INDIAN BANKING
The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881.
Punjab National Bank was established in 1894 .
Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial
banks. Banking crisis during 1913 -1917 and failure of 588 banks in various States during the
decade ended 1949 underlined the need for regulating and controlling commercial banks.
The Banking Companies Act was passed in February1949, which was subsequently amended to
read as Banking Regulation Act, 1949.This Act provided the legal framework for regulation of the
banking system by RBI. The largest bank - Imperial Bank of India - was taken over by the RBI in
1955 and rechristened as State Bank of India, followed by inclusion of its 7 Associate Banks in1959.
At present SBI has five associate banks.
With a view to bring commercial banks into the mainstream of economic development with definite
social obligations and objectives, the Government issued an ordinance on 19 July 1969 acquiring
ownership and control of 14 major banks in the country. Six more commercial banks were
nationalised from 15 April 1980.
Meaning of Bank :-Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand.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 need it.
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-term purposes.
It also facilitates import-export transactions.
It helps in national development by providing credit to farmers, small-scale industries and selfemployed
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
There are various types of banks which operate in our country to meet the financial requirements of
different categories of people engaged in agriculture, business, profession, etc. On the basis of
functions, the banking institutions in India may be divided into the following types:
1. Central Bank (RBI, in India)
2. Commercial Banks
2
Public Sector Banks
Private Sector Banks
Foreign Banks
3. Development Banks (IFCI, SFCs)
4. Co-operative Banks
Primary Credit Societies
Central Co-operative Banks
State Co-operative Banks
5. Specialised Banks (EXIM Bank, SIDBI, NABARD)
Central Bank
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. The Reserve Bank of India is the central bank of our country. The Central Bank 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. 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
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.
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.
Foreign Banks:
3
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. According to a report by RBI there are 47 Foreign Banks branches in India as on March 31, 2013.
Development Banks
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.
Co-operative Banks
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 ReserveBank of India.
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)
INTRODUCTION
NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development
Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development
Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development
Acts as regulator for cooperative banks and RRBs
Some of the milestones in NABARD's activities are:
District Rural Industries Project (DRIP) has generated employment for 23.34 lakh persons with 10.95 lakh units in 105 districts.
It was setup with an initial capital of Rs. 100 crore, which is in henced to 4,000 crore in 2013 fully subscribed by the Government of India and RBI.
4
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. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development, infrastructure, training, etc., internalized for more than two decades.
The Company is registered under the Company's Act, 1956, with an authorized capital of Rs 250 million (US $5.75 million) and paid up capital of Rs 50 million (US $1.15 million).
In tune with NABARD's mission to bring about rural prosperity, Nabcons has more than just commercial interest in the assignments it undertakes.
NABARD Financial Services Limited, [NABFINS] is a subsidiary of National Bank for Agriculture and Rural Development (NABARD) with equity participation from NABARD, Government of Karnataka, Canara Bank of India, 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. NABFINS provides credit and other facilities for promotion, expansion, commercialization and modernization of agriculture and allied activities. NBFINS shall engage in the business of providing micro finance sections of the society for securing their prosperity in both rural and urban areas.
NABARD, which is the world renowned apex development bank of our country and pioneered the world's largest microfinance movement, while promoting NABFINS has envisaged that NABFINS shall evolve into a model Microfinance Institution to set standards of governance among the MFIs, operate with exemplary levels of transparency and operate at reasonable/ moderate rates of interest.
Agri Business Finance (AP) Limited (ABFL) 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 promoted with equity participation from National Bank for Agriculture and Rural Development (NABARD), Andhra Bank, Canara Bank, Govt of Andhra Pradesh, Andhra Pradesh, State Cooperative Bank and few Industrial Houses/individuals from the State. It operates in the state of Andhra Pradesh with its registered office at Hyderabad. It is whole owned subsidiary of NABARD.
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. The organization is specifically catering to the long-term investment needs of Agriculture and allied activities since its inception from 1997.
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
FUNCTIONS OF COMMERCIAL BANKS
The functions of commercial banks are of two types.
(A) Primary functions; and
5
(B) Secondary functions.
Primary functions
The primary functions of a commercial bank includes:
Accepting deposits; and
Granting loans and advances.
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. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow alongwith the interest earned. If the rate of interest is higher, public feels motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
Grant of 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
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. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.
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 from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.
Cash Credit
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 customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.
Overdraft
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. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both.
6
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. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
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.
Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order and demand draft.
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.
The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881.
Punjab National Bank was established in 1894 .
Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial
banks. Banking crisis during 1913 -1917 and failure of 588 banks in various States during the
decade ended 1949 underlined the need for regulating and controlling commercial banks.
The Banking Companies Act was passed in February1949, which was subsequently amended to
read as Banking Regulation Act, 1949.This Act provided the legal framework for regulation of the
banking system by RBI. The largest bank - Imperial Bank of India - was taken over by the RBI in
1955 and rechristened as State Bank of India, followed by inclusion of its 7 Associate Banks in1959.
At present SBI has five associate banks.
With a view to bring commercial banks into the mainstream of economic development with definite
social obligations and objectives, the Government issued an ordinance on 19 July 1969 acquiring
ownership and control of 14 major banks in the country. Six more commercial banks were
nationalised from 15 April 1980.
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 need it.
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-term purposes.
It also facilitates import-export transactions.
It helps in national development by providing credit to farmers, small-scale industries and selfemployed
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
There are various types of banks which operate in our country to meet the financial requirements of
different categories of people engaged in agriculture, business, profession, etc. On the basis of
functions, the banking institutions in India may be divided into the following types:
1. Central Bank (RBI, in India)
2. Commercial Banks
2
Public Sector Banks
Private Sector Banks
Foreign Banks
3. Development Banks (IFCI, SFCs)
4. Co-operative Banks
Primary Credit Societies
Central Co-operative Banks
State Co-operative Banks
5. Specialised Banks (EXIM Bank, SIDBI, NABARD)
Central Bank
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. The Reserve Bank of India is the central bank of our country. The Central Bank 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. 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
Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.
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.
Foreign Banks:
3
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. According to a report by RBI there are 47 Foreign Banks branches in India as on March 31, 2013.
Development Banks
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.
Co-operative Banks
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 ReserveBank of India.
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)
INTRODUCTION
NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development
Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development
Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development
Acts as regulator for cooperative banks and RRBs
Some of the milestones in NABARD's activities are:
District Rural Industries Project (DRIP) has generated employment for 23.34 lakh persons with 10.95 lakh units in 105 districts.
It was setup with an initial capital of Rs. 100 crore, which is in henced to 4,000 crore in 2013 fully subscribed by the Government of India and RBI.
4
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. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development, infrastructure, training, etc., internalized for more than two decades.
The Company is registered under the Company's Act, 1956, with an authorized capital of Rs 250 million (US $5.75 million) and paid up capital of Rs 50 million (US $1.15 million).
In tune with NABARD's mission to bring about rural prosperity, Nabcons has more than just commercial interest in the assignments it undertakes.
NABARD Financial Services Limited, [NABFINS] is a subsidiary of National Bank for Agriculture and Rural Development (NABARD) with equity participation from NABARD, Government of Karnataka, Canara Bank of India, 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. NABFINS provides credit and other facilities for promotion, expansion, commercialization and modernization of agriculture and allied activities. NBFINS shall engage in the business of providing micro finance sections of the society for securing their prosperity in both rural and urban areas.
NABARD, which is the world renowned apex development bank of our country and pioneered the world's largest microfinance movement, while promoting NABFINS has envisaged that NABFINS shall evolve into a model Microfinance Institution to set standards of governance among the MFIs, operate with exemplary levels of transparency and operate at reasonable/ moderate rates of interest.
Agri Business Finance (AP) Limited (ABFL) 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 promoted with equity participation from National Bank for Agriculture and Rural Development (NABARD), Andhra Bank, Canara Bank, Govt of Andhra Pradesh, Andhra Pradesh, State Cooperative Bank and few Industrial Houses/individuals from the State. It operates in the state of Andhra Pradesh with its registered office at Hyderabad. It is whole owned subsidiary of NABARD.
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. The organization is specifically catering to the long-term investment needs of Agriculture and allied activities since its inception from 1997.
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
FUNCTIONS OF COMMERCIAL BANKS
The functions of commercial banks are of two types.
(A) Primary functions; and
5
(B) Secondary functions.
Primary functions
The primary functions of a commercial bank includes:
Accepting deposits; and
Granting loans and advances.
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. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow alongwith the interest earned. If the rate of interest is higher, public feels motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
Grant of 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
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. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.
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 from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.
Cash Credit
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 customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.
Overdraft
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. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both.
6
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. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.
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.
Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order and demand draft.
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.
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