Mobilization of Resources 1 – Banking

Mobilization of Resources 1 – Banking 

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Table of Content

1. Introduction to resource mobilization
2. Basic of Banking
3. Evolution of Banking in India
4. Banking and Agriculture
5. Types of Banks
6. Post offices as Financial Intermediary
7. Role and functions of RBI
8. Priority Sector Lending
9. Some other related Institutions – DICGC, Bhartiya Mahila Bank etc.

 

     

Resource is anything which has some value and is required to accomplish some desired objective. For life on earth sunlight is the supreme resource. It gave birth to all other current form of resources such as Fuel and Food. Human beings (and every creature) constantly struggle and arrange for or mobilize resources they need. Over thousands of years we have built evolutionary societies in which resource mobilization, its means and methods have also evolved. Ancient barter trade was a system of resource mobilization, and then later currencies developed to facilitate it. For a currency to be acceptable to all, it needs a strong legitimacy. In ancient times this legitimacy was provided by Monarchies and now it is done by numerous forms of governments.

Central thing to the concept of laisses Faire was concept of resource mobilization only. When East India Company colluded with British Empire to get the exclusive rights to trade in the east, it created resentment in newly emerged capitalist class. As we know, it was around this time that Adam Smith in his book wealth of nations strongly pitched for free markets. This theory propagated that Ruling regimes should let resources be distributed as per principles of demand and supply, without any intervention. Prices of the different commodities or services will send signals to buyers and suppliers as to what to consume and manufacture, respectively. Shortage will shoot up prices attracting more investment in production and reverse will happen in case of abundance. This is what he called ‘free hand of markets’.

This free hand or Capitalism went on undeterred for almost 2 centuries, when finally in 1920’s there arrived ‘Great economic Depression’ in the west. Just before this in 1919, Russian revolution yielded a new alternative ideology of resource mobilization, to be called socialism and communism. Great depression dismantled the concept of free markets. British Economist John Keynes demonstrated that markets were amenable to a failure and since then term ‘market failure’ came in vogue. He professed that government job in times of market failure should be to incur ‘Fiscal Deficit’ so that demand in economy is increased. Fiscal Deficit (in short) is expenditure by government over and above its earning. So traditionally, government taxed citizens to fulfil its commitments, but now government will be a ‘net giver’ as expenditure will be more than its income. So this unfolded a new chapter in resource mobilization, and fiscal deficit became an all pervasive mean to cause changes in resource distribution toward weak and vulnerable.

By this time Banking System was highly evolved. Capital or Debt markets, Primary and Secondary markets of different things also emerged. Topic of resource mobilization is so central to subject economics that everything, be it budgeting, Taxation, Stock markets, self-help groups, APMCs, Financial Inclusion and many more, are nothing but related means or issues. So, every topic should be read keeping this thing in mind.

It should be noted that in modern societies all factors of production, trade or service like natural resources, human resource, energy resource etc. and their value is represented by currency/money. So study about distribution of money in market subsumes all other types of resource distribution under it.

So the institutions which basically facilitate Resource Mobilization are called ‘financial Intermediaries’ (FI). In last article we discussed importance of investments. Effective Resource mobilization will aim at channelizing resources toward most productive sectors and avenues, which yield maximum good for least advantaged people. It is precisely here that debate of growth vs. development becomes quite relevant.

Most important FI are Banks, Insurance, Capital Markets and as we noted earlier, government also to much extent. So we’ll try to cover these Intermediators, along with related current issues.

This series will tentatively include following articles –

1. Banking Sector
2. Insurance and Capital Markets
3. Government Finance
4. Financial Inclusion
5. Monetary and Fiscal Policy

We’ll try to cover all the relevant topics with reasonable depth connecting them with recent developments, but given the general nature of topic, it is likely that something important gets unintentionally skipped. Further, all these topics are quite interrelated, for example financial inclusion is a common theme running throughout the topic. So something might have been kept deliberately out of this article to be covered in next articles.

Make sure you also read these articles already present on Insights (after this)–

1. Basel Norms and Stability
2. NPAs

Banking Sector as resource mobilizer

Basic concepts

Ancient money lending systems used to serve a limited area, but current banking systems has gone global. Now resource mobilization happens not only in an economy but also beyond political borders. Obviously, degree of integration differs from country to country, as attested by after effects of Global Financial crisis of 2008(discussed latter).

Different persons in an economy have different risk appetite or capacity to take risk. But at same time, most important concept of finance is direct relation of risk and return/profit. More is the risk, more is the profit. Banking system facilitates movement of money from risk averse people to risk ready ones.

Surplus money you have can be (among many other things) invested in Stock markets or deposited in banks. Banks guarantee repayment of whole sum along with pre agreed interest, so there is high degree of certainty and assurance to the depositor. In contrast, Stock exchanges provide no such assurances; person may not be able to recover even his invested money. So risk averse person will prefer bank over, stock markets, private business or any other riskier investment. This is a hypothetical scenario.

On the other hand, many people who have some knowledge for what else to do of money are ready to invest, but they don’t have money. These will borrow same money which was just deposited by risk averse people. So bank insures its lending to these (so called) risk ready people by adequate risk assessment, mortgages or hypothecation.

In Risk assessment, bank studies financial capacity and credibility of potential borrower. For this it goes into matters like his annual income, past credit history etc. Term loans are disbursed by keeping some physical property of borrower mortgage. Under mortgage bank keeps documents of such property on understanding that those will be returned, on repayment of loan. Loan agreement includes a clause in which borrower authorize bank to sell property on inability of borrower to repay such money. In case loan is given against a financial asset such as shares or Debentures, it is called ‘Hypothecation’ (not mortgage).

In the initial phases of economic development, banks are main means of resource mobilization in an economy. On same lines, this is case currently with India. This is because majority people in such economies are too risk averse. New firms in developing economies find it difficult to raise much money through capital markets and consequently, they naturally go to banks for loans. As Indian economy is expanding, capital markets are getting stronger year by year. This makes banking industry a most important backbone of Indian economy.     

Evolution of Banking – Nationalization and Later Private Licenses

For   the  past  three  decades  India’ s  banking  system  has  several  outstanding  achievements  to  its  credit.  The most striking is  its  extensive  reach.  It is no  longer confined  to  only  metropolitans  or   cosmopolitans  in  India.  In  fact,  Indian  banking  system  has  reached  even  to  the  remote  corner s  of  the  country .  This  is  one  of  the main reason of India’ s growth process.

The government’ s regular  policy for  Indian bank since 1969 has paid rich dividends with the nationalization of 14 major  private banks of India.

The  first bank  in  India,  though conservative, was established  in 1786. From 1786  till  today,  the  journey of  Indian Banking System can be segregated  into  three distinct phases. They are as mentioned below:

1. Early phase from 1786 to 1969 of Indian Banks
2. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
3. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

Phase I

The ‘General Bank of India’ was  set  up  in  the  year   1786. Next, Bank of Hindustan  and Bengal Bank. The East India Company  established Bank  of Bengal  ( 1809) , Bank of  Bombay  ( 1840)   and  Bank  of  Madras  ( 1843)   as  independent  units  and  called  it  Presidency  Banks.  These three  banks  were  amalgamated  in  1920  and  Imperial  Bank of India was established which started as private shareholder’s banks, mostly Europeans shareholder’s. This bank later became ‘State Bank of India’.

In  1865  Allahabad  Bank  was  established  and  first  time  exclusively  by  Indians,  Punjab  National  Bank  Ltd.  was set  up  in  1894  with  headquarter s  at  Lahore.  Between 1906  and  1913,  Bank  of  India,  Central  Bank  of  India,  Bank  of  Baroda,  Canara  Bank,  Indian  Bank,  and  Bank  of  Mysore were set  up.  Reserve Bank of India came in 1935 (it was first government company).

During  the  first  phase  the  growth  was  very  slow  and  banks  also  experienced  per iodic  failures  between  1913  and  1948.  There  were  approximately  1100  banks,  mostly small.  To  streamline  the  functioning  and  activities  of  commercial  banks,  the  Government  of  India  came  up  with  The  Banking  Companies  Act,  1949  which  was  later changed  to  Banking  Regulation  Act  1949  as  per   amending  Act  of  1965. As per this, Reserve Bank of India  was  vested  with  extensive  powers  for   the supervision of banking in India as the Central Banking Authority.

During  those  days  public  has  lesser   confidence  in  the  banks.  As an aftermath  deposit  mobilization  was  slow.  Abreast  of  it  the  savings  bank  facility  provided  by  the

Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government  took major  steps  in  this  Indian Banking Sector  Reform after   independence.  In 1955, it nationalized Imperial Bank of India with extensive banking facilities on  a  large  scale  especially  in  rural  and  semi- urban  areas.  It  formed  State  Bank  of  India  to  act  as  the  principal  agent  of  Reserve  Bank  of  India  and  to  handle  banking transactions of the Union and State Governments all over  the country.

Seven  banks  forming  subsidiary  of  State  Bank  of  India  was  nationalized  in  1959. A major   process  of  nationalization  was  carried  out when in 1969 14 major commercial banks in the country were nationalized.

Second  phase  of  nationalization  Indian  Banking  Sector   Reform  was  carried  out  in  1980  with  seven  more  banks.  This step brought  80%  of  the  banking  segment  in India under  Government owner ship.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III

This  phase  has  introduced  many  more  products  and  facilities  in  the  banking  sector   in  its  reforms  measure.  In 1991, a Committee was set up which worked for the liberalization of banking practices. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.

Banking and Agriculture

In the past, farming was carried out in a traditional way. It was a subsidence farming and was more or less self-sufficient and Credit needs of the farmer  were limited and were  met  with  mostly  by  the  money  lenders,  relatives,  friends  and  to  some  extend  by  Taccavi loans  from  Government.  Money lenders used to exploit the  farmers  in various ways like exorbitant rates of interest, false documents, etc.

With government intervention, share of ‘institutionalized credit’ in total farm credit has raised substantially. However, it is said that after reforms of 1991, ratio institutionalized credit has gone down. (Institutional credit is one which is borrowed by farmers from institutions that are monitored by government agencies) 

After   independence  and  particularly  after   the  Green  Revolution,  agriculture  entered  the  era  of  modernization  and  the  credit  needs  of  the  farming  community  started increasing. In the present day market oriented farming, the credit has become one of the crucial inputs.

A  changing  environment  and  government  policies  are  forcing  banks  to  lend  more  to  the  agricultural  sector .  Both private  and  public  banks  are  now  involving themselves  in  a  lot  of  agri- based  lending  activities.  Besides  financing  traditional  activities,  banks  are  also  involved  in  training  and  setting  up  consultancies,  agri clinics, the export and marketing of agricultural produce, etc.

Specialized  loans  ( like  horticulture,  aquaculture,  animal  husbandry,  floriculture  and  sericulture  businesses)   to  meet  specific  needs  of  the  farmer s  are  offered  by  the banks. The Farmers can benefit from these loans by timely approach and prompt repayment.

Types of Banks –

RBI classify banks as –

Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949.

1. Scheduled Commercial Banks are grouped under following categories:

(Those banks which are included under second schedule of RBI act of 1934 and whose paid up capital and funds collected are not less than  Rs. 5 Lakh. Further, they must not involve themselves in any activity which adversely affects interests of depositors.)

1. State Bank of India and its Associates
2. Other Nationalized Banks
3. Foreign Banks

Foreign banks can either open their branch in India, or they can open wholly owned subsidiary (WOS). WOS is a company in which 100% shares are held by parent company. RBI as per current policy is promoting WOS route. This is because of apprehensions of western financial crisis. Branch office remains more dependent and under control of head office, whereas WOS enjoys much autonomy and is to some extent more immune from any problems of parent company or home country.

In case of branch 75% FDI is allowed and in case of WOS 100% FDI is allowed. WOS also receives near national treatment. They are allowed to open branches anywhere in India (except certain sensitive areas)

There were concerns that too much reliance on foreign banks can compromise long term security and sovereignty of India, to address these it is provided that capital and reserves in hand of foreign companies shall not go beyond 20% of capital and reserves of national banking system.    

4. Regional Rural Banks (RRB) –

RRBs were established in 1975 with a view to develop the rural economy and to create a supplementary channel to the ‘Cooperative Credit Structure’ with a view to enlarge institutional credit for the rural and agriculture sector.

RRBs have to be sponsored by some Commercial Bank.

The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively. The area of operation of the RRBs is limited to notify few districts in a State.

The RRBs mobilize deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural laborers, rural artisans and other segments of priority sector.

 

5. Other Scheduled Commercial Banks (also known as Private Banks)

Some banks escaped nationalization derives of pre 1990’s and they continued to operate as private banks for eg. ING vyasya or Jammu & Kashmir Bank. After LPG reforms, new bank licenses were granted in pursuance of Banking Law amended in 1993, this time very competitive banks such as HDFC, ICICI, AXIS bank, kotak Mahindra etc.

In latest round ‘in principle’ license is granted to IDFC and Bandhan bank.

The “in-principle” approval granted will be valid for a period of 18 months during which the applicants have to comply with the requirements under the Guidelines and fulfil the other conditions as may be stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by the RBI as part of “in-principle” approval, they would be considered for grant of a license for commencement of banking business under Banking Regulation Act, 1949. Until a regular licence is issued, the applicants would be barred from doing banking business.

(b) Non-Scheduled Commercial Banks

 Banks not included under second schedule of RBI act 1934. These banks require maintaining statutory cash reserve requirement. But they are not required to keep them with the RBI; they may keep these balances with themselves. They are not entitled to borrow from the RBI for normal banking purposes, though they may approach the RBI for accommodation under abnormal circumstances.

 

Cooperative Banks

A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. This is western concept which came in In beginning of 1900’s. Initial capital of these banks is contributed by RBI, state and Central government in different rations. Cooperative banks operate on principle of no profit and no loss. So they are instrumental in dismantling hegemony of money lenders in rural finance.

Cooperative banks constituted about 80% of institutional credit in 1960’s when nationalization drive was yet to start. But after nationalization they face stiff competition from commercial banks and their share has gone down substantially. Cooperative banks can scheduled or non-scheduled.

As initial investment comes from RBI and government, these banks suffer high degree of outside interference. Cooperative banks in India are not cooperative in spirit. There is need to promote banks in which ownership and management is actually in hand of people. This if supported by policy makes will led to mushrooming of cooperative banks in far flung areas, purely on base of local demand and supply. It is well known that our rural areas are generally self-sufficient, and it is intervention of outside markets which results in distortions.

 There are different types of cooperative banks such as Primary Agriculture Credit Societies (PACS), State or centre land development banks (SLDB/CLDB) , Urban or rural Cooperative Banks (UCB/RCB).

Rural cooperatives structure (under super vision of NABARD) is bifurcated into short-term and long-term structure. The short-term cooperative structure is a three-tier structure with State Cooperative Banks (SCBs) at the apex (State) level, District Central Cooperative Banks (DCCBs) at the intermediate (district) level and Primary Agricultural Credit Societies (PACS) at the ground (village) level. The short term structure caters primarily to the various short / medium-term production and marketing credit needs for agriculture.

Similarly, long-term cooperative structure has the State Cooperative Agriculture and Rural Development Banks at the apex level and the Primary Cooperative Agriculture and Rural Development Banks at the district or block level. These institutions were conceived with the objective of meeting long-term credit needs in agriculture.

There are currently around 93000 cooperative banks, among them huge majority is of PACS. This collectively forms backbone of rural banking system.

Post Offices as Financial Intermediary –

India Post is undoubtedly oldest and largest organization in India involved in resource mobilization. It has huge network of 1.55 lakh post offices, about 2.5 lakh dak sevaks (postmen) and 5 lakh employees . Among these 90% are operating in rural areas. With advent of other modes of communication, importance of India Post as foundation of Indian communication network has collapsed. But it remains quite relevant for wide array of ‘financial services’ it provides such as saving and other time deposit accounts, Public provident fund, Monthly Investment schemes, National saving certificates. (But it can’t provide current accounts)

It comes to rescue government when banking system is not able to deliver cash benefits such as under NREGA, Old age/Widow/disability Pension Schemes etc. In fact, India post applied for banking licence this year, but RBI deferred application saying that India Post should separately consult government (finance Ministry) for the purpose.

If it is granted banking licence, then 155 thousand branches will become bank branches and India post will have to adhere to RBI guidelines on CRR, SLR, Priority Sector Lending, and Capital Adequacy Ratio. Currently India Post only ‘accept deposits’, it can’t lend. In order to be a bank organization will need to be infused with magnificent sums of capital.

But given its deep penetration in rural India, there is strong case for its full-fledged foray into banking.        

It is said that organization holds around Rs 4 lakhs of Deposits and Rs 6 lakh saving certificates. But these deposits get interest rate as low as 4%.

Role and functions of Reserve Bank of India

In 1926, Hilton-Young Commission – recommended the creation of a central bank for India to separate the control of currency and credit from the Government and to augment banking facilities throughout the country. The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935. Since then, the Reserve Bank’s role and functions have undergone numerous changes, as the nature of the Indian economy and financial sector changed.

The functions of the Reserve Bank today can be categorized as follows:

1. Monetary policy

The objectives of monetary policy in India have evolved to include maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for supporting economic growth, and achieving financial stability.

The Governor of the Reserve Bank announces the Monetary Policy in April every year for the financial year that ends in the following March. This is followed by bi monthly policy reviews in which overall macroeconomic stability is sought to be ensured by tinkering with means such as CRR, SLR, and MSF etc.

Year 2014, saw major changes in monetary policy. Earlier there was review every 45 days, it was increased to 60 days so that impact of changes in policy is clearly visible and need for further actions could be properly gauged. Further, Urjit Patel Committee recommended use of ‘Inflation targeting’ for purpose of monetary policy, instead of previous ‘multiple indicators’ regime. (More on this later) So now RBI’s monetary policy is solely based to target Inflation in the economy.    

2. Regulation and supervision of the banking and non-banking financial institutions.

Traditionally, the Reserve Bank’s regulatory and supervisory policy initiatives are aimed at protection of the depositors’ interests, orderly development and conduct of banking operations, and liquidity and solvency of banks. Efficiency of RBI’s regulation and supervision is attested by the fact that Indian banking system almost remained untouched by recent global banking crisis.  

3. Regulation of money, forex and government securities markets and also certain financial derivatives. It interacts with other institutions like SEBI and FMC and some time comes into conflict with them.
4. Banker, Debt and cash management for Central and State Governments

The Reserve Bank of India Act, 1934 requires the Central Government to entrust the Reserve Bank with all its money, remittance, exchange and banking transactions in India and the management of its public debt.

The Reserve Bank may also, by agreement, act as the banker to a State Government. Currently, the Reserve Bank acts as banker to all the State Governments in India, except Jammu & Kashmir and Sikkim. It has limited agreements for the management of the public debt of these two State Governments.

(Other relevant things such as management of public debt etc. will be discussed in articles on fiscal policy and Government budgeting)

5. Management of foreign exchange reserves

The Reserve Bank, as the custodian of the country’s foreign exchange reserves, is vested with the responsibility of managing their investment. In recent years flow and volatility of forex reserves have increased substantially and this has made RBI job to preserve ‘real value’ of reserves highly sophisticated.

Where our Forex reserves are invested? (it’s not at all kept in lockers)

The Reserve Bank of India Act permits the Reserve Bank to invest the reserves in the following types of instruments:

• Deposits with Bank for International Settlements and other central banks
• Deposits with foreign commercial banks
• Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
• Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
• Certain types of derivatives

The Reserve Bank’s approach to foreign exchange reserves management has also undergone a change. Until the balance of payments crisis of 1991, India’s approach to foreign exchange reserves was essentially aimed at maintaining an appropriate import cover. The committee stressed the need to maintain sufficient reserves to meet all external payment obligations, ensure a reasonable level of confidence in the international community about India’s capacity to honor its obligations, and counter speculative tendencies in the market. After the introduction of system of market-determined exchange rates in 1993, the objective of smoothening out the volatility in the exchange rates assumed importance. It was in this backdrop that foreign Exchange Management act was repealing regulation act which was much stringent.

6. Banker to banks – Banks are required to maintain a portion of their demand and time liabilities as cash reserves with the Reserve Bank, thus necessitating a need for maintaining accounts with the Bank. It also acts as banker of last resort.

For example, in yearly 2014 United Bank of India was in crisis, its non-performing assets were around 5% and its own capital was depleting. Then RBI intervened and Rs. 1000 Crore were infused in UBI with certain conditions.

Apart from this RBI helps as following –

• Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations.
• Providing an efficient means of funds transfer for banks.
• Enabling banks to maintain their accounts with the Reserve Bank for statutory reserve requirements and maintenance of transaction balances.
• Acting as a lender of last resort.

7. Oversight of the payment and settlement systems

Payment and settlement system is instrumental in settling interbank, customer, government and other transactions in an economy. For this RBI has constantly modernized banking system by computerization, online transfers, new Cheque truncation system and now mechanisms like Real time gross settlement and NEFT etc. has made transfers much reliable and quicker.

8. Currency management

Management of currency is one of the core central banking functions of the Reserve Bank. Along with the Government of India, the Reserve Bank is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes.

The printing of Re.1 and Rs.2 denominations has been discontinued. However, notes in these denominations issued earlier are still valid and in circulation. The Reserve Bank is also authorized to issue notes in the denominations of five thousand rupees and ten thousand rupees or any other denomination, but not exceeding ten thousand rupees.

Central government has exclusive right to mint all kinds of coins and Re 1 note. RBI can mint currency of Re 2 note and above.

Note that only in currency printed by RBI there are words – ‘I promise to pay bearer’. These are not there in currency issued by CG. Former are signed by RBI governor and later by Finance Secretary.

Rules are governed by Coinage act of 2011. Also, as per this Central Government can authorize production of upto Rs 1000 Coin.

To combat the incidence of forged notes, the Reserve Bank has taken certain measures like publicity campaigns on security features of bank notes and display of “Know Your Bank note” poster at bank branches including at offsite ATMs. The Reserve Bank, in consultation with the Government of India, periodically reviews and upgrades the security features of the bank notes to deter counterfeiting. It also shares information with various law enforcement agencies to address the issue of counterfeiting. It has also issued detailed guidelines to banks and government treasury offices on how to detect and impound counterfeit notes. 

9. The Reserve Bank represents India in various international fora, such as, the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). Its presence on such bodies has enabled the Reserve Bank’s active participation in the process of evolving global standards for enhanced regulation and supervision of banks.

 

Apart from this RBI is licensing authority for private and foreign banks. It ensures corporate governance in Banking Companies. It guards banks from market risks and guides banks to adopt low risk approaches.  Lastly, it has important development role of ensuring financial Inclusion.

Priority sector lending

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

Priority Sector includes the following categories:

1. Agriculture
2. Micro and Small enterprises
3. Education
4. Housing
5. Export Credit
6. Others

Total target for banks is to lend 40% of their total lending to priority sector. Out of this 40, 18% should be in agriculture and 10% to weaker sections. Read more 

In 2014, Nachiket Mor committee recommended to increase this PSL ration to 50%. It should be noted that PSL mandates lending to borrower who may not be otherwise credit worthy. This increases NPA’s and Bad debts of the banks. In turn banks will pass on these costs to other borrowers. This way it may push up general rates of Interests. High rate of interest results in ‘financial Exclusion’ instead, defeating whole purpose of PSL which is Financial Inclusion. 

Deposit Insurance and Credit Guarantee Corporation (DICGC)

As the name suggests it has two functions –

• Deposit insurance – when money is deposited in bank, there’s always market risk (may be negligible) that bank will not be able to repay deposit when due or when demanded. To instill confidence in depositors about banking system it is imperative to insure their deposits. DICGC maintains a ‘Deposits Insurance Fund’ for the purpose. Interestingly, premium in these banks for this insurance is given by banks and not by depositors. In this case DICGC is serving public’s (depositor’s) interest.
• Credit Guarantee – in this case DICGC aims to cover credit risk of bank. This implies that bank is insured against Bad Debts or NPAs going into loss. For this it maintains a ‘credit guarantee fund’

These functions initially were under two separate organizations but latter they both were merged. It is wholly owned subsidiary of RBI.

All India Financial Institutions – These are under full control and supervision of RBI

1. Exim Bank
2. National Bank for Agriculture and Rural Development (NABARD)

It has been accredited with matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India. RBI sold its stake in NABARD to the Government of India, which now holds 99% stake.  NABARD is active in developing financial inclusion policy and is a member of the Alliance for Financial Inclusion

3. National Housing Bank (NHB)
4. Small Industries Development Bank of India (SIDBI)

Non-Banking Finance Companies (NBFCs)

Non-banking Financial Companies play an important role in the financial system. An NBFC is defined as a company engaged in the business of lending, investment in shares and securities, hire purchase, chit fund, insurance or collection of monies. Depending upon the line of activity, NBFCs are categorized into different types. Recognizing the growth in the sector, initially the regulatory set-up primarily focused on the deposit taking activity in terms of limits and interest rate. These companies cannot open current accounts and issue Cheque books. 

Bhartiya Mahila Bank

Bharatiya Mahila Bank Ltd is the first of its kind in the Banking Industry in India formed with a vision of economic empowerment for women. Bank received license from RBI on sept 2013

While the Bank focuses on the entire pyramid of Indian women, special attention is sought to be given to economically neglected, deprived, discriminated, underbanked, unbanked, rural and urban women to ensure inclusive and sustainable growth.

The Bank has designed many women centric products keeping in mind the core strengths of women so as to enable them to unleash their hidden potentials, engage in economic activities and contribute to the economic growth of the country. Most of the products are offered with a concession in the rate of interest for women customers.

From seven branches in December 2013, the BMB is now looking to cross 80 this year with new ones in Kochi, Dholpur and other places. It already has a presence in 23 states. The Bank is slowly emerging as a chief option for women to get credit on easier terms than commercial banks. It lends money to women who set up small businesses, beauty parlors, day care centers and home based initiatives and customers get upto Rs one crore without a credit guarantee (mortgage or hypothecation). They only have to take an insurance policy under the government’s Credit Guarantee Fund Trust Scheme (which is for MSMEs) and pay an annual premium. (So its collateral free credit is not insured by DICGC, but by CGFTS) 

As it is known that at time of independence there was very limited resource mobilization. Reason obviously was lack proper specialized institutions. With continuous efforts of RBI and Finance Ministry today there is highly sophisticated and specialized banking system. Here is evolution timeline of various parts of this humungous system –

1962: Deposit Insurance Corporation

1963: Agricultural Refinance Corporation

1964: Unit Trust of India

1964: Industrial Development Bank of India

1969: National Institute of Bank Management

1971: Credit Guarantee Corporation

1978: Deposit Insurance and Credit Guarantee Corporation (The DIC and CGC were merged and renamed as DICGC)

1982: National Bank for Agriculture and Rural Development (It replaced the Agricultural Refinance and Development Corporation)

1982: Export-Import Bank of India (EXIM)

1987: Indira Gandhi Institute of Development Research

1988: Discount and Finance House of India

1988: National Housing Bank

1990: Small Industries Development Bank of India

1994: Securities Trading Corporation of India

1995: Bharatiya Reserve Bank Note Mudran Private Limited

1996: Institute for Development & Research in Banking Technology

2001: Clearing Corporation of India Limited

2008: National Payments Corporation of India