INDIAN BANKING SYSTEM

1. What is Banking?
2. Objectives of Banking
3. Importance of Banks in an Economy
4. Structure of Indian Banking System
5. Classification of Banks
6. Some interesting cases of banks
FUNCTIONS OF A COMMERCIAL BANK
According to section 6 of the Banking Regulation Act, 1949, the
primary functions of a bank are:
Acceptance of deposits and
Lending of funds.
For centuries, banks have borrowed and lent money to business,
trade, and people, charging interest on loans and paying interest on
deposits.
These two functions are the core activities of banking.

Besides these two functions, a commercial bank performs a variety

of other functions which can be categorized in two broad categories
namely
(a) Agency or Representative functions
(b) General Utility functions.
 AGENCY FUNCTIONS OF A
COMMERCIAL BANK
• Collection and Payment of Various Items: Banks carry out the standing instructions of customers for
making payments; including subscriptions, insurance premium, rent, electricity and telephone bills,
etc.
• Undertake government business like payment of pension, collection of direct tax (e.g. income tax)
and indirect tax like excise duty.
• Letter of Reference: Banks buy and sell foreign exchange and thus promote international trade. This
function is normally discharged by Foreign Exchange Banks.
• Purchase and Sale of Securities: Underwrite and deal in stock, funds, shares, debentures, etc.
• Government’s Agent: Act as agents for any government or local authority or any other person or
persons; also carry on 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.
• Purchase and Sale of Foreign Exchange: Banks buy and sell foreign exchange and thus promote
international trade. This function is normally discharged by Foreign Exchange Banks.
• Trustee and Executor: Banks also act as trustees and executors of the property of their customers
on their advice.
• Remittance of Money: Banks also remit money from one place to the other through bank drafts or
mail or telegraphic transfers.
 GENERAL UTILITY SERVICES
• Locker facility: Banks provide locker facilities to their customers. People can keep their gold or silver
jewellery or other important documents in these lockers. Their annual rent is very nominal.
• ·Business Information and Statistics: Being familiar with the economic situation of the country, the banks
give advice to their customers on financial matters on the basis of business information and statistical data
collected by them.
• Help in Transportation of Goods: Big businessmen or industrialists after consigning goods to their retailers
send the Railway Receipt to the bank. The retailers get this receipt from the bank on payment of the value
of the consignment to it. Having obtained the Railway Receipt from the bank they get delivery of the
consignment from the Railway Goods Office. In this way banks help in the transportation of goods from
the production centers to the consumption centers.
• Acting as a Referee: If desired by the customer, the bank can be a referee i.e. who could be referred by the
third parties for seeking information regarding the financial position of the customer.
• Issuing Letters of Credit: Bankers in a way by issuing letters of credit certify the credit worthiness of the
customers. Letters of credit are very popular in foreign trade.
• ·Acting as Underwriter: Banks also underwrite the securities issued by the government and corporate
bodies for commission. The name of a bank as an underwriter encourages investors to have faith in the
security.
• Issuing of Traveller’s Cheques and Credit Cards: Banks have been rendering great service by issuing
traveller’s cheques, which enable a person to travel without fear of theft or loss of money. Now, some
banks have started credit card system, under which a credit card holder is allowed to avail credit from the
listed outlets without any additional cost or effort. Thus a credit card holder need not carry or handle cash
all the time.
· Issuing Gift Cheques: Certain banks issue gift cheques of various
denominations e.g some Indian banks issue gift cheques of the denomination of
Rs. 101, 501, 1001 etc. These are generally issued free of charge or a very
nominal fee is charged.
· Dealing in Foreign Exchange: Major branches of commercial banks also
transact business of foreign exchange. Commercial banks are the main authorized
dealers of foreign exchange in India.
· Merchant Banking Services: Commercial banks also render merchant
banking services to the customers. They help in availing loans from non-banking
financial institutions.
DEVELOPMENT OF BANKING IN INDIA
The history of banking dates back to the thirteenth century when the first bill of exchange was used as
money in medieval trade. There was no such word as ‘banking’ before 1640, although the practice of safe-
keeping and savings flourished in the temple of Babylon as early as 2000 B.C. Chanakya in his Arthashastra
written in about 300 B.C. mentioned about the existence of powerful guilds of merchant bankers who
received deposits, advanced loans and issued hundis (letters of transfer). The Jain scriptures mention the
names of two bankers who built the famous Dilwara Temples of Mount Abu during 1197 and 1247 A.D.
The first bank called the ‘Bank of Venice’ was established in Venice, Itlay in 1157 to finance the
monarch in his wars. The bankers of Lombardy were famous in England. But modern banking began with
the English goldsmith only after 1640. The first bank in India was the ‘Bank of Hindustan’ started in 1770
by Alexander & Co. an English agency house in Calcutta which failed in 1782 with the closure of the agency
house. But the first bank in the modern sense was established in the Bengal Presidency as the Bank of
Bengal in 1806.
History apart, it was the ‘merchant banker’ who first evolved the system of banking by trading in
commodities than money. Their trading activities required the remittances of money from one place to
another. For this, they issued ‘hundis’ to remit funds. In India, such merchant bankers were known as
‘Seths’.
The next stage in the growth of banking was the goldsmith. The business of goldsmith was such that
he had to take special precautions against theft of gold and jewellery. If he seemed to be an honest
person, merchants in the neighborhood started leaving their bullion, money and ornaments in his care. As
this practice spread, the goldsmith started charging something for taking care of the money and bullion.
As evidence for receiving valuables, he issued a receipt. Since gold and silver coins had no marks of the
owner, the goldsmith started lending them. As the goldsmith was prepared to give the holder of the
receipt an equal amount of money on demand, the goldsmith receipts became like cheques as a medium
of exchange and a means of payment.
 The next stage in the growth of banking is the moneylender. The goldsmith
found that on an average the withdrawals of coins were much less than the deposits
with him. So he started advancing the coins on loan by charging interest. As a
safeguard, he kept some money in the reserve. Thus the goldsmith-money-lender
became a banker who started performing the two functions of modern banking that
of accepting deposits and advancing loans.
In India our historical, cultural, social and economic factors have resulted in the
Indian money market being characterized by the existence of both the unorganized
and the organized sectors.
BANKING SECTOR REFORMS IN INDIA
Why were banking sector reforms were needed ?
a. Mobilization of financial resources and attain higher growth levels.
b. India saw its worst economic crisis in 1980’s so, reforms were needed to attain
macro economic stability.
So, India marked into the era of Economic reforms by doing Liberalization,
Privatization and Globalization.
Therefore after recommendations of various committees financial sector reforms got
momentum.
Reforms were made in two phases :
Ist Phase : Narsimham Committee’s report on financial system focused on making
reforms for enabling and strengthening the banking sector in 1992.
II Phase : Narsimham Committee’s II report on financial system focused on structural
changes, improvements in transparency levels and standards of disclosure. In
1998.
So that banks can increase their efficiency levels and upgrade them to meet
international standards.
Reforms were :
1. Basic Banking :
The central bank had introduced 'no-frills' accounts in 2005 to provide basic banking
facilities to poor and promote financial inclusion. The accounts could be maintained
without or with very low minimum balance. This included the poorer section of the
society. Public, private as well foreign banks were asked to introduce basic banking
no-frills accounts. By the end of March 2007 6.7 million no frills accounts were
opened in India.
2. Deregulation of Interest Rates :
The committee recommended deregulation of the Interest Rates, so that banks can
themselves set the interest rates for their customers. The interest rates were to be
preferably determined by the forces of demand and supply, to make it related to the
market forces.
3. Reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR):
The Narasimham Committee had recommended bringing down the statutory pre-
emptions such as SLR and CRR. It recommended that SLR should be reduced to 25% over
the period of time and CRR should be reduced to 10% over the period of time. When
reduced these ratios, bank would have more funds in their hands to deploy them in
various investment and loans opportunity. The committee also recommended that banks
should get some interest on the CRR balanced.
4. Redefining the priority sector: The Narasimham Committee redefined the priority
sector to include the marginal farmers, tiny sector, small business and transport sector,
village and cottage industries etc. The committee also recommended that there should be
a target of 10% of the aggregate credit fixed for the Priority Sector at least.
5. Diversification of Services : It was recommended by the committee that the banks
should enter in to some non traditional financial services like leasing, hire purchasing,
factoring, mutual funds, merchant banking etc.
SBI was the first to take this initiative to enter into merchant banking by its division called
SBI Capital Market in 1987.
6. Retail Banking :
Since 1991, banks have diversified into retail banking which is also known as consumer
banking. Banks provide mortgages, housing loans, automobile loans, credit and debit
cards etc.

7. New Services : Financial services for financial guarantees, securitization of loans, stock
broking, projects related to infrastructure are some of the new services added by the
bank. To enlarge their activities banks have set up subsidiaries to become the primary
dealers of government securities. SBI and PNB have initiate these services. They have
been invested to the funds of Technology Development and Investment Corporation of
India.
8. Clearing and Settlement:
Banks have set up the Clearing Corporation of India Ltd (CCIL) in 2001 for clearing and
settlement of government securities and foreign exchange transactions. The SBI has
contributed to the 51% of the equity to form this corporation. It was also assisted by
other banks as co-promoters like LIC, IDBI, ICICI, HDFC and Bank of Baroda.
9. Life Insurance :
In 2000, the Government of India through Reserve Bank of India guidelines approved of
banks to set up life insurance business. Many banks have started life insurance businesses
as a part of their activities in the post reform period.
What are Development Banks?
Development banks are those which have been set up mainly to provide
infrastructure facilities for the industrial growth of the country. They provide
financial assistance for both public and private sector industries.

Development Banks in India

Working capital requirements are provided by commercial banks, indigenous
bankers, co-operative banks, money lenders, etc. The money market provides short-
term funds which mean working capital requirements.
The long term requirements of business concerns are provided by industrial banks,
and the various long term lending institutions which are created by government. In
India these long term lending institutions are collectively referred as development
banks.
They are:
Industrial Finance Corporation of India (IFCI), 1948
Industrial Credit and Investment Corporation of India (ICICI), 1955
Industrial Development of Bank of India (IDBI), 1964
State Finance Corporation (SFC), 1951
Small Industries Development Bank of India (SIDBI), 1990
Export Import Bank (EXIM)
Small Industries Development Corporation (SIDCO)
National Bank for Agriculture and Rural Development (NABARD).
Objectives of Development Banks
The main objectives of the development banks are
1. to promote industrial growth,
2. to develop backward areas,
3. to create more employment opportunities,
4. to generate more exports and encourage import substitution,
5. to encourage modernization and improvement in technology,
6. to promote more self employment projects,
7. to revive sick units,
8. to improve the management of large industries by providing
training,
9. to remove regional disparities or regional imbalance,
10. to promote science and technology in new areas by
providing risk capital,
11. to improve capital market in the country.
Export-Import Bank of India: Management and Functions
The Export-Import Bank (Exim bank) was set up on January 1, 1982 to take over the
operations of international finance wing of the IDBI and to provide financial assistance to
exporters and importers and to function as a head financial institution for coordinating
the working of other institutions engaged in financing of exports and imports of goods
and services.

Functions of Exim Bank:

The important functions of Exim Bank are as follows:
(i) It provides direct financial assistance to exporters of plant, machinery and related
service in the form of medium-term credit.
(ii) Underwriting the issue of shares, stocks, bonds, debentures of any company engaged
in exports.
(iii) It provides rediscount of export bills for a period not exceeding 90 days against short-
term usance export bills discounted by commercial banks.
(iv) The bank gives overseas buyers credit to foreign importers for import of Indian capital
goods and related services.
(v) Developing and financing export oriented industries.
(vi) Collecting and compiling the market and credit information about foreign trade.
Industrial Development Bank of India (IDBI):
Functions and Developmental Activities

Industrial Development Bank of India (IDBI) established under Industrial Development

Bank of India Act, 1964, is the principal financial institution for providing credit and other
facilities for developing industries and assisting development institutions.
Till 1976, IDBI was a subsidiary bank of RBI. In 1976 it was separated from RBI and the
ownership was transferred to Government of India. IDBI is the tenth largest bank in the
world in terms of development. The National Stock Exchange (NSE), the National
Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) are
some of the Institutions which has been built by IDBI.
Organization and Management:
IDBI consist of a Board of Directors, consisting of a chairman and Managing Director
appointed by the Government of India, a Deputy Governor of the RBI nominated by that
bank and 20 other Directors are nominated by the Central Government.
The board had constituted an Executive Committee consisting of 10 Directors, including
the Chairman and Managing Director. The executive committee is empowered to sanction
financial assistance.
The Head office of IDBI is located in Mumbai. The bank has five regional offices, one each
in Kolkata, Guwahati, New Delhi, Chennai and Mumbai. Besides the bank have 21 branch
offices.
Functions of IDBI:
The main functions of IDBI are discussed below:
(i) To provide financial assistance to industrial enterprises.
(ii) To promote institutions engaged in industrial development.
(iii) To provide technical and administrative assistance for promotion, management or
expansion of industry.
(iv) To undertake market and investment research and surveys in connection with
development of industry.
IDBI Assistance:
The IDBI provides financial assistance either directly or through some specified
financial institutions:
(i) Direct Assistance:
The IDBI grants loans and advances to industrial concerns. There is no restriction on the
upper or lower limits for assistance to any concern itself. The bank guarantees loans
raised by industrial concerns in the open market from the State Co-operative Banks, the
Scheduled Banks, the Industrial Finance Corporation of India (IFCI) and other ‘notified’
financial institutions.
(ii) Indirect Assistance:
The IDBI can refinance term loans to industrial concerns repayable within 3 to 25 years
given by the IFCI, the State Financial Corporation and some other financial institutions
and to SIDCs (State Industrial Development Corporations), Commercial banks and Co-
operative banks which extend term loans not exceeding 10 years to industrial concerns.
IDBI subscribes to the shares and bonds of the financial institutions and thereby provide
supplementary resources.
Developmental Activities of IDBI:
(1) Promotional Activities:
In fulfillment of its developmental role, the bank continues to perform a wide range of
promotional activities relating to developmental programmes for new entrepreneurs,
consultancy services for small and medium enterprises and programmes designed for
accredited voluntary agencies for the economic upliftment of the underprivileged.
These include entrepreneurship development, self-employment and wage employment in
the industrial sector for the weaker sections of society through voluntary agencies, support
to Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality
Testing Centers for small industries.
(2) Technical Consultancy Organizations:
With a view to making available at a reasonable cost, consultancy and advisory services to
entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other
All-India Financial Institutions, has set up a network of Technical Consultancy Organizations
(TCOs) covering the entire country. TCOs offer diversified services to small and medium
enterprises in the selection, formulation and appraisal of projects, their implementation and
review.
(3) Entrepreneurship Development Institute:
Realizing that entrepreneurship development is the key to industrial development; IDBI
played a prime role in setting up of the Entrepreneurship Development Institute of India for
fostering entrepreneurship in the country. It has also established similar institutes in Bihar,
Orissa, Madhya Pradesh and Uttar Pradesh. IDBI also extends financial support to various
organisations in conducting studies or surveys of relevance to industrial development.
Objectives and Functions of NABARD

NABARD is an apex Development Bank authorised for providing and regulating credit and other
facilities for the promotion and development of agriculture, small-scale industries, cottage and
village industries, handicrafts and other rural crafts and other allied economic activities in rural
areas with a view to promote integrated rural development and prosperity and for matters
connected therewith.
History
Reserve Bank of India (RBI), constituted a committee (Shivaraman committee) to review the
arrangements for institutional credit for agriculture and rural development (CRAFICARD) on 30
March 1979, under the Chairmanship of Shri B.Sivaraman, former member of Planning
Commission, Government of India to review the arrangements for institutional credit for
agriculture and rural development. NABARD was established with an initial capital of 100 cr., on
12 July 1982 by a special act of parliament 1981, by transferring the agricultural credit functions
of RBI and refinance functions of the then Agricultural Refinance and Development Corporation
(ARDC). NABARD replaced the Agricultural Credit Department (ACD) and Rural Planning and
Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development
Corporation (ARDC)
NABARD’s activities are governed by a Board of Directors. The Board of Directors are appointed
by the Government of India in harmony with NABARD Act 1981. It has its headquarters in
Mumbai. Government of India holds 99% stake and RBI holds 1% (initially 72.5%) stake in
NABARD.
Objectives
More than 50% of the rural credit is disbursed by the Co-operative Banks and Regional
Rural Banks. NABARD is responsible for regulating and supervising the functions of Co-
operative banks and RRBs. NABARD works towards providing a strong and efficient rural
credit delivery system, capable of taking care of the expanding and diverse credit needs of
agriculture and rural development.
Functions of NABARD
Credit Functions:
Framing policy and guidelines for rural financial institutions.
Providing credit facilities to issuing organizations
Monitoring the flow of ground level rural credit.
Preparation of credit plans annually for all districts for identification of credit potential.
Development Functions:
Help cooperative banks and Regional Rural Banks to prepare development actions plans for
themselves.
Help Regional Rural Banks and the sponsor banks to enter into MoUs with state
governments and cooperative banks to improve the affairs of the Regional Rural Banks.
Monitor implementation of development action plans of banks.
Provide financial support for the training institutes of cooperative banks, commercial banks
and Regional Rural Banks.
Provide financial assistance to cooperative banks for building improved management
information system, computerization of operations and development of human resources.
Supervisory Functions:
Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other
than urban/primary cooperative banks) under the provisions of Banking Regulation
Act, 1949.
Undertakes inspection of State Cooperative Agriculture and Rural Development Banks
(SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
Provides recommendations to Reserve Bank of India on issue of licenses to
Cooperative Banks, opening of new branches by State Cooperative Banks and Regional
Rural Banks (RRBs).
INDIAN BANKS AND BASEL ACCORD :

BASEL BANKING ACCORD :

These are the norms issued by the Basel Committee on Banking

Supervision, formed under the auspices of Bank of International
Settlements (BIS) located in Basel, Switzerland.
The committee recommends and formulates the best practices for
banking industry.

BASEL I, BASEL II and BASEL III norms are introduced since 1988
specifying the uniform guidelines to be followed by the banks all
over the world.

Indian banks have compulsorily adopt BASEL III accord by 31st

March 2019.
What is Basel III ?

Basel III is an international regulatory accord that introduced a set of

reforms designed to improve the regulation, supervision and risk
management within the banking sector. The Basel Committee on
Banking Supervision published the first version of Basel III in late
2009, giving banks approximately three years to satisfy all
requirements. Largely in response to the credit crisis, banks are
required to meet certain minimum capital requirements.
OBJECTIVES OF BASEL III :

• To Stabilize International Banking System

• Fair and Consistent practices in order to
decrease competitive inequality.
• Increase the ability of banks to absorb shocks
arising from financial and economic stress.
• Improve risk management and governance at
banks.
• Strengthen the bank’s transparency and
disclosure.
 THREE PILLARS OF BASEL III ACCORD

I Pillar : MINIMUM CAPITAL :

Banks must hold capital against 8% of their assets after adjusting their
assets for the risk.
( Assets are having four classifications of provision requirement 0%,
20%, 50% and 100%).

CAPITAL ADEQUACY RATIO

CAR = BANK’S CAPITAL / RISK WEIGHTED ASSETS

• According to latest guidelines cushion of capital in the form of Capital

Conversion Buffer of 2.50% to deal with increased stress is to be
maintained by the banks.

• Counter Cycling Buffer to increase capital requirement in good times

and decrease in bad times is to be maintained. It ranges from 0% to
2.5% consisting of common equity or loss absorbing capital.
II Pillar : SUPERVISORY REVIEW :

The second pillar i.e. Supervisory Review Process is basically intended to ensure
that the banks have adequate capital to support all the risks associated in their
businesses.

In India , the RBI has issued the guidelines to the banks that they should have
an internal supervisory process which is called ICAAP or Internal Capital
Adequacy Assessment Process. With this tool the banks can assess the capital
adequacy in relation to their risk profiles as well as adopt strategies for
maintaining the capital levels. Apart from that, there is another process
stipulated by RBI which is actually the Independent assessments of the ICAAP of
the Banks. This is called SREP or Supervisory Review and Evaluation Process.
The independent review and evaluation may suggest prudent measures and
supervisory actions whatever is needed.
ICAAPis conducted by Banks themselves and SREP is conducted RBI which is
along with the RBI’s Annual Financial Inspection (AFI) of the bank.
Third Pillar: Market Discipline

The idea of the third pillar is to complement the first and second
pillar. This is basically a discipline followed by the bank such as
disclosing its capital structure and approaches to assess the capital
adequacy.

In the above discussion, we could understand that Basel III are

basically guidelines which focus upon adequate capital in the banks
and minimize the risk to the customers or depositors. The idea is to
make a sound financial system which not only helps the banks and
but the entire economy of the country to maintain the trust and
faith, as transparency in the business. The centerpieces are “Capital
Adequacy” and “Risks.
RBI – Reserve Bank of India

The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s bank.
The RBI controls monetary and other banking policies of the Indian government. The
Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with
the Reserve Bank of India Act, 1934. The Reserve Bank is permanently situated in
Mumbai since 1937.
Establishment of Reserve Bank of India
The Reserve Bank is fully owned and operated by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve
Bank.
Organizational Structure of RBI :
•The Reserve Bank of India’s affairs are governed by the central board of directors.
• The Board is appointed by the Government of India in keeping with the Reserve Bank of
India Act.
• Central Board of Directors consists of 20 members as follows :
1. One Governor
2. Four Deputy Governors
3. Fifteen Executive Directors
Local Boards : One each for four regions of the country in Mumbai, Calcutta, Chennai &
New Delhi which consists of five members each & appointed by the Central
Government for a term of 4 years.
Organization Structure
REGIONAL RURAL BANKS :
The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The
banks provide credit to the weaker sections of the rural areas, particularly the small
and marginal farmers, agricultural laborers, artisans and small entrepreneurs.
Initially, five RRBs were set up on October 2, 1975 which were sponsored by
Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank
and United Bank of India.

There are several concessions enjoyed by the RRBs by Reserve Bank of India such as
lower interest rates and refinancing facilities from NABARD like lower cash ratio,
lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring
banks, managerial and staff assistance from the sponsoring bank and reimbursement
of the expenses on staff training. The RRBs are under the control of NABARD.
NABRAD has the responsibility of laying down the policies for the RRBs, to oversee
their operations, provide refinance facilities, to monitor their performance and to
attend their problems.

RRBs are jointly owned by , the concerned State Government and Sponsor Banks (27
scheduled RBBs and one State Cooperative Bank); the issued capital of a RRB is
shared by the owners in the proportion of 50%, 15% and 35%respectively.
In 2015 the RRBs Act was amended whereby such banks permitted
to raise capital from sources other than central, state governments
and sponsor banks. In such instances, the combined shareholding of
central government and the sponsor bank should not be lower than
51%.

FUNCTIONS OF RRBs :

• The granting of loans and advances, particularly to small and

marginal farmers and agricultural laborers, whether to an individual
or in groups and to cooperative societies for agriculture or related
purposes.
• The ranting of loans and advances, particularly to artisans and
small entrepreneurs and persons of small means engaged in trade
commerce or industry or other productive activities within the
notified areas of the rural bank.
CAPITAL REQUIREMENTS OF RRBs:

• In the beginning the authorized share capital of each

was Rs 1 crore, divided into 1 Lakh shares of Rs 100
each.

• 50% of the issued capital was subscribed to by the

central government 15% by state govt. 35% by
sponsoring public sector bank.

• With the enactment of the Regional rural banks

(amendment) Act 1987, the authorized capital of each
RRB has been raised to Rs 5 crores and paid up capital
of Rs 1 crore.
NEEDS/OBJECTIVE OF RRBs –

• Existing Credit Agencies – Cooperative Banks and commercial banks –

lacked in meeting the rural needs.

• Weak Cooperative Credit Structure with respect to the managerial talent,

post credit supervision and loan recovery.

• Inability to mobilize adequate resources and excessive dependence on

RBI for refinance.

• Commercial Banks were urban oriented. They had to adopt to rural

environment in their methods, procedures, training and orientation.

• High cost of operations due to high salary structure, staffing pattern and
establishment cost, therefore unable to provide credit at cheap rates in the
rural area.

•RRBs were locally based, rural oriented and commercially organised.

NAME OF THE RRB SPONSOR BANK STATE

PRATHAMA BANK SYNDICATE BANK UTTAR PRADESH

UTTAR PRADESH
ALLAHBAD UP GRAMIN BANK ALLAHABAD BANK

ASSAM GRAMIN VIKAS BANK UNITED BANK OF INDIA ASSAM

PUNJAB GRAMIN BANK PUNJAB NATIONAL BANK PUNJAB

DENA GUJARAT FRAMIN BANK DENA BANK GUJARAT

RECENT DEVELOPMEMTS IN RRBs :

• In 2005 out of 196 RRBs only 56 RRBs are left after the policy of
amalgamation and consolidation of RRBs as per Bhandari
Committee 1994-94 which focused more on strengthing the
existing structure of RRBs.

•An amendment bill was passed in 2013 which raised the

authorized share capital of RRBs from 50 million in INR and
provided that shareholders can elect the directors.

•The amendments in 2015 also accepted that assistance to RRBs

adopting ICT solutions for financial inclusion would be given.
COOPERATIVE BANKS :

The co-operative Bank involves autonomous association

of persons united voluntarily to meet their common
economic, social and cultural needs through a jointly
owned and democratically controlled enterprise. The
co-operative structure is designed on the principles of
mutual help, democratic decision making and open
membership, in view of the fact that their ownership
and control are directly vested in the hands of the
members.
FEATURES OF CO OPERATIVE BANKS :
• Cooperative banking is small scale banking carried on a no profit
no loss basis for mutual cooperation and help.
• They supplement the work of commercial banks in mobilizing
savings and credit requirements of the local population.
• They are established under the Cooperative Credit Societies Act
of 1904. In 1912 a new act was passed to establish cooperative
central banks.
• They are established by RBI, and governed by the Banking
Regulation Act 1949 and Banking Laws (Cooperative Societies)
Act 1965.
•They are promoted by members who has one vote each and the
bank has to be registered with the State Registrar of Cooperative
Societies.
COOPERATIVE BANKS VS COMMERCIAL BANKS

Cooperative Banks also performs the basic banking functions of banking but they
differ from commercial banks in the following manner :

1. Commercial banks are joint stock companies under the companies act of 1956
or public sector bank under a separate act of a parliament whereas cooperative
banks were established under the cooperative societies acts of different states.

2. Commercial Banks structure is branch banking structure whereas the

cooperative banks have a three-tier setup, with State Cooperative Bank at apex
level, Central/District Cooperative at District Level, and Primary Cooperative
Societies at rural level.

3. Only some sections of Banking Regulation Act of 1949 (fully applicable to

commercial banks) are applicable to cooperative banks, resulting only in partial
control by RBI of cooperative banks and,

4. Cooperative Banks function on the principle of cooperation and not on entirely

commercial parameters.
COOPERATIVE BANKS AND RRBs

• RBI adopted a multi agency approach by creating a link between

commercial banks and cooperative banks in supplementing credit
wherever it was required.

• RBI also brought in the Regional Rural Banks to provide credit

along with the commercial and cooperative banks

• The problems of rural cooperatives were reviewed by The Task

Force (2004) constituted by the GOI and released by RBI in 2005.
They provided a new practical approach to rejuvenate the Indian
Cooperative Structure.
FINANCING BY COOPERATIVES :

• Cooperatives Banks in India finance rural

area under farming, cattle services, milk,
hatchery and personal finance.

• Cooperatives Banks in India finance urban

areas under self employment, industries,
small scale units, home finance, consumer
finance and personal finance.
STRUCTURE OF COOPERATIVE BANKS

• URBAN COOPERATIVE BANKS : Single tier structure,

scheduled and non scheduled, single state and multi
state .
•RURAL COOPERATIVE BANKS : Complex Two structures
a. Short Term Cooperative Credit Structure (STCCS) :
State Cooperative Banks (SCBs), District Central
Cooperative Banks and Primary Agricultural Credit
Societies.
b. Long Term Cooperative Credit Structure (LTCCS) :
State Cooperative Banks (SCBs), agriculture and
rural development banks and primary agriculture
cooperatives.