Role of Banking/ Banks in Resource Mobilization

Role of Banking/ Banks in Resource Mobilization

  • The institutions which basically facilitate Resource Mobilization are called ‘financial Intermediaries’ (FI). Most important FI are Banks, Insurance, and Capital Markets. Bank which is a financial institution that accepts deposits from the public and creates credit. Banks are the perhaps prime Financial Institutional source of resource mobilization.
  • 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;
  • Specialized financial institutions which are banks, which concentrate mainly on financing specialized economic and social activities. Specialized activities may be: z small and cottage industries financing z insurance company’s z commercial mortgage lenders z specialty equipment financing organizations.
  • In India these institutions mainly include, Export-Import Bank of India, Board for Industrial and Financial Reconstruction, Small Industries Development Bank of India, National Housing Bank. They are government undertakings established with a view to offer financial as well as technical assistance to the Indian industries.
  • 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.
  • Effective Resource mobilization will aim at channelizing resources toward most productive sectors and avenues, which yield maximum good for least advantaged people.


RBI classify banks as: Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949 and Other Scheduled Banks.

Scheduled Commercial Banks are 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. They are grouped under following categories:

  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.
  4. RRB: RRBs were established in 1975 with a view to develop the rural economyand 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.


Other Scheduled Commercial Banks (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 IDFCand Bandhan


Non Scheduled 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

  • co-operative bankis a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
  • Cooperatives, which are an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.
  • These 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.
  • Credit union, which is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift credit at competitive rates, and providing other financial services to its members


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.
  • Merchant bank, which is a company that deals mostly in international finance, business loans for companies and underwriting. These banks are experts in international trade, which makes them specialists in dealing with multinational corporations. A merchant bank may perform some of the same services as an investment bank, but it does not provide regular banking services to the general public.
  • International trade financing companies are another source of resource mobilization. These companies provide services which include such activities as lending, issuing letters of credit, factoring, export credit and insurance. Companies involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, and other service providers.
  • Innovation funding like India Innovation Fund, which is a SEBI registered venture capital fund that invests in innovation led, early stage Indian firms. The focus areas include Information and Communication Technologies and Life Sciences.


Indicators used to measure Resource Efficiency

  • Resource efficiency = GDP/Domestic Material Consumption
  • It also calculated as, RE = GDP/Material flow indicator (MFA)