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BANKING & FINANACIALINSTITUTION

1. Type of Banking in India ?
The banking landscape in India is quite diverse, with a variety of bank types
catering to different needs. Here's a breakdown of the main types of banks you'll
find in India:

1. Central Bank: The Reserve Bank of India (RBI) is the central bank of India
and acts as the regulator and supervisor of the entire banking system. It doesn't
directly deal with individual customers but sets monetary policy, issues
currency, and oversees the functioning of other banks.

2. Commercial Banks: These are the most common type of banks in India and
offer a wide range of banking services to individuals and businesses. They can
be further categorized into:

o Public Sector Banks (PSBs): Owned by the government of India, these banks
have a wide network of branches across the country and cater to a large segment
of the population. Some of the major PSBs include State Bank of India (SBI),
Bank of Baroda, and Canara Bank.
o Private Sector Banks: These banks are owned by private entities and are known
for their innovative products and customer-centric approach. Some of the
leading private sector banks include HDFC Bank, ICICI Bank, and Axis Bank.
o Foreign Banks: These are branches of foreign banks operating in India. They
offer a global perspective and cater to the needs of multinational corporations
and high-net-worth individuals. Some of the major foreign banks in India
include HSBC, Citibank, and Standard Chartered.

3. Cooperative Banks: These banks are owned and operated by their members,
who are typically farmers, artisans, or other small businesses. They play a vital
role in providing banking services to rural areas and underserved communities.

4. Small Finance Banks (SFBs): These are a relatively new type of bank in
India, established to cater to the needs of small businesses and individuals in
underserved areas. They offer a simplified product portfolio and focus on
providing credit and other financial services to unbanked or underbanked
segments of the population.
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5. Payment Banks: These banks are primarily focused on providing payment

and remittance services. They can offer basic savings accounts and issue debit
cards, but they cannot lend money or offer traditional banking services.

6. Regional Rural Banks (RRBs): These are a network of 47 banks established

by the government of India to provide banking services in rural areas. They
offer a range of banking products and services to farmers and other rural
communities.

7. Local Area Banks (LABs): These are a type of cooperative bank operating in
a specific geographical area. They cater to the needs of a particular community
or group of people and offer a limited range of banking services.

2. ROLES & FUNCTIONS OF COMMERCIAL BANKS

FUNCTIONS OF VARIOUS BANKS
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 requirements of the commercial transactions. One of the
primary functions of commercial banks is to accept deposits from their
customers, which can be both individuals or business entities. The deposits may
be in the form of time deposits, savings deposits, and current deposits.

• Provides loan and advances : Another critical function of this bank is to offer
loans and advances to the entrepreneurs and business people, 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, short-run loans, and more such banks. The deposits that are taken by the
commercial banks are further invested by way of granting loans to their
customers. Banks derive profits in this manner. However, the lending of funds
may take different forms such as cash credit, advances, discounting bills,
overdraft, 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 the bank to
create money.
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• Remitting Funds Fund remittance, or money transfer in general vernacular,

is also done by these commercial banks. Funds can be transferred in various
modes such as IMPS, NEFT, RTGS, draft pay orders, etc., for specified
commissions.

(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 with the facility of selling and buying the
securities.

Locker facilities: A bank provides locker facilities to the customers to keep

their valuables or documents safely. The banks charge a minimum of an annual
fee for this service.

Paying and gathering the credit : It uses different instruments like a

promissory note, cheques, and bill of exchange.

Services as Agent : Commercial banks may also serve the role of agents to
their customers by way of various services. Services may include a collection of
cheques, drafts, and bills, insurance premium payment, trustee or executor or
customers’ estate, etc.
3. DIFFERENCE BETWEEN PUBLIC BANK VS PRIVATE BANK

Basis Public Sector Banks Private Sector Banks

The banks whose The banks whose stakes

majority of stakes are are held by private
held by the state or companies or maybe by
Meaning
central government are an individual are known
known as Public Sector as Private Sector
Banks. Banks.

Public sector banks are Private sector banks are

Governing Act or Law formed by passing an registered under the
act in the parliament. Indian Companies Act.
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Basis Public Sector Banks Private Sector Banks

Private sector banks are

Public sector banks are
controlled by
Controlling Authority controlled by the
companies or an
government.
individual.

More than 50% of the The majority

shareholding of public shareholding of private
Shareholding Pattern sector banks lies with sector banks lies with
the government (state private companies or
or central). individuals.

There are 12 public There are 21 private

No. of Banks
sector banks in India. sector banks in India.

The Reserve Bank of

India issues rules, The Reserve Bank of
regulations, guidelines, India issues rules,
Regulatory Body and directions for the regulations, guidelines,
public sector banks and directions for the
under the Reserve Bank private sector banks.
of India Act, 1934.

The customer base of The customer base of

Customer Base public sector banks is private sector banks is
high. comparatively low.

In public sector banks, In private sector banks,

the interest rate on the interest rate on
Interest Rate savings is less and the savings is high;
interest rate on loans is however, the interest
high. rate on loans is low.

Public sector banks Private sector banks

include State Bank of include ICICI Bank,
Example India, Union Bank of HDFC Bank, Axis
India, Indian Bank, and Bank, and Karnataka
Punjab National Bank. Bank.
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4. ROLES & FUNCTIONS OF RBI

The Reserve Bank of India (RBI) is the central bank of India, established in
1935. It is the monetary authority of the country and plays a vital role in
regulating the Indian financial system. Here are some of its key roles and
functions:

Monetary Policy:

 Issuing Currency: The RBI is responsible for issuing and managing the Indian
rupee. It controls the money supply in circulation to maintain price stability and
inflation control.
 Setting Interest Rates: The RBI sets benchmark interest rates, which influence
the lending and borrowing rates of commercial banks. This helps in controlling
inflation, economic growth, and credit flow.
 Foreign Exchange Management: The RBI manages India's foreign exchange
reserves and intervenes in the foreign exchange market to stabilize the rupee
exchange rate.

Regulatory and Supervisory Functions:

 Licensing and Regulation of Banks: The RBI licenses and regulates all
commercial banks, co-operative banks, and other financial institutions in India.
It sets prudential norms and regulations for their operations to ensure financial
stability and protect depositors' interests.
 Supervision of Financial Markets: The RBI oversees and regulates various
financial markets like the money market, government securities market, and
foreign exchange market. It ensures fair and efficient trading practices and
investor protection.
 Resolution of Financial Distress: The RBI has the power to intervene and
resolve financial distress in banks and other financial institutions. It can take
various measures like mergers, acquisitions, and reconstruction schemes to
protect depositors and maintain financial stability.

Developmental Functions:

 Financial Inclusion: The RBI promotes financial inclusion by encouraging

banks to provide banking services to the unbanked and underbanked sections of
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the population. It also promotes financial literacy and awareness among the
public.
 Rural Credit: The RBI plays a key role in providing credit to the rural sector
through various schemes and initiatives. This helps in promoting agricultural
development and rural prosperity.
 Research and Development: The RBI conducts research on various economic
and financial issues and disseminates information and knowledge to the public.
It also supports research and development activities in the financial sector.

Government Banker:

 Banker to the Government: The RBI acts as the banker to the Government of
India. It manages the government's accounts, issues government securities, and
provides other financial services.
 Debt Management: The RBI manages the government's domestic debt and plays
a crucial role in raising funds for the government through various instruments
like treasury bills and government bonds.
5. CREDIT CONTROL METHODS OF RBI
The Reserve Bank of India (RBI) uses various credit control methods to manage
the flow of credit in the Indian economy and achieve its monetary policy
objectives like inflation control, economic growth, and financial stability. These
methods can be broadly categorized into quantitative and qualitative measures.

Quantitative Measures:

 Statutory Liquidity Ratio (SLR): This is the minimum percentage of their

deposits that commercial banks must hold in the form of cash or approved
securities like government bonds. Increasing the SLR reduces the amount of
money available for lending and vice versa.
 Cash Reserve Ratio (CRR): Similar to SLR, CRR is the minimum percentage of
their deposits that banks must keep with the RBI. Higher CRR reduces the
amount of money available for lending and increases the RBI's control over the
money supply.
 Open Market Operations (OMOs): The RBI buys and sells government
securities in the open market. By buying securities, the RBI injects money into
the system, while selling them reduces the money supply.
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 Repo Rate: This is the rate at which the RBI lends short-term funds to
commercial banks. Increasing the repo rate makes borrowing more expensive
for banks, which discourages them from lending and vice versa.
 Bank Rate: This is the rate at which the RBI lends money to banks against
approved securities. It acts as a signal for other lending rates in the economy.

Qualitative Measures:

 Selective Credit Control (SCC): This involves setting specific guidelines for
lending to certain sectors or activities. For example, the RBI may impose
restrictions on lending to real estate or speculative sectors to control the flow of
credit to these areas.
 Margin Requirements: These are the minimum amounts that borrowers must
pay upfront as a percentage of the loan value. Higher margin requirements make
borrowing more expensive and discourage excessive borrowing.
 Moral Suasion: The RBI uses moral suasion to influence the lending behavior of
banks by advising them to prioritize certain sectors or activities.
6. NPA & CLASSIFICATIONS OF NPA
NPA – An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was
defined as a credit facility in respect of which the interest and/ or instalment of
principal has remained ‘past due’ for a specified period of time. An asset,
including a leased asset, becomes non-performing when it ceases to generate
income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit
facility in respect of which the interest and/ or installment of principal has
remained ‘past due’ for a specified period of time. It is that loan asset/account in
which the principal or interest payment or both have remained overdue for a
continuous period of more than 90 days.

A non-performing asset (NPA) shall be a loan or an advance where;

i. interest and/ or instalment of principal remain overdue for a period of more

than 90 days in respect of a term loan,
ii. the account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. interest and/or instalment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an advance
granted for agricultural purposes, and
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v. any amount to be received remains overdue for a period of more than 90 days
in respect of other account

A non-performing asset (NPA) shall be a loan or an advance where;

Banks are required to furnish a Report on NPAs as on 31st March each year
after completion of audit. The NPAs would relate to the banks’ global portfolio,
including the advances at the foreign branches.

7. BASEL NORMS : The Basel Norms, also known as the Basel Accords, are a
set of international banking regulations developed by the Basel Committee
on Banking Supervision (BCBS). These regulations aim to strengthen the
global banking system by setting minimum capital requirements for banks.

Objectives:

 Enhance banks' resilience to financial shocks by requiring them to hold

sufficient capital.
 Promote fair competition by creating a level playing field for banks across
different countries.
 Maintain the stability of the financial system by reducing the risk of systemic
financial crises.

Key Components:

 Capital Adequacy Ratio (CAR): This is the central metric of Basel Norms. It
measures the proportion of a bank's capital (equity and other Tier 1 elements) to
its risk-weighted assets. The higher the CAR, the greater a bank's ability to
absorb losses.
 Pillar Structure: Basel Norms are divided into three pillars:
o Pillar 1: Minimum capital requirements.
o Pillar 2: Supervisory review.
o Pillar 3: Market discipline.
 Risk-weighting: Assets are assigned different risk weights based on their
perceived credit risk. This means that loans to higher-risk borrowers will have
higher weights, requiring more capital to be held against them.
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Evolution:

 Basel I: Issued in 1988, it introduced a minimum 8% CAR requirement for Tier

1 capital.
 Basel II: Introduced in 2004, it refined risk-weighting and introduced Pillar 2
and Pillar 3.
 Basel III: Issued in 2010 in response to the 2008 financial crisis, it increased
minimum CAR requirements to 10.5% (including 6% Tier 1 capital) and
introduced additional capital buffers.
The deadline for the implementation of Basel-III was March 2019 in India. It
was postponed to March 2020. In light of the corona virus pandemic, the RBI
decided to defer the implementation of Basel norms by further 6 months.

8. RECOMMENDATIONS OF NARASIMHAM COMMITTEE

Recommendations of Narasimham Committee – 1991
1.Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks
(including SBI) at the top and at bottom rural banks engaged in agricultural
activities.

2. The supervisory functions over banks and financial institutions can be

assigned to a quasi-autonomous body sponsored by RBI.

3. A phased reduction in statutory liquidity ratio.

4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of banks and
financial institutions.
7. Deregulation of Interest rates.
Narasimham Committee Report II – 1998
In 1998 the government appointed yet another committee under the
chairmanship of Mr Narsimham. It is better known as the Banking Sector
Committee.

1. Strengthening Banks in India : The committee considered the stronger

banking system in the context of the Current Account Convertibility ‘CAC’. It
thought that Indian banks must be capable of handling problems regarding
domestic liquidity and exchange rate management in the light of CAC. Thus, it
recommended the merger of strong banks which will have ‘multiplier effect’ on
the industry.
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2. Narrow Banking : Those days many public sector banks were facing a
problem of the Non-performing assets (NPAs). Some of them had NPAs were
as high as 20 percent of their assets. Thus for successful rehabilitation of these
banks, it recommended ‘Narrow Banking Concept’ where weak banks will be
allowed to place their funds only in the short term and risk-free assets.
3. Capital Adequacy Ratio : In order to improve the inherent strength of the
Indian banking system the committee recommended that the Government
should raise the prescribed capital adequacy norms. This will further improve
their absorption capacity also. Currently, the capital adequacy ratio for Indian
banks is at 9 percent.
4. Bank ownership : As it had earlier mentioned the freedom for banks in its
working and bank autonomy, it felt that the government control over the banks
in the form of management and ownership and bank autonomy does not go hand
in hand and thus it recommended a review of functions of boards and enabled
them to adopt professional corporate strategy.

9. ROLES & FUNCTIONS OF RRB

As the Regional Rural Bank is a scheduled commercial bank, it is primarily
responsible for accepting deposits and disbursing loans. The important functions
of the RRBs are as below:
• Accepting deposits from members in current or savings accounts. They can
also be made in fixed or recurring deposits.
• Extending loans to the small and marginal farmers, craftsmen and artisans,
medium and small-scale enterprises, housing, local traders, renewable energy,
etc. that need development and financial assistance.
• Disbursing wages is an important RRB function under the Mahatma Gandhi
National Rural Employment Guarantee Act (MGNREGA) and the Pradhan
Mantri Gram Sadak Yojana (PMGSY)
 Providing agency services and general utility services to the customers
• Assisting in foreign exchange, money wire transfer, bill payments, etc 
• Utility services like the ATM, issuance of debit cards, locker
facilities, UPI, etc.
• Providing of loans and advance to the farmers and other person already
engaged in agriculture activities.
• Providing of loans and advance to the co-operative societies and other
society which are involved in agriculture processing.
• Accepting the various types of deposits from the rural and other
connected areas.
• providing loans and advances to small entrepreneurs and others who are
engaged in trade, commerce and industry.
• Setting up and Maintenance of warehouse.
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10. DIFFERENCE BETWEEN COMMERCIAL BANK VS

REGIONAL RURAL BANK

1. Target Audience:

 Commercial Banks: Serve a wider range of customers, including individuals,

businesses, and corporations, both in urban and rural areas. They offer a diverse
range of products and services.
 RRBs: Focus primarily on the unbanked and underbanked population in rural
and semi-urban areas. They cater to the specific needs of farmers, small
businesses, and artisans.

2. Scope of Services:

 Commercial Banks: Offer a broad spectrum of financial services, including:

o Deposit accounts (savings, current, fixed deposits)
o Loans (personal, housing, education, car, business loans)
o Investment products (mutual funds, insurance)
o Credit cards, debit cards, internet banking, mobile banking
 RRBs: Have a more limited scope, primarily focusing on:
o Providing basic banking services like savings accounts and deposits
o Microfinance and small loans to farmers, artisans, and small businesses
o Agricultural credit for crop cultivation, irrigation, and allied activities
o Government operations like disbursing MGNREGA wages and pensions

3. Ownership and Regulation:

 Commercial Banks: Can be public sector (owned by the government) or

private sector (owned by private individuals or corporations). All commercial
banks are regulated by the Reserve Bank of India (RBI).
 RRBs: Are sponsored by public sector commercial banks but operate as
independent entities. They are also regulated by the RBI.

4. Profit Motive:

 Commercial Banks: Have a primary objective of maximizing profit for their

shareholders.
 RRBs: Have a social development objective alongside financial sustainability.
They aim to provide affordable credit and financial services to underserved
rural communities.
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5. Branch Network:

 Commercial Banks: Have a wider branch network covering urban and rural
areas.
 RRBs: Have a more limited branch network, primarily concentrated in rural and
semi-urban areas.

11. CHALLENGES FACES ON REGIONAL RURAL BANKS

• Financial Viability - Maintaining financial viability is a challenge for RRBs
due to factors such as low-profit margins, high operating costs, and loan
recovery issues in rural areas.

• Asset Quality - RRBs often face challenges in managing asset quality,

especially in the agricultural sector where loan defaults can occur due to factors
like crop failure, natural disasters, or price fluctuations.

• Capital Constraints - RRBs may face capital constraints, limiting their ability
to meet the increasing credit demand in rural areas and comply with regulatory
requirements.

• Technological Advancements - Adopting and integrating new technologies

pose a challenge for RRBs, particularly in remote rural areas where
infrastructure and connectivity are limited.

• Human Resource Development - RRBs face challenges in attracting and

retaining skilled personnel in rural areas, which can impact their ability to
deliver efficient banking services and implement effective risk management
practices.

• Governance and Management - Effective governance and management

practices are essential for the smooth functioning of RRBs. However,
challenges related to governance, leadership, and internal controls may arise,
impacting operational efficiency and transparency.

12. ROLES & FUNCTIONS OF NABARD

NABARD, the National Bank for Agriculture and Rural Development, plays a
pivotal role in the Indian financial system by promoting and developing
agriculture, small-scale industries, cottage and village industries, and other
allied economic activities in rural areas. Its main goal is to ensure integrated
rural development and secure the prosperity of rural areas.
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Here's a breakdown of NABARD's key roles and functions:

1. Financial Support:

 Provides and regulates credit: NABARD acts as a refinancing institution for

rural banks and cooperative banks, ensuring a steady flow of credit to rural
areas. It also directly finances various rural development projects through loans
and grants.
 Microfinance: NABARD promotes financial inclusion by supporting
microfinance institutions that provide small loans to rural entrepreneurs,
farmers, and artisans.
 Infrastructure development: NABARD finances the development of essential
infrastructure in rural areas, including irrigation systems, roads, warehouses,
and rural markets.

2. Supervision & Development:

 Regulates cooperative banks: NABARD supervises the functioning of

cooperative banks and regional rural banks to ensure they adhere to sound
banking practices and meet the credit needs of rural communities.
 Research & development: NABARD conducts research on rural issues and
promotes the adoption of new technologies and best practices in agriculture and
rural development.
 Capacity building: NABARD provides training and capacity-building programs
for rural institutions, farmers, and other stakeholders to improve their skills and
knowledge.

3. Policy Advocacy:

 Provides policy advice: NABARD advises the government on policies related to

rural development, agriculture, and credit flow to rural areas.
 Coordinates rural credit activities: NABARD plays a crucial role in
coordinating the activities of various institutions involved in rural credit
delivery, ensuring effective and efficient utilization of funds.

4. Other Functions:

 Disaster relief: NABARD provides financial assistance and support to rural

communities affected by natural disasters.
 Promoting sustainable development: NABARD promotes sustainable
agricultural practices and environmental conservation in rural areas.
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 Social development: NABARD supports various social development initiatives

in rural areas, including healthcare, education, and sanitation programs.
13. DIFFERENCE BETWEEN LIFE INSURANCE VS
GENERAL INSURANCE

Key Points Life Insurance General Insurance.

Meaning It is an insurance It is an insurance that is
contract, which covers not covered under Life
the life-risk of the person insurance.
insured.

Form It is a form of It is a contract of

investment. indemnity.

Term of Contract. It's a long term contract. It's a short term contract.

Premium Premium has to be paid Premium has to be paid

over the year. lump sum.

Insurance claim Insurable amount is paid Loss is reimbursed, or

either on the occurrence liability will be repaid on
of the event, or on the occurrence of
maturity. uncertain event.

Insurable Interest. Must be present at the Must be present, at the

time of contract. time of contract and loss
both.
Policy Value. It can be done for any The amount payable
value based on the under life insurance is
premium policy. confined to the actual
loss suffered.
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14. MICRO INSURANCE

Micro insurance is specifically intended for the protection of low -income
people, with affordable insurance products to help them cope with and recover
from financial losses. The need of insurance for underprivileged section cannot
be avoided as this section of society is more prone to many risks which
ultimately leads to incapacity to face such uncertain situations. Hence, the role
that micro insurance plays thus becomes inevitable. India has been seen to be a
very exciting market and a pioneer in setting out the regulatory framework for
Micro Insurance in the world. Microinsurance promises to support sustainable
livelihoods of the poor.

Types of Micro insurance Plans:

Micro insurance plans can be divided into the following two broad categories.
1) General Micro insurance : A General or regular Micro insurance product
covers health insurance, personal accidents, and assets such as livestock, hut,
etc. This product can be availed at an individual or a group basis.
2) Life Micro insurance : A Life Micro insurance Plan can be Term or an
Endowment Plan. It can be purchased at an individual or a group level and with
or without an accident benefit. Such plans can also be related to health
insurance.

Importance of Microinsurance Policies:

Here’s why such policies are important.
 They are an accessible risk-management tool to reduce financial
vulnerability in times of adversity.
 The affordable premium of such plans is an incentive for better reach in
an organized manner.
 Microinsurance covers the policyholder’s financial liability as per the
chosen plan.
 Microinsurance helps the poor to save money.
 Can bring about a positive change in poor people’s perception of
insurance.
How Does a Micro insurance Policy Work?
 Micro insurance policies, are distributed via Non-governmental
Organizations (NGOs), Self-help Groups, and Micro-finance Institutions.
 The premium for such plans is nominal to widen the reach and ensure
engagement at a large scale.
 Insurers have the freedom to offer composite covers or a packaged
product belonging to either the General Insurance or the Life Insurance
category.
 Insurers also offer some Microinsurance Policies in case the sum assured
of a policy is within the range specified by the authorities.
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15. ROLES & FUNCTIONS OF Insurance Regulatory and Development

Authority of India(IRDA)

1.IRDAI issues a certificate of registration to the life insurance company and

also renews, modifies, withdraws, suspends, and cancels the registration.

2. The regulatory body secures the policyholder’s interests in areas like

assigning of policy, nomination by policyholders, insurable interest, settlement
of insurance claim, surrender value of the policy, and other terms and conditions
applicable to an insurance contract.

3. It specifies the requisite qualifications, code of conduct, and practical training

required for insurance intermediaries and agents.

4. IRDAI ensures that the code of conduct is followed by surveyors and loss
assessors.

5. The autonomous body promotes efficiency in the conduct of the insurance

business.

6. It also promotes and regulates professional organizations connected with the

insurance and reinsurance business.

7. It levies fees and other charges for carrying out the purposes of the IRDAI
Act.

8. IRDAI carries out functions like inspection, conducting inquiries and

investigations, including an audit of the insurers, insurance intermediaries, and
other organizations involved with the insurance business.

9. The rates, advantages, terms, and conditions that may be offered by insurers
with respect to the general insurance business are also controlled and regulated
by the regulatory body.

10. It also specifies the form and manner in which books of account should be
maintained, and the statement of accounts should be rendered by insurers and
insurance intermediaries.
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16. MUTUAL FUND

Mutual funds pool money from many investors and invest it in a variety of
assets, such as stocks, bonds, and real estate. This diversification helps to reduce
risk and smooth out returns over time. Mutual funds are professionally
managed, so you don't have to worry about picking individual investments
yourself.

Types of mutual funds:

 Equity funds: These funds invest primarily in stocks, which can offer
high potential returns but also come with higher risk.

 Bond funds: These funds invest primarily in bonds, which are less
volatile than stocks but also offer lower potential returns.
 Balanced funds: These funds invest in a mix of stocks and bonds, aiming
for a balance of risk and return.
 Target-date funds: These funds automatically adjust their asset allocation
as you get closer to retirement, becoming more conservative over time.

17. MICRO FINANCIAL INSTITUTION

Microfinance institutions (MFIs) are specialized financial institutions that
provide financial services to underserved communities, particularly low-income
individuals and small businesses who often lack access to traditional banking
services.

Here are some key characteristics of MFIs:

 Target clientele: MFIs primarily focus on serving low-income individuals and

small businesses, who may not have collateral or a formal credit history.
 Loan products: MFIs typically offer small loans, often with flexible repayment
terms and methodologies. This can include group loans, where a group of
borrowers are jointly responsible for repaying the loan.
 Interest rates: Interest rates on MFI loans can be higher than those offered by
traditional banks, but they are often still lower than the rates charged by
informal lenders.
 Non-financial services: Many MFIs also offer non-financial services, such as
financial literacy training, business development support, and savings products.
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The goals of MFIs:

 Poverty alleviation: MFIs aim to help low-income individuals and families

escape poverty by providing them with access to financial resources and
services.
 Economic development: MFIs can contribute to economic development by
supporting small businesses and entrepreneurs.
 Financial inclusion: MFIs play an important role in promoting financial
inclusion by providing financial services to people who would otherwise be
excluded from the formal financial system.
18. FRAUD IN MICRO FINANCE

Types of Fraud in Microfinance:

 Borrower Fraud:

o Fake identities and documents: Borrowers may use forged documents to obtain
loans they are not eligible for.
o Ghost borrowers: Non-existent borrowers are created to siphon off loan funds.
o Collusion with loan officers: Loan officers may collude with borrowers to
approve fraudulent loans or divert funds.

 Institutional Fraud:

o Embezzlement: Misappropriation of funds by MFI staff for personal gain.

o Improper lending practices: Providing loans based on personal relationships or
bribes, inflating interest rates, or hiding fees.
o Weak internal controls: Inadequate oversight and monitoring systems that allow
fraudulent activities to go undetected.

Impacts of Fraud:

 Financial losses for MFIs: Fraud can lead to significant financial losses for
MFIs, impacting their sustainability and ability to serve their clients.
 Erosion of trust: Fraudulent activities can damage the reputation of MFIs and
erode trust among borrowers and investors.
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 Reduced access to finance: Increased fraud risks may lead MFIs to tighten
lending requirements, making it harder for genuine borrowers to access
financing.

Combating Fraud in Microfinance:

 Strong due diligence: Implementing thorough verification procedures to identify

and prevent fake borrowers and documents.
 Effective risk management: Developing and implementing risk management
frameworks to assess and mitigate fraud risks.
19. EXIM
"EXIM" in India primarily refers to the Export-Import Bank of India (EXIM
Bank), a vital institution facilitating and promoting the country's international
trade. Established in 1982, EXIM Bank plays a crucial role in supporting Indian
exporters and importers through a range of financial and advisory services.

Here's a glimpse into EXIM Bank's key functions in India:

1. Financing Exports:

 Loans and Lines of Credit: EXIM Bank provides financial assistance to Indian
exporters through various loan products, including pre-shipment and post-
shipment finance, working capital loans, and term loans. This helps exporters
manage their cash flow and invest in production and expansion.

 Export Credit Guarantee: EXIM Bank offers export credit guarantee insurance
to Indian exporters, protecting them against the risk of non-payment by overseas
buyers. This encourages exporters to venture into new markets and expand their
international reach.

2. Supporting Imports:

 Import Finance: EXIM Bank provides financing solutions for Indian importers,
enabling them to import essential raw materials, machinery, and equipment.
This helps boost domestic manufacturing and infrastructure development.

 Foreign Currency Loans: EXIM Bank offers foreign currency loans to Indian
importers, mitigating their foreign exchange risks and ensuring smooth import
transactions.
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3. Promoting Foreign Investment:

 Lines of Credit: EXIM Bank extends lines of credit to foreign financial

institutions to support foreign direct investment (FDI) in India. This attracts
foreign capital and expertise, contributing to India's economic growth.

 Project Finance: EXIM Bank provides project financing solutions for large
infrastructure and development projects involving foreign collaboration. This
fosters economic development and creates employment opportunities.

4. Knowledge and Advisory Services:

 Market Research and Information: EXIM Bank conducts market research and
disseminates information on international trade regulations, market trends, and
potential opportunities. This empowers Indian businesses to make informed
decisions and navigate the complexities of global trade.

 Capacity Building Programs: EXIM Bank organizes training programs and

workshops for exporters and importers, enhancing their skills and knowledge in
international trade practices.