MODULE 1

EVOLUTION OF FINANCIAL SERVICES IN

INDIA

Financial Services means all those services that are provided in

monetary or financial terms where the essential commodity is
money. These services include banking, purchases, venture
capital, leasing, insurance, mutual funds, stock broking etc

Earlier in the 1960’s, the banking services in India included

merchant banking that was followed by insurance and leasing
finances in the 1970s. Later on, the mutual funds, discounting,
credit rations, venture capitals came into existence and were
trending till 1990. Post liberalization in 1990, deposits,
dematerialization, paperless tracking, online trading, foreign
investors investing in the capital market, and booking of
buildings were the contemporary issues till 2002.

Currently, there is a lot of evolution in the Indian financial

sector as it is converting to dynamism, with the emergence of
the primary equity market, the process of demonetization,
the concept of internet banking and e-brokerage etc.

However, the RBI is worried about facing 6 important issues in

the Indian financial sector. They are credit crunches, market
abuse, the regime of the senior persons, macro-politics,
changing culture and shifting borders.

India has a diversified financial sector undergoing rapid

expansion, both in terms of strong growth of existing financial
services firms and new entities entering the market. The sector
comprises commercial banks, insurance companies, non-
banking financial companies, co-operatives, pension funds,
mutual funds and other smaller financial entities. The banking
regulator has allowed new entities such as payments banks to be
created recently thereby adding to the types of entities operating
in the sector. However, the financial sector in India is
predominantly a banking sector with commercial banks
accounting for more than 64 per cent of the total assets held by
the financial system.

The Government of India has introduced several reforms to

liberalize, regulate and enhance this industry. The Government
and Reserve Bank of India (RBI) have taken various measures
to facilitate easy access to finance for Micro, Small and Medium
Enterprises (MSMEs). These measures include launching Credit
Guarantee Fund Scheme for Micro and Small Enterprises,
issuing guideline to banks regarding collateral requirements and
setting up a Micro Units Development and Refinance Agency
(MUDRA). With a combined push by both government and
private sector, India is undoubtedly one of the world's most
vibrant capital markets. In 2017,a new portal named 'Udyami
Mitra' has been launched by the Small Industries Development
Bank of India (SIDBI) with the aim of improving credit
availability to Micro, Small and Medium Enterprises' (MSMEs)
in the country. India has scored a perfect 10 in protecting
shareholders' rights on the back of reforms implemented by
Securities and Exchange Board of India (SEBI).

FINANCIAL SERVICES OFFERED BY BANKS

a) Individual Banking

Banks typically offer a variety of services to assist individuals in

managing their finances, including:

 Checking accounts
 Savings accounts
 Debit & credit cards
 Insurance
 Wealth management

b) Business Banking

Most banks offer financial services for business owners who

need to differentiate professional and personal finances.
Different types of business banking services include:

 Business loans
 Checking accounts
 Savings accounts
 Debit and credit cards
 Merchant services (credit card processing, reconciliation
and reporting, check collection)
 Cash management (payroll services, deposit services,
etc.)

c) Digital Banking

The ability to manage your finances online from your computer,

tablet, or smartphone is becoming more and more important to
consumers. Banks will typically offer digital banking services
that include:

 Online, mobile, and tablet banking

 Mobile check deposit
 Text alerts
 E-statements
 Online bill pay

d) Loans

Loans are a common banking service offered, and they come in

all shapes and sizes.  Some common types of loans that banks
provide include:

 Personal loans
 Home equity loans
 Home equity lines of credit
 Home loans
 Business loans
INTRODUCTION TO INDIAN FINANCIAL
SYSTEM

The financial system of a country is an important tool for

economic development of the country, as it helps in creation of
wealth by linking savings with investments. It facilitates the
flow of funds form the households (savers) to business firms
(investors) to aid in wealth creation and development of both the
parties.

The financial system of a country is concerned with:

 Allocation and Mobilization of savings

 Provision of funds
 Facilitating the Financial Transactions
 Developing financial markets
 Provision of legal financial framework
 Provision of financial and advisory services

2.1 MEANING AND DEFINITION

The term financial system is a set of inter-related

activities/services working together to achieve some
predetermined purpose or goal. It includes different markets, the
institutions, instruments, services and mechanisms which
influence the generation of savings, investment capital
formation and growth.
A Financial System consists of various financial Institutions,
Financial Markets, Financial Transactions, rules and
regulations, liabilities and claims etc.

According to Robinson, the primary function of a financial

system is “to provide a link between savings and investment for
creation of wealth and to permit portfolio adjustment in the
composition of existing wealth.”

FEATURES OF FINANCIAL SYSTEM

1. It plays a vital role in economic development of a

country
2. It encourages both savings and investment
3. It links savers and investors
4. It helps in capital formation
5. It helps in allocation of risk
6. It facilitates expansion of financial markets
7. It aids in Financial Deepening and Broadening

The Indian financial system is broadly classified into two broad

groups:
Organised sector and (ii) Unorganised sector.

"The financial system is also divided into users of financial

services and providers. Financial institutions sell their services
to households, businesses and government. They are the users of
the financial services. The boundaries between these sectors are
not always clear cut. In the case of providers of financial
services, although financial systems differ from country to
country, there are many similarities. (i) Central bank (ii) Banks
(iii) Financial institutions (iv) Money and capital markets and
(v) Informal financial enterprises.

The organised financial system comprises of an impressive

network of banks, other financial and investment institutions
and a range of financial instruments, which together function in
fairly developed capital and money markets. Short-term funds
are mainly provided by the commercial and cooperative banking
structure. Nine-tenth of such banking business is managed by
twenty-eight leading banks which are in the public sector. In
addition to commercial banks, there is the network of
cooperative banks and land development banks at state, district
and block levels. With around two-third share in the total assets
in the financial system, banks play an important role. Of late,
Indian banks have also diversified into areas such as merchant
banking, mutual funds, leasing and factoring. The organised
financial system comprises the following sub-systems: 1.
Banking system 2. Cooperative system 3. Development Banking
system (i) Public sector (ii) Private sector 4.Money markets and
5. Financial companies/institutions.

The unorganised financial system comprises of relatively less

controlled moneylenders, indigenous bankers, lending pawn
brokers, landlords, traders etc. This part of the financial system
is not directly amenable to control by the Reserve Bank of India
(RBI). There are a host of financial companies, investment
companies, chit funds etc., which are also not regulated by the
RBI or the government in a systematic manner. However, they
are also governed by rules and regulations and are, therefore
within the orbit of the monetary authorities.

The Banking System The structure of the baking system is

determined by two basic factors – economic and legal. The
Development of the economy and the spread of banking habit
calls for increasing banking services. The demand for these
banking services affects the banks' structure and organisation.
National objectives and aspirations result in government
regulations, which have a profound influence on‟ the banking
structure. These regulations are basically of two types. First,
regulations which result in the formation of new banks to meet
the specific needs of a group of economic activities. Secondly,
legislation that affects the structure by means of nationalisation,
mergers or liquidation.
STRUCTURE OF INDIAN FINANCIAL SYSTEM
OR COMPONENTS OF INDIAN FINANCIAL
SYSTEM
1.2.1 FINANCIAL INSTITUTIONS

Financial institutions are intermediaries of financial markets

which facilitate financial transactions between individuals and
financial customers.

It simply refers to an organization (set-up for profit or not for

profit) that collects money from individuals and invests that
money in financial assets such as stocks, bonds, bank deposits,
loans etc.

There can be two types of financial institutions:

FINANCIAL INSTITUTIONS

BANKING/DEPOSITORY NON-BANKING/NON-
INSTITUTIONS DEPOSITORY INSTITUTIONS

 Banking Institutions or Depository institutions

These are banks and credit unions that collect money from the
public in return for interest on money deposits and use that
money to advance loans to financial customers.It consists of
Commercial banks, Co operative banks, Regional rural banks,
and Foreign banks. Commercial banks again divided as Private
banks and Public banks

 Non- Banking Institutions or Non-Depository

institutions
These are brokerage firms, insurance  and mutual funds
companies that cannot collect money deposits but can sell
financial products to financial customers.They are commonly
known as Non Banking Financial Companies or NBFC’s.

Financial Institutions may be classified into three categories:

• Regulatory

 It includes institutions like SEBI, RBI, IRDA etc. which

regulate the financial markets and protect the interests of
investors.

• Intermediaries

It includes commercial banks such as SBI, PNB etc. that provide

short term loans and other financial services to individuals and
corporate customers.

• Non – Intermediaries

 It includes financial institutions like NABARD, IDBI etc. that

provide long-term loans to corporate customers.

1.2.2 FINANCIAL MARKETS 

It refers to any marketplace where buyers and sellers participate

in trading of assets such as shares, bonds, currencies and other
financial instruments.A financial market may be an Organized
one or not.
 An Organized financial market may be further divided into
capital market and money market. While the capital market
deals in long term securities having maturity period of more
than one year, the money market deals with short-term debt
instruments having maturity period of less than one year. 

1.2.3 FINANCIAL ASSETS/INSTRUMENTS

 Financial assets include cash deposits, checks, loans, accounts
receivable, letter of credit, bank notes and all other financial
instruments that provide a claim against a person/financial
institution to pay either a specific amount on a certain future
date or to pay the principal amount along with interest.
1.2.4 FINANCIAL SERVICES 

 Financial Services are concerned with the design and delivery

of financial instruments and advisory services to individuals and
businesses within the area of banking and related institutions,
personal financial planning, leasing, investment, assets,
insurance etc.

It involves provision of a wide variety of fund/asset based and

non-fund based/advisory services and includes all kinds of
institutions which provide intermediate financial assistance and
facilitate financial transactions between individuals and
corporate customers.

2.3 FUNCTIONS OF INDIAN FINANCIAL SYSTEM

 It bridges the gap between savings and investment
through efficient mobilization and allocation of surplus funds.
 It helps a business in capital formation
 It helps in minimising risk and allocating risk efficiently
 It helps a business to liquidate tied up funds
 It facilitates financial transactions through provision of
various financial instruments
 It facilitate trading of financial assets/instruments by
developing and regulating financial markets

2.4 IMPORTANCE OF INDIAN FINANCIAL SYSTEM

 It accelerates the rate and volume of savings through

provision of various financial instruments and efficient
mobilization of savings
 It aids in increasing the national output of the country by
providing funds to corporate customers to expand their
respective business
 It protects the interests of investors and ensures smooth
financial transactions through regulatory bodies such as
RBI, SEBI etc.
 It helps economic development and raising the standard
of living of people
 It helps to promote the development of weaker section
of the society through rural development banks and co-operative
societies
 It helps corporate customers to make better financial
decisions by providing effective financial as well as advisory
services
 It aids in* Financial Deepening and* Broadening:

*Financial Deepening – It refers to the increase in financial

assets as a percentage of GDP

*Financial Broadening – It refers to increasing number of

participants in the financial system.

2.5 INANCIAL INTERMEDIARIES OR

INTERMEDIARIES IN INDIAN FINANCIAL SYSTEM

Commercial Banks

Cooperative Banks

Regional Rural Banks

Development Banks

Non-banking Financial Companies

Mutual Fund companies

Insurance Companies

FORMAL AND INFORMAL FINANCIAL

SYSTEMS
Access to finance is the ability of individuals or enterprises to
obtain financial services, including credit, deposit, payment,
insurance, and other risk management services.  Accumulated
evidence has shown that financial access promotes growth for
enterprises through the provision of credit to both new and
existing businesses.  It benefits the economy in general by
accelerating economic growth, intensifying competition, as well
as boosting demand for labour.  Financial services may be
provided by a variety of financial intermediaries that are part of
the financial system. A distinction is made between formal and
informal providers of financial services, which is based
primarily on whether there is a legal infrastructure that provides
recourse to lenders and protection to depositors.

Specialized Non bank financial institutions Formal system of

finance is licenced by the Central bank. Commercial and
development banks. Rural banks, post bank, savings and loan
companies, savings and loan companies. Large businesses
government Large rural enterprises, salaried workers, small and
medium enterprises. INFORMAL Informal system of finance is
not licenced by the Central bank. Savings collectors, savings
and credit associations and moneylenders. The principal clients
who do informal finance are either self-employed or poor
people.

FORMAL FINANCIAL SYSTEM/SECTOR

 Formal financial institutions often ignore small farmers, lower
income households, and small-scale enterprises in favour of
large scale, well-off, literate clientele who can satisfy their
stringent loan conditions.  Complex administrative services
procedures are beyond the knowledge and understanding of the
rural masses and small savers.  Formal financial institutions do
not mobilize rural savings or small scale deposits.  Formal
sector of institutions are selective regarding their clients, so as
to avoid clients who make only small deposits.  Loan
application procedures are very complex and needs reading and
writing skills so that a file on the borrower maybe established. 
The transaction costs are high and the repayment costs are low.
 The formal sector regularly has loanable funds available. 
The formal sector keeps written records on the activities of the
clients.

INFORMAL FINANCIAL SYSTEM/SECTOR

The informal financial sector provides savings and credit

facilities for small scale farmers in rural areas, and the lower-
income households and small-scale enterprises in urban areas. 
The procedures of the informal schemes are usually simple and
straight forward as they emanate from local cultures and
customs they are easily understood by the population.  The
informal sector mobilises rural savings and small savings from
low income urban households.  Informal groups operate on the
days which are convenient for their members.  Informal sector
associations accept any amount of regular savings, even the
most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based
lend themselves to the management of a large number of small
savings.  Transaction costs are low and repayment costs are
high.  The interest paid on the deposits in informal sector
compares favourably with that paid in the formal sector, thus
providing an incentive for rural and small urban house holds to
save.

 The informal financial sector provides savings and credit

facilities for small scale farmers in rural areas, and the lower-
income households and small-scale enterprises in urban areas. 
The procedures of the informal schemes are usually simple and
straight forward as they emanate from local cultures and
customs they are easily understood by the population.  The
informal sector mobilises rural savings and small savings from
low income urban households.  Informal groups operate on the
days which are convenient for their members.  Informal sector
associations accept any amount of regular savings, even the
most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based
lend themselves to the management of a large number of small
savings.  Transaction costs are low and repayment costs are
high.  The interest paid on the deposits in informal sector
compares favourably with that paid in the formal sector, thus
providing an incentive for rural and small urban house holds to
save.

NON BANKING FINANCIAL COMPANIES

Non-banking financial companies (NBFCs) are financial

institutions that offer various banking services, but do not have
a banking license. Generally, these institutions are not allowed
to take deposits from the public, which keeps them outside the
scope of traditional oversight required under banking
regulations. NBFCs can offer banking services such as loans
and credit facilities, retirement planning, money
markets, underwriting and merger activities.

They are responsible for providing financial services but are not
regulated by a national or international governing body and do
not hold a full-fledged license for conducting operations. The
financial services offered by NBFCs include disbursement of
loans and advances, acquisition of stocks, shares or bonds etc

They supplement the role of the banking sector in meeting the

increasing financial needs of the corporate sector, delivering
credit to the unorganized sector and to small local borrowers. In
India, despite being different from banks, NBFC are bound by
the Indian banking industry rules and regulations.

A Bank is an establishment, office, and a company, which deals

in money. A bank receives money in deposit accounts of its
customers on certain conditions in different type of deposit
accounts. The conditions of these accounts differ from the
nature of accounts

DIFFERENCE BETWEEN BANKS AND NBFC ‘S

NBFC cannot accept demand deposits;

NBFCs do not form part of the payment and settlement system

and cannot issue cheques drawn on itself

NBFC cannot issue Demand Drafts like banks

Deposit insurance facility of Deposit Insurance and Credit

Guarantee Corporation is not available to depositors of NBFCs,
unlike in case of banks.

While banks are incorporated under banking companies act,

NBFC is incorporated under company act of 1956

The NBFCs are allowed to accept/renew public deposits for a

minimum period of 12 months and maximum period of 60
months. They cannot accept deposits repayable on demand. The
deposits with NBFCs are not insured. The repayment of deposits
by NBFCs is not guaranteed by RBI.

NBFC fixed deposits are generally rated by the rating agencies

in the country. On the other hand the fixed deposit of banks are
not rated by the rating agencies. 

Bank fixed deposits are insured, while NBFC fixed deposits are
not insured.In fact, if there is a default of Rs 1 lakh and less the
Deposit Insurance and Credit Guarantee Corporation of India
pays the insurance amount on a bank deposit.

NBFC defaults on its payments, you would lose your principal

and insurance amount, which is why you should opt for highly
rated safe fixed deposits only. Also, another thing worth
mentioning is that NBFCs tend to offer higher interest rates as
compared to bank deposits.

s far as lending is concerned banks tend to target corporates as

well as retailers. On the other hand NBFCs are more geared
towards the retail sector.

Banks tend to frequently issue credit cards of different types

depending on the needs of the customers, while  NBFCs do not.

Rating is another key difference between banks and NBFCs. For

example, the deposits of NBFCs are rated, while the deposits of
banks are not. The latter is considered as very safe, while the
former is not. One also needs to remember that the deposits
from Non Banking Finance Company are not guaranteed while
that of banks are. It is a good idea to hence check the ratings of
NBFCs before you invest. In general the good quality ones are
AAA rated, which ensures the safety and timely payment of
interest and principal amount. Hence, do check the same before
investing.
 BANKING COMPANY

Meaning of Banking Company:

A Bank is an establishment, office, and a company, which deals

in money. A bank receives money in deposit accounts of its
customers on certain conditions in different type of deposit
accounts. The conditions of these accounts differ from the
nature of accounts.

In deposit accounts banks also pay interest to its customers as

per the nature and conditions of the account. A bank also lends
money to its customers as per decided guideline. Although no
statuary definition of a bank is given anywhere but as per
section 5(c) of Banking Regulation Act 1949 a “Banking
Company” means any company which transacts the business of
a Banking Company in India.

The term has been further elaborated under section 5(B) of the
said Act which says. The 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
able by cheque, draft, pay order or otherwise.

One thing is very important to understand that any Bank

functioning in India is bound to obey the rules of the Reserve
Bank of India. A better care of the customers is taken by all
banks is ensured by the Reserve Bank of India. As such the
Reserve Bank of India keeps an attentive eye on the functioning
of banks in India and also takes corrective steps whenever
required to protect the interest of each banking customer.

The Role of Banks is Co-related with their functions. The

functions of banks are always based on the frame work of
banking regulations act of 1949 prescribes banking as
acceptance for the purpose of lending or investment deposits of
money from the public repayable on demand or otherwise and
withdrawals by cheques, drafts or otherwise.

The functions of any Banking Company can be divided into two

parts the main functions and the allied functions. The main
function as already stated above is accepting money as deposits
and lending and investing such deposited money. Although
banks accept deposits from public but each bank is free to
formulate their own schemes of deposits to attract maximum
number of customers in order to be able to mobilize maximum
deposits (the raw material) of banking industry.

They are also free to fix the rate of interest on deposits (except
Saving account deposited which is same and fixed by RBI for
all banks) depending on the individual policy of accepting
deposits by each bank which is always based on the basis of cost
of funds for each bank. Accordingly each bank prepares its own
schemes for mobilizing deposits but all such schemes are
subject to

Another main function of banks is to provide loans. It may be

for Industries, trade, Retail business, Agriculture, Housing
Finance, Education or for personal needs of customers. Like
deposits banks also prepare different kind of schemes to attract
more and more borrowers but each scheme is required to be
framed within banking regulations.

While accepting deposits banks commit to pay interest on

deposit accounts as per rules of payment of interest. Likewise
while lending money banks also charge interest on loans as per
scheme of specified type of loans the details of types of loans is
discussed in the relevant part of this book.

In addition to main functions of accepting deposits and lending

banks also performs many type of other functions which can be
nomenclature as Non-fund based functions like issuing of Letter
of Credits, Letter of Bank guarantees, Safe custody vaults.
Locker Facilities, issuing of credit worthy certificate, collection
of cheques, bills, Local taxes, Agency functions for Govt. and
local bodies, collection of payments for govt. agencies. And so
on. The list not exhaustive.

PRODUCTS AND SERVICES OFFERED BY BANKING

COMPANY:

In brief we may sum up the products and services offered by

banking company:

ADVERTISEMENTS:
a. Deposits like Current Account, Saving Account, Term or
Fixed Deposits, Recurring Deposits, PPF Accounts and all other
deposit accounts.

b. Payment Services: such as pension, payment orders,

remittances by way of Demand Drafts and wire services.

c. Banking services related to Government transactions.

d. Demand accounts, equity, government bonds.

e. Indian currency notes exchange facility.

f. Collection of cheques, Safe Custody services, Safe deposit

locker facility.

g. Loans and Overdrafts.

h. Foreign Exchange services including money changing.

i. Third party insurance and investment products.

j. Card products including Credit Cards, Debit Cards, ATM

Cards etc.

Whatever functions a bank performs is subject to restrictions

and controls as provided under the Banking Regulations Act
1949.

FORMS OF BUSINESS OF BANKING COMPANY:

In addition to the business of banking, a banking company
may engage in any one or more of the following forms of
business, namely:

(a) The borrowing, raising, or taking up of money; the lending

or advancing of money either upon or without security; the
drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundies, promissory
notes, coupons, drafts, bills of lading, railway receipts, warrants,
debentures, certificates, scrips and other instruments and
securities whether transferable or negotiable or not; the granting
and issuing of letters of credit, traveller’s cheques and circular
notes; the buying, selling and dealing in bullion and specie; the
buying and selling of foreign exchange including foreign bank
notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures,
debenture stock, bonds, obligations, securities and investments
of all kinds; the purchasing and selling of bonds, scrips or other
forms of securities on behalf of constituents or others, the
negotiating of loans and advances; the receiving of all kinds of
bonds, scrips or valuables on deposit or for safe custody or
otherwise; the providing of safe deposit vaults; the collecting
and transmitting of money and securities;

(b) Acting as agents for any Government or local authority or

any other person or persons; the carrying on of agency business
of any description including the clearing and forwarding of
goods, giving of receipts and discharges and otherwise acting as
an attorney on behalf of customers, but excluding the business
of a managing agent or secretary and treasurer of a company;

(c) Contracting for public and private loans and negotiating and
issuing the same;

(d) The effecting, insuring, guaranteeing, underwriting,

participating in managing and carrying out of any issue, public
or private, of State, municipal or other loans or of shares, stock,
debentures, or debenture stock of any company, corporation or
association and the lending of money for the purpose of any
such issue;

(e) Carrying on and transacting every kind of guarantee and

indemnity business;

(f) Managing, selling and realising any property which may

come into the possession of the company in satisfaction or part
satisfaction of any of its claims;

(g) Acquiring and holding and generally dealing with any

property or any right, title or interest in any such property which
may form the security or part of the security for any loans or
advances or which may be connected with any such security;

(h) Undertaking and executing trusts;

(i) Undertaking the administration of estates as executor, trustee

or otherwise;
(j) Establishing and supporting or aiding in the establishment
and support of associations, institutions, funds, trusts and
conveniences calculated to benefit employees or ex- employees
of the company or the dependents or connections of such
persons; granting pensions and allowances and making
payments towards insurance; subscribing to or guaranteeing
moneys for charitable or benevolent objects or for any
exhibition or for any public, general or useful object;

(k) The acquisition, construction, maintenance and alteration of

any building or works necessary or convenient for the purposes
of the company;

(l) Selling, improving, managing, developing, exchanging,

leasing, mortgaging, disposing of or turning into account or
otherwise dealing with all or any part of the property and rights
of the company;

(m) Acquiring and undertaking the whole or any part of the

business of any person or company, when such business is of a
nature enumerated or described in this sub- section;

(n) Doing all such other things as are incidental or conducive to

the promotion or advancement of the business of the company;

(o) Any other form of business which the Central Government

may, by notification in the Official Gazette, specify as a form of
business in which it is lawful for a banking company to engage.