Samir K Mahajan

Financial Intermediaries in India

Financial Institutions are intermediaries that mobilizes saving andchannelize the funds to the productive investment. These are responsiblefor efficient allocation and distribution of saving among those whodemands it.

Finical institutions are classified as:

o Banking financial institutions (creators and purveyors of credit)

o Non-banking financial institutions (purveyors of credit)

Financial Intermediaries /Institutions

Samir K Mahajan

Financial Institutions contd.

Samir K Mahajan

Development FIs/ Non-Bank Non-Intermediary FIs

Development Financial Institutions ( FIs) were set up during the planningperiod to meet the needs of industrial economy mostly through legislationwhich would provide term finances to the public sector industrial economyof the country.

They are not financial intermediaries because till recently they did notmobilize saving from the ultimate surplus spending units and insteadobtain funds from Government or RBI.

They can not be classed as banks though some of them include the terms‘bank’.

Samir K Mahajan

Development FIs/ Non-Bank Non-Intermediary FIs contd.

Some of them have turned into companies, and private participation inownership and functioning has been allowed after new economic reformsin 1990s.

Some of them entered in commercial banking and diversified theiractivities in financial sector of the country.

Samir K Mahajan

Non-Bank Non-Intermediary FIs contd

Samir K Mahajan

Classification of Development Financial Institutions

All-India Development FIs

Development Banks (mainly confined to over all capital good sectorindustrial finances) such as :

o Industrial Finance Corporation of India (IFCI )1948o Industrial Credit and Investment Corporation of India (ICICI )1955o Industrial Development Bank of India( IDBI )1964

Development FIs contd

Samir K Mahajan

Classification of Development Financial Institutions contd.

All-India Development Fis contd.

Specialized FIs ( provides finance certain specific areas industrial andproductive activities ) such as

o Industrial Reconstruction Corporation of India IRCI 1985 now IndustrialInvestment Bank of India (IIBI )1997

o Export Import Bank of India (EXIM )bank1982o Tourism Finance Corporation of India (TFCI )1990o Infrastructure Development Finance Companies ( IDFC)1990

Development FIs contd

Samir K Mahajan

Classification of Development FIs contd.

Refinance Institution (extends refinance to banks as well as non-bankingfinancial intermediaries for lending to agricultures. Small scale industries,and housing finance companies.

o National Bank For Agriculture And Rural Development (NABARD) 1982o Small Industries Development Bank of India (SIDBI) 1990o National Housing Bank (NHB)

Development FIs contd

Samir K Mahajan

Classification of Development FIs contd.

Other financial Institutions includeso Deposit Insurance and Credit Guarantee Corporation (DICGC) 1962o Export Credit Guarantee Corporation of India Limited (ECGC ) 1985

State level development financial institution includeso State Finance Corporations (18 nos.)o State Industrial Development Corporations (28 nos.)

Development FIs contd

Samir K Mahajan

History of Banking in India

In modern times, the first bank was set up in 1683 in Madras by members of East India Company.

The first joint stock bank was Bank of Hindustan in Calcutta which was established in 1770.

Three presidency banks:

Bank of Bengal established in Calcutta Presidency in 1806. Bank of Bombay in Bombay Presidency set up in 1840 Bank of Madras in Madras Presidency set up in 1843

Banking FIs

Samir K Mahajan

Three presidency banks were merged to form Imperial Bank of India in 1921. The role of Imperial Bank was that of commercial bank, a banker’s bank and a banker to the government.

The Imperial Bank eventually became the State Bank of India.

Banking Institutions

History of Banking contd.

Samir K Mahajan

Reserve Bank of India was set up in 1935 to check bank failures and tocater to the requirement of agriculture.

However, the RBI did not have enough power to regulate or control thecommercial banks which were regulated by the Company Law. The RBIwas entirely owned by private shareholders. It was nationalized on 1January 1949.

In order to enlarge the reach of banking services, the governmentnationalized Imperial Bank of India by converting it into State bank ofIndia in 1955. This step is the first bank nationalization in India.

History of Banking contd.

Samir K Mahajan

By the late 1960s, there had been significant rise in the number of banksand bank branches in the country but banking services did not extend torural and agriculture sector of the country.

In 1969, 14 private sector joint stock banks were nationalized to promoteobjectives of economic growth and regional balance. This was the secondphase of bank nationalization. Further, 6 commercial banks in privatesector were nationalized in 1980. This is the third phase of banknationalization.

At present there are 27 nationalized bank in the country.

History of Banking contd.

Samir K Mahajan

Banking Institutions

Samir K Mahajan

Commercial banks are governed by Banking Regulation Act. ScheduledCommercial Banks are those which are included in the Second schedule ofReserve Bank of India Act 1934. RBI in turn includes only those banks in thisschedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

Scheduled Commercial Banks includeso 27 Public Sector Banks (banks in which government has major holding)o 23 Private Sector Bankso 45 Foreign bankso 82 Regional Rural Banks

Note: Bank data (number of banks may change)

Scheduled Commercial Banks

Samir K Mahajan

Public Sector Banks : Public sector banks have State Bank of India and its fiveassociates, 19 nationalized banks, IDBI and Bharatiya Mahila Bank. Statebank of India and its five associates (SB of Patiala, SB of Travancore, SB ofBikaner and Jaipur, SB of Hyderabad , SB of Mysore ) is the largest bankinginstitution in the country with more than 15000 bank branches and largestnumber of ATM network and around 17 percent market share.

Scheduled Commercial Banks

Samir K Mahajan

Private Sector Banks : During bank nationalisation of 14 banks in 1969, nobanks were allowed to be set up private sector. In the pre-reformed periodthere were 19 private sectors banks. However after economic reforms andguidelines of Narasimhan Committee, new private sector banks are allowedto operate in India. Today there are all together 23 private sector banks in thebanking sector: 14 old private sector banks and 9 new private sector banks.

Scheduled Commercial Banks contd.

Samir K Mahajan

Bandhan Financial Services and to IDFC Ltd are two new privates sector banks.

Hence the number of Private Sector Bank is 23.

Foreign Banks : Foreign banks have been operating in India for decades. A fewbanks have been operating in India for centuries. ANZ Grindlays had beenoperating in India for more than hundred years , while Standard CharteredBank has been around since 1858. Many foreign banks from differentcountries set their branches in India during the 1991 – the liberalizationperiod. A total of 27 new foreign banks open branches after economicreforms. Altogether there are 84 foreign banks in India.

Scheduled Commercial Banks contd.

Samir K Mahajan

Regional Rural Banks: Regional Rural Banks were established underthe provisions of an Ordinance passed on 26 September 1975 and theRRB Act 1976 to provide sufficient banking and credit facility ruraleconomy of India and to supplement cooperative credits structure.

The Government of India, the concerned State Government and thesponsoring bank, contributed to the share capital of RRBs in theproportion of 50%, 15% and 35%, respectively. At present, the sourcesof funds of RRBs comprise of owned fund, deposits, borrowings fromNABARD, Sponsor Banks and other sources including SIDBI andNational Housing Bank.

Scheduled Commercial Banks contd.

Samir K Mahajan

The area of operation of the RRBs is limited to notified few districts in a State.However, RRBs may have branches set up for urban operations and their areaof operation may include urban areas too.

The main purpose of RRB's is to mobilize financial resources from rural / semi-urban areas, and grant loans and advances mostly to small and marginalfarmers, agricultural labourers and rural artisans. RRBs also carry outgovernment operations like disbursement of wages of MGNREGA workers,distribution of pensions, providing Para-Banking facilities like locker facilities,debit and credit cards etc. There are 82 RRBs in the country.

Scheduled Commercial Banks contd.

Samir K Mahajan

Co-operative banks are registered with Registrar of Co-operative Societies(Co-operative Societies Act 1904). These banks are organised and managedon the principles of co-operation, self help and mutual help. They mobilisessavings, supply credit and provide remittance facilities but range of servicesoffered by them are narrower, degree of product differentiation in service ismuch less compared to commercial banks.

Co-operative banks are structured in into Urban Co-operative Banks (bothScheduled and Non-scheduled) and Rural Credit Institutions offering short –term and long-term loans.

Co-operative Banks

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State Co-operative Bank is the apex of the rural co-operative credit structure(short term ). These banks gets financial and other help NABARD, central andstate governments which they disburse to District Central Cooperative Banksand Primary Agricultural Credit Societies.

District Central Cooperative banks are the federation of Primary AgriculturalCredit Societies.

Primary Agricultural Credit Societies are formed at grass root level.

Co-operative Banks contd.

Samir K Mahajan

Samir K Mahajan

NABARD (NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT) 1982

NABARD is the apex institution for financing agriculture and rural sectors . It co-ordinates the rural financingactivities of all institutions engaged in developmental work at the field level and maintains liaisonwith Government of India, State Governments, Reserve Bank of India (RBI) and other national levelinstitutions concerned with policy formulation.

NABARD is a refinancing agency to financial institutions such as state cooperative banks, regional ruralbanks, and commercial banks for promotion of both farm and non-farm sector in rural areas.

It promotes credit for development of agriculture and allied activities (such as: minor irrigation, farmmechanization, land development, soil conservation, dairy, sheep rearing, poultry, piggery, plantation andagriculture, forestry, storage, biogas), small scale industries, cottage and village industries, handicrafts andother rural crafts and allied economics activities in rural areas.

It oversees entire rural credit system and to that extent, it has taken over the role of RBI such as refinancingrole of RBI relating to state cooperative banks and regionals and rural banks.

Samir K Mahajan

Non-Bank Financial Intermediaries

Non-Banking Financial Intermediaries mobilize savings from the ultimate lenders i.e. the households and supply the same to borrowers i.e. corporate and government sectors . These are business organizations that act as mobilisers and depositories of savings, and purveyors of credit or finance.

Samir K Mahajan

Non-Bank Financial Intermediaries contd.

Samir K Mahajan

Non-Banking Financial Companies (NBFCs)

A Non-Banking Financial Company (NBFC) is a company registered underthe Companies Act, 1956 engaged in the business of finance. NBFCs lendand make investments and hence their activities are akin to that ofbanks; however there are a few differences. NBFC cannot acceptdemand deposits and cannot form part of payment and settlementsystem and cannot issue cheque drawn on itself.

As per RBI Act 1934, no NBFC can commence or carry on businesswithout a) obtaining a certificate of registration from the RBI andwithout having a Net Owned Funds of Rs. 25 lakhs (Rs two crore sinceApril 1999). However, NBFCs regulated by other regulators are exemptedfrom the requirement of registration with RBI.

Samir K Mahajan

Non-Banking Financial Companies(NBFCs) contd.

Various types of NBFCs :o Loan Companies (RBI)o Investment Companies (RBI)o Asset Finance Companies (RBI)o Infrastructure Finance Company (RBI)o Microfinance Companies (RBI)o Factors (RBI)o Merchant Banking (SEBI)o Investment Banks (SEBI)o Venture Capital Fund (SEBI)o Stock Broking Companies (SEBI)

o Depositories and CustodialServices(SEBI)

o Housing Finance Companieso Credit Rating Agencies (SEBI)o Hire-Purchase Companieso Lease Finance Companieso Miscellaneous Non-Banking

Financial Companies such asChit Fund (Chit Funds Act,1982)

o Residual Non-BankingFinancial Companies such as:Nidhis etc. (Companies Act1956)

Samir K Mahajan

Non-Bank Financial Intermediaries contd

Small Savings /Small Saving OrganizationsNext to commercial banks, Small Saving Organizations mobilize the largestvolumes of savings, followed by co-operative banks, UTI. Among these, postoffice branches play a dominant role. Small Savings constitute non-marketable debt of public authorities. Though, technically, these saving goto Central Government, these mostly shared with state governments tomeet their budgetary obligations.

Various Types of Small Savings Instruments are o Post Office Saving Deposits o Post Office Recurring Depositso Post office Time Deposits o National Savings Certificates o Kisan Vikas Patra o National Savings Schemes

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Provident FundsProvident Funds are maintained by salaried people to provide for old agesecurity after superannuation or relief to the family after the income earner’sdeath during the tenure of the job. However, with the introduction of PublicProvident Fund Schemes, it is possible for non-salaried earner to save inprovident fund.

Funds mobilized through provident fund, should be invested wholly orsubstantially in central and state government securities, and securitiesguaranteed by these public authorities; securities of public sector financialinstitutions including banks, and bonds of public sector enterprises, certificatesof deposits issued by public sector banks.

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Provident Funds contd.

Various Types of Provident Funds Instruments areo Employees’ Provident Fundso Coal Mine Provident Fundso Assam Tea plantations Provident Fundso Public Provident Funds in Post Office or Banks

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Mutual Funds Mutual Funds /Unit TrustsMutual Funds Mutual Funds /Unit Trusts mobilise savings from the publicby selling units/share, and invests the mobilised funds/resources in largediversified and sound portfolios of equity shares, bonds and moneymarket instruments.

It is a pure intermediaries which performs a basic functions of buying andselling of securities on behalf of its unit-holders.

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Mutual Funds Mutual Funds /Unit Trusts contd.

Mutual Fund was introduced in India with the setting up of Unit Trust ofIndia (UTI) in the country in 1964. UTI maintained its monopoly andexperienced a consistent growth in till 1987.

The second phase witnessed the entry of mutual fund companiessponsored by nationalised banks and insurance companies since then.

The third phase marked a turning point in the history of mutual findswhen Securities Exchange Board of India issued Mutual Funds Regulationsin January 1993.

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Insurance Companies Insurance may be described as a social device to reduce or eliminate risk oflife and property. Insurance is a collective bearing of risk. Insurance spreadsthe loss of the risks and losses of few people among large number ofpeople who as whole subscribe to a common pool or fund which iscollected by the insurers. Insurance cannot prevent the occurrence of risksbut provides for the losses of risks. Insurance is also a means of savings andinvestment. The risks can be insured against loss of life/premature death,ailments, loss or theft of property, fire accidents and so on.

Samir K Mahajan

Non-Banking Financial Intermediaries contd.

Insurance Companies contd.

The major players are Life Insurance Corporation of India (dealing with life/public sector)General Insurance Corporation of India (dealing with property/public

sector)o Oriental Insurance Companies o New India Insurance Company o National Insurance Company o United India Insurance Company

Private Insurers in Life and Property

Samir K Mahajan