commercial banks meet the credit requirements of all types of rural
people.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having low incomes do not possess
sufficient financial resources to buy durable consumer goods. The commercial banks advance
loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In
this way, they also help in raising the standard of living of the people in developing countries by
providing loans for consumptive activities.
6. Financing Employment Generating Activities:
The commercial banks finance employment generating activities in developing countries.
They provide loans for the education of young person’s studying in engineering, medical and
other vocational institutes of higher learning. They advance loans to young entrepreneurs,
medical and engineering graduates, and other technically trained persons in establishing their
own business. Such loan facilities are being provided by a number of commercial banks in India.
Thus the banks not only help inhuman capital formation but also in increasing entrepreneurial
activities in developing countries.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country by faithfully
following the monetary policy of the central bank. In fact, the central bank depends upon the
commercial banks for the success of its policy of monetary management in keeping with
requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a developing economy by granting
loans to agriculture, trade and industry, by helping in physical and human capital formation and
by following the monetary policy of the country.
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The Commercial banks provide rural credit on the following lines
 Production credit
 Investment credit
 Credit for infra structural facilities
 Distribution credit
 Credit for activities jointly undertaken for agricultural development
 The Commercial banks introduced different methods for rural credit.
 Village adoption scheme
 Service area approach
The strength of the service area approach are (a) Better rapport (b) Accomplishment of
services (c) Quality lending )d) Full coverage.
Different types of agricultural advances

It is classified
I. On the basis of time
a)Short term finance (b) Medium term finance (c)Long term finance.
II. On the basis of methods of advances
Direct finance (b) Indirect finance
III. On the basis of purpose
(a) Production finance (b) Development finance (c) Equipment finance
Credit requirements for farmers

There are a number of loans that are available specifically for farmers. The most popular
amongst these are Kisan Credit Cards and various crop loans for farmers.
(a) Kisan Credit Card
The Kisan Credit Card is an innovative form of providing adequate and timely credit to
farmers with flexible and simplified procedures. It has a single window clearance and is broad
based
–
it meets the short-term, medium term and long term credit needs of the borrowers for agriculture
and allied activities and a reasonable component for consumption needs. Farmers covered under
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the scheme are issued a credit card and a pass book or a credit card-cum-pass book which
contains their name, address, particulars of land holding, borrowing limit, validity period, a
passport size photograph of holder etc. This serves both as an identity card and facilitates
regular recording of transactions. It is valid for 3 to 5 years subject to annual review. The
security, margins, rate of interest, etc. on the card is set as per RBI norms. The farmers are
required to produce their card-cum-pass book whenever they operate the account
– i.e. withdraw money or repay their loans. The card can be operated through issuing branches
or PACS in the case of Cooperative Banks or through other designated branches at the discretion
of bank. Farmers can use the card to make a number of withdrawals and repayments, as long as
they remain within their credit limit. The credit limit is fixed on the basis of their land holding,
cropping pattern and scale of finance that they require. Within the overall limit, there are sub
limits which cover short term, medium term as well as term credit. These are fixed at the
discretion of the issuing banks. Farmers are given the flexibility to reschedule their loans in case
of damage to crops due to natural calamities.
(b) Crop Loans for Farmers
A crop loan consists of short term credit and is generally obtained from primary credit
co-op societies of a village or from a commercial bank. The period of the loan is about one year,
except for sugarcane for which the period is 18 months. Crop loans are given to farmers either on
the basis of the gross value of the crop or on the basis of the cost of cultivation. The farmer has
to offer his land as a security against which the loan is given.
c) Longer term credit needs of farmers
Beyond loans for cropping and farm maintenance, for farmers to increase their scale of
operation, they require very long term credit. This could involve taking loans with terms of
anywhere between 5 to 20 years or even more, in some special cases. Some activities that may
require long term loans include creation of a sinking well, land levelling, fencing and permanent
improvements on land, purchase of large machinery like tractors with attachments such as
trolleys, establishment of fruit orchard (such as mango, cashew, coconut, sapota (chiku), orange,
pomegranate, fig, guava, etc. Such activities may require very large investments and may not
give returns for a period of even 4-5 years. However, they are required if the farmer wants to
increase his scale of operations.
d) Direct Finance for Agricultural Purposes
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Direct Agricultural advances denote advances given by banks directly to farmers for
agricultural purposes. These include short-term loans for raising crops i.e. for crop loans. In
addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural
produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers
were given crop loans for raising the produce, provided the borrowers draw credit from one
bank. Direct finance also includes medium and long-term loans (Provided directly to farmers for
financing production and development needs) such as Purchase of agricultural implements and
machinery, Development of irrigation potential, Reclamation and Land Development Schemes,
Construction of farm buildings and structures, etc. Other types of direct finance to farmers
includes loans to plantations, development of allied activities such as fishery, poultry etc and also
establishment of bio-gas plants, purchase of land for agricultural purposes by small and marginal
farmers and loans to agri-clinics and agri- business centres.
Regional Rural Banks

Regional Rural Banks are local level banking organizations operating in different States
of India. They have been created with a view to serve primarily the rural areas of India with
basic banking and financial services. However, RRB's may have branches set up for urban
operations and their area of operation may include urban areas too. The government of India had
constituted a working group on rural banks headed by Mr. M Narasimhan on 1st July 1975 to
study, in-depth, the problem of devising alternative agencies to provide institutional credit to the
rural people. The committee recommended the establishment of regional rural banks.
History
Regional Rural Banks were established under the provisions of an Ordinance passed on
26 September 1975 and the RRB Act. 1976 to provide sufficient banking and credit facility for
agriculture and other rural sectors. These were set up on the recommendations of The
Narasimham Working Group during the tenure of Indira Gandhi's government with a view to
include rural areas into economic mainstream since that time about 70% of the Indian Population
was of Rural Orientation. The development process of RRBs started on 2 October 1975 with the
forming of the first RRB, the Prathama Bank. Also on 2 October 1976 five regional rural banks
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were set up with a total authorised capital of Rs. 100 crore ($ 10 Million) which later augmented
to 500 crore ($ 50 Million). The Regional Rural Bank were owned by the Central Government
,the State Government and the Sponsor Bank(There were five commercial banks, Punjab
National Bank, State Bank of India, Syndicate Bank, United Bank of India and United
Commercial Bank, which sponsored the regional rural banks) who held shares in the ratios as
follows Central Government-60%, State Government- 20% and Sponsor Banks- 20%.. Earlier, of
Reserve Bank India had laid down ceilings on the rate of interest to be charged by these RRBs.
However from August 1996 the RRBs have been granted freedom to fix rates of interest, which
is usually in the range of 14-18% for advances.
Recapitalization of Regional Rural Banks (RRBs)

Subsequent to review of the financial status of RRBs by the Union Finance Minister in
August, 2009, it was felt that a large number of RRBs had a low Capital to Risk weighted Assets
Ratio (CRAR). A committee was therefore constituted in September, 2009 under the
Chairmanship of K C Chakrabarty, Deputy Governor, RBI to analyse the financials of the RRBs
and to suggest measures including re-capitalisation to bring the CRAR of RRBs to at least 9% in
a sustainable manner by 2012. The Committee submitted its report in May, 2010. The following
points were recommended by the committee:
 RRBs to have CRAR of at least 7% as on 31 March 2011 and at least 9% from 31 March
2012 onwards. recapitalisation requirement of Rs. 2,200.00 crore for 40 of the 82 RRBs.
This amount is to be released in’ two installments in 2010-11 and 2011-12. .
 The remaining 42 RRBs will not require any capital and will be able to maintain CRAR
of at least 9% ifs on 31 st March 2012 and thereafter on their own.
 A fund of Rs. 100 crore to be set up for training and capacity building of the RRB staff.
The Government of India recently approved the recapitalization of Regional Rural Banks (RRBs)
to improve their Capital to Risk Weighted Assets Ratio CRAR) in the following manner:
 Share of Central Government i.e. Rs.1, 100 crore will be released as per provisions made
by the Department of Expenditure in 2010-11 and 2011-12. However, release of
Government of India share will be contingent on proportionate release of State
Government and Sponsor Bank share.
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 A capacity building fund with a corpus of Rs.100 crore to be set up by Central
Government with NABARD for training and capacity building of the RRB staff in the
institution of NABARD and other reputed institutions. The functioning of the Fund will
be periodically reviewed by the Central Government. An Action Plan will be prepared by
NABARD in this regard and sent to Government for approval.
 Additional amount of Rs. 700 crore as contingency fund to meet the requirement of the
weak RRBs, particularly those in the North Eastern. and Eastern Region, the necessary
provision will be made in the Budget as and when the need arises.
Organizational Structure
The Organizational Structure for RRB's varies from branch to branch and depends upon
the nature and size of business done by the branch. The Head Office of an RRB normally had
three to seven departments.
The following is the decision making hierarchy of officials in a Regional Rural Bank.
 Board of Directors
 Chairman & Managing Director
 General Manager
 Chief Manager/Regional Managers
 Senior Manager
 Manager
 Officer / Assistant Manager
 Assistants
Amalgamation
Currently, RRB's are going through a process of amalgamation and consolidation. 25
RRBs have been amalgamated in January 2013 into 10 RRBs. This counts 67 RRBs till 1st week
of June 2013. On 31 March 2006, there were 133 RRBs (post-merger) covering 525 districts
with a network of 14,494 branches. All RRBs were originally conceived as low cost institutions
having a rural ethos, local feel and pro poor focus. However, within a very short time, most
banks were making losses. The original assumptions as to the low cost nature of these
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institutions were belied. This may be again amalgamated in near future. At present there are 56
RRBs in India.
Legal Existence and Protection

RRB's are recognized by the law and they have legal significance.The Regional Rural
Banks Act, 1976 Act No. 21 Of 1976 [9 February 1976.] reads
"For the incorporation, regulation and winding up of Regional Rural Banks with a view to
developing the rural economy by providing, for the purpose of development of agriculture, trade,
commerce, industry and other productive activities in the rural areas, credit and other facilities,
particularly to the small and marginal farmers, agricultural laborers, artisans and small
entrepreneurs, and for matters connected therewith and incidental thereto".
Capital structure and sponsorship

The authorized capital of RRB was fixed at Rs.1 crore and issue capital at Rupees twenty
five lakhs. The sponsoring bank provides assistance to the RRB in several ways such as (i)
subscription to its share capital (ii) Provision of managerial assistance (iii) provision to staff
assistance etc.
Objectives of RRB
 To provide cheap and liberal credit facilities
 To save the rural poor from the money lenders
 To act as a catalyst element and accelerate the economic growth
 To cultivate the banking habits among rural people
 To increase employment opportunities
 To increase entrepreneurship in rural areas
 To cater the needs of the backward areas
 To develop underdeveloped region
Problems of rural credit

The burden of indebtedness in rural India is great, and falls mainly on the households of
rural working people. The exploitation of this group in the credit market is one of the most
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pervasive and persistent features of rural life in India, and despite major structural changes in
credit institutions and forms of rural credit in the post-Independence period, Darling’s statement
(1925), that “the Indian peasant is born in debt, lives in debt and dies in debt,” still remains true
for the great majority of working households in the countryside. Rural households need credit for
a variety of reasons. They need it to meet short - term requirements for working capital and for
long - term investment in agriculture and other income-bearing activities. Agricultural and non -
agricultural activity in rural areas are typically seasonal, and households need credit to smooth
out seasonal fluctuations in earnings and expenditure. Rural households, particularly those
vulnerable to what appear to others to be minor shocks with respect to income and expenditure,
need credit as an insurance against risk. In a society that has no free, compulsory and universal
education or health care, and very few general social security programmes, rural households
need credit for different types of consumption. These include expenditure on food, housing,
health and education. In the Indian context, another important purpose of borrowing is to meet
expenses for a variety of social obligations and rituals.
If these credit needs of the poor are to be met, rural households need access to credit
institutions that provide them a range of financial services, provide credit at reasonable rates of
interest and provide loans that are unencumbered by extra - economic provisions and obligations.
Historically, there have been four major problems with respect to providing credit to the Indian
countryside.
First, the supply of formal sector credit to the countryside as a whole has been inadequate.
Secondly, rural credit markets in India themselves have been very imperfect and fragmented.
Thirdly, as the foregoing suggests, the distribution of formal sector credit has been unequal,
particularly with respect to region and class, caste and gender. Fourthly, the major source of
credit to rural households, particularly income - poor working households, has been inform all
sector loans which are usually advanced at very high rates of interest. Further, the terms and
conditions attached to these loans have The formal sector of rural credit is the sector in which
loan transactions are regulated by legislation and other public policy requirements. The
institutions in this sector include commercial banks, cooperative banks and credit societies, and
other registered financial institutions. The informal sector of credit is not regulated by public
authorities, and the terms and conditions attached to each loan are personalized, and therefore
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vary according to the bargaining power of borrowers and lenders in each case given rise to an
elaborate structure of coercion – economic and extra - economic – in the countryside.
That these factors constitute what may be called the “problem of rural credit” has been well
recognized in official evaluations and scholarship since the end of the nineteenth century. Given
the issues involved, the declared objectives of public policy with regard to rural credit in the post
-Independence period were, in the words of the Governor of the Reserve Bank of India, “to
ensure that sufficient and timely credit, at reasonable rates of interest, is made available to as
large a segment of the rural population as possible”. The policy instruments to achieve these
objectives were to be, first, the expansion of the institutional structure of formal-sector lending
institutions; secondly, directed lending; and thirdly, concessional or subsidized credit (ibid).
Public policy was thus aimed not only at meeting rural credit needs but also at pushing out the
informal sector and the exploitation to which it subjected borrowers.
Difficulties faced by RRB.

 Running in losses
 Slow Progress
 Limited scope of investments
 Delay in decision making
 Lack of co-ordination
 Difficulties in deposit mobilization
 lack of training facilities
 poor recovery rate
 Capital inadequacy
Development & policies

Rural credit policy in India envisaged the provision of a range of credit services,
including long -term and short - term credit and large - scale and small - scale loans to rural
households. Three phases of rural banking policy since 1969 The period of our study three
phases in banking policy for the Indian countryside. The first was the period following the
nationalization of India’s 14 major commercial banks in 1969. This was also the early phase of
the green revolution in India. During this period, nationalized banks attempted to mop up new
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rural liquidity. The declared objectives of the new policy, known as “social and development
banking”, were the following to provide banking services in previously unbanked or under -
banked rural areas; to provide substantial credit to specific activities including agriculture and
cottage industries; and to provide credit to certain disadvantaged groups such as, for example,
Dalit households. The Government of India and the Reserve Bank of India (RBI) issued, from
time to time, specific directives regarding “social and development banking”.
These included setting targets for the expansion of rural branches, imposing ceilings on
interest rates, and setting guidelines for the sectoral allocation of credit. Given the new farming
practices associated with the green revolution, the first post -nationalization phase of expansion
in rural banking saw growth in credit advances for agriculture. Specifically, a target of 40 per
cent of advances for the priority sectors, namely agriculture and allied activities, and small -
scale and cottage industries, was set for commercial banks. In addition, a decision was taken in
1972 to introduce regional rural banks, institutions that would specialize in social and
development banking for rural areas was examined in 1993 by Binswanger, Khandker and
Rosenzweig (Narayana, 2000). Advances to the countryside increased substantially, although
they were, as was the green revolution itself, biased in respect of regions, crops and classes.
Some of the social objectives of bank nationalization were included in the Bank
Nationalization Act, titled formally The Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, notes that the social objectives of bank nationalization were also
specified, for example, in Government of India (1969,1972) and the RBI’s Annual Reports and
Reports on Currency and Finance. To take some further examples, the directive on Lead Banks
was issued in 1969, on Regional Rural Banks in 1975 and on allocating a minimum of 40 per
cent of advances to the priority sector in 1979. The monetarist approach guides the new policy.
This has meant “primacy to the control of money supply” and monetary targeting at the cost of
neglecting the “size and distribution of bank credit”. Thirdly, the “uncritical acceptance of the
free- market philosophy has blinded the government to the needs of a genuine reform of the
financial system”. The third phase inevitably saw a reduction in rural banking in general and in
priority sector lending and preferential lending to the poor in particular. The new policies also
contributed to other distortions in the financial system. Record of progress of rural banking. This
section documents changes in rural banking at the national level with respect to five indicators:
total deposits mobilized and credit advanced in rural areas; the share of priority sectors in total
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advances; credit advanced to agriculture and allied activities; and the scale of credit disbursed
through the IRDP.
Measures suggested for improvement of RRBs.

 Increased training facility should be provided for RRB Staff
 Customer orientation
 Re-Structuring of RRBs and branches
 Prudential regulation
 Re-capitalization of RRBs
 Legal and operational issues.
Rural bank offices:

There are four area categories used by banks: rural areas, semi-urban areas, urban areas
and metropolitan areas. The impact of bank nationalization on the growth of scheduled
commercial banks in rural areas is clear: the share of rural bank offices in total bank offices
jumped from 17.6 per cent in 1969 to 36 per cent in 1972. The share rose steadily thereafter, and
attained a peak of 58.2 per cent in March 1990. From 1990 onwards, there was a gradual decline
in the share of rural bank offices, and the share fell below 50 per cent in 1998 and thereafter. In
fact, the absolute number of bank offices fell in the 1990s: 2,706 rural bank offices were closed
between March 1994 and March 2000, most in 1995 and 1996. The period after nationalization
was characterized by an expansion of bank credit to rural areas. The proportion of credit
disbursed to rural areas tripled in the 1970s, and continued to rise in the 1980s. After 1988,
however, the share of total bank credit that went to rural areas declined, from 15.3 per cent in
1987 and 1988 to 10.6 per cent in March 2000.
Rural deposits also grew rapidly after nationalization; their share of aggregate deposits
doubled in the 1970s, from 6.3 per cent in 1969 to 12.6 per cent in 1980 and continued to grow,
although at a slower pace, in the 1980s. Once again, the peak was reached in 1990, when rural
deposits accounted for 15.5 per cent of aggregate deposits. The pace of deposit mobilization in
rural areas fell in the 1990s. Given the pattern of growth of gross bank credit and aggregate
deposits, it is not surprising that the credit-deposit ratio in rural areas rose after 1969. The ratio
peaked at 68.6 per cent in 1984 and remained above 60 per cent until 1990. From 1985 to 1988
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the share of the rural sector in gross bank credit was higher than its share of total deposits, and in
these years, the rural credit-deposit ratio exceeded the all India credit-deposit ratio.
Co-operative banking in India

Co-operative banking is retail and commercial banking organized on a cooperative basis.
Co-operative banking institutions take deposits and lend money in most parts of the world. Co-
operative banking, as discussed here, includes retail banking carried out by credit unions, mutual
savings banks, building societies and cooperatives, as well as commercial banking services
provided by mutual organizations (such as cooperative federations) to cooperative businesses.
Co-operative banking is retail and commercial banking organized on a cooperative basis.
Cooperative banking institutions take deposits and lend money in most parts of the world.
Cooperative banking, as discussed here, includes retail banking carried out by credit unions,
mutual savings banks, building societies and cooperatives, as well as commercial banking
services provided by mutual organizations (such as cooperative federations) to cooperative
businesses. Larger institutions are often called cooperative banks. Some are tightly integrated
federations of credit unions, though those member credit unions may not subscribe to all nine of
the strict principles of the World Council of Credit Unions (WOCCU).
Co-operative banks are owned by their customers and follow the cooperative principle of one
person, one vote. Unlike credit unions, however, cooperative banks are often regulated under
both banking and cooperative legislation. They provide services such as savings and loans to
non-members as well as to members and some participate in the wholesale markets for bonds,
money and even equities.[2] Many cooperative banks are traded on public stock markets, with the
result that they are partly owned by non-members. Member control is diluted by these outside
stakes, so they may be regarded as semi-cooperative.
Cooperative banking systems are also usually more integrated than credit union systems. Local
branches of cooperative banks select their own boards of directors and manage their own
operations, but most strategic decisions require approval from a central office. Credit unions
usually retain strategic decision-making at a local level, though they share back-office functions,
such as access to the global payments system, by federating.
Some cooperative banks are criticized for diluting their cooperative principles. Principles 2-4 of
the "Statement on the Co-operative Identity" can be interpreted to require that members must
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control both the governance systems and capital of their cooperatives. A cooperative bank that
raises capital on public stock markets creates a second class of shareholders who compete with
the members for control. In some circumstances, the members may lose control. This effectively
means that the bank ceases to be a cooperative. Accepting deposits from non-members may also
lead to a dilution of member control.
Co-operative banking in India

Introduction of co-operative banks 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 persons belonging to the same local or professional
community or sharing a common interest. Co-operative banks generally provide their members
with a wide range of banking and financial services (loans, deposits, banking accounts etc.). Co-
operative banks differ from stockholder banks by their organization, their goals, their values and
their governance. In most countries, they are supervised and controlled by banking authorities
and have to respect prudential banking regulations, which put them at a level playing field with
stockholder banks. Depending on countries, this control and supervision can be implemented
directly by state entities or delegated to a co-operative federation or central body. Co-operative
banking is retail and commercial banking organized on a co-operative basis. Co-operative
banking institutions take deposits and lend money in most parts of the world. Co-operative
banking, includes retail banking, as carried out by credit unions, mutual savings and loan
associations, building societies and co-operatives, as well as commercial banking services
provided by manual organizations (such as co-operative federations) to co-operative businesses.
The structure of commercial banking is of branch-banking type; while the co-operative
banking structure is a three tier federal one.
A State Co-operative Bank works at the apex level (ie. works at state level).
The Central Co-operative Bank works at the Intermediate Level. (ie. District Co-operative Banks
ltd. works at district level)
Primary co-operative credit societies at base level (At village level)
Even if co-operative banks organizational rules can vary according to their respective
national legislations, co-operative banks share common features as follows:
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Customer-owned entities: In a co-operative bank, the needs of the customers meet the
needs of the owners, as co-operative bank members are both. As a consequence, the first aim of a
co-operative bank is not to maximize profit but to provide the best possible products and services
to its members. Some co-operative banks only operate with their members but most of them also
admit non-member clients to benefit from their banking and financial services.
Democratic member control: Co-operative banks are owned and controlled by their
members, who democratically elect the board of directors. Members usually have equal voting
rights, according to the co-operative principle of “one person, one vote”.
Profit allocation: In a co-operative bank, a significant part of the yearly profit, benefits
or surplus is usually allocated to constitute reserves. A part of this profit can also be distributed
to the co-operative members, with legal or statutory limitations in most cases. Profit is usually
allocated to members either through a patronage dividend, which is related to the use of the co-
operative products and services by each member, or through an interest or a dividend, which is
related to the number of shares subscribed by each member. Co-operative banks are deeply
rooted inside local areas and communities. They are involved in local development and
contribute to the sustainable development of their communities, as their members and
management board usually belong to the communities in which they exercise their activities. By
increasing banking access in areas or markets where other banks are less present, farmers in
rural areas, middle or low income households in urban areas - co-operative banks reduce banking
exclusion and foster the economic ability of millions of people. They play an influential role on
the economic growth in the countries in which they work in and increase the efficiency of the
international financial system. Their specific form of enterprise, relying on the above-mentioned
principles of organization, has proven successful both in developed and developing countries.
History of co-operative banks in India

For the co-operative banks in India, co-operatives are organized groups of people and
jointly managed and democratically controlled enterprises. They exist to serve their members
and depositors and produce better benefits and services for them. Professionalism in co-operative
banks reflects the co-existence of high level of skills and standards in performing, duties
entrusted to an individual. Co-operative bank needs current and future development in informati
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on technology. It is indeed necessary for co-operative banks to devote adequate attention for
maximizing their returns on every unit of resources through effective services. Co-operative
banks have completed 100 years of existence in India. They play a very important role in the
financial system. The co-operative banks in India form an integral part of our money market
today. Therefore, a brief resume of their development should be taken into account. The history
of co-operative banks goes back to the year 1904. In 1904, the co-operative credit society act was
enacted to encourage co-operative movement in India. But the development of co-operative
banks from 1904 to 1951 was the most disappointing one.
The first phase of co-operative bank development was the formation and regulation of co-
operative society. The constitutional reforms which led to the passing of the Government of
India Act in 1919 transferred the subject of “Cooperation” from Government of India to the
Provincial Governments. The Government of Bombay passed the first State Co-operative
Societies Act in 1925 “which not only gave the movement, its size and shape but was a pace
setter of co-operative activities and stressed the basic concept of thrift, self help and mutual aid.”
This marked the beginning of the second phase in the history of Co-operative Credit Institutions.
There was the general realization that urban banks have an important role to play in economic
construction. This was asserted by a host of committees. The Indian Central Banking Enquiry
Committee (1931) felt that urban banks have a duty to help the small business and middle class
people. The Mehta-Bhansali Committee (1939) recommended that those societies which had
fulfilled the criteria of banking should be allowed to work as banks and recommended an
Association for these banks. The Co-operative Planning Committee (1946) went on record to say
that urban banks have been the best agencies for small people in whom Joint stock banks are not
generally interested. The Rural Banking Enquiry Committee (1950), impressed by the low cost
of establishment and operations recommended the establishment of such banks even in places
smaller than taluka towns. The real development of co-operative banks took place only after the
recommendations of All India Rural Credit Survey Committee (AIRCSC), which were made
with the view to fasten the growth of co-operative banks. The co-operative banks are expected to
perform some duties, namely, extend all types of credit facilities to customers in cash and kind,
advance consumption loans, extend banking facilities in rural areas, mobilize deposits, supervise
the use of loans etc. The needs of co-operative bank are different. They have faced a lot of
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problems, which has affected the development of co-operative banks. Therefore it was necessary
to study this matter.
The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-59.
The Report published in 1961 acknowledged the widespread and financially sound framework of
urban co-operative banks; emphasized the need to establish primary urban co-operative banks in
new centers and suggested that State Governments lend active support to their development. In
1963, Varde Committee recommended that such banks should be organised at all Urban Centers
with a population of 1 lakh or more and not by any single community or caste. The committee
introduced the concept of minimum capital requirement and the criteria of population for
defining the urban centre where UCBs were incorporated.
RBI Policies for co-operative banks

The RBI appointed a high power committee in May 1999 under the chairmanship of Shri.
K. Madhava Rao, Ex-Chief Secretary, Government of Andhra Pradesh to review the
performance of Urban Co-operative Banks (UCBs) and to suggest necessary measures to
strengthen this sector. With reference to the terms given to the committee, the committee
identified five broad objectives:
 To preserve the co-operative character of UCBs
 To protect the depositors’ interest
 To reduce financial risk
 To put in place strong regulatory norms at the entry level to sustain the operational
efficiency of UCBs in a competitive environment and evolve measures to strengthen the
existing UCB structure particularly in the context of ever increasing number of weak
banks
 To align urban banking sector with the other segments of banking sector in the context of
 application or prudential norms in to and removing the irritants of dual control regime
 RBI has extended the Off-Site Surveillance System (OSS) to all non-scheduled urban co-
 operative banks (UCBs) having deposit size of Rs. 100 Crores and above.
Types of Co-operative Banks

The co-operative banks are small-sized units which operate both in urban and non-urban
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centers. They finance small borrowers in industrial and trade sectors besides professional
and salary classes. Regulated by the Reserve Bank of India, they are governed by the Banking
Regulations Act 1949 and banking laws (co-operative societies) act, 1965. The co-operative
banking structure in India is divided into following 5 components:
Primary Co-operative Credit Society

The primary co-operative credit society is an association of borrowers and non-borrowers
residing in a particular locality. The funds of the society are derived from the share capital and
deposits of members and loans from central co-operative banks. The borrowing powers of the
members as well as of the society are fixed. The loans are given to members for the purchase of
cattle, fodder, fertilizers, pesticides, etc.
Central co-operative banks

These are the federations of primary credit societies in a district and are of two types-
those having a membership of primary societies only and those having a membership of societies
as well as individuals . The funds of the bank consist of share capital, deposits, loans and
overdrafts from state co-operative banks and joint stocks. These banks provide finance to
member societies within the limits of the borrowing capacity of societies. They also conduct all
the business of a joint stock bank.
State co-operative banks

The state co-operative bank is a federation of central co-operative bank and acts as a
watchdog of the co-operative banking structure in the state. Its funds are obtained from share
capital, deposits, loans and overdrafts from the Reserve Bank of India. The state co-operative
banks lend money to central co-operative banks and primary societies and not directly to the
farmers.
Land development banks

The Land development banks are organized in 3 tiers namely; state, central, and primary
level and they meet the long term credit requirements of the farmers for developmental purposes.
The state land development banks oversee, the primary land development banks situated in the
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districts and tehsil areas in the state. They are governed both by the state government and
Reserve Bank of India. Recently, the supervision of land development banks has been assumed
by National Bank for Agriculture and Rural development (NABARD). The sources of funds for
these banks are the debentures subscribed by both central and state government. These banks do
not accept deposits from the general public.
Urban Co-operative Banks

The term Urban Co-operative Banks (UCBs),though not formally defined, refers to
primary co-operative banks located in urban and semi-urban areas. These banks, till 1996, were
allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
These banks were traditionally centered on communities, localities, work place groups. They
essentially lend to small borrowers and businesses. Today, their scope of operations has widened
considerably.
The origins of the urban co-operative banking movement in India can be traced to the close of
nineteenth century. Inspired by the success of the experiments related to the co-operative
movement in Britain and the co-operative credit movement in Germany, such societies were set
up in India. Co-operative societies are based on the principles of cooperation, mutual help,
democratic decision making, and open membership. Co-operatives represented a new and
alternative approach to organization as against proprietary firms, partnership firms, and joint
stock companies which represent the dominant form of commercial organization. They mainly
rely upon deposits from members and non-members and in case of need, they get finance from
either the district central co-operative bank to which they are affiliated or from the apex co-
operative bank if they work in big cities where the apex bank has its Head Office. They provide
credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.
Functions of co-operative banks

Co-operative banks also perform the basic banking functions of banking but they differ
from commercial banks in the following respects
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 Commercial banks are joint-stock companies under the companies’ act of 1956, or public
sector bank under a separate act of a parliament whereas co-operative banks were
established under the co-operative society’s acts of different states.
 Commercial bank structure is branch banking structure whereas co-operative banks have
a three tier setup, with state co-operative bank at apex level, central / district co-operative
bank at district level, and primary co-operative societies at rural level.
 Only some of the sections of banking regulation act of 1949 (fully applicable to
commercial banks), are applicable to co-operative banks, resulting only in partial control
by RBI of co-operative banks and
 Co-operative banks function on the principle of cooperation and not entirely on
commercial parameters.
Problems of Co-operative Banks

Duality of control system of co-operative banks However, concerns regarding the
professionalism of urban co-operative banks gave rise to the view that they should be better
regulated. Large co-operative banks with paid-up share capital and reserves of Rs.1 lakh were
brought under the purview of the Banking Regulation Act 1949 with effect from 1st March, 1966
and within the ambit of the Reserve Bank’s supervision. This marked the beginning of an era of
duality of control over these banks. Banking related functions (viz. licensing, area of operations,
interest rates etc.) were to be governed by RBI and registration, management, audit and
liquidation, etc. governed by State Governments as per the provisions of respective State Acts. In
1968, UCB’s were extended the benefits of deposit insurance. Towards the late 1960s there was
debate regarding the promotion of the small scale industries. UCB’s came to be seen as
important players in this context. The working group on industrial financing through Co-
operative Banks, (1968 known as Damry Group) attempted to broaden the scope of activities of
urban co-operative banks by recommending these banks should finance the small and cottage
industries. This was reiterated by the Banking Commission in 1969.
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The Madhavdas Committee (1979) evaluated the role played by urban co-operative banks
in greater details and drew a roadmap for their future role recommending support from RBI and
Government in the establishment of such banks in backward areas and prescribing viability
standards.
The Hate Working Group (1981) desired better utilization of bank’s surplus funds and
that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity Ratio (SLR) of
these banks should be brought at par with commercial banks, in a phased manner. While the
Marathe Committee (1992) redefined the viability norms and ushered in the era of liberalization,
the Madhava Rao Committee (1999) focused on consolidation, control of sickness, better
professional standards in urban co-operative banks and sought to align the urban banking
movement with commercial banks.
The feature of the urban banking movement has been its heterogeneous character and its uneven
geographical spread with most banks concentrated in the states of Gujarat, Karnataka,
Maharashtra, and Tamil Nadu. While most banks are unit banks without any branch network,
some of the large banks have established their presence in many states when at their behest
multi-state banking was allowed in 1985. Some of these banks are also Authorized Dealers in
Foreign Exchange
Industrial development bank of India

The Industrial Development Bank of India is the apex financial institution in the field of
development banking in the country. IDBI Bank Limited is an Indian government-owned
financial service company, formerly known as Industrial Development Bank of India,
headquartered in Mumbai, India. It was established in 1964 by an Act of Parliament to provide
credit and other financial facilities for the development of the fledgling Indian industry.
It is currently 10th largest development bank in the world in terms of reach, with 2713 ATMs,
1513 branches, including one overseas branch at Dubai, and 1013 centers, including two
overseas centres at Singapore & Beijing. IDBI Bank is on a par with nationalized banks and the
SBI Group as far as government ownership is concerned. It is one among the 26 commercial
banks owned by the Government of India.
It was established in July, 1964 with the twin objectives of:
(a) Meeting the growing financial needs of rapid industrialization in the country, and
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(b) Coordinating the activities and assisting the growth of all institutions engaged in financing
industries. It is an organization with sufficiently large financial resources which not only
provides direct financial assistance to the large and medium-large industrial units, but also helps
the small and medium industries indirectly by extending refinancing and re-discounting facilities
to other industrial financing institutions.
Thus, the primary aim of the IDBI has been to integrate the structure of industrial financing
institutions and to fill the gap between demand and supply of term finance in the country.
Initially, the IDBI was set up as a wholly owned subsidiary of the Reserve Bank of India, but, in
1976, it was taken over by the Government of India and was made an autonomous institution.
Growth of Industrial Development Bank of India

The Industrial Development Bank of India was established in the year 1964 by the Act of
Parliament. The main aim was to provide more financial impetus to the industrial sector in order
to add to the Gross Domestic Product. Since then, the bank has gradually grown itself to become
one of the well known financial institutions in the country by providing high class facilities and
services. Today, it has become the tenth largest development bank in the world in terms of reach
and reception. The bank has 975 ATMs, 352 centers and 568 branches. The IBDI is also credited
with the establishment of other renowned financial institutions such as the National Stock
Exchange of India, the Stock Holding Corporation of India and the National Securities
Depository Services Ltd. Some basic facts about the bank are:
Type Public sector bank
Established 1964
Headquarters India
Key personalities Chairman, Yogesh Agarwal
Industry Finance
Products Financial services
Employees Around 8989
To keep pace with the changing trends, the Industrial Development Bank of India has
come up with various reforms. The main aim of the new reforms is to emphasize on the financial
and commercial aspect in addition to acting as a financial organization. In the year 2004, the
bank was given the status of a public limited company and was renamed as Industrial
282
Development Bank of India Limited (IDBIL). The Reserve Bank of India (RBI) also nominated
IDBI as a scheduled bank under the RBI Act, 1934. Since then, the bank has entered into
business Transactions with the name of IDBIL.
In the year 2008, the IDBI went into a joint venture with Fortis Insurance International
and the Federal Bank for making the IDBI Fortis Life Insurance program. The ownership of the
bank in this program is around 48 %. According to the recent surveys, the premium of the bank
amounts to around ` 300 Crores.
Growth of Industrial Development Bank of India

The Industrial Development Bank of India was established in the year 1964 by the Act of
Parliament. The main aim was to provide more financial impetus to the industrial sector in order
to add to the Gross Domestic Product. Since then, the bank has gradually grown itself to become
one of the well known financial institutions in the country by providing high class facilities and
services. Today, it has become the tenth largest development bank in the world in terms of reach
and reception. The bank has 975 ATMs, 352 centers and 568 branches. The IBDI is also credited
with the establishment of other renowned financial institutions such as the National Stock
Exchange of India, the Stock Holding Corporation of India and the National Securities
Depository Services Ltd. Some basic facts about the bank are:
Type Public sector bank
Established 1964
Headquarters India
Key personalities Chairman, Yogesh Agarwal
Industry Finance
Products Financial services
Employees Around 8989
Services of Industrial Development Bank of India

In order to increase its customer base, the Industrial Development Bank of India offers a
number of customized and innovative banking services. The services are meant to offer cent
percent satisfaction to the customers. Some of the well known services offered by the bank are:
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Wholesale Banking services:
The wholesale banking services form a major part of the banking services of the bank. The
services that are offered under the wholesale division are:
 Cash Management
 Transactional services
 Finance of working capital
 Agro based business transactions
 Trade services
The wholesale banking services are an important source of income in a number of infrastructure
projects such as power, transport, telecom, railways, roadways, and logistics and so on.
Retail Banking Services:

The Industrial Development Bank of India is also a leader in the retail banking services. The
Net Interest Income amounted to around ` 2166 Crores while the Net Profit amounted to around `
187 Crores. The main objective of the retail services is to provide high quality financial products
to the target market to give that one-stop-solution to the banking needs. The retail products
offered by the bank include:
 Housing loans
 Personal loans
 Securities loans
 Mortgage loans
 Educational loans
 Merchant establishment overdrafts
 Holiday travel plans
 Commercial property loans
Treasury facilities and services:

The net interest income of this sector amounts to around ` 1283 Crores while the net profit
amounts to around ` 44.8 Crores. One can get an array of financial products such as cash
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management services, deposit, treasury products, trade finance services and so on. The three
segments in this sector are:
 Local Currency Money Market
 Debt Securities and equities
 Foreign Exchange and Derivatives
Other services of Industrial Development Bank of India

In addition to these, IDBI also offers some allied services and financial solutions to cater to
the target audience. To cater to the capital market, the bank has floated the IDBI Capital Market
Services Limited, also known as IDBI Capital. The various services offered in this section are:
 Corporate Advisory Services
 Financial product distribution
 Pension fund management
 Corporate and retail services
 Debt management services
The IDBI Home Finance Limited is also a subsidiary of the Industrial Development Bank of
India. It is used for the purpose of providing long term loans and other financial benefits to
various companies of the industrial sector.
In addition to these, there is also the IDBI Intech Limited which is a trusted name in the
field of system support and implementation, applications, server hosting, system integration and
other related services. Another subsidiary of the Industrial Development Bank of India is the
IDBI Gilts Limited. The main services of this segment is trading of bonds, offering insurance,
auction underwriting and so on. - See more at: http://business.mapsofindia.com/banks-in-
india/industrial-development-bank-of-india.html#sthash.ipWWBHH4.dpuf
Role of IDBI
IDBI is vested with the responsibility of co-ordinating the working of institutions
engaged in financing, promoting and developing industries. It has evolved an appropriate
mechanism for this purpose. IDBI also undertakes/supports wide-ranging promotional activities
including entrepreneurship development programmes for new entrepreneurs, provision of
285
consultancy services for small and medium enterprises, upgradation of technology and
programmes for economic upliftment of the underprivileged.
IDBI's role as a catalyst

IDBI's role as a catalyst to industrial development encompasses a wide spectrum of
activities. IDBI can finance all types of industrial concerns covered under the provisions of the
IDBI Act. With over three decades of service to the Indian industry, IDBI has grown
substantially in terms of size of operations and portfolio.
Developmental Activities of IDBI

1.Promotional 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
services for small and medium enterprises and programmes designed for accredited voluntary
agencies for the economic upliftment of the underprivileged. These include entrepreneurship
development, self-employment and wage employment in the industrial sector for the weaker
sections of society through voluntary agencies, support to Science and Technology
Entrepreneurs' Parks, Energy Conservation, Common Quality Testing Centres for small
industries.
2.Technical Consultancy Organizations:
With a view to making available at a reasonable cost, consultancy and advisory services
to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other
All-India 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.
3. Entrepreneurship Development Institute:
Realizing that entrepreneurship development is the key to industrial development, IDBI
played a prime role in setting up of the Entrepreneurship Development Institute of India for
fostering entrepreneurship in the country. It has also established similar institutes in Bihar,
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Orissa, Madhya Pradesh and Uttar Pradesh. IDBI also extends financial support to various
organizations in conducting studies or surveys of relevance to industrial development.
Functions of Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was set up in July 1964, as a wholly-
owned subsidiary of the Reserve Bank of India. It was given complete autonomy in February
1976.Today, the IDBI is regarded as an apex institution in the arena of development banking.
The IFCI and the UT1 are the subsidiaries of the IDBI. As an apex development bank, the
IDBI’s major role is to co-ordinate the activities of other development banks and term-financing
institutions in the capital market of the country.
The main functions of the IDBI may be stated as follows:

1. Planning, promoting and developing industries with a view to fill the gaps in the
industrial structure by conceiving, preparing and floating new projects.
2. Providing technical and administrative assistance for promotion, management and
expansion of industry.
3. Providing refinancing facilities to the IFCI, SFCs and other financial institutions
approved by the government.
4. Coordinating the activities of financial institutions for the promotion and development of
industries.
5. Purchasing or underwriting shares and debentures of industrial concerns.
6. Guaranteeing deferred payments due from industrial concerns and for loans raised by
them. Undertaking market and investment research, surveys and techno-economic
studies helpful to the development of industries.
In short, the IDBI is the leader, coordinator and innovator in the field of industrial financing
in our country. Its major activity is confined to financing, developmental, co-ordination and
promotional functions.
With the passing of the IDBI (Amendment) Act, 1986, the IDBI has been empowered to
provide assistance to diverse range of industrial activities including the activities of services
sector of industries like informatics, health care, storage and distribution of energy and other
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services contributing to value addition. The scope of business of the IDBI has also been extended
to cover consulting, merchant banking and trusteeship activities.
Under the 1986 Amendment, the authorised capital of the IDBI has been raised to Rs. 1,000
crores (with the possibility of further increasing it to Rs. 2,000 crores by the Central
Government’s notification) for sustaining the growing tempo of its operations.
During the year 1986-87, the IDBI provided Rs. 929 crores of direct industrial assistance by way
of project loans, including assistance under the modernisation scheme, technical development
fund scheme, equipment finance scheme and underwriting of and direct subscriptions to shares
and debentures of industrial firms.
It however, sanctioned Rs. 65 billions and disbursed Rs. 40 billions of loans in the aggregate.
The cumulative assistance sanctioned and disbursed by the IDBI 1964-1987 aggregated to Rs.
227 billions and Rs. 165 billions respectively. During 1995-96, the IDBI’s financial assistance
sanctioned amounted to Rs. 19,469 crore of which Rs. 10,636 crore were disbursed.
In recent years, the IDBI has started providing assistance to backward areas and small-scale
industries remarkably well.
ICICI
ICICI Bank is an Indian multinational banking and financial services company
headquartered in Mumbai, Maharashtra. As of 2014 it is the second largest bank in India in terms
of assets and market capitalization. It offers a wide range of banking products and financial
services for corporate and retail customers through a variety of delivery channels and specialized
subsidiaries in the areas of investment banking, life, non-life insurance, venture capital and asset
management. The Bank has a network of 3,800 branches and 11,162. ATMs in India, and has a
presence in 19 countries.
ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab
National Bank and Bank of Baroda. The bank has subsidiaries in the United Kingdom, Russia,
and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and
Dubai International Finance Centre; and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The company's UK subsidiary has
also established branches in Belgium and Germany. [6]
288
In March 2013, Operation Red Spider showed high-ranking officials and some employees of
ICICI Bank involved in money laundering. After a government inquiry, ICICI Bank suspended
18 employees and faced penalties from the Reserve Bank of India in relation to the activity. The
Industrial Credit and Investment Corporation of India was registered as a private limited
company in 1955. It was set up as a private sector development bank to assist and promote
private industrial concerns in the country.
History
ICICI Bank was established by the Industrial Credit and Investment Corporation of India
(ICICI), an Indian financial institution, as a wholly owned subsidiary in 1994. The parent
company was formed in 1955 as a joint-venture of the World Bank, India's public-sector banks
and public-sector insurance companies to provide project financing to Indian industry. The bank
was initially known as the Industrial Credit and, before Investment Corporation of India Bank it
changed its name to the abbreviated ICICI Bank. The parent company was later merged with the
bank.
ICICI Bank launched internet banking operations in 1998. ICICI's shareholding in ICICI
Bank was reduced to 46 percent, through a public offering of shares in India in 1998, followed
by an equity offering in the form of American Depositary Receipts on the NYSE in 2000. ICICI
Bank acquired the Bank of Madura Limited in an all-stock deal in 2001 and sold additional
stakes to institutional investors during 2001-02.
In the 1990s, ICICI transformed its business from a development financial institution offering
only project finance to a diversified financial services group, offering a wide variety of products
and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank.
In 1999, ICICI become the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on the NYSE.[15]
In 2000, ICICI Bank became the first Indian bank to list on the New York Stock Exchange with
its five million American depository shares issue generating a demand book 13 times the offer
size.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI
and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial Services
Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by
289
shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at
Ahmedabad in March 2002 and by the High Court of Judicature at Mumbai and the Reserve
Bank of India in April 2002.[16]
In 2008, following the 2008 financial crisis, customers rushed to ICICI ATMs and branches in
some locations due to rumours of adverse financial position of ICICI Bank. The Reserve Bank of
India issued a clarification on the financial strength of ICICI Bank to dispel the rumours.
Objectives of the ICICI

 To assist in the creation, expansion and modernization of private concerns;
 To encourage the participation of internal and external capital in the private concerns;
 To encourage private ownership of industrial investment.
Functions of the ICICI

 It provides long-term and medium-term loans in rupees and foreign currencies.
 It participates L* the equity capital of the industrial concerns.
 It underwrites new issues of shares and debentures.
 It guarantees loans raised by private concerns from other sources.
 It provides technical, managerial and administrative assistance to industrial concerns.
1. Capital Initially:
The Corporation started with the authorized capital of Rs. 25 crore. At the end of June
1986, the authorized capital was Rs. 100 crore and the paid-up capital was 49.5 crore. Various
sources of financial resources of the Corporation are Indian banks, insurance companies and
foreign institutions, including the World Bank, and the public. The government and the IDBI
have also provided loans to the Corporation.
2. Financial Assistance:
The performance of the ICICI in the field of financial assistance provided to the industrial
concerns has been quite satisfactory. Over the years, the assistance sanctioned by the
Corporation has grown from Rs.14.8 crore in 1961-62 to Rs. 43.0 crore in 1970-71 and Rs.
36229 crore in 2001-02. Similarly the amount disbursed has increased from Rs.8.6 crore in 1961-
62 to Rs.29.8 crore in 1970-71 and to Rs. 25831 in 2001-02. Cumulatively, at the end of March
290
1996, the ICICI has sanctioned and disbursed financial assistance aggregating Rs. 66169 crore
and Rs. 36591 crore respectively.
Features of ICICI
The important features of the functioning of the ICICI arc as given below:
 The financial assistance as provided by the ICICI includes rupee loans, foreign currency
loans, guarantees, underwriting of shares and debentures, and direct subscription to
shares and debentures.
 Originally, the ICICI was established to provide financial assistance to industrial
concerns in the private sector. But, recently, its scope has been widened by including
industrial concerns in the public, joint and cooperative sectors.
 ICICI has been providing special attention to financing riskier and non-traditional
industries, such as chemicals, petrochemicals, heavy engineering and metal products.
These four categories of industries have accounted for more than half of the total
assistance.
 Of late, the ICICI has also been providing assistance to the small scale industries and the
projects in backward areas.
 Along with other financial institutions, the ICICI has actively participated in conducting
surveys to examine industrial potential in various states.
 In 1977, the ICICI promoted the Housing Development Finance Corporation Ltd. to grant
term loans for the construction and purchase of residential houses.
 Since 1983, the ICICI has been providing leasing assistance for computerization,
modernization and replacement schemes; for energy conservate; for export orientation;
for pollution controller balancing and expansion: etc.
 The ICICI has not contributed much to reduce regional disparities. About three-fifth of
the total assistance given by the ICICI has been received by the advanced states of
Maharashtra, Gujarat and Tamil Nadu.
 With effect from April 1, 1996, Shipping Credit and Investment Company of India ltd,
(SCICI) was merged with ICICI.
 The ICICI Ltd. was merged with ICICI Bank Ltd. effective from May 3, 2002.
291
Financial Assistance of ICICI
To achieve its objectives, ICICI provides financial assistance in various forms such as:
1. Long term and medium term loans both in terms of rupee and foreign currency.
2. Participating in equity capital and in debentures.
3. Underwriting new issues of shares and debentures.
4. Guarantee to suppliers of equipment and foreign loaners.
Activities of ICICI:
The activities of ICICI are discussed below:
1. Project Finance:
The project finance is provided to industries for the cost of establishment, modernization
or expansion of manufacturing and processing activities in the form of rupee and foreign loans,
underwriting, subscription to shares and debentures and guarantees to supply of equipment and
foreign donors.
The rupee loan is given for the purchase of equipment and machinery, construction and
preliminary expenses. The foreign currency loans are provided for the purchase of imported
capital equipment.
2. Leasing:
The leasing operations of the ICICI commenced in 1983. Leasing assistance is given for
computerization, modernization/replacement, equipment of energy conservation, export
orientation, pollution control etc.
3. Project Advisory Services:
The Project advisory services are provided to the Central and State Governments and
public sector and private sector companies. Advice to the governments is provided on policy
reforms and on value chain analysis and to private sector companies on strategic management.
4. Facilities for Non-resident Indians:
The information regarding on facilities and incentives given by the Government of India
to the non-resident Indians for judicious investing in India are offered.
292
5. Provision of Foreign Currency Loans:
The ICICI has a provision of foreign currency loans and advances to enable Indian
Industrial concerns to secure essential capital goods from foreign countries.
6. Other Institutions Promoted:
a. ICICI promoted the Housing Development Finance Corporation (HDFC) to provide long-
term finance to individuals in middle and lower income groups, co-operations, etc., for
the construction and purchase on ownership basis of residential houses all over the
country.
b. Credit Rating Information Services of India Ltd. (CRISIL) set up by ICICI in association
with Unit Trust of India (UTI) to provide credit rating services to the corporate sector.
c. Technology Development and Information Company of India Ltd. (TDICI), promoted by
ICICI, to finance the transfer and Up gradation of technology and provide technology
information.
d. Programme for the Advancement of Commercial Technology (PACT) set up with a grant
of US $10 million provided by USAID (United States Aid) to assist market-oriented
R&D activity, jointly undertaken by Indian and US companies, ICICI has been entrusted
with the administration and management of PACT.
e. Programme for Acceleration of Commercial Energy Research (PACER) funded by
USAID with a grant of US $ 20 million to support selected research and technology
development proposals in Indian energy sector PACER was also launched by ICICI.
ICICIs role in Indian financial infrastructure

The bank has contributed to the set up of a number of Indian institutions to establish financial
infrastructure in the country over the years;
 National Stock Exchange –
The National Stock Exchange was promoted by India's leading financial
institutions (including ICICI Ltd.) in 1992 on behalf of the Government of India with the
objective of establishing a nationwide trading facility for equities, debt instruments and
hybrids, by ensuring equal access to investors all over the country through an appropriate
communication network.[18]
 Credit Rating Information Services of India Limited (CRISIL) –
293
In 1987, ICICI Ltd along with UTI set up CRISIL as India's first professional
credit rating agency. CRISIL offers a comprehensive range of integrated products and
service offerings which include credit ratings, capital market information, industry
analysis and detailed reports.[19]
 National Commodities and Derivatives Exchange Limited –
NCDEX is an online multi-commodity exchange, set up in 2003, by ICICI Bank
Ltd, LIC, NABARD, NSE, Canara Bank, CRISIL, Goldman Sachs, Indian Farmers
Fertiliser Cooperative Limited (IFFCO) and Punjab National Bank.[20]
 Financial Innovation Network and Operations Pvt Ltd. –
ICICI Bank has facilitated setting up of "FINO Cross Link to Case Link Study" in
2006, as a company that would provide technology solutions and services to reach the
underserved and underbanked population of the country. Using cutting edge technologies
like smart cards, biometrics and a basket of support services, FINO enables financial
institutions to conceptualise, develop and operationalise projects to support sector
initiatives in microfinance and livelihoods.[21]
 Entrepreneurship Development Institute of India –
Entrepreneurship Development Institute of India (EDII), an autonomous body and
not-for-profit society, was set up in 1983, by the erstwhile apex financial institutions like
IDBI, ICICI, IFCI and SBI with the support of the Government of Gujarat as a national
resource organisation committed to entrepreneurship development, education, training
and research.[22]
 North Eastern Development Finance Corporation –
North Eastern Development Finance Corporation (NEDFI) was promoted by
national level financial institutions like ICICI Ltd in 1995 at Guwahati, Assam for the
development of industries, infrastructure, animal husbandry, agri-horticulture plantation,
medicinal plants, sericulture, aquaculture, poultry and dairy in the North Eastern states of
India. NEDFI is the premier financial and development institution for the North East
region.[23]
 Asset Reconstruction Company India Limited –
Following the enactment of the Securitisation Act in 2002, ICICI Bank together
with other institutions, set up Asset Reconstruction Company India Limited (ARCIL) in
294
2003, to create a facilitative environment for the resolution of distressed debt in India.
ARCIL was established to acquire non-performing assets (NPAs) from financial
institutions and banks with a view to enhance the management of these assets and help in
the maximisation of recovery. This would relieve institutions and banks from the burden
of pursuing NPAs, and allow them to focus on core banking activities.[24][25]
 Credit Information Bureau of India Limited –
ICICI Bank has also helped in setting up Credit Information Bureau of India
Limited (CIBIL), India's first national credit bureau in 2000. CIBIL provides a repository
of information (which contains the credit history of commercial and consumer borrowers)
to its members in the form of credit information reports. The members of CIBIL include
banks, financial institutions, state financial corporations, non-banking financial
companies, housing finance companies and credit card companies.[26]
 Institutional Investor Advisory Services India Limited (IiAS) –
ICICI Bank has indirectly invested in Institutional Investor Advisory Services,
through ICICI Prudential Life Insurance Company, in IiAS. IiAS is a voting advisory
firm aka proxy firm, dedicated to providing participants in the Indian market with data,
research and commentary. It provides recommendations on resolutions placed before
shareholders of over 300 companies.
Social responsibility programmes for elementary Education

 Read to Lead Phase I:
Read to Lead is an initiative of ICICI Bank to facilitate access to elementary
education for underprivileged children in the age group of 3–14 years including girls and
tribal children from the remote rural areas. The Read to Lead initiative supports partner
NGOs to design and implement programmes that mobilise parent and community
involvement in education, strengthen schools and enable children to enter and complete
formal elementary education. Read to Lead has reached out to 100,000 children across 14
states of Andhra Pradesh, Bihar, Delhi, Gujarat, Haryana, Jharkhand, Karnataka,
Maharashtra, Orissa, Rajasthan, Tamil Nadu, Tripura, Uttar Pradesh and West Bengal.
 Read to Lead Phase II:
295
In Phase II of the Read to Lead programme, ICICI Bank has supported the
establishment of 63 libraries that will reach out to approximately 7,200 children in the
rural areas of Jagdalpur block of Bastar district in Chhattisgarh. The programme includes
building libraries, sourcing books and conducting various interactive activities to make
the library a dynamic centre for learning.
QUESTIONS
UNIT V
SECTION-A
1. SBI was established on the recommendations of the
2. The Head office of State Bank is located in ________
3. Regional Rural banks are started to bring about _________
4. ICICI was established in the year _______
5. The rural banks were established mainly to give credit to ___
6. The banks which provides mainly to the requirements of the farmers in village is
_________________
7. The number of regional rural banks in Tamil nadu is ____
8. The State Bank of India was established by nationalising the __
9. Reserve Bank of India Act _____
10. IDBI - Expand
SECTION-B
1. State the reasons for failure of Regional Rural Banks in India?
2. What are Regional Rural banks? What are its objectives?
3. What are the differences between Regional Rural Banks and Commercial banks?
4. Write a short note on ICICI? State the various functions of Regional rural bank
5. What are the functions of NABARD?
6. Write a brief note on Co-operative banks and rural credit?
7. Explain the development Banks IDBI and ICICI?
8. Explain the role of SBI in rural credit?
9. Explain the role of Regional rural banks in Rural development?
10. Discuss the role of Cooperative bank in the provisions of Rural credit?
296
SETION-C
1. Explain the sources of Rural Financing?
2. Write briefly about State Bank and rural credit?
3. Explain the development Banks IDBI and ICICI?
4. Explain the role of RBI in the rural development of India?
5. What is the place of Co –operative’s banks in the Indian Banking system?
6. Explain the role of Co- operative banks in rural credit?
7. Analyze the role of SBI in Indian Economy?
8. Explain the Multi-Agency approach in Rural Financing?
9. What are the causes for slow growth of Co-operative banks?
10. State Bank of India is instrumental for economic growth-Explain?
11. Explain the various types of Co-operative banks?
297
BANKING THEORY
SYLLABUS
UNIT - I
Origin of Banks – Definition of Banking – Classification of Banks – Banking System : Unit
Banking – Branch Banking Universal Banking & Banking Markets – Functions of Modern
Commercial Banks – Balance Sheet of a Commercial Bank – Credit creation by Commercial
Banks.
UNIT - II
Recent Trends in Indian Banking – Automated Teller Machines – Merchant Banking – Mutual
Fund – Factoring Service – Customer Service – Credit Card – E-Banking. Privatization of
Commercial Banks – Place of Private Sector Banks in India.
UNIT - III
Central Banks – Functions – Credit Control Measures – Quantitative and selective credit control
measures – Role of RBI in regulating and controlling banks.
UNIT - IV
Indian Money market – Organized and Unorganized Part – Deficiencies of the Indian Money
Market – Comparison with British and American Money Market.
UNIT - V
State Bank of India – its special place in the banking scene – Commercial Banks and rural
financing – Regional Rural Banks – place of Co-operative banks in the Indian Banking scene.
Development Banking – IDBI – ICICI.
BOOKS FOR REFERENCE
298
1. Banking of India - Panandigar .S.J.
2. A Text Book of Banking - Radhasamy M & Vasudevan S.V.
3. A Text Book on Banking - Maheswari . S. N.
4. Indian Banking - Natarajan. S. & Parameswaran .R.
5. Banking and Financial Systems - Santhanam .B
299

Banking Theory

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BANKING THEORY

Disadvantages of Unit Banking

Advantages of Group Banking

Pure and mixed banking:

Advantages of Mixed Banking:

Disadvantages of Mixed Banking:

Bank and economic development:

Importance of banking and economic development:

Credit creation by Commercial Banks:-

Process of multiple expansion of credit

BANKS PRIMARY CRR Credit Creation or

Limitations of credit creation

Balance sheet of commercial banks:

SCHEDULE 2 – RESERVES & SURPLUS

SCHEDULE 2A-MINORITIES INTEREST

SCHEDULE 5 – OTHER LIABILITIES AND PROVISIONS

SCHEDULE 6 – CASH AND BALANCES WITH RESERVE BANK OF INDIA

SCHEDULE 7 – BALANCES WITH BANKS AND MONEY AT

SCHEDULE 9 – LOANS & ADVANCES

SCHEDULE 10 – FIXED ASSETS

SCHEDULE 13 – INTEREST AND DIVIDENDS EARNED

SCHEDULE 14 – OTHER INCOME

SCHEDULE 15 – INTEREST EXPENDED

SCHEDULE 16 – OPERATING EXPENSES

Recent Trends in Indian Banking Sector

Role of Information Technology (IT) and Customer Relationship Management (CRM) in

Foreign Direct Investment (FDI) in India

Take out financing

Automated teller machine:

Deposit insurance scheme:

Gold deposit scheme:

Multi dimensional development:

IDBI Bank Ltd:

Functions of Merchant Banking

Assistance provided by merchant bankers:

SEBI guidelines on merchant banking:

Characterstics features of factoring service:

Factoring: conceptual frame work

Types of credit sales

Factoring and Services

Benefits of factoring Service

Factoring service suffers from the following limitations:

Suggestions of C.S. KalayanaSundaram Committee Jan 28, 1988

Concept of mutual funds:

Types of mutual fund scheme:

1. Open ended scheme

Features of open ended funds:

Close ended scheme:

Classification of close ended scheme:

Advantages of Mutual Funds

Risks involved in mutual funds:

Organisation of mutual funds:

Operation of mutual fund:

Charges for managing the funds:

Repurchase and Reissue prices:

SEBI and mutual fund industry

Net asset value of mutual fund:

Guidelines for Mutual funds:

Mutual Fund Industry in India: Recent trends & Progress

Types of service provided by the bank:

Operation of credit card:

Mechanism of credit card:

Diagrammatic representation of credit card: