The central banking and monetary authority of India
Scheduled Banks in India
Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks.
Scheduled commercial banks form the bedrock of the Indian
financial system, currently accounting for more than three-fourths of all
financial institutions’ assets.
SCBs are present throughout India, and their branches,
having grown more than four-fold in the last 40 years now number more than
80,500 across the country.
Public Sector Banks
Public sector banks are those in which the majority stake is
held by the Government of India.
Public sector banks together make up the largest category in
the Indian banking system.
There are currently 27 public sector banks in India.
They include the SBI and its 6 associate banks, 19
nationalized banks and IDBI Bank Ltd.
Public sector banks have taken the lead role in branch
expansion, particularly in the rural areas.
Public sector banks account for bulk of the branches in
India (88 percent in 2009).
In the rural areas, the presence of the public sector banks
is overwhelming; in 2009,
96 percent of the rural bank branches belonged to the public
sector.
Regional Rural Banks
Regional Rural Banks (RRBs) were established during
1976-1987 with a view to develop the rural economy.
Each RRB is owned jointly by the Central Government,
concerned State13 Government and a sponsoring public sector commercial bank.
RRBs provide credit to small farmers, artisans, small
entrepreneurs and agricultural laborers.
Over the years, the Government has introduced a number of
measures of improve viability and profitability of RRBs, one of them being the
amalgamation of the RRBs of the same sponsored bank within a State. This
process of consolidation has resulted in a steep decline in the total number of
RRBs to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.
Private Sector Banks
In this type of banks, the majority of share capital is held
by private individuals and corporate.
Not all private sector banks were nationalized in 1969, and
1980.
The private banks which were not nationalized are
collectively known as the old private sector banks and include banks such as
The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.
As at end March, 2009 there were 7 new private sector banks
and 15 old private sector
Foreign Banks
Foreign banks have their registered and head offices in a
foreign country but operate their branches in India.
The RBI permits these banks to operate either through
branches; or through wholly-owned subsidiaries.
The primary activity of most foreign banks in India has been
in the corporate segment.
However, some of the larger foreign banks have also made
consumer financing a significant part of their portfolios.
These banks offer products such as automobile finance, home
loans, credit cards, household consumer finance etc.
Foreign banks in India are required to adhere to all banking
regulations, including priority-sector lending norms as applicable to domestic
banks.
Some of the existing private sector banks, which showed
signs of an eventual default, were merged with state owned banks.
It may be noted that two important erstwhile developmental
financial institutions, viz. Industrial Development Bank of India (IDBI) and
Industrial Credit and Investment Corporation of India (ICICI) converted
themselves into commercial banks after the new bank licensing policy was announced
in July 1993.
In addition, a foreign institution could also invest up to
74% in domestic private bank, in which up to 49% can be via portfolio
investment.
At the end of June 2009, there were 32 foreign banks with
293 branches operating in India.
Besides, 43 foreign banks were operating in India through
representative offices.
Under the World Trade Organization (WTO) Agreement, RBI
allows a minimum 12 branches of all foreign banks to be opened in a year.
Co-operative Banks
Co-operative banks cater to the financing needs of
agriculture, retail trade, small industry and self-employed businessmen in
urban, semi-urban and rural areas of India.
A distinctive feature of the co-operative credit structure
in India is its heterogeneity.
The structure differs across urban and rural areas, across
states and loan maturities.
Urban areas are served by urban cooperative banks (UCBs),
whose operations are either limited to one state or stretch across states.
The rural co-operative banks comprise State co-operative banks,
district central cooperative banks, SCARDBs and PCARDBs.
The co-operative banking sector is the oldest segment of the
Indian banking system. The network of UCBs in India consisted of 1721 banks as
at end-March 2009, while the number of rural co-operative banks was 1119 as at
end-March 2008.
Owing to their widespread geographical penetration,
cooperative banks have the potential to become an important instrument for
large-scale financial inclusion, provided they are financially strengthened.
The RBI and the National Agriculture and Rural Development
Bank (NABARD) have taken a number of measures in recent years to improve
financial soundness of co-operative banks.
Role of Reserve Bank of India
The Reserve Bank of India (RBI) is the central bank of the
country.
It was established on April 1, 1935 under the Reserve Bank
of India Act, 1934, which provides the statutory basis for SCARDB stands for
state co-operative agricultural and rural development banks and PCARDB stands
for primary co-operative agricultural and rural development banks.
In addition, the rural areas are served by a very large
number of primary agricultural credit societies (94,942 at end-March 2008).
Financial Inclusion implies provision of financial services
at affordable cost to those who are excluded from the formal financial system.
Every country has its own central bank. The central bank of
USA is called the Federal Reserve Bank, the central bank of UK is Bank of
England and the central bank in China is known as the People’s Bank of China
and so on.
Most central banks were established around the early
twentieth century.
Functions of RBI
When the RBI was established, it took over the functions of currency issue from the Government of India and the power of credit control from the then Imperial Bank of India. As the central bank of the country, the RBI performs a wide range of functions; particularly, it:
Acts as the currency authority
Controls money supply and credit
Manages foreign exchange
Serves as a banker to the government
Builds up and strengthens the country’s financial
infrastructure
Acts as the banker of banks
Supervises banks
RBI as Bankers’ Bank
As the bankers’ bank, RBI holds a part of the cash reserves
of banks,; lends the banks funds for short periods, and provides them with
centralized clearing and cheap and quick remittance facilities.
Banks are supposed to meet their shortfalls of cash from
sources other than RBI and approach RBI only as a matter of last resort,
because RBI as the central bank is supposed to function as only the ‘lender of
last resort’.
To ensure liquidity and solvency of individual commercial
banks and of the banking system as a whole, the RBI has stipulated that banks
maintain a Cash Reserve Ratio (CRR).
The CRR refers to the share of liquid cash that banks have
to maintain with RBI of their net demand and time liabilities (NDTL).
CRR is one of the key instruments of controlling money
supply. By increasing CRR, the RBI can reduce the funds available with the
banks for lending and thereby tighten liquidity in the system; conversely
reducing the CRR increases the funds available with the banks and thereby
raises liquidity in the financial system.
RBI as supervisor
To ensure a sound banking system in the country, the RBI
exercises powers of supervision, regulation and control over commercial banks.
The bank’s regulatory functions relating to banks cover
their establishment (i.e. licensing), branch expansion, liquidity of their
assets, management and methods of working, amalgamation, reconstruction and
liquidation.
RBI controls the commercial banks through periodic
inspection of banks and follow-up action and by calling for returns and other
information from them, besides holding periodic meetings with the top
management of the banks.
While RBI is directly involved with commercial banks in
carrying out these two roles, the commercial banks help RBI indirectly to carry
out some of its other roles as well. For example, commercial banks are required
by law to invest a prescribed minimum percentage of their respective net demand
and time liabilities (NDTL) in prescribed securities, which are mostly
government securities. This helps the RBI to perform its role as the banker to
the Government, under which the RBI conducts the Government’s market borrowing
program.
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