UNIT 1st

INDIAN FINANCIAL SYSTEM

MEANING :
The Indian financial system is a complex and interconnected network of
institutions, markets, and instruments that facilitate the flow of funds
between savers and borrowers. It plays a vital role in the economic
development of the country by mobilizing savings and allocating them
to productive investments.
Indian Financial System
The Indian financial system is a complex network of financial
institutions, markets, instruments, and services that facilitate the flow of
funds between savers and investors. It comprises various entities such
as banks, non-banking financial companies (NBFCs), insurance
companies, stock exchanges, mutual funds, pension funds, and other
financial intermediaries.
The Indian Financial System plays a crucial role in mobilizing savings,
allocating capital, and facilitating economic growth and development in
the country.

Structure of Indian Financial System

The Indian Financial System is made up of various components that
work together to facilitate the flow of funds between savers and
investors. The structure of the Indian financial system can be broadly
divided into two parts: the organized sector and the unorganized sector.

The organized sector includes formal financial institutions such as

banks, insurance companies, NBFCs, mutual funds, stock exchanges,
and pension funds. These institutions are regulated by the Reserve Bank
of India (RBI) and other regulatory bodies such as the Securities and
Exchange Board of India (SEBI), the Insurance Regulatory and
Development Authority of India (IRDAI), and the Pension Fund
Regulatory and Development Authority (PFRDA).
The unorganized sector, on the other hand, includes informal financial
intermediaries such as moneylenders, chit funds, and other unregulated
entities that cater to the financial needs of the unbanked and
underserved sections of society.
Check here in detail the Difference Between Organized Sector and
Unorganized Sector.
Indian Financial System Components
The Indian Financial System is composed of various components,
including:
Components of Indian Financial System
1.Banks;
Banks are financial institutions that accept deposits from customers and
provide loans and other financial services. In India, banks can be
classified into public sector banks, private sector banks, and foreign
banks.
2. Non-Banking Financial Companies (NBFCs)
NBFCs are financial institutions that provide banking services without
holding a banking license. They offer a wide range of financial services,
such as loans, leasing, hire purchase, and investment advisory services.
3.Insurance Companies
Insurance companies offer a range of life and non-life insurance
products, including health insurance, motor insurance, and property
insurance. They are regulated by the Insurance Regulatory and
Development Authority of India (IRDAI).
4.Capital Markets
The capital markets in India comprise the stock exchanges, such as the
Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE), and other capital markets intermediaries such as brokers,
depositories, and registrars. They provide a platform for companies to
raise capital through the issuance of equity and debt instruments.
5.Mutual Funds
Mutual funds are investment vehicles that pool money from various
investors and invest in a diversified portfolio of stocks, bonds, and other
securities. They are regulated by the Securities and Exchange Board of
India (SEBI).
6.Pension Funds
Pension funds in India offer retirement solutions to individuals and are
regulated by the Pension Fund Regulatory and Development Authority
of India (PFRDA).
Indian Financial System Code
The Indian financial system is governed by various laws, regulations,
and codes issued by different regulatory bodies. For example, the
Reserve Bank of India Act, of 1934 governs the functioning of the
Reserve Bank of India, while the Securities and Exchange Board of
India (SEBI) Act, of 1992 regulates the securities market in India. There
have been proposals in the past to introduce a comprehensive financial
code, but they are still in the drafting stages and have not been
implemented yet.

Features of Indian Financial System

The Indian financial system is a complex and interconnected network of
institutions, markets, and instruments that facilitate the flow of funds
between savers and borrowers. It plays a vital role in the economic
development of the country by mobilizing savings and allocating them
to productive investments. The Indian financial system is characterized
by the following features:
 1. Dual structure system consisting of a formal sector and an
informal sector.
2. Intermediated, meaning that financial institutions play a key role
in mobilizing savings and allocating them to borrowers
3. Increasingly market-based
4. Regulated by the government through a number of regulatory
bodies
5. Promote financial inclusion, through the Pradhan Mantri Jan Dhan
Yojana and the Pradhan Mantri Mudra Yojana etc.
6. Promoting economic growth
Indian Financial System Functions
The Indian financial system has several functions that help to meet the
financial needs of individuals and businesses. Here are some of the key
functions of the Indian financial system:
1. Mobilization of Savings:
The Indian financial system helps to mobilize savings from various
sectors of the economy and channel them towards productive
investments. This is achieved through various financial intermediaries
such as banks, mutual funds, and insurance companies.
2. Allocation of Credit:
The Indian financial system also plays a key role in allocating credit to
different sectors of the economy. Banks and other financial institutions
provide loans and credit facilities to businesses and individuals to help
them meet their financial needs.
3. Payment System:
The financial system provides a safe and efficient payment mechanism
to facilitate transactions between different individuals and businesses.
This is achieved through various payment systems such as NEFT,
RTGS, and IMPS.
4. Risk Management:
The financial system helps to manage risks associated with financial
transactions. Financial intermediaries such as insurance companies
provide risk management products such as life insurance, health
insurance, and property insurance.
5. Price Discovery:
The Indian financial system also helps in the discovery of prices of
financial assets such as stocks, bonds, and commodities. This is
achieved through various financial intermediaries such as stock
exchanges and commodity exchanges.
6. Economic Development:
The financial system plays a critical role in the economic development
of the country. It provides financial resources for investment in
infrastructure, industries, and other productive sectors of the economy.
7. Financial Inclusion:
The Indian financial system also strives to promote financial inclusion
by providing access to financial services to individuals and businesses
in remote and underdeveloped areas of the country.
Structure of Indian Financial System is as Follows:

The financial system is a network. It consists of buyers and sellers like a

market. But, the buyers are the borrowers who seek money. Sellers are
investors who want to invest their surplus. The system facilitates this
flow so that the funds reach the right place. One must understand the
basic flow function to explain the structure of Indian financial
system. The system classifies into two parts.

o Organized sector: This sector includes banks, financial

institutions, NBFCs, insurance companies, etc. This organized
sector is also regulated. Official bodies like the Reserve Bank of
India or the Securities and Exchange Board monitor their
activities.
 o Unorganized sector: This sector is not regulated. The
moneylenders, chit funds, or other institutions outside regulations
are present. They provide money to people without bank accounts
or sufficient collateral securities.

Components of Indian Financial System

One must learn the components to explain the structure of Indian

financial system. These components make up the entire system. Also,
the financial system participants help provide facilities. These facilities
are necessary for the public and business growth. Read below the
different components.

Financial Institutions

The financial institutions are the intermediaries among the investors and
borrowers. People who need money approach loans. People who want
to invest also submit their savings. The total savings are mobilized and
further given for economic development. The major financial
institutions are usually the banks.

Read below the functions of financial institutions.

o Conversion of short-term liabilities to long-term investments

o Conversion of risky investments to risk-free domains
o A medium of convenience denomination: Matches a large loan for
a small deposit or a small loan for a large deposit

These functions help the country's citizens. They can take loans with a
small or large deposit. They can invest in risk-free investments. The
banks take surplus from earners to borrowers. The bank and the investor
both earn interest income.

Types of Financial Institutions

The types of financial institutions have been discussed below.

 o Banking or depository institutions: This type has banks or credit
unions. These organizations mobilize money from the ones having
a surplus. People who need loans take this money. The investors
earn interest as per the deposits. Borrowers pay the same.
o Non-banking or non-depository institutions: This type has
brokerage companies, insurance, or mutual funds organizations.
These organizations cannot take monetary deposits. However,
they sell financial products.

Classification of Financial Institutions

The classification of financial institutions has been stated below.

o Regulatory: These institutions regulate the market, like RBI and

SEBI.
o Intermediaries: Commercial banks with loans and financial
assistance like SBI and PNB
o Non-intermediaries:Institutions with financial aid for corporate
customers like NABARD. (National Bank for Agriculture and
rural development)

Financial Assets

These financial assets are products in the financial market. One must
understand them to explain the structure of Indian financial system.
The borrowers can compare these assets. They can then choose the one
as per their needs. Read below some financial asset types.

o Call money: This money or loan is only for one day. The person
has to pay it back the next day. It doesn't require any security or
collateral. Thus, it becomes easy to get this loan.
o Notice money: It is the loan or money lent for less than 14 days.
This loan term has to be more than a day. The borrower doesn't
need collateral in this too.
o Term money: A deposit with more than 14 days maturity period.
 o Treasury bills: These are government securities or bonds. The
government sells them to raise money. The maturity term is less
than a year.
o Certificate of deposits: A person gets this dematerialized
certificate. It acknowledges funds deposited in the bank for a
specific period.
o Commercial paper: It is a short-term debt product by companies.
This debt is unsecured.

These financial assets are majorly present to explain the structure of

Indian financial system.

Financial Services

Financial services are for the country's citizens and companies. These
services help explain the structure of Indian financial system. These
services help mobilize funds. The investors earn interest and secure
savings. The borrowers get loans. Also, the institutions help in security
sales, money settlements, lending, etc. Read the financial services
below.

o Banking services: Banking is the primary financial service. The

banks help issue loans, keep deposits, open accounts, etc. It has
basic services like issuing cards to granting big loans.
o Insurance services: Insurance becomes necessary for every
person. It helps mitigate risk. The financial services include
selling policies and undertaking insurance.
o Investment services: Financial services also include directing
funds. There are asset management firms which manage money.
People hire them to invest funds for interest.
o Foreign exchange service: Financial services also help in foreign
exchange. It helps settle international payments. This helps in
trade among nations.

These financial services become necessary for a nation. They help in

the development and smooth working.
 Financial Markets

The traders buy or sell securities in the financial markets. It is integral

to explain the structure of the Indian financial system. Learn the
different types of these markets.

1. Capital market: These markets help finance long-term investments.

This transaction duration is for over a year. These markets help get long-
term deposits.

2 Money market: These markets help finance small-term investments.

This transaction here is for less than a year. This wholesale market has
low risk and is highly liquid. Banks, governments, and large companies
are present in this.

3.Foreign exchange market: This market helps in international

transactions. It allows the exchange of currencies. This market also helps
traders earn through forex speculation.

4.Credit market: This market is for short-term and long-term loans.

Financial institutions or banks are present in this.

..

Indian Financial System Functions

The functions are necessary to explain the structure of Indian
financial system. These functions are what help in smooth
working. Read below the significant functions.
 Savings mobilization:The financial institutions collect savings from
different sectors. These funds reach the borrowers. The borrowers
often invest in productive services to generate growth.

Credit allocation:

The financial system ensures that people have credit facilities. They
provide loans to individuals or organizations for investment, business,
or personal needs.

Payments system:

This system is also responsible for facilitating payments. Modes

such as NEFT or IMPS help in safe transactions.

Risk management:

The financial system helps provide security against risks. Insurance

companies allow risk minimization for companies and individuals.

Price discovery:

This system helps understand security prices. The stock

exchanges list prices per the securities' demand or supply.

Economic development:

The financial system is responsible for economic growth. It provides

funds for businesses. It also helps improve living standards. Thus, it
becomes necessary to facilitate this growth.

Financial inclusion:
 The financial system aims to provide services to all sectors and
businesses. It reaches remote areas and underdeveloped cities

Structure of the Indian Banking System

Reserve Bank of India is the central bank of the country and regulates the banking
system of India. The structure of the banking system of India can be broadly
divided into scheduled banks, non-scheduled banks and development banks.
Banks that are included in the second schedule of the Reserve Bank of India Act,
1934 are considered to be scheduled banks.

 All scheduled banks enjoy the following facilities:

 Such a bank becomes eligible for debts/loans on bank rate from the RBI

 Such a bank automatically acquires the membership of a clearing house.

 All banks which are not included in the second section of the Reserve Bank
of India Act, 1934 are Non-scheduled Banks. They are not eligible to
borrow from the RBI for normal banking purposes except for emergencies.

 Scheduled banks are further divided into commercial and cooperative

banks.
 Scheduled, Non-Scheduled Banks and Development Banks

Commercial

Commercial Banks
The institutions that accept deposits from the general public and advance loans
with the purpose of earning profits are known as Commercial Banks.
 Commercial banks can be broadly divided into public sector, private sector,
foreign banks and RRBs.

 In Public Sector Banks the majority stake is held by the government. After the
recent amalgamation of smaller banks with larger banks, there are 12 public sector
banks in India as of now. An example of Public Sector Bank is State Bank of
India.

 Private Sector Banks are banks where the major stakes in the equity are owned
by private stakeholders or business houses. A few major private sector banks in
India are HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.
 A Foreign Bank is a bank that has its headquarters outside the country but runs
its offices as a private entity at any other location outside the country. Such banks
are under an obligation to operate under the regulations provided by the central
bank of the country as well as the rule prescribed by the parent organization
located outside India. An example of Foreign Bank in India is Citi Bank.

 Regional Rural Banks were established under the Regional Rural Banks
Ordinance, 1975 with the aim of ensuring sufficient institutional credit for
agriculture and other rural sectors. The area of operation of RRBs is limited to the
area notified by the Government. RRBs are owned jointly by the Government of
India, the State Government and Sponsor Banks. An example of RRB in India is
Arunachal Pradesh Rural Bank.
Cooperative Banks
A Cooperative Bank is a financial entity that belongs to its members, who are
also the owners as well as the customers of their bank. They provide their
members with numerous banking and financial services. Cooperative banks are
the primary supporters of agricultural activities, some small-scale industries and
self-employed workers. An example of a Cooperative Bank in India is Mehsana
Urban Co-operative Bank.

At the ground level, individuals come together to form a Credit Co-operative

Society. The individuals in the society include an association of borrowers and
non-borrowers residing in a particular locality and taking interest in the business
affairs of one another. As membership is practically open to all inhabitants of a
locality, people of different status are brought together into the common
organization. All the societies in an area come together to form a Central Co-
operative Banks.
  Cooperative banks are further divided into two categories - urban and rural.

 Rural cooperative Banks are either short-term or long-term.

 Short-term cooperative banks can be subdivided into State Co-operative

Banks,

 District Central Co-operative Banks, Primary Agricultural Credit Societies

.
 Long-term banks are either State Cooperative Agriculture and Rural
Development Banks (SCARDBs) or Primary Cooperative Agriculture and
Rural Development Banks (PCARDBs).

 Urban Co-operative Banks (UCBs) refer to primary cooperative banks

located in urban and semi-urban areas.

Development Banks
Financial institutions that provide long-term credit in order to support capital-
intensive investments spread over a long period and yielding low rates of return
with considerable social benefits are known as Development Banks. The major
development banks in India are; Industrial Finance Corporation of India (IFCI
Ltd), 1948, Industrial Development Bank of India' (IDBI) 1964, Export-Import
Banks of India (EXIM) 1982, Small Industries Development Bank Of India
(SIDBI) 1989, National Bank for Agriculture and Rural Development (NABARD)
1982.
The banking system of a country has the capability to heavily influence the
development of a country’s economy. It is also instrumental in the development of
rural and suburban regions of a country as it provides capital for small businesses
and helps them to grow their business. The organized financial system comprises
Commercial Banks, Regional Rural Banks (RRBs), Urban Co-operative Banks
(UCBs), Primary Agricultural Credit Societies (PACS) etc. caters to the financial
service requirement of the people. The initiatives taken by the Reserve Bank and
the Government of India in order to promote financial inclusion have considerably
improved the access to the formal financial institutions. Thus, the banking system
of a country is very significant not only for economic growth but also for
promoting economic equality
 . Reserve Bank of India

Reserve Bank of India also works as a central bank where commercial banks
are account holders and can deposit money. RBI maintains banking accounts
of all scheduled banks. Commercial banks create credit. It is the duty of the
RBI to control the credit through the CRR, repo rate, and open market
operations.

All the central activities about the money in India is controlled by the
RBI. They are responsible for the changing exchange rates as well as
the interest rates. But there are many other functions as well which RBI
performs. The functioning of RBI is fully done the central board of
directors.

functioning of RBI

Issue of Money/Currency
RBI in India controls the flow of money in the market. The main
objective is to check on the credit system and based on it maintain the
money in the system.

This is done so that the reserves are maintained. Also, RBI is the sole
authority when it comes to the printing of money. This function of
issuing notes by RBI has many advantages. They are:

 It is easy to supervise.
 This helps in the uniformity of the notes that are issued.
 It becomes easy to control and regulate the credit that is within the
system.
Issuer of Banking License
Any bank that has to obtain the license for various banking activities
has to obtain the license from the RBI. They can only conduct the
banking business if they have the license. This is as per section 22.

Banker’s to government
RBI acts as a bank to both the central as well as the state government.
It provides them the short-term loan whenever necessary. The
government deposit accounts are also maintained by the RBI.

On behalf of the government, it collects the receipts of the funds and

makes the payment. It is also responsible for advising the government
on financial and banking subjects.

Custodian for the Foreign Currency in the Country

Every country has some reserve of foreign exchange. The RBI in India
has the custody to reserve this currency. This helps the RBI fight any
crisis related to the bad balance of payments situation.

Lender to Commercial Banks

In the time of emergency and financial difficulties, the commercial
banks approach the RBI. The RBI helps these banks by charging them
a bit higher interest rate.

Debt Manager for Government

The government of India stores their money in the RBI. They keep
these deposits of government free of interest. Besides, it all makes and
receives the payment and help floating the new loans.
It carries the exchange remittances for the government. It acts as an
advisor to government and manages the public debt.

Accounts Settlement and Central Clearance

All the commercial banks in India, stores their surplus cash in the
Reserve Bank of India. Thus, it becomes easier for them to deal with
each other and settle any claims that are entered in the books. This has
also made the clearing account a very important function for the RBI.

Credit Controller
The credit money is a very important part of the supply of money. And
there are implications for the supply of money on the economic
stability of the country.

Thus, it becomes important to control credit. This credit is controlled

by the RBI on the basis of the economic priorities of the government.

Government Securities
Besides other government deposits, RBI also manages government
securities. They administer the investment for the institutions that
invest a portion of their total liabilities or assets in the government
securities

What is Commercial Bank?

A commercial bank is a kind of financial institution that carries all the operations related to
deposit and withdrawal of money for the general public, providing loans for investment, and
other such activities. 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 the 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 a bank lends money is known as the lending rate.

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
requirements of the commercial transactions.

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.

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.

(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.

Types of Commercial Banks:

There are three different types of commercial banks.

Private bank –: It is a 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. Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit
and Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.

Public bank –: It is a type of bank that is nationalised, and the government holds a significant
stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank,
and Punjab National Bank.

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, Citibank, and more such banks.

Examples of Commercial Banks

Few examples of commercial banks in India are as follows:

1. State Bank of India (SBI)

2. Housing Development Finance Corporation (HDFC) Bank

3. Industrial Credit and Investment Corporation of India (ICICI) Bank

4. Dena Bank

5. Corporation Bank

Banking and Non-Banking Financial Institutions

 There are two types of financial institutions: banking and non-banking. This
article shows the differences between banking and non-banking financial
institutions.

There are two main types of financial institutions: banking and non-banking.
Banking institutions include commercial banks, savings and loan associations, and
credit unions. Non-banking financial institutions include insurance companies,
pension funds, and hedge funds. So what sets these two groups apart? This article
will discuss the key differences between banking and non-banking financial
institutions!

Banking Financial Institutions

Banking financial institutions are in the business of taking deposits from the
public and making loans. In addition, they provide other services such as
investment banking, foreign exchange, and safe deposit boxes. These institutions
are heavily regulated by governments to protect consumers and ensure that the
banking system is stable.

Types of Banking Financial Institutions

There are two types of banking financial institutions: depository and non-
depository.

 Depository institutions include banks, savings and loans associations, credit

unions, and mutual savings banks
 Non-depository institutions include finance companies, insurance companies, and
pension funds

Non-Banking Financial Institutions

Non-banking financial institutions (NBFCs) are companies that provide financial

services such as lending, insurance, and investment banking but that are not
regulated as banks. This means that they have a different set of rules and
regulations to follow.

Types of Non-Banking Financial Institutions

 There are a few different types of non-banking financial institutions, which
include:

1. Insurance companies: These companies sell insurance policies to individuals and

businesses. The policies can provide coverage for things like car accidents,
medical expenses, or property damage.

2. Investment banks: These banks help companies raise money by issuing and selling
securities. They also provide advice on mergers and acquisitions, and they trade
stocks and bonds.

3. Pension funds: These funds provide retirement income for workers. The money is
invested in stocks, bonds, and other assets.

4. Mutual funds: These funds pool money from investors and invest it in a portfolio
of stocks, bonds, and other assets.

5. Hedge funds: These funds are private investment partnerships that use a variety of
investment strategies to make money.

6. Private equity firms: These firms invest in private companies and help them grow.
They may also take the companies public.

7. Venture capital firms: These firms invest in early-stage companies with high
growth potential.
Each of these non-banking financial institutions serves a different purpose, but
they all work towards the ultimate goal of providing funding for businesses and
individuals.

NABARD: Functions& Roles

National Bank for Agriculture and Rural Development (NABARD) was
established on July 12, 1982 with the paid up capital of Rs. 100 cr. by 50: 50
contribution of government of India and Reserve bank of India.

It is the apex banking institution to provide finance for Agriculture and rural
development. National Bank for Agriculture and Rural Development (NABARD)
was established on July 12, 1982 with the paid up capital of Rs. 100 cr. by 50: 50
contribution of government of India and Reserve bank of India. It is an apex
institution in rural credit structure for providing credit for promotion of
agriculture, small scale industries, cottage and village industries, handicrafts etc .

Functions of NABARD:

NABARD was established as a development bank to perform the following

functions:

1. To serve as an apex financing agency for the institutions providing investment

and production credit for promoting various developmental activities in rural
areas;

2. To take measures towards institution building for improving absorptive

capacity of the credit delivery system, including monitoring, formulation of
rehabilitation schemes, restructuring of credit institutions and training of
personnel;

3. To coordinate the rural financing activities of all institutions engaged in

developmental work at the field level and liaison with the Government of India,
the State Governments, the Reserve Bank and other national level institutions
concerned with policy formulation; and

4. To undertake monitoring and evaluation of projects refinanced by it.

5. NABARD gives high priority to projects formed under Integrated Rural
Development Programme (IRDP).

6. It arranges refinance for IRDP accounts in order to give highest share for the
support for poverty alleviation programs run by Integrated Rural Development
Programme.

7. NABARD also gives guidelines for promotion of group activities under its
programs and provides 100% refinance support for them.

8. It is setting linkages between Self-help Group (SHG) which are organized by

voluntary agencies for poor and needy in rural areas.

9. It refinances to the complete extent for those projects which are operated under
the ‘National Watershed Development Programme‘and the ‘National Mission of
Wasteland Development‘.

10. It also has a system of District Oriented Monitoring Studies, under which,
study is conducted for a cross section of schemes that are sanctioned in a district
to various banks, to ascertain their performance and to identify the constraints in
their implementation, it also initiates appropriate action to correct them.

11. It also supports “Vikas Vahini” volunteer programs which offer credit and
development activities to poor farmers.

12. It also inspects and supervises the cooperative banks and RRBs to periodically
ensure the development of the rural financing and farmers’ welfare.

13. NABARAD also recommends about licensing for RRBs and Cooperative
banks to RBI.

14. NABARD gives assistance for the training and development of the staff of
various other credit insti¬tutions which are engaged in credit distributions.

15. It also runs programs for agriculture and rural development in the whole
country.

16. It is engaged in regulations of the cooperative banks and the RRB’s, and
manages their talent acquisition through IBPS CWE conducted across the country.

Role of NABARD:
1. It is an apex institution which has power to deal with all matters concerning
policy, planning as well as operations in giving credit for agriculture and other
economic activities in the rural areas.

2. It is a refinancing agency for those institutions that provide investment and

production credit for promoting the several developmental programs for rural
development.

3. It is improving the absorptive capacity of the credit delivery system in India,

including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, and training of personnel.

4. It co-ordinates the rural credit financing activities of all sorts of institutions

engaged in developmental work at the field level while maintaining liaison with
Government of India, and State Governments, and also RBI and other national
level institutions that are concerned with policy formulation.

5. It prepares rural credit plans, annually, for all districts in the country.

6. It also promotes research in rural banking, and the field of agriculture and rural
development.

NABARD: Functions,& Roles

National Bank for Agriculture and Rural Development (NABARD) was
established on July 12, 1982 with the paid up capital of Rs. 100 cr. by 50: 50
contribution of government of India and Reserve bank of India.

It is the apex banking institution to provide finance for Agriculture and rural
development. National Bank for Agriculture and Rural Development (NABARD) was
established on July 12, 1982 with the paid up capital of Rs. 100 cr. by 50: 50
contribution of government of India and Reserve bank of India. It is an apex institution
in rural credit structure for providing credit for promotion of agriculture, small scale
industries, cottage and village industries, handicrafts etc.

Functions of NABARD:
NABARD was established as a development bank to perform the following functions:

1. To serve as an apex financing agency for the institutions providing investment and
production credit for promoting various developmental activities in rural areas;

2. To take measures towards institution building for improving absorptive capacity of

the credit delivery system, including monitoring, formulation of rehabilitation schemes,
restructuring of credit institutions and training of personnel;

3. To coordinate the rural financing activities of all institutions engaged in

developmental work at the field level and liaison with the Government of India, the State
Governments, the Reserve Bank and other national level institutions concerned with
policy formulation; and

4. To undertake monitoring and evaluation of projects refinanced by it.

5. NABARD gives high priority to projects formed under Integrated Rural Development
Programme (IRDP).

6. It arranges refinance for IRDP accounts in order to give highest share for the support
for poverty alleviation programs run by Integrated Rural Development Programme.

7. NABARD also gives guidelines for promotion of group activities under its programs
and provides 100% refinance support for them.

8. It is setting linkages between Self-help Group (SHG) which are organized by

voluntary agencies for poor and needy in rural areas.

9. It refinances to the complete extent for those projects which are operated under the
‘National Watershed Development Programme‘and the ‘National Mission of Wasteland
Development‘.

10. It also has a system of District Oriented Monitoring Studies, under which, study is
conducted for a cross section of schemes that are sanctioned in a district to various
banks, to ascertain their performance and to identify the constraints in their implemen-
tation, it also initiates appropriate action to correct them.

11. It also supports “Vikas Vahini” volunteer programs which offer credit and
development activities to poor farmers.

12. It also inspects and supervises the cooperative banks and RRBs to periodically
ensure the development of the rural financing and farmers’ welfare.
 13. NABARAD also recommends about licensing for RRBs and Cooperative banks to
RBI.

14. NABARD gives assistance for the training and development of the staff of various
other credit insti¬tutions which are engaged in credit distributions.

15. It also runs programs for agriculture and rural development in the whole country.

16. It is engaged in regulations of the cooperative banks and the RRB’s, and manages
their talent acquisition through IBPS CWE conducted across the country.

Role of NABARD:

1. It is an apex institution which has power to deal with all matters concerning policy,
planning as well as operations in giving credit for agriculture and other economic
activities in the rural areas.

2. It is a refinancing agency for those institutions that provide investment and production
credit for promoting the several developmental programs for rural development.

3. It is improving the absorptive capacity of the credit delivery system in India, including
monitoring, formulation of rehabilitation schemes, restructuring of credit institutions,
and training of personnel.

4. It co-ordinates the rural credit financing activities of all sorts of institutions engaged
in developmental work at the field level while maintaining liaison with Government of
India, and State Governments, and also RBI and other national level institutions that are
concerned with policy formulation.

5. It prepares rural credit plans, annually, for all districts in the country.

6. It also promotes research in rural banking, and the field of agriculture and rural
development.

. RRB and its Functions

The Regional Rural Banks or RRBs are commercial banks in India. The recapitalisation of RRBs is sponsored
by the central bank. These banks are empowered to conduct financial transactions to promote growth and
development in rural areas. RRB as a mix of cooperative and commercial banks has certain features:
 Provide easy and accessible banking
 Support and promote local artisans, MSMEs (Medium-Small Sized Businesses), and agricultural farmers
 Mobilise regional financial resources
 Operate on the district as well as state-level

RRB and its functions include:

 Extend loans to artisans, farmers, labourers, and MSMEs
 Accepting savings and other forms of deposits
 Distributional and disbursement of pension and wages
 Providing internet banking
 UPI services
 Provide credit facility in the agricultural department, renewable energy sources, and cultural initiatives

The RRBs are owned by the state, central governments, and sponsoring banks. The RRBs are often subjected
to amalgamations which cause a fluctuation in their number over the country.

The word ‘co-operative’ originated from the Latin word ‘cooperari’ or ‘cooperat’
which means worked together, it basically means that individuals come together and
help each other for their similar interests. Likewise, co-operative banks are a kind of
associations of members who have a common belief in which they come together and
cooperate with each other. o-operative Banking started to established in India when
the Co-operative Societies Act, 1904 got passed and the main objective of the Act
passed was to help in establishing the co-operative credit societies in the country.

The community comes together and purchase shares of capital of the co-operatives.

Functions of Co-Operative Bank

The functions of Co-operative banks are:

 Provides Credit: it provides credit/loan at lower rate of interest

 Encourage saving: cooperative banks encourage the habit of saving

among members/customers.
 Employment Generation: These cooperatives require different types of
human resources like technicians, administrators, workers etc. So, they
provide employment opportunities.

 Helps to develop rural areas: cooperatives are basically established in

the rural areas to support the weaker section of the people. They help
them to start their own business and provides various job opportunities.
Which helps to develop the rural areas.

 Improves living standard: cooperatives provide credit facilities at low

rate of interest to the people. It also provides job opportunities which
improves the standard of living of the people.

 Agricultural Development: cooperative societies provide loans at low

rate of interest to small farmers to buy improved seeds, chemical
fertilizers, agricultural tools etc. to increase their production. This way
cooperative banks play an important role in agricultural development

ICICI
full form of ICICI is Industrial Credit and Investment Corporation of India.
It was ICICI Bank's parent organisation which had been incorporated in
2002 with ICICI Bank. ICICI was renamed as ICICI bank just after
integration, so it is now branded as ICICI Bank. he Industrial Credit and
Investment Corporation of India (ICICI) was a government institution
established on 5 January 1994 and Sir Arcot Ramasamy Mudaliar was
elected as the first Chairman of ICICI Ltd.


 FUNCTIONS OF THE ICICI
In order to accomplish the above objectives, the Corporation
performs the following functions:
1. Providing finance in the form of long-term or medium term loans or
equity participation.
2. Sponsoring and underwriting new issues of shares and other securities,
3. Guaranteeing loans from other private investment sources.
4. Making funds available for reinvestment by revolving investment as
rapidly as possible.
5. Providing project advisory services i.e. offering advice –
i. to private sector companies in the pre-investment stages on Government policies and procedures,
feasibility studies and joint venture search, and
ii. to Central and State Governments on specific policy related issues.

IDBI
Industrial Development Bank of India (IDBI) was constituted under the
Industrial Development Bank of India Act, 1964 as a Development Financial
Institution (DFI) and came into being on July 01, 1964, vide GoI notification
dated June 22, 1964.

Main Functions
Following are the main functions of IDBI Bank –

Providing financial support for the industries: The long-term financial

assistance, say for 25 years.

 Undertake market study and research to find the investment opportunity

related to industrial development.
 Promoting institutions working for industrial development.
 Providing technical and administrative assistance for the promotion and
expansion of industries.
 Coordinating and supervising the activities of the institutions working in the
financing sector.
 Facilitate balanced industrial development across India.

In 2003, IDBI converted to a commercial bank under the Industrial

Development Bank (Transfer of undertaking and Repeal) Act, 2003. The
bank gained its new status as a part of reforms in the financial sector. Later
on, in 2004, it was incorporated as a scheduled bank. The bank was renamed
IDBI Ltd.

IFCI

Established in 1948 as a statutory corporation, IFCI is a public limited

company listed on BSE and NSE. IFCI has six number of subsidiaries and
one associate under its fold. IFCI is having mandate to provide financial
support for the diversified growth of Industries across the spectrum nitially
established in 1948, the Industrial Finance Corporation of India was
converted into a public company on 1 July 1993 and is now known as
Industrial Finance Corporation of India Ltd. The main aim of setting up
this development bank was to provide assistance to the industrial sector
to meet their medium and long-term financial needs.

The IDBI, scheduled banks, insurance sector, co-op banks are some of
the major stakeholders of the IFCI. The authorized capital of the IFCI
is 250 crores and the Central Government can increase this as and
when they wish to do so.

Functions of the IFCI

 First, the main function of the IFCI is to provide medium and long-
term loans and advances to industrial and manufacturing concerns. It
looks into a few factors before granting any loans. They study the
 importance of the industry in our national economy, the overall cost
of the project, and finally the quality of the product and
the management of the company. If the above factors have
satisfactory results the IFCI will grant the loan.
 The Industrial Finance Corporation of India can also subscribe to
the debentures that these companies issue in the market.
 The IFCI also provides guarantees to the loans taken by such
industrial companies.
 When a company is issuing shares or debentures the Industrial
Finance Corporation of India can choose to underwrite such
securities.
 It also guarantees deferred payments in case of loans taken from
foreign banks in foreign currency.
 There is a special department the Merchant Banking & Allied
Services Department. They look after matters such as capital
restructuring, mergers, amalgamations, loan syndication, etc.
 It the process of promoting industrialization the Industrial Finance
Corporation of India has also promoted three subsidiaries of its own,
namely the IFCI Financial Services Ltd, IFCI Insurance Services Ltd
and I-Fin. It looks after the functioning and regulation of these three
companies.

IIBI

The full form of IIBI is the Industrial Investment Bank of India. IIBI
was an Indian government-run financial investment company that
operated from its creation in 1971 until the Indian government closed
down in 2012. It was a sort of development bank to restore sick
industrial companies in India. The Industrial Investment Bank of India
(IIBI) was a development financial institution that was established in
1948 to provide financial assistance to small and medium enterprises
(SMEs) in India. Some of the key functions of the IIBI included:

1. Providing financing: The IIBI provided a range of financial products and

services to SMEs, including working capital finance, term loans, and project
finance.

2. Promoting the growth of small industries: The IIBI played a key role in
promoting the growth and development of small industries in India by
providing financial assistance and advisory services.

3. Facilitating the development of new projects: The IIBI provided financial

assistance to SMEs to help them fund new projects, such as setting up a new
factory or modernizing existing facilities.

4. Providing advisory services: The IIBI also provided advisory services to

SMEs, including financial planning and management, marketing, and
technical support.

In addition to these functions, the IIBI also played a key role in promoting
entrepreneurship and innovation among SMEs in India. It operated through a
network of regional offices and branches located across the country. The IIBI
was merged with the Industrial Development Bank of India (IDBI) in 2004,
and the merged entity, known as the IDBI Bank, now provides a range of
financial products and services to a variety of customers.

State Financial Corporations

The act of SFC, that is to say, State Financial Corporations was first passed
in the year 1951, and it gave the power to all the States and union territories
for setting up Financial Corporations in the States, in order to help the small
scale and medium scale industries of the State.

Functions
. State Financial Corporations are established by the respective state governments
aimed at assisting Small and Medium industries. The major functions of State
Financial Corporations are-

1. Long Term Financial Assistance:

Providing long term financial assistance to finance small and medium industries is the
prominent function for which the State Financial Corporations are set up. These
enterprises may be in the form of individual proprietorships, partnership firms, private or
public companies and the maximum tenure of the loan is twenty years.

2. Guarantee for Loans:

The State Financial Corporations also stand guarantee for loans taken by small and
medium business concerns from cooperative banks, commercial banks, or any other
banking financial institution for a tenure of up to 20 years.

3. Acts as Agents of Government:

The State Financial corporation also acts as an agent of the state as well as the central
government when it comes to implementing government schemes related to small and
medium industries financing. The SFCs also disburse loans as per different schemes of
the governments.

4. Underwriting and Subscription:

The State Financial Corporation also functions as an underwriter by underwriting the

shares of small and medium public companies. The SFCs also subscribe to debentures of
these small and medium firms which are of tenure of fewer than 20 years.
5. Credit and Guarantee for Purchases:

State Financial Corporation also provides loans and guarantees deferred payment for
purchases for the industry like machinery, plant, or any other fixed expenditure.

SIDBI
The SIDBI (Small Industries Development Bank of India) is a wholly-owned
subsidiary of IDBI (Industrial Development Bank of India), established under the
special Act of the Parliament 1988 which became operative from April 2,
1990.SIDBI was made responsible for administering Small Industries
Development Fund and National Equity Fund that were administered by IDBI
before. SIDBI is the Primary Financial Institution for promoting, developing and
financing MSME (Micro, Small and Medium Enterprise) sector. Besides
focussing on the development of the Micro, Small and Medium Enterprise sector,
SIDBI also promotes cleaner production and energy efficiency.

Functions of SIDBI

 Small Industries Development Bank of India refinances loans that are

extended by the PLIs to the small-scale industrial units and also offers
resources assistance to them.

 It discounts and rediscounts bills.

 It also helps in expanding marketing channels for the products of SSI (Small
Scale Industries) sector both in the domestic as well as international markets.

 It offers services like factoring, leasing etc. to the industrial concerns in the
small-scale sector.
 It promotes employment-oriented industries particularly in semi-urban areas
for creating employment opportunities and thus checking the relocation of
people to the urban areas.

 It also initiates steps for modernisation and technological up-gradation of

current units.

 It also enables the timely flow of credit for working capital as well as term
loans to Small Scale Industries in cooperation with commercial banks.

 It also co-promotes state-level venture funds.

QUESTION BANK
Ques 1: Explain the the function and working of following Banks ?
(a) NABARD
(b) ICICI
(c) IDBI
(d) IFCI
(e) IIBI
(f) SFCs
(g) SIDBI
Ques2: What is Indian financial system ?Explain its structure?
Ques 3: Explain the role and function of Indian financial system ?
Ques4: What are the function and working of RBI?
Ques5: What are the function of regional rural banks and
cooperative bank ?
Ques6: Explain Banking and Non Banking intermediaries with its
structure?