FBM 1202- COOPERATION, MARKETING & FINANCE

Lecture 11 HIGHER FINANCING AGENCIES

RESERVE BANK OF INDIA (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was
established in April 1935 in accordance with the provisions of the RBI Act, 1934 with a
share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young
Commission. Its headquarters is located at Mumbai
The RBI was set up:
 To regulate the issue of bank notes
 To secure monetary stability in the country
 To operate currency and credit system to its advantage
Functions:
The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank
the Reserve Bank of India.
1. Issuing Authority: Under Section 22 of the Reserve Bank of India Act, the Bank has
the sole right or authority or monopoly of issuing currency notes other than one
rupee notes and coins and coins of smaller denominations. RBI also makes adequate
arrangements for holding and distributing the currency notes and coins which ensure
its complete and uniform control over the credit and currency system of the
economy.
2. Banker of Government: The second important function of the Reserve Bank of
India is to act as banker to the Government of India statutorily and to state
governments by virtue of agreements entered into with them. The Reserve Bank is
agent of Central Government and of all State Governments in India excepting that of
Jammu and Kashmir. The Reserve Bank has the obligation to transact Government
business, via. To keep the cash balances as deposits free of interest, to receive and to
make payments on behalf of the Government and to carry out their exchange
remittances and other banking operations.
3. Bankers’ Bank and Lender of the Last Resort or Father of Banks: The Reserve
Bank of India acts as the bankers’ bank. The RBI controls the volume of reserves of

1
 the banks and determines their deposit credit creation ability. The banks hold all/ a
part of their reserves with the RBI and in times of need, they borrow from the RBI.
4. Controller of Credit: The Reserve Bank of India is the controller of credit i.e. it has
the power to influence the volume of credit created by banks in India. It can do so
through changing the Bank rate or through open market operations. RBI is armed
with many more powers to control the Indian money market.
5. Custodian of Foreign Reserves: The RBI maintains the external value of the rupee
through the regulation of foreign exchange market coupled with domestic policies.
RBI administer ‘foreign exchange control’, choose the exchange rate system and fix
or manage the exchange rate between the rupee and other currencies and also
manages exchange reserves.
6. Supervisory Functions: To promote a sound and effective banking system, the RBI
is vested with wide ranging powers to supervise and control banks. The main powers
are:
 To issue licenses for the establishment of new banks.
 To issue licenses for setting up of bank branches.
 To prescribe for banks, the minimum requirements regarding capital and
resources, the transfer of reserve fund and maintenance of cash reserve and
other liquid assets.
 To investigate into complaints, irregularities and fraud in respect of banks.
 To check improper investments and injudicious advances by the banks.
 To approve/ force amalgamation etc.
7. 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 agencies.
8. Monetary Planning and Control Functions: The RBI regulates the availability, cost
and terms and conditions of credit in the market. It aims at regulating and
controlling the money supply as per the requirements of the economy and the
monetary policy.

2
The functions of RBI in the sphere of rural credit can be dealt seen under three aspects:
1. Provision of finance
2. Promotional activities, and
3. Regulatory functions
Provision of Finance:
- Reserve Bank of India provides necessary finances needed by the farmers through the
commercial banks, cooperative banks and RRBs on refinance basis.
- It advances long-term loans to state governments for their contribution to the share
capital of the cooperative credit institutions like State Cooperative Banks (SCBs) and
District Cooperative Central Banks (DCCBs).
- The RBI Act was amended in 1955 to provide for the establishment of two funds, viz.,
National Agricultural credit (Long Term Operations) Fund and National Agricultural
Credit (Stabilization) Fund.
- It advances medium-term loans to State Cooperative Banks.
- It extends refinance facility to the RRBs only to an extent of 50 % of outstanding
advances.
Promotional activities:
Reserve Bank of India constitutes study teams to look into the organisation and
operation of the cooperative credit institutions all over the country. It also conducts number
of surveys and studies pertaining to rural credit aspects in the country.
- Rehabilitation of those central cooperative banks, which are financially weak due to
mounting overdues, insufficiency of internal finances, untrained staff, poor management
etc.
- Strengthening of PACS to ensure their financial and operational viability.
- Arranging suitable training programmes for the personnel of cooperative institutions.

Regulatory functions
Reserve bank of India is concerned with efficiency of channels through which credit
is distributed. Banking Regulation Act, 1966 makes the RBI to exercise effective supervision
over cooperative banks and commercial banks.

3
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT
(NABARD)
Reserve Bank of India established in 1935 with a mandate to set up a special
Agricultural credit Department (ACD) with expert staff. RBI initiated different measures to
develop a healthy rural credit structure and provided guidance to state governments and co-
operative credit structure. Agriculture Refinance corporation (ARC) was established in 1963
to support investment credit needs for agricultural development. Consequent to undertaking
of development and promotional Functions, ARC was renamed as Agricultural Refinance
and Development Corporation (ARDC) in 1972.
RBI, at the instance of Government of India (G.O.I.) appointed a Committee to
Review Arrangement for Institutional Credit for Agriculture and Rural Development
[CRAFICARD] under the chairmanship of Sri. B. Sivaraman in 1979. The CRAFICARD
reviewed the need of integrating short term, medium term and long term agriculture credit
structure. As a result of CRAFICARD’S recommendations, NABARD came into existence
on July 12th, 1982. The then existing national level institutions such as Agricultural
Refinance and Development Corporation (ARDC), Agricultural Credit Department (ACD)
and Rural Planning and Credit Cell (RPCC) of RBI were merged with NABARD with a
share capital of Rs.500 crore equally contributed by Government of India and RBI.
NABARD operates through its head office at Mumbai.
Objectives of NABARD
1) Integrated rural development is main objective of NABARD.
2) To provide training and Research facilities for rural Development.
3) To keep a check on all the projects which are refinanced by NABARD; through
timely inspection, monitoring and evaluation.
4) To Act as a coordinator and regulator for rural credit institutions.
5) NABARD was established with a mandate for promotion and development of
agriculture, Small Scale industries, cottage and village industries, handicrafts and other
rural crafts.
6) To formulate rural credit plans on annual basis for all districts in country.
Functions of NABARD:
NABARD is an apex development bank which performs following functions.

4
  Credit Function
NABARD prepares credit policy and guideline for rural financial institutions. It provides
credit facilities to issuing organizations such as regional rural bank, cooperative banks
commercial banks etc. while the ultimate beneficiaries of investment credit can be
individuals, partnership concerns, companies, and state owned corporation or co-operative
societies. It provides refinance facilities to all small scale industries, agriculture sector and
rural development. It also provides credit facilities in the event of natural calamities.
 Development Function
NABARD provides credit facilities for developmental activities such as:
- Provides assistance for self development of RRBs commercial banks and cooperatives
banks.
- Helps to RRBs commercial banks and cooperatives banks by providing training to
senior and middle level executives.
- It uses Vikas Volunteer Vahini and farmers clubs to generate awareness on ethics of
repayment.
- It provides the funds for developments of agriculture and rural developments.
- Helps in human resource development, organization development and agriculture
development.
 Supervisory Functions
Under provision of banking regulation Act 1949, it undertakes inspection of RRB’s
and cooperative banks. It also undertakes voluntary inspection of state cooperative
agriculture and rural development banks and apex non credit cooperative societies.

AGRICULTURAL FINANCE CORPORATION (AFC)

In the view of the inexperience of the commercial banks in financing agriculture, a
need was felt to set up an institutional agency at the national level to take care of this aspect.
Accordingly the Agricultural Finance Corporation was promoted by the Indian Bank’s
Association. It was incorporated on 10th April 1968 under the Indian Companies Act, 1956
with an authorized share capital of Rs 100 crore and issued share capital of Rs 10 crore.
AFC is a consortium of 37 commercial banks and consultancy agency of member
banks in the formulation of projects for agriculture and rural development.

5
 Agricultural Finance Corporation Limited (AFCL) which is owned by public sector
banks, NABARD and Exim Bank, is a forty year old consultancy organisation mainly
involved in providing consultancy services in the field of agriculture, allied and also social
sectors. AFCL has good rapport with the various Ministries/Departments in the
Government of India, and State Governments, and now is a well-known name in the field
of consultancy. Headquarter of AFCL is situated at Mumbai.
The major services include consultancy, capacity building, micro finance and project
implementation.
The corporation has two distinct roles:
i. Financing role
AFC finance the individuals/ institutions/ organisations involved in agricultural
development. In this regard, the corporation formulates projects, works out the economics
and invites the commercial banks to join with it in financing the projects. Top priority is
being given by the Corporation to the following projects:
- Sinking & deepening irrigation wells
- Production, distribution & marketing of agricultural inputs such as seeds,
Fertilizers, insecticides, implements & machinery
- Construction of storage structures for foodgrains & fertilizers
- Establishment of agricultural service units etc
ii. Promotional role
AFC promotes Commercial bank advances for agricultural development. It provides
expertise in the formulation of appropriate projects to all commercial banks working under
its guidance and advancing loans. AFC tries to increase the credit absorbing capacity in
agriculture through a) formulation of potential projects financed by commercial banks, b)
development of requisite infrastructure for rapid agricultural development, c) simplifying &
streamlining the procedures in sanctioning the loans etc.
iii. Consultancy services
AFCL offers consultancy services in Agribusiness Management, Livelihood
Development and Poverty Alleviation, Water Resources Management, Watershed
development and Management Rural Credit, Agriculture, Micro Enterprises and Micro-
Finance, Area Development, Capacity Building, Fishery, Forestry, Gender Development,
Horticulture & Plantation, Wasteland Development, etc.

6
ASIAN DEVELOPMENT BANK
The Asian Development Bank is a regional development bank established in the year
1966 to promote economic and social development in Asia and Pacific countries by
providing loans and technical assistance. The ADB’s headquarters are located at Manila,
Philippines. It aims at eradication of poverty in the Asia –Pacific region.
It is a multilateral financial institution owned by 67 members, with 48 members from
the region of Asia- pacific and 19 from other parts of globe. The highest policymaking body
of the bank is the Board of Governors consists of one representative from each member
country. The Board of Governors, in turn, elect among themselves, the 12 member Board of
Directors. Eight of the twelve members come from Asia- Pacific members, while the rest
come from non-regional members.
The Board of Governors also elects the bank’s president who is the chairperson of
the Board of Directors and manages the ADB. The term of office of president lasts for five
years, and may be reelected for second term. As Japan is the largest shareholder of the bank,
traditionally the president has always been from Japan.
The ADB was founded in 1966 with goal of eradicating the poverty in the Asia-
Pacific region. With over 1.9 billion people living on less than $2 a day in Asia, the
institution has a formidable challenge.
ADB's main partners are governments, the private sector, nongovernment
organizations, development agencies, community-based organizations, and foundations.
Under Strategy 2020, a long-term strategic framework adopted in 2008, ADB will follow
three complementary strategic agendas: inclusive growth, environmentally sustainable
growth, and regional integration. In pursuing its vision, ADB's main instruments comprise
loans, technical assistance, grants, advice, and knowledge. Although most lending is in the
public sector - and to governments - ADB also provides direct assistance to private
enterprises of developing countries through equity investments, guarantees, and loans.
It plays the following functions for countries in the Asia –Pacific region:
 Provides loans and equity investments to its developing member countries (DMCs).
 Provides technical assistance for the planning and execution of development projects,
programmes and for advisory services.
 Promotes and facilitates investment of public and provide capital for development.
 Assists in coordinating developmental policies and plans of its DMCs.

7
WORLD BANK
The World Bank is an international organization dedicated to providing financing,
advice and research to developing nations to aid their economic advancement. The World
Bank was created out of the Bretton Woods agreement as a result of many European and
Asian countries needing financing to fund reconstruction efforts. As of 2016, the Bank
predominantly acts as an organization that attempts to fight poverty by offering
developmental assistance to middle- and poor-income countries.
The World Bank is a provider of financial and technical assistance to developing
countries around the globe. The bank considers itself a unique financial institution that
provides partnerships to reduce poverty and support economic development by giving loans
and offering advice and training to both the private and public sectors. The World Bank was
established in 1944, is headquartered in Washington D.C., and has more than 10,000
employees in over 120 offices worldwide.

Structure of World Bank

The World Bank has expanded from the single institution that was created in 1944 to
a group of five unique and cooperative institutional organizations.

 International Bank for Reconstruction and Development (IBRD) - an institution that

provides debt financing to governments that are considered middle income.
 International Development Association (IDA) - a group that gives interest-free loans
to governments of poor countries.
 International Finance Corporation (IFC) - focuses on the private sector and provides
developing countries with investment financing and financial advisory services.
 Multilateral Investment Guarantee Agency (MIGA) - an organization that promotes
foreign direct investments in developing countries.
 International Centre for Settlement of Investment Disputes (ICSID) - an entity that
provides arbitration on international investment disputes.

The World Bank has two stated goals that it aims to achieve by 2030. The first is to
end extreme poverty by decreasing the amount of people living on less than $1.90 a day to

8
below 3% of the world population. The second is to increase overall prosperity by increasing
the income growth in the bottom 40% of the world's population.

Motto: Working for a world free of poverty

President: Jim Yong Kim

DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION (DICGC)

The failure of two scheduled banks- Palai Central Bank Ltd (Kerala) & Laxmi Bank
Ltd (Maharashtra) in 1960 gave a rude shock to the stability of the banking system in the
country. This forced RBI to frame legislative measures so as to arrest bank mortality and
create confidence in depositors. In 1961, RBI formulated proposals for the establishment of
Deposit Insurance Corporation (DIC). The GOI also established Credit Guarantee
Corporation of India Ltd (CGCI) in 1971 to provide safety to the banking system from
risks involved in lending to priority sectors.

These two corporations named Deposit Insurance Corporation (DIC) and Credit
Guarantee Corporation of India Ltd (CGCI) which were merged to form DICGC with a
view to integrate the functions of both DIC and CGCI.

DICGC is one of the wholly owned subsidiary of the Reserve bank of India (RBI). It
was established on 15 July 1978 under Deposit Insurance and Credit Guarantee
Corporation Act, 1961 for the purpose of providing insurance of deposits and guaranteeing
of credit facilities to the customers of banks. This means that the money of customers who
deposit money in the banks is insured by DICGC. And the customers who take loans from
banks are guaranteed of money by DICGC.

DICGC insures all bank deposits, such as saving, fixed, current, recurring, etc. except
the following types of deposits:

 Deposits of foreign Governments;

 Deposits of Central/State Governments;
 Inter-bank deposits;
 Deposits of the State Land Development Banks with the State co-operative banks;

9
 Any amount due on account of and deposit received outside India;
 Any amount which has been specifically exempted by the corporation with the
previous approval of the RBI.

10