Indian Banking System
Indian Banking System
• The Indian banking structure comprises both
organised and unorganised banking sector. The
unorganised banking sector consists of indigenous
bankers and money lenders. The organised sector
comprises the central bank at the top level and
commercial banks, specialised banks, institutional
banks and non- banking financial institutions
Indigenous Bankers
• It includes shroffs, seths, mahajans, chettis, etc. The indigenous
bankers lend money; act as money changers and finance internal
trade of India by means of hundis or internal bills of exchange.
• Defects of indigenous banking:
• unorganised & no contact with other sections of the banking world.
• They combine banking with trading and commission business and thus have introduced
trade risks into their banking business.
• They do not distinguish between short term and long term finance and also between
the purpose of finance.
• Vernacular methods of keeping accounts. Not giving receipts in most cases and interest
which they charge is out of proportion to the rate of interest charged by other banking
institutions in the country.
Hundies
Moneylenders
• Moneylenders are the second element of the unorganised sector. They
depend entirely on their own funds for lending. They include large
farmers, merchants, goldsmiths etc. They charge a very high rate of
interest for their loans.
Organised Sector
Reserve Bank of India (RBI)
• The Reserve Bank of India (RBI), the central
bank of India, which was established in
1935, has been fully owned by the
government of India since nationalization in
1949. Like the central bank in most
countries, Reserve Bank of India is entrusted
with the functions of guiding and regulating
the banking system of a country.
Commercial Banks
•Public sector banks
•Private Banks
•Foreign banks
Public sector banks
• These are banks where majority stake is
held by the Government of India or Reserve
Bank of India. In 2012, the largest public
sector bank is the State Bank of India. This
consists of 14 banks which are nationalised
in the year 1969 and 6 banks which are
nationalised in the year l980.
Private Banks
•Private Banks are banks that the
majority of share capital is held by
private individuals. In Private sector
small scheduled commercial banks and
newly established banks
Foreign Banks
• Foreign banks are registered and have their headquarters in a foreign
country but operate their branches in India. Apart from financing of
foreign trade, these banks have performed all functions of
commercial banks and they have an advantage over Indian banks
because of their vast resources and superior management.
Co-operative banks
• Co-operative banks are banks incorporated in the legal form of
cooperatives. Any cooperative society has to obtain a license from the
Reserve Bank of India before starting banking business and has to
follow the guidelines set and issued by the Reserve Bank of India
Primary Credit Societies
• Primary Credit Societies are formed at the village
or town level with borrower and non- borrower
members residing in one locality. The operations
of each society are restricted to a small area so
that the members know each other and are able
to watch over the activities of all members to
prevent frauds
Central Co-operative Banks
• Central co-operative banks operate at the district
level having some of the primary credit societies
belonging to the same district as their members.
These banks provide loans to their members
(i.e., primary credit societies) and function as a
link between the primary credit societies and
state co-operative banks.
State Co-operative Banks
• These are the highest level co-operative banks in
all the states of the country. They mobilize funds
and help in its proper channelization 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
Regional rural Banks
• To increase the flow of credit to smaller borrowers in the rural areas.
• The benefits of the co- operative banking system were not reaching all
the farmers in rural areas.
• FUNCTIONS
• Granting of loans and advances to small and marginal farmers,
agricultural workers, co - operative societies including agricultural
marketing societies and primary agricultural credit societies for
agricultural purposes or agricultural operations or related purposes.
• Granting of loans and advances to artisans small entrepreneurs
engaged in trade, commerce or industry or other productive activities.
Development Banks
• Development banks offer medium- and long-term
financial support to businesses for acquiring
machinery, adopting advanced technology, or
undertaking expansion and modernization. They act
as versatile institutions, sharing entrepreneurial risks,
adapting to industrial trends, and promoting new
industrial projects to accelerate economic growth.
Additionally, they support companies by subscribing
to shares and debentures when public subscriptions
fall short.
Industrial Development Bank of
India (IDBI)
• The IDBI, established on July 1, 1964, under an Act of Parliament, was
initially a wholly owned subsidiary of the RBI until its separation on
February 16, 1976. As the apex institution for industrial finance, IDBI
coordinates, supports, and integrates the activities of specialized
financial institutions. It operates in the capital market, providing
refinancing for term loans and export credits, and conducts techno-
economic studies to support rapid industrialization. The IDBI finances
enterprises in manufacturing, processing, mining, transport, and
power generation across both public and private sectors.
Industrial finance Corporation of
India (IFCI)
• Established in 1948, the IFCI was India's first development
financial institution, pioneering development banking in the
country. Its primary goal was to provide financial support to
large-scale industries, especially when conventional banks
were unable to assist. IFCI's functions included project
financing, financial services, merchant banking, and
investments. Initially operating as a statutory corporation, it
transitioned into a company under the Indian Companies Act
in 1993 and was renamed IFCI Ltd in October 1999.
Industrial Credit and Investment Corporation of
India (ICICI)
• Established in 1955 as a public limited company with no government
shareholding, ICICI was designed as a private sector development
bank. It offers diverse long-term financial solutions, including project
financing, equipment financing, underwriting, leasing, advisory
services, and business consultancy. Its primary goal was to provide
long-term funding for private sector industries.
• In addition, the Industrial Reconstruction
Corporation of India (IRCI) was founded in 1971
to revive and rehabilitate viable sick units. It was
restructured as the Industrial Reconstruction
Bank of India (IRBI) in 1985 with expanded
powers. At the state level, 18 State Financial
Corporations (SFCs) and 26 State Industrial
Investment/Development Corporations (SIDCs)
now manage development banking within their
respective regions.
Specialized Banks
• In India, specialized banks focus on supporting
specific sectors or activities by addressing their
unique business needs. These banks operate
within defined areas, earning them the title of
specialized banks. They can be broadly
categorized into three key types, each serving
distinct functions.
Export Import Bank of India
(EXIM Bank):
• The Export-Import (EXIM) Bank of India, established on January 1,
1982, is the primary institution for managing export and import trade
financing in India. Fully owned by the Government of India, it
supports foreign trade by offering loans to exporters and importers.
Additionally, it provides insights into international markets, guidance
on export and import opportunities, risk assessment, and strategies to
address competition.
Export Import Bank of India
(EXIM Bank)- Functions
• Financing of exports and imports of goods and services, not only of India but
also of the third world countries;
• Financing of exports and imports of machinery and equipment on lease basis;
(iii) Financing of joint ventures in foreign countries;
• Providing loans to Indian parties to enable them to contribute to the
share capital of joint ventures in foreign countries;
• to undertake limited merchant banking functions such as underwriting
of stocks, shares, bonds or debentures of Indian companies engaged in
export or import; and
• To provide technical, administrative and financial assistance to parties
in connection with export and import.
Small Industries Development
Bank of India
(SIDBI)
• The Small Industries Development Bank of India (SIDBI),
established in October 1989 and operational from April 1990,
is headquartered in Lucknow. This central government
undertaking focuses on promoting and developing small-
scale industries by providing essential financial support.
SIDBI also coordinates with various institutions and
commercial banks that offer both long-term and short-term
financing to small entrepreneurs.
• Initiates steps for technology adoption, technology exchange, transfer and
Small Industries
upgradation Development
and modernisation of existing units. Bank of India
Functions
• SIDBI participates in the equity type of loans on soft terms, term loan, working
capital both in rupee and
• foreign currencies, venture capital support, and different forms of resource
support to banks and other institutions.
• SIDBI facilitates timely flow of credit for both term loans and working capital to
SSI in collaboration with commercial banks.
• SIDBI enlarges marketing capabilities of the products of SSIs in both domestic
and international markets.
• SIDBI directly discounts and rediscounts bills with a view to encourage bills
culture and helping the SSI units to realise their sale proceeds of capital goods /
equipments and components etc
• SIDBI promotes employment oriented industries especially in semi-urban areas
to create more employment opportunities so that rural-urban migration of
people can be checked.
National Bank for Agricultural and Rural
Development (NABARD)
• It was established on 12 July 1982 by a special act by the
parliament. This specialized bank is a central or apex
institution for financing agricultural and rural sectors. It can
provide credit, both short- term and long-term, through
regional rural banks. It provides financial assistance,
especially, to co- operative credit, in the field of agriculture,
small-scale industries, cottage and village industries
handicrafts and allied economic activities in rural areas .
NABARD -FUNCTIONS
• Takes measures towards institution building for improving absorptive
capacity of the credit delivery system, including monitoring,
formulation of rehabilitation schemes, restructuring of credit
institutions, training of personnel, etc.
• Co-ordinates the rural financing activities of all institutions engaged in
developmental work at the field level and maintains liaison with
Government of India, State Governments, Reserve Bank of India (RBI)
and other national level institutions concerned with policy
formulation
• Undertakes monitoring and evaluation of projects refinanced by it.
• NABARD refinances the financial institutions which finances the rural
sector.
NABARD -FUNCTIONS
• The institutions which help the rural economy, NABARD
helps develop.
• NABARD also keeps a check on its client institutes.
• It regulates the institution which provides financial help
to the rural economy.
• It provides training facilities to the institutions working
the field of rural upliftment.
• It regulates the cooperative banks and the RRB
Indian Bank- like financial
institution
• In India, there are some Bank-like financial institutions that provide
financial services. There are two types of such institution that are
important to the development on India.
Microfinance Institutions
• Microfinance Institutions are Bank-like financial institutions that
providing financial services, such as microcredit, micro savings or
micro insurance to poor people. Functions
• provide financing facilities, with or without collateral security, in cash
or in kind, for such terms and subject to such conditions as may be
prescribed, to poor persons for all types of economic activities
including housing, but excluding business in foreign exchange
transactions
• To buy, sell and supply on credit to poor persons industrial and
agricultural inputs, livestock, machinery and industrial raw materials
• To provide professional advice to poor persons regarding investments
in small business and such cottage industries as may be prescribed.
Development financial
institutions (DFIs)
• DFIs are specialized financial institutions the Government established to
promote investments in the manufacturing and agricultural sectors.
Functions:
• Extending financial assistance in the form of medium- and long-term
loans, participating in equity capital, underwriting and wherever
relevant, acting as issuing house for public shares issues and providing
guarantees for loans
• Specialize in medium- and long-term financing in addition to
supplying financial services not normally provided by commercial banks
and finance companies
• they help in identifying new projects, participate in their promotion, and
where appropriate, provide ancillary financial, technical and managerial
advice.
