BANKING SYSTEM IN INDIA

Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand.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. Banks also render many other useful services – like collection of bills, payment of foreign bills, safe-keeping of jewellery and other valuable items, certifying the credit-worthiness of business, and so on. Banks give two assurances to the depositors – a)  Safety of deposit, and b)  Withdrawal of deposit, whenever needed They play a significant role in the economy of a nation such as: • 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 IN INDIA 1) Reserve Bank of India The Reserve Bank of India Act of 1934 established the Reserve Bank as the central banking institution of India which controls the monetary policy of the rupee as well as the currency reserves.  The shares were entirely owned by private shareholders. Finally Reserve Bank of India was nationalized in the year 1949. The Bank was constituted for the following basic functions: • To regulate the issue of Bank Notes • To maintain reserves with a view to securing monetary stability and • To operate the credit and currency system of the country to its advantage. 2) 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:  (i) 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. (ii) 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 Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991. 3) Regional Rural Banks  Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural labourers and rural artisans. The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State. RRBs are jointly owned by Government of India, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively. 4) Co-operative Banks Co-operative banks are small-sized units organized in the co-operative sector which operate both in urban and non-urban centers.  Co-operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Types of Co-operative Banks (i) 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. (ii) 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. (iii) 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 Cooperative banks in India finance rural areas under: a) Farming b) Cattle c) Milk d) Hatchery e) Personal finance Cooperative banks in India finance urban areas under: a) Self-employment b) Industries c) Small scale units d) Home finance e) Consumer finance f) Personal finance