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Tutorial on Bank

What are the Financial Institutions in India?
This segment is divided into two types of Institutions: (See the Complete Chart)
1. Regulators
2. Intermediaries

Regulators
Regulatory Institutions are statutory bodies assigned with the job of monitoring and controlling different segments of the Indian Financial System (IFS). These Institutions have been given adequate powers through the vehicle of their respective Acts to enable them to supervise the segments assigned to them. It is the job of the regulator to ensure that the players in the segment work within recognized business parameters, maintain sufficient level of disclosure and transparency of operations and do not act against the national interests. At present, there are two regulators directly connected to IFS:
· Reserve Bank of India
· Security and Exchange Board of India

Intermediaries
Intermediary Financial Institutions are essentially of two types:
· Banking
· Non Banking
A distinguishing characteristic of banking Financial Institutions lies in the fact that, unlike other institutions, they participate in the economy's payments mechanism, i.e., they provide transaction services, their deposit liabilities constitute a major part of the national money supply, and they can, as a whole, create deposits or credit, which is money. Banks, subject to legal reserve requirements, can advance credit by creating claims against themselves. Financial Institutions, on the other hand, can lend only out of resources put at their disposal by the savers. Indian Financial System boasts of well developed banking Financial Institutions each designated to carry out a specific developmental task. Most FIs, however, work on commercial lines with an eye on the development of the sectors assigned to them.
Financial institutions have been the primary source of long term lending for large projects. Conventionally, they raised their resources in the form of bonds subscribed by RBI, Public Sector Enterprises, Banks and others. With the drying up of concessional Long Term Operations (LTO) funds from the Reserve Bank in the early 1990s, Financial Institutions have increasingly raised resources at the short end of the deposit market.

What are the Banking Institutions of India?
The Banking Segment in India functions under the umbrella of Reserve Bank of India, the regulatory central bank. This segment broadly consists of: (See the Compete Chart)
· Commercial Banks
· Co-operative Banks

What do we mean by commercial Banks?
The commercial banking structure in India consists of:
· Scheduled Commercial Banks
· Unscheduled Banks
Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. This sub sector can broadly be classified into:
1. Public sector
Public sector banks have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of:
· State Bank of India (SBI) and its subsidiaries;
· other nationalized banks
2. Private sector (old and new)
3. Foreign banks.

What do we mean by Cooperative Banks? (see the complete chart)
Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfil, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased in recent years mainly due to the sharp increase in the number of primary co-operative banks. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. This section is devoted to the discussion of this important type of financial institution in India.

FEATURES OF CO-OPERATIVES BANKS
Co-operative movement is quite well established in India. Co-operative Institutions are engaged in all kinds of activities namely production, processing, marketing, distribution, servicing, and banking in India and have vast and powerful superstructure. Co-operative Banks are important cogs in this structure.
In the beginning of this century, availability of credit in India, more particularly in rural areas, was almost absent. Agricultural and related activities were starved of organized, institutional credit. The rural folk had to depend entirely on the moneylenders, who lent often at usurious rates of interest.
The co-operative banks arrived in India in the beginning of 20th Century as an official effort to create a new type of institution based on the principles of co-operative organization and management, suitable for problems peculiar to Indian conditions.These banks were conceived as substitutes for money lenders, to provide timely and adequate short-term and long-term institutional credit at reasonable rates of interest. Co-operative Banks :
>>are organised and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of "one member, one vote".
>>· function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the goal of profit maximisation.
>>· Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also.
>>· UCBs provide working capital loans and term loan as well.
>>· The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also.
>>· Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural.
>>· Co-operative banks are perhaps the first government sponsored, government-supported, and government-subsidised financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments. They constitute the "most favoured" banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance.
>>· Co-operative Banks belong to the money market as well as to the capital market.
>>· Primary agricultural credit societies provide short term and medium term loans.
>>· Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans.
>>· Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank.
>>· Some co-operative bank are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act.
>>· Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are. However, their requirements are less than commercial banks.
>>· Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion.
>>· Although the main aim of the co-operative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable.

What do we mean by Non Banking Financial Institutions?
Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilise the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions.
--UNIT TRUST OF INDIA
--LIFE INSURANCE CORPORATION (LIC)
--GENERAL INSURANCE CORPORATION (GIC)
Apart from these NBFIs, another part of Indian financial system consists of a large number of privately owned, decentralised, and relatively small-sized financial intermediaries. Most work in different, miniscule niches and make the market more broad-based and competitive. While some of them restrict themselves to fund-based business, many others provide financial services of various types. The entities of the former type are termed as "non-bank financial companies (NBFCs)". The latter type are called "non-bank financial services companies (NBFCs)".
Post 1996, Reserve Bank of India has set in place additional regulatory and supervisory measure that demand more financial discipline and transparency of decision making on the part of NBFCs. NBFCs regulations are being reviewed by the RBI from time to time keeping in view the emerging situations. Further, one can expect that some areas of co-operation between the Banks and NBFCs may emerge in the coming era of E-commerce and Internet banking.

What do we mean by Central Banking?
Governments create central banks to perform a variety of functions. The functions actually performed vary considerably from country to country. Broadly speaking, central banks serve as the government's banker, as the banker to the banking system, and as the policymaker for monetary and financial matters.

As the government's banker, the central bank can act as the repository for government receipts, as the collection agent for taxes, and as the auctioneer for government debt. It can also act as a lender to the government and as the government's advisor on financial matters. As the banker for the country's banks, the central bank can act as the repository for bank reserves, as the supervisor and regulator of banks, as the facilitator of interbank services such as check clearing and money transfers, and as a lender when banks need money to honor deposit withdrawals or other needs for liquidity.

As the country's monetary policymaker, the central bank controls the amount of credit and money available, the level of interest rates, and the exchange rate (the rate at which one nation's currency can be exchanged for another nation's). To achieve its monetary policy objectives, central bankers use a combination of policy tools. For example, the central bank may increase or decrease the amount of money (coin and currency) in circulation by buying or selling government debt instruments, such as bonds, on the open market. This policy tool is known as open market operations. Since interest rates are usually related to how much money and credit are available in the economy, the central bank can usually lower interest rates by buying bonds from the public with money. This increases the amount of money in the economy and lowers interest rates. To raise rates, the authority would sell bonds, thereby reducing the amount of money available to the public. The central bank could also cause a lowering or raising of interest rates by increasing or decreasing the amount of money banks must hold as a reserve against their deposits. By increasing reserves, the central bank forces banks to hold more money in their vaults, which means they can lend less money. Less money available for loans makes loans harder to get which, in turn, causes banks and other lenders to raise interest rates on loans.

Central banks can be either privately owned or owned by the government. In Europe, central banks are owned and operated by the government. In the United States, commercial banks own the central bank, which is called the Federal Reserve. The Federal Reserve, established in 1913, consists of a seven-person Board of Governors located in Washington, D.C., and the presidents of 12 regional Federal Reserve Banks. Each member of the Board of Governors is appointed by the U.S. president and confirmed by the U.S. Senate for staggered 14-year terms. From among the seven governors, the president also designates and the Senate confirms a chairman of the board for a four-year term. Alan Greenspan is the current chairman of the Federal Reserve Board. The Federal Reserve's primary policy group is called the Federal Open Market Committee (FOMC). It consists of the seven governors plus five regional Federal Reserve Bank presidents. The FOMC is responsible for controlling the money supply and interest rates in the United States.

Because central banks control the money supply, there is always the danger that central banks will simply create more money and then lend it to the government to finance its expenditures. This often leads to excessive money creation and inflation (a continuous increase in the prices of goods), which can be caused by having too much money available to purchase goods. Inflation occurred in the United States when the government printed Continental dollars to pay for the Revolutionary War. So many were printed that they became worthless, and a popular slogan of the day was "It's not worth a Continental." The danger of inflation is particularly acute in countries where the government owns the central bank.

Government ownership of the central bank is illegal in the United States, except in national emergencies. European countries agreed in the Maastricht Treaty of 1992 not to allow central banks to lend money to their governments.

Updated till 27-May-2004