CHAPTER-2

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can be withdrawn on demand.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 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 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 following types:
1. Central Bank (RBI, in India)
2. Commercial Banks
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 Governments 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 bankers 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
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
(b) Secondary functions
Primary functions

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 interest.
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 from bank to bank.
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.
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.
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 banks.
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,
Grindlays 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.
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 Cooperative Societies Act. When a co-operative society
engages itself in banking business it is called a Cooperative 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 level
and state level.
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
credit societies.

Specialised Banks
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 sector.
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 economy.
It provides training facilities to the institutions working in
the field of rural upliftment.
It regulates the cooperative banks and the RRBs.
It promotes research in the fields of rural banking,
agriculture and rural development.
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 lending.
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,
hirepurchase, 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 NonBanking 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.

Debit Card
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
account.
Credit Card
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 generally quite high.
Net Banking
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 banks website and
access his bank account. He can make payments for bills, give
instructions for money transfers, fixed deposits and collection
of bills, etc.
Phone Banking
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 telephone.
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

Practice Exercise
Q.1. On the basis of recommendations of which of the
following committees NABARD was established?
(1) Shunglu Committee
(2)
Shivaraman
Committee
(3) Narsimhan Committee
(4)
Public
Accounts Committee
(5) None of these
Q.2. In which year National Bank for Agriculture and Rural
Development (NABARD) was established in _____.
(1) 1991
(2) 1982 (3) 1952
(4) 1968
(5) None of
these
Q.3. In banking terminology bad loans refer to
------------------.
(1) Bad debts
(2)
Non
Performing
assets
(3) Underwriting assets
(4) Fictitious assets
(5) None of these
Q.4. Which of the following is the name of a Private Sector
Bank in India ?
(1) IDBI Bank
(2) Axis Bank
(3) Corporation Bank
(4) UCO Bank
(5) All are Private Banks
Q.5. Mobile banking is set to get a boost from IMPS, which
stands for----------------.
(1) Inter-Bank Mobile Payment Service
(2)
InterBank Money Portability Service
(3) Intra-Bank Mobile Payment System
(4)
InterBank
Money
Preventing System
(5) None of these
Q.6. Which of the following is not Development Bank/Non
Commercial Bank?

(1) SIDBI
(4) NABARD

(2) National Housing Bank (3) IDBI

(5) None of these

Q.7. Functions of NBFC includes(1) Equipment Leasing

(2) Term Deposits
(3) Housing Finance & Investment
(4) 1 and 3
in Financial Securities
(5) None of these
Answer with Explanation
Q.1. (2) Shivraman Committee
Q.2. (2) NABARD was established on 12th July 1982 and
owned by the Government of India and Reserve Bank of
India (RBI). It is an apex development bank of the country
for supporting and promoting agriculture and rural
development.
Q.3. (2) Non-performing assets, also called non-performing
loans, are loans, made by a bank or finance company, on
which repayments or interest payments are not being made
on time.
Q.4. (2) Axis Bank is a Private Sector Bank.
Q.5. (1) Interbank Mobile Payment Service (IMPS)
Q.6. (3) IDBI is a Scheduled Public Sector Bank.
Q.7. (4) Functions of NBFC includes equipment Leasing
Housing Finance & Investment
in Financial Securities.