N302 Indian Banking System BBA Unit 1st Notes

 

 

BBA-III SEMESTER 

N302 Indian Banking System Unit-I Notes

           

                                                                                                                     

Objective: The objective is to familiarize the students to understand the practice and procedure of the Indian banking system.

Unit I

Indian Banking System: Structure and organization of banks, Reserve Bank of India; Apex banking institutions; Commercial banks; Regional rural banks; Co-operative banks; Development banks.

 

 

EVOLUTION OF BANKING

 As a public initiative, banking completed its commencement in the twelfth century in Italy. The Bank of Venice, originated in 1157, was the first public banking association.1 Following its institution, were recognized the Bank of Barcelona and the bank of Genoa in 1401 and 1407 respectively. The Bank of Venice and the Bank of Genoa continued to work effectively till the completion of the eighteenth century. The word ‘Bank’ is used in the intelligence of a profitable bank. It is of Germanic origin, though some persons smidgen its origin to the French word ‘Banqui’ and the Italian word ‘Banca’. It denoted a bench for keeping, lending, and exchanging of money or coins in the marketplace by money lenders and money changes. 2 Approximately there was no such word as ‘banking’ before 1640, though the training of safe-keeping and investments succeeded in the temple of Babylon as early as 2000 B.C. Chanakya in his Arthashastra written in 300 B.C stated about the survival of powerful unions of commercial bankers who received deposits, advanced loans and hundreds (letters of transfer).The Jain scriptures comment the names of two bankers who built the famous Dilwara temples of Mount Abu during 1197 and 1247 A.D. The bankers of Lombardy were well-known in England. However the modern 40 banking started with the English goldsmiths only after 1640.The Bank of England started its business in 1694 with a view to investment the Government to transfer on its war with France.3 

Definition of Banking

 The bank is an institution that deals with money. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively moreover it provides other financial services

 

Overview of Indian Banking Sector

A bank is a financial institution that provides banking and other financial services to their customers.

 A bank is generally understood as an institution that provides fundamental banking services such as accepting deposits and providing loans.

 

There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both now vanish. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955

 

 

Phases of the evolution of the banking industry:

 

1- Early Phase of Indian Banks, from 1786 to 1969

 

The first bank, namely Bank of Bombay was established in 1720 in Bombay. Later on, the Bank of Hindustan was established in Calcutta in 1770. General Bank of India was established in 1786. Bank of Hindustan carried on the business till 1906.

First Joint Stock Bank with limited liability established in India in 1881 was Oudh Commercial Bank Ltd.

East India Company established the three independently functioning banks, also known by the name of “Three Presidency Banks” - The Bank of Bengal in 1806, The Bank of Bombay in 1840, and Bank of Madras in 1843. These three banks were amalgamated in 1921 and given a new name as Imperial Bank of India. After Independence, in 1955, the Imperial Bank of India was given the name "State Bank of India". It was established under the State Bank of India Act, 1955.
In the surcharged atmosphere of Swadeshi Movement, a number of private banks with Indian managements had been established by the businessmen from mid of the 19th century onwards, prominent among them being Punjab National Bank Ltd., Bank of India Ltd., Canara Bank Ltd, and Indian Bank Ltd. The first bank with fully Indian management was Punjab National Bank Ltd. established on 19 May 1894, in Lahore (now in Pakistan).

2. Nationalization of Banks and the Banking Sector Reforms, from 1969 to 1991:

The number of banks in India in 1951 was the highest – 566. In 1960, RBI was empowered to force the compulsory merger of the weak banks with the strong ones. This led to a reduction in the number of banks to 89 in 1969.

On July 19, 1969, 14 major banks were nationalized.

On April 15, 1980, another six banks were nationalized and thus raising the number of nationalized banks to 20.

3. New Phase of Indian Banking System, with the Reforms After 1991:

On the suggestions of Narasimha Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened.

In 1993, the New Bank of India was merged with Punjab National Bank. “Industrial Development Bank of India (IDBI)” - was established as a Development Bank in 1964 - by an act of Parliament. It was given the status of a scheduled bank in September 2004 by RBI.

Bharatiya Mahila Bank Ltd – all women’s bank was established in 2013. It is based in New Delhi. Its first branch started its operations on November 19, 2013. The inauguration was done by former Indian Prime Minister S. Manmohan Singh

Indian Banking System:

The present structure of Indian Banking System

The structure of banking system differs from country to country depending upon their economic conditions, political structure, and financial system.

Structure of Indian Banking As per Section 5(b) of the Banking Regulation Act 1949, the existing banking structure in India evolved over several decades is elaborate and has been serving the credit and banking services needs of the economy.

There are multiple layers in today’s banking structure to cater to the specific and varied requirements of different customers and borrowers.

 

 The structure of banking in India played a major role in the mobilization of savings and promoting economic development.

The Indian banking industry has been divided into two parts, organized and unorganized sectors. The organized sector consists of Reserve Bank of India, Commercial Banks and Cooperative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc).

  

 

Structure of Banks in India:

 

 1-Scheduled Banks

 

Scheduled banks are included in the second schedule of the RBI under of the RBI Act 1934. Every scheduled bank must have a paid-up capital and reserves of an aggregate value of at least Rs 5 lakhs, and satisfying the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of its depositors.

Non-Scheduled Banks are those banks which are not included under of the RBI act 1934, and not able to fulfill the criteria of this act.

 Scheduled banks are further classified into commercial and cooperative banks.

  

 

The commercial banks can be broadly classified under two heads:

1. Scheduled Banks:

Scheduled Banks refer to those banks which have been included in the Second Schedule of Reserve Bank of India Act, 1934.

In India, scheduled commercial banks are of three types:

(i) Public Sector Banks:

These banks are owned and controlled by the government. The main objective of these banks is to provide service to the society, not to make profits. State Bank of India, Bank of India, Punjab National Bank, Canada Bank, and Corporation Bank are some examples of public sector banks.

Public sector banks are of two types:

(a) SBI and its subsidiaries;

(b) Other nationalized banks.

(ii) Private Sector Banks:

These banks are owned and controlled by private businessmen. Their main objective is to earn profits. ICICI Bank, HDFC Bank, IDBI Bank is some examples of private sector banks.

(iii) Foreign Banks:

These banks are owned and controlled by foreign promoters. Their number has grown rapidly since 1991 when the process of economic liberalization had started in India. Bank of America, American Express Bank, Standard Chartered Bank are examples of foreign banks.

2. Non-Scheduled Banks:

Non-Scheduled banks refer to those banks which are not included in the Second Schedule of Reserve Bank of India Act, 1934.

Commercial banks are of (3) Three Types:

(a) Public Sector Banks:

Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government. In India, public sector banks operate under the guidelines of the Reserve Bank of India (RBI), which is the central bank. Some of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank.

(b) Private Sector Banks:

Refer to a kind of commercial bank in which a major part of share capital is held by private businesses and individuals. These banks are registered as companies with limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial Credit, and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank.

(c) Foreign Banks:

Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the number of foreign banks. Commercial banks mark significant importance in the economic development of a country as well as serving the financial requirements of the general public.

 

Private Sector banks: Private sector banks continued to operate in the banking sector after the nationalization of 20 banks in 1969 & 1980. According to a new policy framed in January 1993 by RBI new banks were formed in the private sector. Such as

 

 

 

 Sources of funds for a bank

A bank is a business firm. Its main aim is to earn a profit. In order to achieve this objective, it provides services to customers. It offers a variety of interest-bearing obligations to the public. These obligations are the sources of funds for the bank and are shown on the liability side of the balance sheet of a commercial bank.

 The main sources which supply funds to a bank are as follows:

A Bank‘s Own Funds.

B Borrowed Funds.

1. Bank’s own funds. Bank‘s own funds are mainly of three types;

(a) Paid-up capital,

(b) Reserve fund and

(c) A portion of the undistributed profit.

 

(a) Bank‘s own paid-up capital-The amount with which a banking company is registered is called nominal or authorized capital. It is the maximum amount of capital that is mentioned in the capital clause of the memorandum of association of the company. Capital is further divided into (i) paid-up capital and (ii) subscribed capital.

(b). Reserve fund. Reserve is another source of fund which is maintained by all commercial banks. At the time of declaring a dividend, a certain portion of the profit is transferred to the reserve fund. This reserve belongs to the .shareholdersand at the time of liquidation, the Shareholders are entitled to these reserves along with the capital. The main purpose of setting aside part of the profit is to meet the unforeseen expenses of the bank. The Banking Companies Ordinance has made it obligatory (binding) for every banking company incorporated in Pakistan to create a reserve fund.

(c). Profit. Profit is another source to a bank for the purpose of business. Profits signify the credit balance of the profit and loss account which has not been distributed. The accumulated profits over the years increase the working capital of the bank and strengthen its financial position.

(B) Borrowed Funds.The borrowed capital is a major and important source of funds for any banking business. It mainly comes from deposits that are accepted on varying terms in different accounts. Bank‘s borrowing is mostly in the form of deposits. Bank collects three kinds of deposits from its customers

(1) current or demand deposits

 (2) saving deposits and

(3) fixed or time deposits. The larger the deposits of the bank, the larger will be it's (use) fund for employment and so higher is its profit.

1. Borrowing from central bank.-The commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required by the commercial banks.

2. Other sources-Bank also raise funds by issuing bonds, debentures, cash certificates, etc. etc. Though it is not common but is a dependable source of borrowing.

3. Deposits-Public deposits are a powerful source of funds to a bank. There are‘ three types of bank deposits

(i) current deposits

(ii) saving deposits and

(iii) time deposits.

Due to the spread of literacy, banking habits and growth in the volume of business operations, there is a marked increase in deposit money with banks.

 

 

Reserve Bank of India apex banking institutions.

 

Reserve Bank of India is a Central Bank of India i.e. an apex Institution of Indian monetary system. According to the RBI act 1934, Reserve Bank of India established on April 1st, 1935. So, Reserve Bank of India was set up as the private shareholder’s bank with a paid capital of  5 crores.

Objectives

The primary objectives of RBI are to supervise and undertake initiatives for the financial sector consisting of commercial banks, financial institutions and non-banking financial companies (NBFCs).

Some key initiatives are:

1.       Restructuring bank inspections

2.       Fortifying the role of statutory auditors in the banking system

Functions of the Reserve Bank of India (RBI)

As per the RBI Act 1934, it performs 3 types of functions as that of any other central bank. They are,

1.       Banking Functions

2.       Supervisory Functions and

3.       Promotional Functions.

The main functions of the RBI are to regulate the money supply in the country. Moreover, it has been directed to take care of agriculture, industry, export promotion, etc. The RBI is also responsible for the maintenance of the external value of the rupee.

1. Banking Functions:

1. Bank of Issue:

Under section 22 of the Reserve Bank of India Act, the bank has the sole right to issue banknotes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as an agent of the Government.

The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those other Banking Department.

Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupees coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India.

Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known,-as the minimum reserve system.

2. Banker to Government:

The second important function of the Reserve Bank of India is to act as a Government banker, agent, and adviser. The Reserve The bank is agent of the Central Government and of all State Governments in India excepting that of Jammu and Kashmir.

The Reserve Bank has the obligation to transact Government business, via to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government, and to carry out their exchange remittances and other banking operations.

The Reserve Bank of India helps the Government—both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as an adviser to the Government on all monetary and banking matters.

3. Bankers’ Bank and Lender of the Last Resort:

The Reserve Bank of India acts as the banker’s bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 percent of its time liabilities in India.

By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 percent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker’s bank but also the lender of the last resort.

4. Controller of Credit:

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations.

According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a license from the Reserve Bank of India to do banking business within India. The license can be canceled by the Reserve Bank if certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch.

Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, its assets and liabilities. This power of the Reserve Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.

As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers:

1.       It holds the cash reserves of all the scheduled banks.

2.       It controls the credit operations of banks through quantitative and qualitative control.

3.       It controls the banking system through the system of licensing, inspection, and calling for information.

4.       It acts as the lender of the last resort by providing re-discount facilities to scheduled banks.

5. Custodian of Foreign Reserve:

It is the responsibility of the Reserve bank to stabilize the external value of the national currency. The Reserve Bank keeps gold and foreign currencies as reserves against note issues and also meets the adverse balance of payments with other counties. It also manages foreign currency in accordance with the controls imposed by the government.

As far as the external sector is concerned, the task of the RBI has the following dimensions:

§   To administer the foreign Exchange Control;

§   To choose , the exchange rate system and fix or manages the exchange rate between the rupee and other currencies;

§   To manage exchange reserves;

§   To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union, and other countries, and with international financial institutions such as the IMF, World Bank, and Asian Development Bank.

The RBI is the custodian of the country’s foreign exchange reserves, id it is vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner. The RBI achieves this through buying and selling of foreign exchange market, from and to schedule banks, which, are the authorized dealers in the Indian foreign exchange market. The Bank manages the investment of reserves in gold counts abroad and the shares and securities issued by foreign governments and international banks or financial institutions.

2. Supervisory Functions

In addition to its traditional central banking functions, the Reserve Bank has certain non-monetary functions of the nature of supervision of banks and the promotion of sound banking in India.

The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.

The RBI is authorized to carry out periodical inspection of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives.

The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

3. Promotional Functions

With economic growth assuming a new urgency since independence, the range of the Reserve Bank’s functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking.

The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the Industrial Finance Corporation of India and the State Financial Corporations; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of Indian in 1963 and the Industrial Reconstruction Corporation of India in 1972.

These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in this field has become extremely important.

The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

  Commercial Bank

A commercial bank is a kind of financial institution which carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, etc. These banks are profit-making institutions and do business only to make a profit.

The two primary characteristics of a commercial bank are lending and borrowing. The bank receives deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to the depositors is known as the borrowing rate, while the rate at which banks lends the money is called the lending rate.

 The function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions –

• Accepts deposit – The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary required of commercial transactions.
• Provides Loan and Advances – Another critical function of this bank is to offer loans and advances to the entrepreneurs and businesspeople and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, and short-run loans, etc.
• Credit Cash- When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer, and then the money is transferred to the account. This process allows a bank to create money.

(b) Secondary functions –

• Discounting bills of exchange – It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
• Overdraft Facility – It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
• Purchasing and Selling of the Securities – The bank offers you the facility of selling and buying the securities.
• Locker Facilities – Bank provides lockers facility to the customers to keep their valuable belonging or documents safely. Banks charge a minimum of an annual fee for this service.
• Paying and Gather the Credit – It uses different instruments like a promissory note, cheques, and bill of exchange.

Types of Commercial Bank:

There are three different types of commercial banks.

• Private Bank – It is one type of commercial banks where private individuals and businesses own a majority of the share capital. All private banks are recorded as companies with limited liability. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank, and Punjab National Bank.
• Public Bank – It is those type of bank that is nationalized, and the government holds a significant stake. Such as  Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Vysya Bank, etc.
• Foreign Bank – These banks are established in foreign countries and have branches in other countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation (HSBC), Standard & Chartered Bank, and Citibank, etc.

 

Examples of Commercial Bank

Few examples of commercial banks in India are.

• State Bank of India (SBI)
• Housing Development Finance Corporation (HDFC) Bank
• Industrial Credit and Investment Corporation of India (ICICI) Bank
• Dena Bank
• Corporation Bank

                          

                        

Regional Rural Banks (RRBs)

                                   

History of RRBs:

The Regional Rural Banks were set up on the basis of Narasimhan Committee report (1975), by the legislations of the Regional Rural Banks Act of 1976. Thereafter, the first Regional Rural Bank was set up in 1975 itself by the name Prathama Grameen Bank.

Ownership of RRBs:

The equity of RRBs is held by the stakeholders in fixed proportions of 50:15:35 distributed among the following –

• Central The government has a 50% share.
• State The government has a 15% share.
• The Sponsor Bank has a 35% share.

These ratios are important to remember to be able to face questions related to regional rural bank recruitment.

Objectives of Regional Rural Banks (RRB):

• To bridge the credit gap in rural regions in India.
• To check rural credit outflow to urban areas.
• To reduce regional imbalances in terms of availability of financial facilities.
• To increase rural employment generation.

Characteristic features of RRBs:

• RRBs have knowledge of rural constraints and problems like a cooperative because it operates in a familiar rural environment.
• RRBs show professionalism in mobilizing financial resources like a commercial bank.
• RRBs are supposed to work in its prescribed local limits.
• It provides banking facilities as well as credit to small and marginal farmers, small entrepreneurs, laborers, artisans in rural areas.
• RRBs have to fulfill the priority sector lending norms as applicable to other commercial banks.

                                                                   

 

Functions of Regional Rural Banks

 

 RRBs do all such functions as are done by domestic banks like accepting deposits from the public, providing credit, remittance services, etc. They can also invest in Government securities and deposit schemes of Banks and Financial Institutions.

Regional Rural Banks may also seek to refinance facilities provided by NABARD for the loans sanctioned and disbursed by them.

All the RRBs are covered under the DICGC scheme and they are also required to observe the RBI stipulations for Cash Reserve Ratio and Statutory Liquidity Ratio.

The Reserve bank of India has brought all the RRBs under the ambit of Priority Sector lending w.e.f April 1997. Like all other commercial banks, RRB are bound to provide 40% of their Net Bank Credit to Priority Sector. Out of which 25% of PS advances or 10 % of Net Bank Credit is to be given to weaker sectors.

  

                                   

  Co-Operative Banks of India

 

§  A Co-operative bank is a financial an entity which belongs to its members, who are at the same time the owners and the customers of their bank.

§  Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the

o    Banking Regulations Act of 1949

o    Banking Laws (Co-operative Societies) Act, 1955.

§  Features of Cooperative Banks:

o    Customer Owned Entities: Co-operative bank members are both customers and owners of the bank.

o    Democratic Member Control: Co-operative banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.

o    Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.

o    Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses.

§  Structure of Cooperative Banking:

§  Advantage of Cooperative Banking

o    Cooperative Banking provides an effective alternative to the traditional defective credit system of the village moneylender.

o    It provides cheap credit to masses in rural areas.

o    Cooperative Banks have discouraged unproductive borrowing personal consumption and have established the culture of productive borrowing.

o    Cooperative credit movement has encouraged saving and investment, instead of hoarding money the rural people tend to deposit their savings in the cooperative or other banking institutions.

o    Cooperative societies have also greatly helped in the introduction of better agricultural methods. Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc

o    Cooperatives Banks offers a higher interest rate on deposits.

§  Problems with Cooperative Banking in India

o    Organizational and financial limitations of the primary credit societies considerably reduce their ability to provide adequate credit to the rural population.

·         The needs of tenants and small farmers are not fully met.

·         Primary credit societies are financially weak and are unable to meet the production-oriented credit needs

·         Overdue is increasing alarmingly at all levels.

·         Primary credit societies have not been able to provide adequate and timely credit to the borrowing farmers.

o    The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital. Raising working capital has been a major hurdle in their effective functioning.

o    A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.

·         Large amounts of overdue restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.

o    Most of the benefits from the cooperatives have been covered by the big landowners because of their strong socio-economic position.

o    Cooperative Banks are losing their luster due to the expansion of Scheduled Commercial Bank and the adoption of technology. They are also facing stiff competition from payment banks and small finance banks.

o    Long-term credit extended by them is declining.

o    Regional Disparities: The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.

o    Political Interference: Politicians use them to increase their vote bank and usually get their representatives elected over the board of directors in order to gain undue advantages.

 

   Development Banks

 

Development banks are those which have been set up mainly to provide infrastructure facilities for the industrial growth of the country. They provide financial assistance for both public and private sector industries.

Objectives of Development Banks

 

The main objectives of the development banks are

1. To promote industrial growth,

2. To develop backward areas,

3. To create more employment opportunities,

4. To generate more exports and encourage import substitution,

5. To encourage modernization and improvement in technology,

6. To promote more self-employment projects,

7. To revive sick units,

8. To improve the management of large industries by providing training,

9. To remove regional disparities or regional imbalance,

10. To promote science and technology in new areas by providing risk capital,

11. To improve the capital market in the country.

Development Banks in India

Working capital requirements are provided by commercial banks, indigenous bankers, co-operative banks, money lenders, etc. The money market provides short-term funds which mean working capital requirements.

The long term requirements of business concerns are provided by industrial banks and the various long term lending institutions which are created by the government. In India these long term lending institutions are collectively referred to as development banks. They are:

1.     Industrial Finance Corporation of India (IFCI), 1948

2.     Industrial Credit and Investment Corporation of India (ICICI), 1955

3.     Industrial Development of Bank of India (IDBI), 1964

4.     State Finance Corporation (SFC), 1951

5.     Small Industries Development Bank of India (SIDBI), 1990

6.     Export Import Bank (EXIM)

7.     Small Industries Development Corporation (SIDCO)

8.     National Bank for Agriculture and Rural Development (NABARD).

In addition to these institutions, there are also institutions such as Life Insurance Corporation of India, General Insurance Corporation of India, National Housing Bank, Unit Trust of India, etc., which are providing investment funds.

Differences between Commercial banks and Development banks

The following are some of the differences between commercial banks and development banks.

 

COMMERCIAL BANKS	DEVELOPMENT BANKS
Provide short term loans.	Provide long term loans.
Accept deposits from the public.	Accept deposits from commercial banks, Central and State governments.
Direct finance to customers.	Provide refinancing facilities to commercial banks.
Plays an important role in the money market.	Play an important role in hiring purchase, lease finance, housing loan.
Public sector banks have their share capital contributed by the government while private sector banks have share capital contributed by the public.	Central and Statement governments contribute to capital.
Promote savings among the public and help commercial activities.	They promote the economic growth of the country https://www.amazon.in/ref=as_li_ss_tl?ie=UTF8&linkCode=ll2&tag=creative64-21&linkId=bc3502de40ad5dc2f92500fefb9d3d3c&language=en_IN .

 

 

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