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1. Introduction ………………………………………………………………………….01
2. Meaning and definition of Bank ………………………………………………....02-04
3. Utility of Banks ………………………………….......................................................04
4. Role of banksin socio-economic development………………………................04-06
5. Classification of banking system in India … ………….....................................…06-07
6. Central Bank …………………………….……………………………………….07-10
7. Advances to priority sectors and credit guarantee schemes……………………10-13
8. Commercial Banks ……………………………………………………………….13-15
9. Development Banks……...……………………………………………………….16-22
10. Co-operative societies ……………………………………………………………23-24
11. Conclusion …………………………………………………………………………...25
12. Bibliography …………………………………………………………………………26

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also nonbanking
institutions that provide certain banking services without meeting the legal definition of a
bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India should not only be hassle free but
it should be able to meet the new challenges posed by the technology and any other external
and internal factors.
For the past three decades, India’s banking system has several outstanding achievements to
its credit. The Banks are the main participants of the financial system in India. The Banking
sector offers several facilities and opportunities to their customers. All the banks safeguards
the money and valuables and provide loans, credit, and payment services, such as checking
accounts, money orders, and cashier’s cheques. The banks also offer investment and
insurance products. As a variety of models for cooperation and integration among finance
industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks continue to
maintain and perform their primary role is accepting deposits and lending funds from these


As per the Banking Act 1979:

This was the first UK Act to put banking regulation on a statutory footing. This Act
introduced the requirement for institutions to be licensed in order to accept deposits from the
public. It made no attempt to define a bank or “banking business” and its provisions were
applicable only to deposit taking institutions.

As perLord Denning
The best description in UK law is found in Case Law. In United Dominions Trust v
Kirkwood1, Lord Denning in the Court of Appeal describes what makes up a bank. In this
case, Kirkwood, a garage, argued that UDT could not recover on a debt because they were
neither a bank, and as unregistered money lenders, they were unable to recover due to the
provisions of the Moneylenders Act 1990. Consequently, UDT sought to show that it was a

The Court of Appeal defined 3 elements for determining whether or not a person is a banker:
1. The nature of the banking services provided.
2. The importance of these services in relation to the business as a whole.
3. The reputation of the institution.
Lord Denning also found that the following were characteristics usually found in the
business of banking:
a) Accepting money from and collecting cheques for customers and placing these at the
credit of the customers’ accounts.
b) Honouring cheques or orders drawn on bankers by the customers when presented for
payment, and debiting their customers’ accounts.
c) Keeping running accounts for customers in which debits and credits were entered.

As per The Banking Act, 1987

The Banking Act, 1987 of England defined a bank as a body corporate or a non-corporate
that was recognised by the bank of England to accept deposits as defined by that act. Besides
this laboured effort, there appeared to be no statutory definition of the term bank per se in
English Banking Act, 1987.

As per Banking Regulation Act, 1949

United Dominions Trust v Kirkwood(1966) 2KB 431.
As per Section 5(b) of Banking Regulation Act, 1949 Banking means “the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand
or otherwise, and withdrawable by cheque, draft, order or otherwise”.

As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any
company which transacts the business of banking in India.

Explanation: Any company which is engaged in the manufacture of goods or carries on any
trade and which accepts the deposits of money from public merely for the purpose of
financing its business as such manufacturer or trader shall not be deemed to transact the
business of banking within the meaning of this clause."

As per Section 5(d)of Banking Regulation Act, 1949, company means any company as
defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the
meaning of Section 591 of that Act.


Before the establishment of banks, the financial activities were handled by money lendersand
individuals. At that time the interest rates were very high. Again there were nosecurity of
public savings and no uniformity regarding loans. So as to overcome suchproblems the
organized banking sector was established, which was fully regulated by thegovernment. The
organized banking sector works within the financial system to provideloans, accept deposits
and provide other services to their customers. The followingfunctions of the bank explain the
need of the bank and its importance:
 To provide the security to the savings of customers.
 To control the supply of money and credit
 To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.
 To avoid focus of financial powers in the hands of a few individuals and institutions.
 To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers


Banks are extremely useful and indispensible institution for a modern community. They are
custodian and distributors of liquid capital and essential ingredient for commercial and
industrial activities. The utility of bank can be summarised as follows:
a) The banks create purchasing power, in the form of bank notes, cheques, bill, draft,
etc and economise the use of metallic money which is very expensive and
b) Banks transfers fund, by bringing lenders and borrowers together, and by helping
funds to move from place to place and from person to person in a convenient and
inexpensive manner, through the use of cheques bills and drafts. In this way they help
trade and economy.
c) The bank encourage the habit of saving among the people and enable small
savings, which otherwise would have been scattered ineffectively, tobe accumulated
in large funds and thus made available for investments of various kinds. In this way
they promote economic development through capital formation.
d) By encouraging saving and investment, the banks increase the productivity of
resources of the county and thus contribute general prosperity and welfare by
promoting economic development.
e) The bank agency functions are very useful to the customers of the bank. They
undertake to make various types of payment on behalf of their customers and also
make several types of collection on their behalf.
Thus, the banks are useful to both the community in general and individual customer in


Banks play a vital role in economic development of the country as explained hereunder:
A safe and sound financial sector is a prerequisite for sustainedgrowth of any economy.
Globalization, deregulation and advances in information technology in recent years have
brought about significantchanges in the operating environment for banks and other
financialinstitutions. These institutions are faced with increased competitive pressures and
changing customer demands. These, in turn, haveengendered a rapid increase in product
innovations and changes in business strategies. While these developments have enabled
improvement in the efficiency of financial institutions, they have also posed some serious

Banks play a very useful and dynamic role in the economic life of every modern state. A
study of the economic history of western countryshows that without the evolution of
commercial banks in the 18th and19th centuries, the industrial revolution would not have
taken place in Europe. The economic importance of commercial banks to
developingcountries may be viewed thus:

1. Promoting capital formation

2. Encouraging innovation
3. Monetisation
4. Influence economic activity
5. Facilitator of monetary policy
6. Promote growth with stability
7. Promote balanced regional development
8. Financing the priority sectors
Above all view we can see in briefly, which are given below:


A developing economy needs a high rate of capital formation to accelerate the tempo of
economic development, but the rate of capital formation depends upon the rate of saving.
Unfortunately, in underdeveloped countries, saving is very low. Banks afford
facilitiesfor saving and, thus encourage the habits of thrift and industry in the community.
They mobilize the ideal and dormant capital of the country and make it available for
productive purposes.

Innovation is another factor responsible for economicdevelopment. The entrepreneur in
innovation is largely dependent on themanner in which bank credit is allocated and utilized in
the process of economic growth. Bank credit enables entrepreneurs to innovate andinvest, and
thus uplift economic activity and progress.
Banks are the manufactures of money and they allow many to playits role freely in the
economy. Banks monetize debts and also assist the backward subsistence sector of the rural
economy by extending their branches in to the rural areas. They must be replaced by the
moderncommercial bank’s branches.
Banks are in a position to influence economic activity in a country by their influence on the
rate interest. They can influence the rate of interest in the money market through its supply of
funds. Banks mayfollow a cheap money policy with low interest rates which will tend
tostimulate economic activity.
Thus monetary policy of a country should be conductive toeconomic development. But a
well-developed banking system is onessential pre condition to the effective implementation
of monetary policy. Under-developed countries cannot afford to ignore this fact.
Banks regulate the rate of investment by influencing the rate of interest. The primary function
of RBI was to regulate the issue of banks notes and keep adequate reserve to ensure monetary
By opening branches in backward areas the bank make credit facilities available here. Also,
the funds collected in developed regions through deposits may be channelized for investment
in the underdeveloped regions of the country.
The banks and financial institutions operate in a manner as to confirm the priorities of
development and not in terms of return their capital. The banks now play a more positive


Indian banking industry has been divided into two parts, organized and unorganizedsectors.
The organized sector consists of Reserve Bank of India, Commercial Banks, Co-operative
Banks and also Specialized Financial Institutions (IDBI, NABARD, SIDBI, EXIM etc). The
unorganized sector, which is not homogeneous, is largely made up of money lenders
andindigenous bankers.

An outline of the Indian Banking structure may be presented as follows:-

1. Central Bank (Reserve banks of India).
2. Indiancommercial banks.
A. Scheduled Commercial Banks
a. State Bank of India and its Associates2
b. Nationalised Banks
c. Foreign Banks
d. Regional Rural Banks
e. Other Scheduled Commercial Banks.
B. Non-Scheduled Commercial Banks

3. Development banks


4. Co-operative banks.


A central bank is the apex financial institution in the banking and financial system of a
country. It is regarded as the highest monetary authority in the country. It acts as the leader of

The subsidiaries to State Bank of India are: (i) The State Bank of Bikaner & Jaipur; (ii) The
State Bank of Hyderabad; (iii) The State Bank of Indore; (iv) The State Bank of Mysore; (v)
The State Bank of Mysore; (v) The State Bank of Patiala; (vi) The State Bank of Saurashtra;
and (vii) The State Bank of Travancore.
the money market. It supervises, control and regulates the activities of the commercial banks.
It is a service oriented financial institution.

India’s central bank is the Reserve Bank of India established in1935. A central bank is
usually state owned but it may also be a privateorganization. For instance, the Reserve Bank
of India (RBI), was startedas a shareholders’ organization in 1935, however, it was
nationalizedafter independence, in 1949. It is free from parliamentary control.

Reserve Bank of India

The Reserve Bank of India is a Central Bank and was established in April 1, 1935 in
accordance with the provisions of reserve bank of India act 1934. The central office of RBI is
located at Mumbai since inception. Though originally the reserve bank of India was privately
owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was
inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid
up. RBI is governed by a central board (headed by a governor) appointed by the central
government of India. RBI has 22 regional offices across India.
The reserve bank of India was nationalized in the year 1949. The general superintendence
and direction of the bank is entrusted to central board of directors of 20 members, the
Governor and four deputy Governors, one Governmental official from the ministry of
Finance, ten nominated directors by the government to give representation to important
elements in the economic life of the country, and the four nominated director by the Central
Government to represent the four local boards with the headquarters at Mumbai, Kolkata,
Chennai andNew Delhi. Local Board consists of five members each central government
appointed for a term of four years to represent territorial and economic interests and the
interests of cooperative and indigenous banks.

The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory
basis of the functioning of the bank. The bank was constituted for the need of following:
 To regulate the issues of banknotes.
 To maintain reserves with a view to securing monetary stability
 To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:

 Bank of Issue: The RBI formulates, implements, and monitors the monitory policy.
Its main objective is maintaining price stability and ensuring adequate flow of credit
to productive sector.
 Regulator-Supervisor of the financial system: RBI prescribes broad parameters of
banking operations within which the country’s banking and financial system
functions. Their main objective is to maintain public confidence in the system, protect
depositor’s interest and provide cost effective banking services to the public.
 Manager of exchange control: The manager of exchange control department
manages the foreign exchange, according to the foreign exchange management act,
1999. The manager’s main objective is to facilitate external trade and payment and
promote orderly development and maintenance of foreign exchange market in India.
 Issuer of currency: A person who works as an issuer, issues and exchanges or
destroys the currency and coins that are not fit for circulation. His main objective is to
give the public adequate quantity of supplies of currency notes and coins and in good
 Developmental role: The RBI performs the wide range of promotional functions to
support national objectives such as contests, coupons maintaining good public
relations and many more.
 Related functions: There are also some of the related functions to the above
mentioned main functions. They are such as, banker to the government, banker to
banks etc.
 Banker to government performs merchant banking function for the central and
the state governments; also acts as their banker.
 Banker to banks maintains banking accounts to all scheduled banks.
 Controller of Credit: RBI performs the following tasks:
 It holds the cash reserves of all the scheduled banks.
 It controls the credit operations of banks through quantitative and qualitative
 It controls the banking system through the system of licensing, inspection and
calling for information.
 It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Supervisory Functions:
In addition to its traditional central banking functions, the Reserve Bank performs certain
non-monetary functions of the nature of supervision of banks and promotion of sound
banking in India. The Reserve Bank Act 1934 and the banking regulation act 1949 have given
the RBI wide powers of supervision and control over commercial and co-operative banks,
relating to licensing and establishments, branch expansion, liquidity of their assets,
management and methods of working, amalgamation, reconstruction and liquidation. The
RBI is authorized to carry out periodical inspections of the banks and to call for returns and
necessary information from them. The nationalisation of 14 major Indian scheduled banks in
July 1969 has imposed new responsibilities on the RBI for directing the growth of banking
and credit policies towards more rapid development of the economy and realisation of certain
desired social objectives. The supervisory functions of the RBI have helped a great deal in
improvingthe standard of banking in India to develop on sound linesand to improve the
methods of their operation.

Promotional Functions:
With economic growth assuming a new urgency since independence, the range of the Reserve
Bank’s functions has steadily widened. The bank now performs a variety of developmental
and promotional functions, which, at one time, were regarded as outside the normal scope of
central banking. The Reserve bank was asked to promote banking habit, extend banking
facilities to rural and semi-urban areas, and establish and promote new specialized financing


As far back as in 1967-68, the RBI in its credit policy has introduced the concept of Priority
Sector Lending to tide over the severe imbalances, existed then both in agricultural and
industrial fronts. In order to channelise the flow of credit to the priority sectors RBI had
enunciated a credit policy. The major impediment before the introduction of the concept of
PSL was that for various historical reasons, the bulk of bank advances was directed towards
medium and large scale industries and big business houses, whereas, sectors likeculture,
small scale industries and export were languishing for want of funds.

Theconcept of PSL was evolved to ensure the flow of adequate credit from banks to certain
prioritised segments of the economy, as enunciated in the national planning priorities “To
give incentive to banks for lending to small borrowers under priority sector.”The RBI in
January 1971 has set up the Credit Guarantee Corporation of India Limited, Nowknown as
the Deposit Insurance and Credit Guarantee Corporation. The idea was to administer a
comprehensive credit guarantee scheme for loans by banks to the individual small borrowers
under the priority sector.

During the period of social control of banks, major banks did make an attempt to assist the
agricultural sector by providing credit for marketing of agricultural products. Despite
commercial banks' lending to agriculture under (a) direct financing and (b) indirect financing,
the lending towards agriculture did not exceed two per cent of the total credit. It was in the
post-bank nationalisation period only the PSL and mass banking concepts were crystalized
for the purpose of credit deployment.After the bank nationalisation in July, 1969, RBI has
adopted lending to the following broad segments under priority sector: (a) agriculture, (b)
small scale industries and (c) exports.

The composition of the priority sector remained somewhat vague even after the bank
nationalisation. There was wicle variation as far as compiling PSL data are concerned among
various banks. Later a more comprehensive classification of categories under PSL was
evolved and adopted on the basis of a report submitted by Informal Study Group on statistics
relating to priority sectors constituted by RBI.3


Reserve Bank of India, Annual Report, 1976-77, Bombay.
The broad categories of priority sector for all scheduled commercial banks are as under:

(i) Agriculture (Direct and Indirect finance): Direct finance to agriculture shall
include short, medium and long term loans given for agriculture and allied
activities directly to individual farmers, Self-Help Groups (SHGs) or Joint
Liability Groups (JLGs) of individual farmers without limit and to others (such as
corporates, partnership firms and institutions) up to Rs. 20 lakh, for taking up
agriculture/allied activities.Indirect finance to agriculture shall include loans given
for agriculture and allied activities as specified in Section I, appended.
(ii) Small Scale Industries (Direct and Indirect Finance): Direct finance to small
scale industries (SSI) shall include all loans given to SSI units which are engaged
in manufacture, processing or preservation of goods and whose investment in
plant and machinery (original cost) excluding land and building does not exceed
the amounts specified in Section I, appended. Indirect finance to SSI shall include
finance to any person providing inputs to or marketing the output of artisans,
village and cottage industries, handlooms and to cooperatives of producers in this
(iii) Small Business / Service Enterprises shall include small business, retail trade,
professional & self employed persons, small road & water transport operators and
other service enterprises as per the definition given in Section I and other
enterprises that are engaged in providing or rendering of services, and whose
investment in equipment does not exceed the amount specified in Section I,
(iv) Micro Credit: Provision of credit and other financial services and products of very
small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-
urban and urban areas, either directly or through a group mechanism, for enabling
them to improve their living standards, will constitute micro credit.
(v) Education loans: Education loans include loans and advances granted to only
individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs.
20 lakh for studies abroad, and do not include those granted to institutions;
(vi) Housing loans: Loans up to Rs. 15 lakh for construction of houses by individuals,
(excluding loans granted by banks to their own employees) and loans given for
repairs to the damaged houses of individuals up to Rs.1 lakh in rural and semi-
urban areas and up to Rs.2 lakh in urban areas.
In addition to the above, various other schemes were introduced for the benefit of the
priority sectors like the:

(a) National rural employment programme (NREP) which basically dealt with the
problem of unemployment and underemployment in the rural areas.
(b) Rural landless employment guarantee programme (RLEGP) more specifically to
tackle the problem of unemployment among the landless and create durable assets for
strengthening the rural infrastructure.
(c) Self Employment Scheme for Educated Unemployed Youth (SEEUY) SEEUY was
launched by the then Prime Minister on 15 august, 1983 to provide self employment
opportunities to the educated unemployed youth who are matriculates for starting
industry, service and business avocations by providing subsidy through Government
and loan by Commercial banks.
(d) Development of Women and Children in Rural Areas (DWCRA) DWCRA is a sub-
scheme of IRDP. This was started in 1982-83 wit11 the main objective of focussing
attention towards women members of the BPL rural families. This scheme was started
to provide self-employment opportunities to women without depending upon their
men folk. This scheme is a group activity with 10 to 15 women each for taking up
economic activities suited to their skill and aptitude. A group strategy is adopted to
motivate the rural women to come together and break social bonds, which have
denied them income generating opportunities.


For any financial system to mobilize and allocate savings of the country successfully and
productively and to facilitate day-to-day transactions there must be a class of financial
institutions that the public view as safe and convenient outlets for its savings. In virtually all
countries, the single dominant class of institutions that emerged as both the respiratory of a
dominant class of the society’s liquid savings and the entity through which payments are
made is the Commercial Banks.

The commercial banks in India play a major role in the development of the country itself.
These banks are primarily concerned with providing loans and accepting deposits. Several ot
her facilities are also provided by the commercial banks in India. At the same time, the
commercial banks in India have the opportunity to develop manifold in the future because the
economy of India is developing at a good pace and thus the financial institutions of the
country are bound todevelop with this growth. The name commercial banking may suggest a
number of things, butthe term is used to differentiate the other forms of banking from this
particular form. Thecommercial banks in India generate funds for the purpose of financing
their various financialrequirements through a definite process. The commercial banks in India
accept deposits fromdifferent sources like businesses and individuals. A wide range of
financial products have beendeveloped by these banks to encourage the savings habit of the
clients. There are savingsdeposits, term deposits and many more to attract the investors.
These deposits are recycled in theeconomy through the loans and other credit products.

Commercial banks are divided into:

(a) Scheduled Commercial Banks are grouped under following categories:

i. State Bank of India and its Associates

ii. Nationalised Banks
iii. Foreign Banks
iv. Regional Rural Banks
v. Other Scheduled Commercial Banks.

(b) Non-Scheduled Commercial Banks

Scheduled Banks:
Scheduled Banks in India constitute those banks which have beenincluded in the second
schedule of RBI Act 1934. RBI in turn includes only those banksin this schedule which
satisfy the criteria laid down vide Section 42(6a) of the Act.
“Scheduled banks in India” means the State Bank of India constituted under the StateBank of
India Act, 19554, a subsidiary bank as defined in the State Bank ofIndia (subsidiary banks)
Act, 19595, a corresponding new bank constitutedunder section 3 of the Banking companies
(Acquisition and Transfer of Undertakings)Act, 19806 or any other bank being a bank
included in the Second Scheduleto the Reserve bank of India Act, 19347 but does not include
a co-operativebank”.
For the purpose of assessment of performance of banks, the Reserve Bank of Indiacategories
those banks as public sector banks, old private sector banks, new private sectorbanks and
foreign banks, i.e. private sector, public sector, and foreign banks come underthe umbrella of
scheduled commercial banks.

The role and functions of the Scheduled Financialinstitutional banks are discussed

1. They constitute an important source of long term finance toindustry. Over a period of
time, there has been a steady growth inthe number of industrial units assisted, and in
the amount of loansanctioned and distributed by Scheduled Financial Institutions.
2. Scheduled Financial Institutions have played an important role in the development of
(a) Smallscale industry, and (b) Projects in backward areas.
3. They have helped new and small entrepreneurs in setting up industry.
4. Through their operations involving underwriting of and directsubscription to the issue
of shares and debentures, they have beenimportant players in the capital market.
These operations have afavourable impact on the ability of industrial concerns to
raisefunds from capital market.

(23 of 1955)
(38 of 1959)
(40 of 1980),
(2 of 1934),
5. These institutions have improved the allocation of funds to industryand thus, have
aided in better use of the available resources forthe economic development of the
6. SFIs have been a source of technical and managerial advice to theindustry. They have
also helped in identification, evaluation andexecution of new investmentprojects.
7. These institutions have been helpful in the establishment of concerns which required
extra-ordinarily large amounts of finance for their projects with a long gestation

Regional rural bank:

The government of India set up Regional Rural Banks (RRBs) onOctober 2, 1975. The banks
provide credit to the weaker sections of the rural areas,particularly the small and marginal
farmers, agricultural labourers, and small entrepreneurs. Initially, five RRBs were set up on
October 2, 1975 which was sponsored by Syndicate Bank, State Bank of India, Punjab
National Bank, United Commercial Bank and United Bank of India. The total authorized
capital was fixed at Rs. 1 Crore which has since been raised to Rs. 5 Crores. There are several
concessions enjoyed by the RRBs byReserve Bank of India such as lower interest rates and
refinancing facilities fromNABARD like lower cash ratio, lower statutory liquidity ratio,
lower rate of interest onloans taken from sponsoring banks, managerial and staff assistance
from the sponsoringbank and reimbursement of the expenses on staff training. The RRBs are
under thecontrol of NABARD. NABARD has the responsibility of laying down the policies
forthe RRBs, to oversee their operations, provide refinance facilities, to monitor
theirperformance and to attend their problems.

Unscheduled Banks: “Unscheduled Bank in India” means a banking company as definedin

clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is nota
scheduled bank”

Development Banks should be understood as institutions whose primary interest lies in
financingor they may (and they do mostly) undertake development utilities as well. In other
words,institutions undertaking financial and developmental functions are considered as
development banks.Structure of Development Banks/ Development Financial Institutions –
During the post-independence period, India is well-served by a network of development
banks, atthe national as well as state levels. At present, there are seven all India industrial
development banks, viz.
(1) National Bank for Agriculture and Rural development of India
(2) The Small Industries Development Bank of India (SIDBI)
(3) The Industrial Development Bank of India (IDBI)
(4) Export Import Bank of India (EXIM)

NABARD (National Bank for Agriculture and Rural Development)

NABARD is an apex institution accredited with all matters concerning policy, planning and
operations in the field of credit for agriculture and other economic activities in rural areas. It
is an apex refinancing agency for the institutions providing investment and production credit
for promoting the various developmental activities in rural areas

It 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. It co-ordinates the rural financing activities of all
the institutions engaged in developmental work at the field level and maintains liaison with
Government of India, State Governments, Reserve Bank of India and other national level
institutions concerned with policy formulation. It prepares, on annual basis, rural credit plans
for all districts in the country; these plans form the base for annual credit plans of all rural
financial institutions. It undertakes monitoring and evaluation of projects refinanced by it. It
promotes research in the fields of rural banking, agriculture and rural

Development NABARD also offers various credit facilities like:

1. Short-term/ Medium term/ Long-term refinance for various types of

production/marketing/ procurement activities at attractive interest rates to various
organizations, societies, Govts etc. • Investment Credit (Medium and Long Term)
Refinance with a mission of Accelerating Private Capital Formation to Promote
Sustainable and Equitable Agriculture and Rural Prosperity with Refinance as Lever
2. Rural Infrastructure Development Fund (RIDF) is a fund to promote the
investment in infrastructure for agriculture. State Governments as well as Panchayat
Raj Institutions (PRIs), Non-Governmental Organisations, Self-Help Groups, etc. are
eligible to borrow out of RIDF for their schemes like ongoing Irrigation, Flood
Protection, Watershed Management projects, rural Road & Bridge projects, Primary
and Secondary Schools, Primary Health Centers, Village Haats, Joint Forest
Management, Terminal and Rural Market/Godowns, Rain Water Harvesting,
Watershed development, flood protection, drainage, Cold Storage, Riverine Fisheries,
Fishing Harbour & Jetties, Mini/Small Hydel Projects in Power Sector, Rural
Drinking Water Supply Schemes, Citizen Information Centres, Modern abottoir,
Seed/Agri./Hori. Farms, etc.
3. Rural Farm and Non Farm Sector Schemes
4. Refinance for Rural Housing Facilities scheme provides Credit to the Individuals,
Co-operative Housing Societies, Public Bodies, Housing Boards/ Housing
Development Authorities/ Improvement, Trusts, Local Bodies, Voluntary agencies
and NGOs, Housing Finance Companies registered, with NHB for finance extended
by them to housing projects in the 'rural' areas only. The finance is provides for
Construction of New Houses as well as Repairs/Renovation of existing houses in rural
areas/ Rainwater Harvesting Structures/ Sanitary Latrines, etc.
5. Under the Micro Credit Innovation scheme, NABARD facilitates sustained access
to financial services for the unreached poor in rural areas through various micro-
finance innovations in a cost effective and sustainable manner
6. NABARD has been designated the Implementing Agency for implementing the
Revival Package in all the states. The Department for Cooperative Revival and
Reforms (DCRR) has been constituted in NABARD for this purpose. NABARD is
providing dedicated manpower at the national, state and district levels for
implementing the Package.
7. Loans to State Governments for funding equity of Co-operative Credit Institutions.
8. NABARD has formulated a Model scheme for issue of Kisan Credit Cards to
farmers, on the basis of their land holdings, for uniform adoption by banks, so that the
farmers may use them to readily purchase agricultural inputs such as seeds, fertilisers,
pesticides, etc. and also draw cash for their production needs. Farmers have to get in
touch with Authorised banks to use this facilitynot normally eligible for assistance
under this fund.
9. SWAROJGAR CREDIT CARD SCHEME aims at providing adequate and timely
credit ie. working capital or block capital or both to small artisans, handloom weavers,
service sector, fishermen, self employed persons, rickshaw owners, other micro-
entrepreneurs, SHGs, etc from the banking system in a flexible, hassle free and cost
effective manner. Borrowers in urban areas can be covered under SCC Scheme.
10. NABARD Consultancy Services (Nabcons) is engaged in providing consultancy in
all spheres of agriculture, rural development and allied areas. Nabcons leverages on
the core competence of the NABARD in the areas of agricultural and rural
development, especially multidisciplinary projects, banking, institutional
development, infrastructure, training, etc., internalized for more than two decades.

SIDBI (Small Scale Industrial Development Bank of India)

The SIDBI was set up in October 1989 under the Act of parliament as a wholly owned
subsidiaryof the IDBI. It is the central or apex or principal institution which oversees co-
ordinates andfurther strengthens various arrangements for providing financial and non-
financial assistance tosmall-scale, tiny, and cottage industries.
SIDBI objectives are:
 To initiate steps for technological up gradation and modernization of existing units
 To expand channels for marketing of SSI sector products in India and abroad
 To promote employment-oriented industries in semi-urban areas and to check
migrationof population to big cities.It operates two funds:
a) Small Industries Development Fund and
b) Small Industries Development Assistance Fund.

The operation of the former and of National Equity Fund which were earlier looked by IDBI
is now handled by the SIDBI. Its financial assistance is channeled through theexisting credit
delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, co-operative
banks and RRBs. The total number of institutions are eligible for assistance from SIDBI
is900. It discounts and rediscounts bills arising from the sale of machinery to small units;
extends seed capital/soft loan assistance through National Equity Fund and through seed
capital schemesof specialized lending institutions; refinance loans; and provide services like
factoring, Leasing and so on.The union budget 1996-97 envisaged a number of measures to
develop small-scale sector withSIDBI as the focal point. They include:
1. SIDBI will now refinance the SFCs and commercial banks for modernization projects
uptoRs 50 lakhs from unutilized corpus of about Rs 75 crore;
2. SIDBI’s refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc.
for composite loans will be doubled to Rs 100 lakhs
3. SIDBI will participate in venture capital funds set up by public sector institutions as
wellas private companies up to 50 percent of the total corpus of the fund, provided
such fundis dedicated to the financing of small-scale industry;
4. SIDBI will provide refinance lending institutions which are now permitted to lend to
SSIunits seeking ISO certification of quality.Since its inception SIDBI has
provided assistance to the entire SSIs sector including tiny, village,and cottage
industries through suitable schemes tailored to meet the requirement of setting up
of new products, expansions, diversifications, modernization, and rehabilitation. It has
providedequity capital, domestic and foreign currency term loans, working capital
finance, etc.

IDBI (Industrial Development Bank of India)

The IDBI was set up as a wholly-owned subsidiary of the RBI on July 1, 1964 under the Act
of parliament, and by merging the Industrial Refinance Corporation (IRC) which, in turn, was
setup by the government earlier in June 1958. In February 1976, the IDBI was delinked from
the RBI and since then, it has become a separate and independent entity wholly owned by the
government. It is now the central or apex institution in the field of industrial finance.

Its main objective is to provide credit, term finance and financial services for the
establishment of new projects as well as expansion, diversification, modernization and
technology up gradation of the existing industrial enterprise in order to bring about industrial
development in the country. It also provides several diversified financial products of non-
project nature such as equipment finance, asset credit and equipment leasing, merchant
banking, debenture trusteeship and Forex services to corporate.
It functions as a development financing agency in its own right, in addition to its work of co-
coordinating, supplementing, and monitoring the operations of other term lendinginstitutions
in the country. It also provides indirect assistance in the form of discounting/rediscounting
long term bills/promissory notes of term loans given by SFCs, banks and so on and
subscribing to resources of notified financial institutions such as SFCs, ICICI,IRBI, and so
on. There are more than 850 primary lending institutions which are eligible for refinancing
facilities of the IDBI. It also takes up various promotional activities such as balance
development of regions, entrepreneurship development, technology development, and so on.

During the four decades of its existence, IDBI has been instrumental not only in establishing
a well-developed, diversified and efficient industrial and institutional structure but also
adding a qualitative dimension to the process of industrial development in the country. IDBI
has played a pioneering role in fulfilling its mission of promoting industrial growth through
financing of medium and long-term projects, in consonance with national plans and priorities.
Over the years, IDBI has enlarged its basket of products and services, covering almost the
entire spectrum of industrial activities, including manufacturing and services.

IDBI provides financial assistance, both in rupee and foreign currencies, for green field
projects as also for expansion, modernisation and diversification purposes. In the wake of
financial sector reforms unveiled by the government since 1992, IDBI evolved an array of
fund and fee-based services with a view to providing an integrated solution to meet the entire
demand of financial and corporate advisory requirements of its clients. IDBI also provides
indirect financial assistance by way of refinancing of loans extended by State-level financial
institutions and banks and by way of rediscounting of bills of exchange arising out of sale of
indigenous machinery on deferred payment terms.

IDBI has played a pioneering role, particularly in the pre-reform era (1964-91),in catalyzing
broad based industrial development in the country in keeping with its Government-ordained‘
development banking’ charter. In pursuance of this mandate, IDBI’s activities transcended
theconfines of pure long-term lending to industry and encompassed, among others,
balancedindustrial growth through development of backward areas, modernization of specific
industries, employment generation, entrepreneurship development along with support
services for creating adeep and vibrant domestic capital market, including development of
apposite institutionalframework.
The migration to the new business model of commercial banking, with its gateway to low-
cost current, savings bank deposits, would help overcome most of the limitations of the
current business model of development finance while simultaneously enabling it to diversify
its client/asset base. IDBI Bank, with which the parent IDBI was merged, was a vibrant new
generation Bank. The Private Bank was the fastest growing banking company in India. The
bank was pioneer in adapting to policy of first mover in tier 2 cities. The Bank also had the
least NPA and the highest productivity per employee in the banking industry.

Main Functions of IDBI:

1. IDBI coordinates between various financial institutions who are highly involved in pr
oviding financial assistance, promoting, and developing various industrial units
2. IDBI is also engaged in a variety of promotional activities such as development
programsfor the fresh entrepreneurs, planning of consultancy services for both the
small scaleenterprises and the medium sized industrial units
3. IDBI works for the advancement of technology and other welfare schemes to
ensureeconomic development.
4. Industrial Development Bank of India acts as a catalyst in various industrial
development programs
5. IDBI provides financial assistance to all kinds of industrial units which comes under
the provisions of the IDBI Act
6. IDBI has served various industrial sectors in India for about three years and has
grownleaps and bounds in its size and operating units


The EXIM bank was set up in January 1982 as a statutory corporation wholly owned by
centralgovernment. Its paid up capital in 1988-89 was Rs 220.50 crores.Activities performed
by EXIM Bank:
1. It grants direct loans in India and outside for the purpose of imports and exports
2. Refinances loans to banks and other notified financial institutions for the purpose
of international trade ;
3. Rediscounts usance export bills for banks;
4. Provide overseas investment finance for Indian companies toward their equity particip
ation in joint venture abroad and guarantees, along with banks, obligations on behalf
of project exporters;
5. It is also a co-coordinating agency in the field of international finance and it
undertakesdevelopment of merchant banking activities in relation to export oriented
industries;Thus it provides fund based as well as non fund based assistance in the
foreign tradesector.
The main objective of Export-Import Bank (EXIM Bank) is to provide financial assistance
to promote the export production in India. The financial assistance provided by the EXIM
Bank widely includes the following:

 Direct financial assistance

 Direct financial assistance
 Foreign investment finance
 Term loaning options for export production and export development
 Pre-shipping credit
 Buyer's credit
 Lines of credit
 Re-loaning facility
 Export bills rediscounting
 Refinance to commercial banks
The Export-Import Bank also provides non-funded facility in the form of guarantees to the
 Various Stages of Exports Covered by EXIM Bank-
 Development of export makers
 Expansion of export production capacity
 Production for exports
 Financing post-shipment activities
 Export of manufactured goods
 Export of projects
 Export of technology and software’


Co-operative banks in this country are the part of vast and powerful structure of cooperative
institution which is engaged in task of production, processing, marketing, distribution,
servicing and banking in India. The cooperative banking system in this country were started
around 1904, when official efforts were made for create new type of institution based on
principle of co-operative organisation and management, which were considered to be suitable
for solving the problem peculiar to Indian conditions.

In rural areas, as far as agriculture and related activities are concerned, supply of credit was
inadequate and money lenders would exploit the poor people in rural areas providing them
loans at higher rates.

Co-operative banks in India are registered under cooperative societies act. The co-operative
banks are also regulated by RBI and governed by Banking Regulation Act 1949 and Banking
Laws (Co-operative Societies) Act, 1965.


1. Co-operative bank performs all the main banking functions of deposit mobilisation,
supply of credit and provision of remittance facilities.
2. Co-operative Banks belong to the money market as well as to the capital market.
3. Co-operative Banks provide limited banking products and are functionally specialists
inagriculture related products. However, co-operative banks now provide housing
4. UCBs provide working capital loans and term loan as well.
1. Co-operative Banks are organised and managed on the principal of co-operation, self-
help, and mutual help. They work on the basis of “no profit no loss”. Profit
maximizationis not their goal.
2. Cooperative banks do banking business mainly in the agriculture and rural sector.How
ever, UCBs, SCBs, and CCBs operate in semi-urban, urban, and metropolitan
3. The State Co-operative Banks (SCBs), Central Cooperative Banks (CCBs) and Urban
Co-operative Banks (UCBs) can normally extend housing loans up to Rs 1 lakh to
anindividual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housing
purposes.The UCBs can provide advances against shares and debentures

A. Cooperative banks in India finance rural areas under:

 Farming
 Cattle
 Milk
 Hatchery
 Personal finance
B. Cooperative banks in India finance urban areas under:
 Self-employment
 Small scale units
 Home finance
 Consumer finance
 Personal finance

Some facts about Cooperative banks in India:

Some cooperative banks in India are more forward than many of the state and privatesector
banks.According to NAFCUB the total deposits & lending of Cooperative Banks in India
ismuch more than Old Private Sector Banks & also the New Private Sector Banks.This
exponential growth of Co operative Banks in India is attributed mainly to their much better
local reach, personal interaction with customers, and their ability to catch the nerveof the
local clientele.

We can conclude that the financial sector is a nerve system of Indian economy. Banking
plays an important role in development of economy. For steady growth in economy
innovations and development in financial sector is very important. Economy of any country
faces lots of challenges and problems. To tackle those problems financial sector plays a vital
role. The financial sector makes the economy efficient to the extent where it can rival other
developed economies in the world.

Financial sector also faces lots of problems but it should develop certain strategies to come
out of these problems which is very important for healthy growth of economy. The banking
system in India has undergone significant changes during last 16 years. There have been new
banks, new instruments, new windows, new opportunities and, along with all this, new
challenges. While deregulation has opened up new vistas for banks to augment incomes, it
hasalso entailed greater competition and consequently greater risks. India adopted
prudentialmeasures aimed at imparting strength to the banking system and ensuring its safety
andsoundness, through greater transparency, accountability and public credibility.

Banking sector reform has been unique in the world in that it combines a comprehensive
reorientation of competition, regulation and ownership in a non-disruptive and cost-
effectivemanner. Indeed banking reform is a good illustration of the dynamism of the public
sector inmanaging the overhang problems and the pragmatism of public policy in enabling
the domesticand foreign private sectors to compete and expand. There has been no banking
crisis in India.The Government took steps to reduce its ownership in nationalised banks and
inducted privateownership but without altering their public sector character. The underlying
rationale of thisapproach is to assure that the salutary features of public sector banking were
not lost in thetransformation process. On account of healthy market value of the banks’
shares, the capitalinfusion into the banks by the Government has turned out to be profitable
for the Government.


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Law House, New Delhi, 1997.
2. Vasudevan, S.V. Theory of Banking, S. Chand &Company Ltd, New Delhi, 1984.
3. Sundharanl, K.P. Varshney, P.N. Banking Theory Law and Practice, Sultan Chand &
Sons, New Delhi, 1987.
4. Panicker, K.K. Banking theory and systems, S. Chand and Co. Ltd. New Delhi 2010.
5. Davar, S.R. Law and Practice of Banking, Progressive Corporation Private Ltd,
Bombay, 1986.