INDIAN BANKING INDUSTRY

INDIAN BANKING INDUSTRY

MEANING OF BANK

Bank is a lawful organisation, which accepts deposits that can be withdrawn

on demand. It also lends money to individuals and business houses that

ROLE OF BANKING

Banks provide funds for business as well as personal needs of individuals.

They play a significant role in the economy of a nation. Let us know about

the role of banking.

 It encourages savings habit amongst people and thereby makes funds

available for productive use.

 It acts as an intermediary between people having surplus money and those

requiring money for various business activities.

 It facilitates business transactions through receipts and payments by

cheques instead of currency.

 It provides loans and advances to businessmen for short term and long-

 It also facilitates import-export transactions.

 It helps in national development by providing credit to farmers, small-scale

industries and self-employed people as well as to large business houses

which lead to balanced economic development in the country.

 It helps in raising the standard of living of people in general by providing

loans for purchase of consumer durable goods, houses, automobiles, etc.

TYPES OF BANKS

On the basis of functions, the banking institutions in India may be divided into the

1. Central Bank (RBI, in India)                                        

 Public Sector Banks    

 Private Sector Banks    

3. Development Banks (IFCI, SFCs)

 Primary Credit Societies

 Central Co-operative Banks

 State Co-operative Banks

5. Specialised Banks (EXIM Bank, SIDBI, NABARD)

A bank which is entrusted with the functions of guiding and regulating the

banking system of a country is known as its Central bank. Such a bank does

not deal with the general public.  It acts essentially as Government’s banker,

maintain deposit accounts of all other banks and advances money to other

banks, when needed. The Central Bank provides guidance to other banks

whenever they face any problem.  It is therefore known as the banker’s bank.

Functions of Central Bank

The Reserve Bank of India is the central bank of our country.

 The Central bank functions as a banker, agent and financial adviser to the

government. It maintains record of Government revenue and expenditure

under various heads.

 It also advises the Government on monetary and credit policies and decides

on the interest rates for bank deposits and bank loans.

 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.

 In addition, foreign exchange rates are also determined by the central bank.

 Another important function of the Central Bank is the issuance of currency

notes, regulating their circulation in the country by different methods.  No

other bank than the Central Bank can issue currency.

Commercial banks are the financial institutions that accept deposits from the

people and advances loans. Commercial Banks also create credit. In India,

such banks alone called commercial banks which are established in

accordance with the provision of the Banking Regulation Act, 1949.

Functions Of Commercial Banks

The functions of commercial banks are of two types.

(a) Primary functions; and

The primary functions of a commercial bank includes:

(i) Accepting deposits: The most important activity of a commercial bank is to

mobilise deposits from the public. People who have surplus income and

savings find it convenient to deposit the amounts with banks. Banks give

interest on this deposit.

(ii) Granting loans and advances: The second important function of a

commercial bank is to grant    loans and advances. Such loans and advances

are given to members of the public and to the business community at a

higher rate of interest than allowed by banks on various deposit accounts.

The rate of interest charged on loans and advances varies according to the

purpose and period of loan and also the mode of repayment.

 Loans: Loan is a sum of money that is expected to be paid back with

 A loan is granted for a specific time period.

 Generally commercial banks provide short-term loans.

 But term loans, i.e., loans for more than a year may also be

granted.

 The borrower may be given the entire amount in lump sum or in

instalments.

 Loans are generally granted against the security of certain assets.

 Advances: An advance is a credit facility provided by the bank to its

customers. It differs          from loan in the sense that loans may be granted for

longer period, but advances are normally granted for a short period of time.

Further the purpose of granting advances is to meet the day-to-day

requirements of business. The rate of interest charged on advances varies

       Types of Advances

    Banks grant short-term financial assistance by way of cash credit, overdraft

Cash credit is an arrangement whereby the bank allows the borrower to draw

amount upto a specified limit. The amount is credited to the account of the

Overdraft is also a credit facility granted by bank. A customer who has a

current account with the bank is allowed to withdraw more than the amount

of credit balance in his account.

 Discounting of Bills

Banks provide short-term finance by discounting bills, that is, making

payment of the amount before the due date of the bills after deducting a

certain rate of discount.

Secondary functions

 In addition to the primary functions of accepting deposits and lending money,

banks perform a number of other functions, which are called secondary

functions. These are as follows:

 Issuing letters of credit, travellers cheque, etc.

 Undertaking safe custody of valuables, important documents and securities

by providing safe deposit vaults or lockers.

 Providing customers with facilities of foreign exchange dealings.

 Standing guarantee on behalf of its customers, for making payment for

purchase of goods, machinery, vehicles etc.

 Collecting and supplying business information.

 Providing reports on the credit worthiness of customers.

Types of Commercial banks

Commercial banks are of three types i.e., Public sector banks, Private sector

banks and Foreign banks.

 Public Sector Banks:

These are banks where majority stake is held by the Government of India or

Reserve Bank of India. Examples of public sector banks are: State Bank of

India, Corporation Bank, Bank of Baroda and Dena Bank, etc.

 Private Sectors Banks:

In case of private sector banks majority of share capital of the bank is held by

private individuals. These banks are registered as companies with limited

liability. For example: The ICICI Bank, Axis Bank, Federal Bank etc.

 Payment Banks and Small Banks:

The Reserve Bank of India has introduced the concept of Payment Banks and

Small Banks. These banks can offer deposit and remittances but it is

compulsory for them to invest all their funds in safe investments such as

government securities. The Reserve Bank of India is still to announced the

rules for such banks. Post offices may be considered to be made into payment

 Foreign Banks:

These banks are registered and have their headquarters in a foreign country

but operate their branches in our country. Some of the foreign banks

operating in our country are Hong Kong and Shanghai Banking Corporation

(HSBC), Citibank, American Express Bank, Standard & Chartered Bank,

Grindlay’s Bank, etc. The number of foreign banks operating in our country

has increased since the financial sector reforms of 1991.

 Note: According to a report by RBI there are 47 Foreign Banks branches

in India as on March 31, 2013.

Business often requires medium and long-term capital for purchase of

machinery and equipment, for using latest technology, or for expansion and

modernization. Such financial assistance is provided by Development Banks.

They also undertake other development measures like subscribing to the

shares and debentures issued by companies, in case of under subscription of

the issue by the public. Industrial Finance Corporation of India (IFCI) and State

Financial Corporations (SFCs) are examples of development banks in India.

People who come together to jointly serve their common interest often form

a co-operative society under the Co-operative Societies Act. When a co-

operative society engages itself in banking business it is called a Co-

operative Bank. The society has to obtain a licence from the Reserve Bank of

India before starting banking business. Any co-operative bank as a society has

to function under the overall supervision of the Registrar, Co-operative

Societies of the State. As regards banking business, the society must follow

the guidelines set issued by the Reserve Bank of India.

Types of co-operative banks

There are three types of co-operative banks operating in our country. They

are primary credit societies, central co-operative banks and state co-operative

banks. These banks are organized at three levels, village or town level, district

 Primary Credit Societies:

These are formed at the village or town level with borrower and non-

borrower members residing in one locality. The operations of each society are

restricted to a small area so that the members know each other and are able

to watch over the activities of all members to prevent frauds.

 Central Co-operative Banks:

These banks operate at the district level having some of the primary credit

societies belonging to the same district as their members. These banks

provide loans to their members (i.e., primary credit societies) and function as

a link between the primary credit societies and state co-operative banks.

 State Co-operative Banks:

These are the apex (highest level) co-operative banks in all the states of the

country.  They mobilise funds and help in its proper channelisation among

various sectors. The money reaches the individual borrowers from the state

co-operative banks through the central co-operative banks and the primary

There are some banks, which cater to the requirements and provide overall

support for setting up business in specific areas of activity. EXIM Bank, SIDBI

and NABARD are examples of such banks. They engage themselves in some

specific area or activity and thus, are called specialised banks and are

Development Financial Institutions. Let us know about them.

Export Import Bank of India (EXIM Bank)

 Exim bank was established in the year 1982.

 It is headquartered in Mumbai, India.

 If you want to set up a business for exporting products abroad or

importing products from foreign countries for sale in our country, EXIM

bank can provide you the required support and assistance.

 The bank grants loans to exporters and importers and also provides

information about the international market

Small Industries Development Bank of India (SIDBI)

 SIDBI was established in the year 1990.

 Its headquarters is in Lucknow.

 If you want to establish a small-scale business unit or industry, loan on

easy terms can be available through SIDBI.  It also finances

modernisation of small-scale industrial units, use of new technology

and market activities. The aim and focus of SIDBI is to promote, finance

and develop small-scale industries.

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

 National Bank for Agriculture and Rural Development (NABARD) is an

apex development bank in India established on 12 July 1982.

 Its headquarters is in Mumbai (Maharashtra).

 The Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development (CRAFICARD), set up by the Reserve

Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman,

conceived and recommended the establishment of the National Bank

for Agriculture and Rural Development (NABARD).

ROLE AND FUNCTIONS

 NABARD is an apex institution accredited with all matters concerning

policy, planning and operations in the field of credit for agriculture and

other economic activities in rural areas.

 It is an apex refinancing agency for the institutions providing

investment and production credit for promoting the various

developmental activities in rural areas.

 It takes measures towards institution building for improving absorptive

capacity of the credit delivery system, including monitoring,

formulation of rehabilitation schemes, restructuring of credit

institutions, training of personnel, etc.

 NABARD refinances the financial institutions which finances the rural

 The institutions which help the rural economy, NABARD helps develop.

 NABARD also keeps a check on its client institutes.

 It regulates the institution which provides financial help to the rural

 It provides training facilities to the institutions working in the field of

rural upliftment.

 It regulates the cooperative banks and the RRB’s.

 It promotes research in the fields of rural banking, agriculture and rural

Subsidiaries of NABARD

Nab cons: NABARD Consultancy Services (Nabcons) is a wholly owned

subsidiary promoted by National Bank for Agriculture and Rural

Development (NABARD) and is engaged in providing consultancy in all

spheres of agriculture, rural development and allied areas.

 NABARD Financial Services Limited, [NABFINS]: It is a subsidiary of

NABARD with equity participation from NABARD (owns 68%), Government

of Karnataka, Canara Bank Union Bank of India, Bank of Baroda,

Dhanalakshmi Bank and Federal Bank. It is a non-deposit taking NBFC

registered with the Reserve Bank of India and shall operate throughout

India. The main objectives of the Company are to provide financial services

in two broad areas of agriculture and microfinance.

Agri Business Finance (AP) Limited (ABFL) : It was incorporated under

Companies Act., 1956 on 17 February 1997. It is a state specific financial

institution registered as Non Banking Finance Company. ABFL was

incorporated with the objective of providing credit and to offer facilities

for promotion, expansion, commercialization and modernization of

enterprises engaged in Agriculture and allied activities.

 BANKERS INSTITUTE OF RURAL DEVELOPMENT (BIRD)

Established in 1983, at Lucknow, is an autonomous institute promoted and

funded by NABARD. BIRD was established primarily to cater to the training

needs of RRB personnel. The Institute, has, since 1st April 1992, been

catering to the training and information needs of rural bankers through its

topical training programs/seminars. The Institute's mandate also includes

Research and Consultancy in the related areas.

RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF)

The Rural Infrastructure Development Fund (RIDF) continues to sanction

and disburse funds to State Governments. The Rural Infrastructure

Development Fund (RIDF) is operated by NABARD with funds raised from

the scheduled commercial banks (public sector banks and private sector)

which are unable to meet their targets for priority sector and/or agriculture

NON BANKING FINANCIAL COMPANIES (NBFCs)

A Non-Banking Financial Company (NBFC) is a company a) registered under

the Companies Act. 1956, b) its principal business is lending, investments in

various types of shares/stocks/bonds/debentures/securities, leasing, hire-

purchase, insurance business, chit business, and c) its principal business is

receiving deposits under any scheme or arrangement in one lump sum or in

installments. However, a Non-Banking Financial Company does not include

any institution whose principal business is agricultural activity, industrial

activity, trading activity or sale/purchase/construction of immovable

property. NBFCs whose asset size is of Rs.100 cr or more as per last audited

balance sheet are considered as systemically important NBFCs. The rationale

for such classification is that the activities of such NBFCs will have a bearing

on the financial stability in our country.

The Reserve Bank of India regulates and supervises Non-Banking Financial

Companies which are into the business of (i) lending (ii) acquisition of shares,

stocks, bonds, etc., or (iii) financial leasing or hire purchase. The Reserve Bank

also regulates companies whose principal business is to accept deposits.

(Section 45I (c) of the RBI Act, 1934)

The Reserve Bank has been given the powers under the RBI Act 1934 to

register, lay down policy, issue directions, inspect, regulate, supervise and

exercise surveillance over NBFCs that meet the 50-50 criteria of principal

business. The Reserve Bank can penalize NBFCs for violating the provisions of

the RBI Act or the directions or orders issued by RBI under RBI Act. The penal

action can also result in RBI cancelling the Certificate of Registration issued to

the NBFC, or prohibiting them from accepting deposits and alienating their

assets or filing a winding up petition.

Differences between NBFCs and Banks

NBFCs lend and make investments and hence their activities are akin to that

of banks; however there are a few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot

issue cheques drawn on itself;

iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee

Corporation is not available to depositors of NBFCs, unlike in case of banks.

MODERN MODES OF TRANSACTION

E-banking (Electronic Banking)

With advancement in information and communication technology, banking

services are also made available through computer. Now, in most of the

branches you see computers being used to record banking transactions.

Information about the balance in your deposit account can be known through

computers.  In most banks now a days human or manual teller counter is

being replaced by the Automated Teller Machine (ATM). Banking activity

carried on through computers and other electronic means of communication

is called ‘electronic banking’ or ‘e-banking’.

Automated Teller Machine (ATM)

Banks have now installed their own Automated Teller Machine (ATM)

throughout the country at convenient locations. By using this, customers can

deposit or withdraw money from their own account any time.

Banks are now providing Debit Cards to their customers having saving or

current account in the banks. The customers can use this card for purchasing

goods and services at different places in lieu of cash. The amount paid

through debit card is automatically debited (deducted) from the customers’

Credit cards are issued by the bank to persons who may or may not have an

account in the bank. Just like debit cards, credit cards are used to make

payments for purchase, so that the individual does not have to carry cash.

Banks allow certain credit period to the credit cardholder to make payment of

the credit amount. Interest is charged if a cardholder is not able to pay back

the credit extended to him within a stipulated period. This interest rate is

With the extensive use of computer and Internet, banks have now started

transactions over Internet. The customer having an account in the bank can

log into the bank’s website and access his bank account. He can make

payments for bills, give instructions for money transfers, fixed deposits and

collection of bills, etc.

In case of phone banking, a customer of the bank having an account can get

information of his account, make banking transactions like, fixed deposits,

money transfers, demand draft, collection and payment of bills, etc. by using

As more and more people are now using mobile phones, phone banking is

possible through mobile phones. In mobile phone a customer can receive and

send messages (SMS) from and to the bank in addition to all the functions

possible through phone banking.

With the advent of mobile banking customers are able to transfer money

from their accounts to any other account in the country using their

cellphones, through the National Payment Corporation of India's Inter-bank

Mobile Payment Service (IMPS). The facility allows transactions without the

need for a computer or an Internet-enabled phone.

NON PERFORMING ASSET

Non Performing Asset means an asset or account of borrower, which has

been classified by a bank or financial institution as sub-standard, doubtful or

loss asset, in accordance with the directions or guidelines relating to asset

classification issued by the Reserve Bank of India.

Ninety Days Overdue

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the ‘90 days overdue’

norm for identification of NPAs, from the year ending March 31, 2004.

 Interest and / or installment of principal remain overdue for a period of

more than 90 days in respect of a Term Loan.

 The account remains out of order for a period of more than 90 days, in

respect of an Overdraft / Cash Credit.

 The bill remains overdue for a period of more than 90 days in case of the

bill purchase and discounted.

 Interest and / or installment of principal remain overdue for two harvest

seasons but for a period not exceeding two half years in the case of an

advance granted for agricultural purpose.

 Any amount to be received remains over-due for a period of more than 90

days in respect of the other accounts.

THE DEBTS RECOVERY TRIBUNAL

The Debts Recovery Tribunal have been constituted under Section 3 of the

Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The

original aim of the Debts Recovery Tribunal was to receive claim applications

from Banks and Financial Institutions against their defaulting borrowers. For

this the Debts Recovery Tribunal (Procedure) Rules 1993 were also drafted.

While initially the Debts Recovery Tribunals did perform well and helped the

Banks and Financial Institutions recover substantially large parts of their non

performing assets, or their bad debts as they are commonly known, but their

progress was stunted when it came to large and powerful borrowers. These

borrowers were able to stall the progress in the Debts Recovery Tribunals on

various grounds, primarily on the ground that their claims against the lenders

were pending in the civil courts, and if the Debts Recovery Tribunal were

adjudicate the matter and auction off their properties irreparable damage

would occur to them.

SARFAESI

The lenders continued to groan under the weight of the Non Performing

Assets. This led to the enactment of one more drastic act titled as the

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interests Act, also called as SRFAESI Act or SRFAESIA for short.

This new Act, the SRFAESI Act, empowered the lenders to take into their

possession the secured assets of their borrowers just by giving them notices,

and without the need to go through the rigors of a Court procedure.

INDIAN BANKS' ASSOCIATION

 The Indian Banks' Association (IBA) was formed on the 26th September

1946 with 22 members.

 As on June 2011 IBA has 161 members.

 The members comprise of

 Public Sector Banks

 Private Sector Banks

 Foreign Banks having offices in India and

 Urban Co-operative Banks