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This report aims to provide an overview of banking sector in India for the purpose of expansion planning. The overview will be broadly divided into two parts: Indian Banking system and Bank-like financial institutions. For each type of banking institutions, a brief introduction, some recent statistics and corresponding functions will be included. The outline of this report is as follows:
1. Indian Banking system
1.1 Central Bank – Reserve Bank of India (RBI)
1.2 Commercial Banks
－ Public sector Banks
－ Private Banks
－ Foreign Banks
1.3 Co-operative Banks
－ Primary Credit Societies
－ Central Co-operative Banks
－ State Co-operative Banks
1.4 Regional Rural Banks
1.5 Development Banks
1.6 Specialized Banks
－ Export Import Bank of India
－ Small Industries Development Bank of India
－ National Bank for Agricultural and Rural Development
2. Indian Bank-like financial institutions
2.1 Microfinance institutions
2.2 Development financial institutions
1. Indian Banking system
Reserve bank of India, commercial banks, co-operative banks and regional rural banks broadly make up the banking system in India. There are two more types of banks, namely development banks and specialized banks for some particular purposes.
1.1 Central Bank – Reserve Bank of India (RBI)
The Reserve Bank of India (RBI), the central bank of India, which was established in 1935, has been fully owned by the government of India since nationalization in 1949.
Like the central bank in most countries, Reserve Bank of India is entrusted with the functions of guiding and regulating the banking system of a country. The main functions of RBI are to:
1. Formulate and monitor the monetary policy, aiming to stabilize the price level and ensure adequate flow of credit to productive sectors.
2. Issue or destroy currency and coins not fit for circulation, aiming to give the public adequate quantity of supplies of currency notes and coins and in good quality.
3. Regulate and supervise the financial system by prescribing broad parameters of banking operation, aiming to maintain public confidence and protect depositors’ interest.
4. Manage the Foreign Exchange Management Act, aiming to facilitate external trade and promote orderly development and maintenance of foreign exchange market.
5. Act as Indian government’s banker, performs merchant banking function for the central and the state governments
6. Maintain deposit accounts of all other banks and advances money to other banks, when needed.
The recent focus of RBI is to cut asset (real estate, property) price inflation by formulating suitable monetary policy that is healthy to the economy of India.
1.2 Commercial Banks
There are three types of commercial banks in India
1. Public sector banks
2. Private banks
3. Foreign banks
Currently, there are 88 scheduled commercial banks, including 28 public sector banks, 29 private banks and 31 foreign banks.
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1 Public sector banks
These are banks where majority stake is held by the Government of India or Reserve Bank of India. In 2006, the largest public sector bank is the State Bank of India.
2 Private Banks
Private Banks are banks that the majority of share capital is held by private individuals.
3 Foreign Banks
Foreign banks are registered and have their headquarters in a foreign country but operate their branches in India.
Though there are three types of commercial banks, their functions as commercial banks are very similar.
The primary functions of Indian commercial banks include:
1. Accepting of deposits of money from the public for the purpose of lending or investment.
2. Granting of loans and advances for the purpose of smoothing the public’s consumption and business sectors’ investment in different period of business cycles.
The secondary functions include:
1. Issuing letters of credit, travellers cheque, etc.
2. Providing safe deposit vaults or lockers.
3. Providing customers with facilities of foreign exchange dealings
4. Transferring money from one account to another
5. Collecting and supplying business information
6. Providing reports on the credit worthiness of customers
7. Granting educational loans to students at reasonable rate of interest for higher studies, especially for professional courses
8. Providing consumer finance for individuals by way of loans on easy terms for purchase of consumer durables
The last two secondary functions are provided by Indian commercial banks to cater for the needs of the community.
1.3 Co-operative banks
Co-operative banks are banks incorporated in the legal form of cooperatives. Any cooperative society has to obtain a license from the Reserve Bank of India before starting banking business and has to follow the guidelines set and issued by the
Reserve Bank of India. Currently, there are 68 co-operatives banks in India.
There are three types of co-operatives banks with different functions:
1. Primary Credit Societies:
Primary Credit Societies 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.
2. Central Co-operative Banks:
Central co-operative 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.
3. State Co-operative Banks:
These are the highest level co-operative banks in all the states of the country. They mobilize 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 credit societies.
1.4 Regional rural Banks
The regional rural banks are banks set up to increase the flow of credit to smaller borrowers in the rural areas. These banks were established on realizing that the benefits of the co-operative banking system were not reaching all the farmers in rural areas.
Currently, there are 196 regional rural banks in India.
Regional rural banks perform the following two functions:
1. Granting of loans and advances to small and marginal farmers, agricultural workers, co-operative societies including agricultural marketing societies and primary agricultural credit societies for agricultural purposes or agricultural operations or related purposes.
2. Granting of loans and advances to artisans small entrepreneurs engaged in trade, commerce or industry or other productive activities.
1.5 Development Banks
Development Banks are banks that provide financial assistance to business that requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization.
These banks 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
1.6 Specialized Banks
In India, there are some specialized banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. They engage themselves in some specific area or activity and thus, are called specialized banks. There are three important types of specialized banks with different functions:
1. Export Import Bank of India (EXIM Bank):
This specialized bank grants loans to exporters and importers and also provides information about the international market. It also gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.
2. Small Industries Development Bank of India
This specialized bank grant loan to those who want to establish a small-scale business unit or industry. It also finances modernization 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.
3. National Bank for Agricultural and Rural Development
This specialized bank is a central or apex institution for financing agricultural and rural sectors. It can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas
2 Indian Bank-like financial institutions
In India, there are some Bank-like financial institutions that provide financial services. There are two types that are important to the development on India:
2.1 Microfinance Institutions
Microfinance Institutions are Bank-like financial institutions that providing financial services, such as microcredit, microsavings or microinsurance to poor people.
In addition, they also perform the following important functions:
1. provide financing facilities, with or without collateral security, in cash or in kind, for such terms and subject to such conditions as may be prescribed, to poor persons for all types of economic activities including housing, but excluding business in foreign exchange transactions
2. to buy, sell and supply on credit to poor persons industrial and agricultural inputs, livestock, machinery and industrial raw materials
3. to provide professional advice to poor persons regarding investments in small business and such cottage industries as may be prescribed;
2.2 Development financial institutions (DFIs)
DFIs are specialized financial institutions the Government established to promote investments in the manufacturing and agricultural sectors.
Their functions include:
1. extending financial assistance in the form of medium- and long-term loans, participating in equity capital, underwriting and wherever relevant, acting as issuing house for public shares issues and providing guarantees for loans
2. specialize in medium- and long-term financing in addition to supplying financial services not normally provided by commercial banks and finance companies
3. In addition, they help in identifying new projects, participate in their promotion, and where appropriate, provide ancillary financial, technical and managerial advice
To conclude, the banking sector in India is robust and its standards are broadly in conformity with international standards, therefore India can be considered under the expansion plan.
Diagrams summarize the banking system in India