EVOLUTION, BACKGROUND

AND DEVELOPMENT OF
BANKING: AN OVERVIEW
PROF. KARTHIK SHIVA
ASSISTANT PROFESSOR,
VIT SCHOOL OF LAW, VIT CHENNAI
 INTRODUCTION
• Bank – etymology – root word – banco – old Italian – meaning –
table/bench – moneylender’s table – Jews in Lombardy – transaction
–failed – people broke it up – term ‘bankrupt’
• German – word ‘back’ – joint stock fund – basis for ‘bank’
• Modern Banks - financial Institution – deals in money, money
substitutes and related services
• Banking – “Trust as the only product being sold” – Patrick Dixon
• Its primary business is the lending and borrowing of money –
Bankers as ‘aggregators’ of capital
 INTRODUCTION
• Black’s Law Dictionary – defines ‘bank’ - A financial establishment
for the deposit, loan, exchange, or issue of money and for the
transmission of funds
• Walter Leaf - “A bank is a person or corporation which holds itself
out to receive from the public, deposits payable on demand by
cheque.”
• Banking Regulation Act 1949 – Sec. 5(b) – “banking” means the
accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or other wise;
 INTRODUCTION

The banking sector performs three primary functions in

an economy:

• the operation of the payment system,

• the mobilization of savings and

• the allocation of savings to investment projects.

 BANKING IN ANCIENT PERIOD
• Temples as Banks – Safe, Secure and Sacred – 2000 BCE
• Ancient Babylon – Loans – temple priests to merchants – 1800 BCE
• Ancient Greece – Deposits, Currency Exchanges, Validation of Coins – Temples and
Civic Place
• Mesopotamia - Royal Palaces and Private Houses – Early Banks as ‘Safe Keepers’ -
Loans to farmers and traders
• India – Traditional Informal and Unorganized System of Indigenous Banking
• Loans and Usury Prevailed in Ancient India
• Manusmrithi – special chapter – deposits and pledges – similar references in works of
Narada, Brishapathi, Katyayana
• Hundis – Indigenous bills of exchange – date to the Mahabharata
• Kautilya’s Arthashastra – Reference to creditors and money lending – Priority of state
debts over private creditors
• Indigenous Banking System - Sharoffs, Seths, Sahukars, Mahajans of North India –
Marwari Kayas of Assam – Nattukottai Chettiars of South India
• Lending funds to general public, traders and even to Kings
• From Ancient times – until the middle of the 19th century
 BANKING IN MEDIEVAL PERIOD

• Reign of Firoz Shah – 1355-88 – Loans from the bankers of

Sarsuti – payment to the Army
• Bank of Venice – 1157 – First Public Bank
• Hundi system developed – medieval era - financial instruments
evolved on the Indian sub-continent used in trade and credit
transactions. It was used as
a). remittance instruments (to transfer funds from one place to
another),
b). as credit instruments (to borrow money [IOUs]),
c). for trade transactions (as bills of exchange).
• Community-based banking – developed and flourished
• British East India Company – relied on indigenous bankers in its
early days – Jagat Seths – Battle of Plassey
 BANKING IN BRITISH INDIA
• Modern Banking in British India – started in trading houses of Calcutta
• M/s. Alexander & Co. – M/s. Fergusson & Co. – engaged in other business apart from banking
– predecessor of joint stock banks in India
• Earliest modern bank in India – Bank of Hindustan (Calcutta) – owned by M/s/ Alexander &
Co.
• Bank of Calcutta – 1806 – 50 lakh capital – 1/5th contributed by the Government – 1809 – was
renamed Bank of ‘Bengal’ - 1823 – granted power to issue notes
• Bank of Bombay (1840) & Bank of Madras (1843) – also granted power to issue notes - Paper
Currency Act, 1861
• Royal Charter – 3 Presidency Banks played triple role – commercial bank, banker’s bank and
banker to government
• Notes issued by Presidency Banks – not popular – 1862 – replaced by Government paper
money
• Many banks – failed and later revived - Landmark period - 1860 onwards – emergence of
limited liability principle – joint stock banks
 BANKING IN BRITISH INDIA (CONTD.)
• Swadeshi Movement – 1906-1913 – Indian joint stock banks sprung into life

• Ex: Bank of India, Canara Bank, PNB, Bank of Baroda, Indian Bank, etc.

• Amalgamation of Presidency Bank – 27th January 1921 – Imperial Bank Act 1920

• Imperial Bank – no power to issue notes – held government balances, managed public
debt and clearing houses – until 1935 (RBI)

• Imperial Bank – functions transferred to RBI – Imp. Bank was RBI agent in places
with branches

• RBI – April 1, 1935 – Banker’s bank – Commercial, Co-operative and Regional Rural
Banks – Scheduled Banks – Schedule II – RBI Act, 1935 – paid up capital of 5 lakhs +
no adverse/detrimental acts against interest of customers
 BANKING IN INDEPENDENT INDIA (CONTD.)

• RBI (Transfer to Public Ownership) Act, 1948

• Banking Companies Act 1949 – renamed ‘Banking Regulation Act
1949’ in 1966
• Imperial Bank of India – Nationalized – State Bank of India Act,
1955
• 1960 – RBI empowered to force the compulsory merger – weak
banks + strong ones – reduction in no. of banks – 566 in 1951 –
89 in 1969
• 1961 – Credit Insurance introduced
• 1971 – Deposit Insurance and Credit Guarantee Corporation –
established
BANKING IN INDEPENDENT INDIA (CONTD.)

Phases of Banking in Independent India

a). Pre-Nationalization Phase (1947-1969)
b). Nationalization Phase (1969-1991)
c). Privatization and Liberalization Phase (1991 –
present)
 SOCIAL CONTROL OF BANKS
• Congress party manifesto – 1967 – social control – private banking institution to sub-serve
– economic growth and social objectives effectively

• National Credit Council – 1st Feb, 1969

a). To assess bank credit demand from various sectors of economy

b). To determine priority for grant of loans and advances – priority sector needs addressed

c). To coordinate lending and investment policies between commercial banks, co-op banks
and other specialized agencies for optimum use of financial resources.

• Whole-time chairperson and directors – expertise in fields of finance, banking, economics,

etc. – prohibition of loans to directors having substantial interest in a company
 NATIONALISATION OF BANKS
• Traced – PM’s note on Economic Policy – “Stray Thoughts on Bank Nationalization” –
endorsed by the All India Congress Committee Bangalore session – First Phase - 19th July
1969 – 14 commercial banks – Deposits – Rs. 50 crores and above – nationalized

• To serve better the needs of development of the economy in conformity with national
priorities and objectives.

• PM – Indira Gandhi - “…process of public ownership over the principal institutions for the mobilization
of people's savings and channelizing them towards productive purposes.”

• Second Phase – 15th April 1980 – 6 commercial banks – Time and Demand Liabilities above
– Rs. 200 crore or more – nationalized - 91% banking business – govt. owned

• Finally grip loosened – 1990s – 4-6-4 Method replaced by New Private Banks
 NEED FOR BANK NATIONALISATION
1. Curtail Monopoly of Industrialists
2. Lack of effective participation in social welfare measures of the Government
3. Prevent misuse of public funds/resources
4. Spreading of Branch networks
5. Lack of finance in Agriculture
6. Balanced Development
7. Better credit control and discipline
8. Greater stability of banking structure
 STRUCTURE OFBank
Reserve BANKING
of India SECTOR

Small Payment
Commercial Cooperative Non-Banking Finance Banks – India
Specialized All India
Banks Banks Financial Banks – Post, PayTM,
Financial Financial
Institutions Companies Airtel
Institutions Payment
Public Private (NBFC)
Banks Banks Bank, Reliance
State Co- Jio Payment
Operative Industrial EXIM Bank, etc.
SBI & PSU Foreign Banks Finance
Associates Banks Indian Banks Bank Deposit Taking –
(Old/New) Corporation
Private of India (NBFC-D)
Bank (IFCI) National
(Old/New) Housing
District Bank
(NHB)
Non-Deposit Taking
Central –
Co-
Operative (NBFC-ND)
Industrial Small
Banks Credit and Industries
Investment Development
Bank of
Corporation India
Urban of India Residual Non-Banking
(SIDBI) Companies (RNBC)
Co- Primary (ICICI)
Operative Agricultur
Bank al Credit
Societies National Bank
(PACS) for Agriculture,
Tourism Reconstruction
Finance and
Corporation Development
of India (NABARD)
(TFCI)
 DIFFERENCE BETWEEN NBFCS AND BANKS
NBFCs can lend and make investments, but it;
a). cannot accept demand deposits;
b). not part of the payment and settlement system and cannot
issue cheques drawn on itself;
c). deposit insurance facility of Deposit Insurance and Credit
Guarantee Corporation is not available to depositors of NBFCs,
unlike banks.
 RESERVE BANK OF INDIA
• The Problem of the Rupee – Its origin and its solution – B.R Ambedkar –
Royal Commission on Indian Currency and Finance (Hilton Young
Commission)- recommendation – creation of a Central Bank
• RBI - Central Bank of the Government – RBI Act, 1934 – April 1, 1935 – in
Calcutta initially – Central office shifted in 1937 – Mumbai – 5 crores paid-up
share capital (Rs. 100/share)
• Originally privately owned – token shareholding by Govt. – 2.2 % -
nationalized in 1948 – Reserve Bank (Transfer to Public Ownership) Act 1948
– January 1, 1949 – statutory role as Apex Bank of India
• Independent Apex Monetary Authority
• RBI has 31 offices across India – 27 regional offices and 4 sub-offices
• Headed by a Governor – First Governor – Sir Osborne Smith – First Indian
RBI Governor – Sir Chintaman D. Deshmukh present Governor – Shri
Shakthikantha Das
• Four Local Boards - Mumbai, Kolkata, Chennai, and Delhi – West, East,
South and North - Area
 RESERVE BANK OF INDIA - OBJECTIVE
Preamble to RBI Act, 1934
• “to regulate the issue of Bank notes and keeping of reserves with a view
to securing monetary stability in India and

• to operate the currency and credit system of the country to its advantage;

• to have a modern monetary policy framework to meet the challenge of an

increasingly complex economy,

• to maintain price stability while keeping in mind the objective of growth.”

 SCOPE OF RBI ACT, 1934

The RBI Act deals with:

(a) incorporation, capital, management and business of the RBI

(b) the functions of the RBI such as issue of bank notes, monetary control, banker
to the Central and State Governments and banks, lender of last resort and other
functions

(c) general provisions in respect of reserve fund, credit funds, audit and accounts

(d) issuing directives and imposing penalties for violation of the provisions of the
Act
 RESERVE BANK OF INDIA - (SEC. 3)
• Body corporate – by name – Reserve Bank of India
• Perpetual Succession
• Common Seal
• Can sue and be sued in its own name
LOGO OF THE RBI
• Seal inspired by the double mohur coin issued by the crown between
1835-1918
• The seal should emphasize “the Governmental status of the Bank, but not
too closely” and that “it should have something Indian in the design”.
• Palm tree – victory, triumph, peace and eternal life
• Tiger – willpower, courage, and personal strength
• K.J Udeshi – First female Deputy Governor of RBI – 2003
RESERVE BANK OF INDIA - COMPOSITION (SEC. 8)
• Reserve Bank’s affairs – managed and governed by a central board of
directors.
• Total 21 Members > Appointed/Nominated
• Official Directors – Full Time >> 1 Governor + 4 Deputy Governors
>> Sec. 8(1)(a) >> 5 years term
• Non-Official Directors – Nominated by Govt. – Others - One Member
from each of the Four Local Board + Ten Directors (4-year term) + 2
Govt. Officials – Fin. Min. (pleasure of the Govt.)
Sir C.D Deshmukh
• Minimum six meetings are held by the members of Central Board each
year –at least one for each quarter
• Assistive Boards – Board for Financial Supervision – Board for Payment
and Settlement System
 RBI – BOARD FOR FINANCIAL SUPERVISION
• Board for Financial Supervision – Sec. 58 – RBI Act, 1934 – November 1994 –
Role of BFS – to undertake integrated supervision of different sectors of the financial
system.

• Regulates and supervises banks, financial institutions and non-banking

financial companies (including Primary Dealers).

• BFS – comprises of total nine members – RBI Governor (Chairperson) + 4

Deputy Governors + 4 Directors out the Central Board (nominated)

• It deliberates on various regulatory and supervisory policy issues

 RBI – BOARD FOR PAYMENT AND SETTLEMENT SYSTEM
• Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) - set up as a sub-committee of the
Central Board of Directors

• Based on PSS Act - The Board for Regulation and Supervision of Payment and Settlement System Regulations, 2008

• BPSS provides an oversight and direction for policy initiatives on payment and settlement systems within the country

• Highest policy making body on payment systems in RBI.

• Empowered for authorising, prescribing policies and setting standards for regulating and supervising all the payment and
settlement systems in the country.

• The Department of Payment and Settlement Systems (DPSS) of RBI serves as the Secretariat to the BPSS and executes its
directions.

• Composition of BPSS – RBI Governor + 2 Deputy Governor + 3 Directors of Central Board + Domain Experts

• It lays down policies for regulation and supervision of payment and settlement systems, sets standards for existing and
future systems, authorizes such systems, and lays down criteria for their membership.
RBI – BOARD FOR PAYMENT AND SETTLEMENT SYSTEM

As on August 4, 2022
 RESERVE BANK OF INDIA - BROAD FUNCTIONS
• Monetary policy
• Regulation and supervision of the banking and non-banking financial institutions, including credit
information companies
• Regulation of money, forex and government securities markets and certain financial derivatives
• Debt and cash management for Central and State Governments
• Management of foreign exchange reserves
• Foreign exchange management—current and capital account management
• Banker to banks
• Banker to the Central and State Governments
• Oversight of the payment and settlement systems
• Currency management
 RESERVE BANK OF INDIA - FUNCTIONS (SEC. 20-45)
Monetary Authority: Formulates, implements and monitors the monetary policy.
Maintaining price stability while keeping in mind the objective of growth.
Regulator and supervisor of the financial system: Prescribes broad
parameters of banking operations within which the country's banking and
financial system functions.
Maintain public confidence in the system, protect depositors' interest and provide
cost-effective banking services to the public.
Manager of Foreign Exchange: Manages the Foreign Exchange Management
Act, 1999. Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
Lender of Last Resort: Banker to banks: maintains banking accounts of all
scheduled banks. Lends to all other banks.
 RESERVE BANK OF INDIA - FUNCTIONS (SEC. 20-45)
Issuer and Regulator of currency and credit: Issues and exchanges or destroys currency
and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and
in good quality.
Regulator and Supervisor of Payment and Settlement Systems:
Introduces and upgrades safe and efficient modes of payment systems in the country to
meet the requirements of the public at large.
Objective: maintain public confidence in payment and settlement system
Related Functions – Government’s Bank
Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
Developmental role: Performs a wide range of promotional functions to support national
objectives.
 RESERVE BANK OF INDIA - FUNCTIONS (SEC. 20-45)
• Issue and Management of Currency and Distribution of coins
• Banker to the Government
• Banker to the Banks
• Lender of Last Resort
• Loans and Advances
• Emergency Advances
• Controller of Credit
• Managing the External Value of Rupee
• Collection and Furnishing of Credit Information
 ISSUE AND MANAGEMENT OF CURRENCY AND
DISTRIBUTION OF COINS
• RBI has Sole Monopoly of issues of Bank Notes
• Sec. 22 of RBI Act, 1934 – Issue of Bank Notes
• Sec. 24 of RBI Act, 1934 - Denomination of Bank Notes
• Sec. 26 of RBI Act, 1934 – Power to Demonetize
• Issue Department of RBI
• Issue Offices, Currency Chests and Small Coin Depots across the
country – Commercial Banks and RRB are involved – seamless follow
of currency
 ISSUE AND MANAGEMENT OF CURRENCY AND
DISTRIBUTION OF COINS
• Section 22 – RBI as the sole right to issue bank notes in India.
• Bank Notes – Issued by a department of RBI known as Issue Department –
Maintain reserves 200 crores (115 crore [gold bullion] + 85 crore [foreign
currency]) – separate assets from Banking Dept.
• Design, form and material of bank notes are to be approved by the Central
Government on the basis of recommendations of Central Board of the RBI
• Every bank note shall be a legal tender at any place in India
• Department of Currency Management (‘DCM’) - Responsibility of
administering the functions of currency management. It relates to the issue of
notes and coins and retrieval of unfit notes from circulation.
 BANK NOTES V. CURRENCY NOTES
• Bank Notes – It refers to notes that are
issued by the Reserve Bank of India
• Currency Notes – It refers to notes that are
issued directly by the government
• Sec. 24(1) – RBI not empowered to print
ONE RUPEE NOTE
• Sec. 24(2) – Government not empowered to
issue currency notes
• Sec. 2(a) – Coinage Act, 2011 – “any coin
made of any metal or other material…”
• ONE RUPEE NOTE IS A COIN
 BANKER TO THE GOVERNMENT
• Section 20 of RBI Act - RBI has an obligation to Act as a banker to the central government.
To accept monies for account of the Central Government,
To make payments up to the amount standing to the credit of Central Government,
To carry out its exchange, remittance and other banking operations, including the management of the public
debt of the Union of India.
• Section 21 of RBI Act - Right to transact Government business India
It includes money, remittance, exchange and banking transactions in India;
The Central Government to deposit free of interest all its cash balances with the RBI under mutually agreed
terms.
Section 21A – Transact business of the State Government by Agreements
• Responsibility of receiving and paying money on behalf of the various Government depart
• RBI is entitled for a commission for managing public debt functions – No other commission for Government
Banker function
• It manages consolidated fund of India, contingency fund and public accounts as these accounts are maintained
by RBI.
 BANKER’S BANK
• Special Relationship – Statutory basis by RBI Act
• Second Schedule of RBI Act - Scheduled Banks – Financial
accommodation by the RBI
• Required to maintain Cash Reserve with the RBI
• Means of transfer and settlement of funds between banks on account
of clearing, remittances, lending and borrowing through such accounts
• E-Kuber – Core Banking Solution (CBS) of RBI – Each bank can
connect their current account across the country – Auction of
Government Securities –Ways and Means Advances to the
Government
 LENDER OF LAST RESORT
• When banks exhaust all other means for raising funds for their operations, they
fall back on RBI as a source for finance as provided under the RBI Act.
• RBI as the Lender of last resort.
• Grants financial accommodation to banks in terms of section 17(2), (3) and 3
(A) Through “sale, purchase and rediscount of eligible bills”
• Provides Loans and to advances banks under section 17(4) of RBI Act.
• Rediscounting of Commercial Bills, Government Securities, Foreign Bills, etc.
• RBI, grants emergency advances to specified banks on special occasions as
envisaged in Section 18 of the said Act in the interest of regulating credit to
trade, commerce, agriculture and industries.
 CREDIT CONTROL
• Credit control is a major weapon of the monetary policy used to
control the demand and supply of money i.e. liquidity in the economy.
• Key functions of RBI is to manage the credit for the advantage of the
country – Preamble of RBI Act, 1934
• It exercises control over the credit extended by banks through specific
instruments on account of wide powers granted
• It is provided both by RBI Act as well as Banking Regulation Act,
1949.
• Cascading Effect of Bank credit - Extended by various banks has its
manifold impact on the economy
 OBJECTIVES OF CREDIT CONTROL

The primary objectives of credit control are as follows:

• To attain stability in internal price level (control inflation)
• To obtain stability in foreign exchange rates to maintain external value
of currency
• To maintain stability in money marker through liquidity control
measures
• To promote overall economic growth and development
• To promote national interest
 METHODS OF CREDIT CONTROL - RBI
The principal methods are classified under two heads viz.
a).Quantitative methods – expand or contract the total
volume of credit in the banking system
1). Policy Rates – Bank Rate, Repo Rate and
Reverse Repo Rate
2). Open Market Operations
3). Variable Reserves Ratios – Cash Reserve Ratio +
Statutory Liquidity Ratio
 QUANTITATIVE CREDIT CONTROL
Bank Rate – Rate at which RBI lends money to all other banks
Open Market Operations - In the form of outright purchase/sale of
Government securities are an important tool of the Reserve Bank’s
monetary management.
Cash Reserve Ratio - Indicates the quantum of cash that banks are
required to keep with the Reserve Bank as a proportion of their net
demand and time liabilities
Statutory Liquidity Ratio prescribes the amount of money that banks
must invest in securities prescribed by the government that are liquid in
nature and it includes govt. securities, cash, gold, etc.
 QUANTITATIVE CREDIT CONTROL - BANK RATE
• The minimum rate of interest, which the Reserve Bank of India, while
lending loans to domestic banks is called "Bank Rate".
• It is the rate at which the RBI offers financial accommodation to all
other banks
• When a bank suffers fund deficiency, it can borrow money from RBI
to continue services.
• By increasing / decreasing the rate the RBI can control the volume of
credit by making loans costlier/cheaper for commercial banks.
• It ultimately influences the interest rates fixed by the commercial banks
for their customers.
 QUANTITATIVE CREDIT CONTROL – REPO RATE
AND REVERSE REPO RATE
Repo Rate – It is abbreviation of the phrase ‘Repurchase Option’.
It relates to the ‘repurchase of government securities’.
It is the rate at which the RBI lends money to all other banks in India
It is short-term loans from RBI by selling their excess securities, generally bonds,
along with an agreement in which they state to repurchase these securities at a
predefined price after a certain period.
Reverse Repo Rate – It is the short term borrowing rate at which the RBI
borrows money from other banks in India.
Surplus funds in hand, which banks to the RBI and earn money at a rate which is
called reverse repo rate.
 QUANTITATIVE CREDIT CONTROL – SDF RATE

SDF Rate – It is abbreviation of the phrase ‘Standing Deposit

Facility’ Rate.
It is additional measure introduced to absorb excess money in the
economy of Rs. 8.5 lakh crore and to control inflation.
It relates to overnight deposits and has the flexibility to be retained for
longer tenure as and when need arises
It was introduced in the backdrop of the extraordinary liquidity injected
after the pandemic
Enabled by the amendment to sec. 17 of the RBI Act in 2018
 QUANTITATIVE CREDIT CONTROL – MSF RATE
MSF Rate – It is abbreviation of the phrase ‘Marginal Standing Facility’ Rate.
It is additional measure introduced in 2011
Reserve Bank of India provides money to the scheduled commercial banks who are
facing acute shortage of liquidity
It relates to obtaining funds overnight at the time of acute emergency by selling
their government securities that come under Statutory Liquidity Ratio (SLR).
MSF rate is only applicable for the Scheduled Commercial Banks who have current
accounts and Subsidiary General Ledger or SGL with RBI.
When funds are borrowed via MSF, banks have to pledge government approved
securities to RBI.
CURRENT RATES OF RESERVE BANK OF INDIA

As on August 17, 2022

 METHODS OF CREDIT CONTROL – RBI
b). Qualitative (Selective) Methods - control and
regulate the flow of credit into particular industries
or businesses
1). Margin Requirements
2). Regulation of consumer credit
3). Credit rationing – Portfolio ceiling & Capital-
Asset ratio
 QUALITATIVE CREDIT CONTROL
1). Margin Requirements
2). Regulation of consumer credit
3). Credit rationing – Portfolio Ceiling & Capital-Asset ratio
4). Control through Directives
5). Moral Suasion – Suggestion, Guidelines, Advice, Request
and Persuasion – Soft tool
6). Publicity – Publication of Bulletins
7). Direct Action – Taking action, refuse to issue credit
 QUALITATIVE CREDIT CONTROL
Margin Requirements:
RBI determines the margin which commercial banks and financial
institution need to maintain for the amount extended by them for
various sectors
Margin means that proportion of the value of security against which
loan is not given.
It is increased or decreased to discourage the flow of credit into
specific sectors
It varies from 20% to 80%
Higher the margin means lesser amount of sanction of loans
 QUALITATIVE CREDIT CONTROL
Regulation of Consumer Credit:
Consumer credit refers to a personal debt taken by a consumer
on the purchase of goods and services for the satisfaction of
wants.
It is a qualitative credit control measure of the central bank.
At the time of inflation or deflation, the consumer credit is
regulated on a certain relative products which are affected by
inflation or deflation.
 QUALITATIVE CREDIT CONTROL
Directives: The RBI issues directives to banks regarding advances. Directives
are regarding the purpose for which loans may or may not be given.
Direct Action: It may involve refusal by RBI to rediscount bills or cancellation
of license, if the bank has failed to comply with the directives of RBI.
It is generally severe in nature and is therefore used an extreme measure.
Example: Cancellation of License of Shivaji Rao Bhosale Sahakari Bank Ltd.,
Rupee Cooperative Bank (2022) – Scheduled Bank
Moral Suasion: RBI issues periodical letters to bank to exercise control over
credit in general or advances against particular commodities. Periodic discussions
are held with authorities of commercial banks in this respect.
OTHER FUNCTIONS UNDER BANKING REGULATION ACT, 1949
The Banking Regulation Act, 1949 also confers various powers on the RBI
1). Power to Appoint Whole time Chairman of BoD / MD of a Banking Company
(BC) when vacancy adversely affects the Banking Company (Sec. 10BB)
2). Power to control advances by Banking Company (Sec. 21)
3). Power to grant License for Banking Company (Sec. 22)
4). Power to exempt a Cooperative Bank (Sec. 24A)
5). Power to call for monthly returns/other returns/information (Sec. 27)
6). Power regarding associate enterprises of Banking Company (Sec. 29A)
7). Power to order a Special Audit (Sec. 30)
8). Power to Inspect Banking Company (Sec. 35)
9). Power to give directions (Sec. 35A)
OTHER FUNCTIONS UNDER BANKING REGULATION ACT, 1949

10). Power to Caution/Prohibit Banking Companies in respect of particular transaction or

particular class of transactions (Sec. 36),
11). Power to offer Amalgamation Assistance (Sec. 44A),
12). Power to grant Loans and Advances (Sec. 18),
13). Power of Removal of managerial personnel (Sec. 36AA),
14). Power to Appoint Additional Directors (Sec. 36AB),
15). Power to Supersede the Board of Directors in certain cases (Sec. 36CA),
16). Power to Supersede the Board of Directors of a multi-state cooperative bank (Sec.
36AAA),
17). Power to Impose Penalty (Sec. 47)
18). Power to collect credit information (Sec. 45B)
 SUBSIDIARIES OF RBI

• Deposit Insurance and Credit Guarantee Corporation of India

(DICGC)

• National Housing Bank (NHB)

• Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

• National Bank for Agriculture and Rural Development (NABARD)

 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION
OF INDIA (DICGC)

DICGC came into existence on July 15, 1978 – established under the DICGC Act 1961 –
fully owned by RBI. It insures all deposits (such as savings, fixed, current, and recurring
deposits) with eligible banks except the following:
(i) Deposits of foreign Governments;
(ii) Deposits of Central/State Governments;
(iii) Inter-bank deposits;
(iv) Deposits of the State Land Development Banks with the State cooperative bank;
(v) Any amount due on account of any deposit received outside India;
(vi) Any amount, which has been specifically exempted by the corporation with the previous
approval of Reserve Bank of India.
DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION
OF INDIA (DICGC)

Commercial Banks : All commercial

banks including branches of foreign
banks functioning in India, local area
banks and regional rural banks are
insured by the DICGC.
Cooperative Banks : All State, Central and
Primary cooperative banks, also called
urban cooperative banks, functioning in
States / Union Territories. At present all
co-operative banks are covered by the
DICGC.
Primary cooperative societies are not
insured by the DICGC
 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION
OF INDIA (DICGC)

Each deposits kept in different branches of a bank are aggregated for the purpose of
insurance cover and a maximum amount of up to Rupees five lakhs is paid.
The depositor in a bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for
1) both principal and interest amount
2) held by him in the same right and same capacity as on the date of liquidation/cancellation
of bank's license or the date on which the scheme of
amalgamation/merger/reconstruction comes into for
 NATIONAL HOUSING BANK (NHB)

NHB is an apex financial institution for housing in India. It has been established with an objective to operate as a
principal agency to promote housing finance institutions both at local and regional levels and to provide financial
and other support incidental to such institutions and for matters connected therewith.
Under Section 14 of NHB Act, 1987 some of the important businesses of NHB is as follows:
(a) Promoting, establishing, supporting or aiding in the promotion, establishment and support of housing finance
institutions;
(b) Making of loans/advances/rendering financial assistance to housing finance institutions and scheduled banks, or
to any slum clearance authority established by or under any Central, State or Provincial Act ….
(d) guaranteeing the financial obligations of housing finance institutions and underwriting the issue of stocks, shares,
bonds debentures and securities of every other description of housing finance institutions……
(h) formulating one or more schemes, for the purpose of mobilization of resources and extension of credit for
housing…….
(i) formulating one or more schemes for the economically weaker sections of society which may be subsidized by the
Central Government or any State Government or any other source… etc.”
 NATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
(NABARD)
• NABARD is an apex regulatory body for overall regulation of regional rural banks and apex cooperative
banks in India.
• It was established on the recommendations of Committee to Review the Arrangements For Institutional
Credit for Agriculture and Rural Development (CRAFICARD) headed by B. Sivaramman
• It 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).
• It is active in developing and implementing financial inclusion.
• It is entrusted with "matters concerning policy, planning, and operations in the field of credit for agriculture and
other economic activities in rural areas in India".
• S. 35(6) of BR Act, 1949 - It supervises State Cooperative Banks (StCBs), District Cooperative Central
Banks (DCCBs), and Regional Rural Banks (RRBs) and conducts statutory inspections of these banks
• Mission - Promote sustainable and equitable agriculture and rural development through participative financial and
non-financial interventions, innovations, technology and institutional development for securing prosperity.
• Linkages with World Bank and Asian Development Bank
 NATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
(NABARD)
The major functions of NABARD include promotion and development, refinancing, financing, planning, monitoring
and supervision.
Non-credit related:
• Credit Planning and Monitoring, Coordination with various agencies and institutions.
• Assist in policy formulation of GoI, RBI and State Governments on matters related to agricultural credit and rural development.
• Institutional development and capacity building of Cooperatives and Regional Rural Banks (RRBs) to strengthen the rural credit
delivery system. Statutory inspection of Regional Rural Banks (RRBs), State Cooperative Banks and District Central Cooperative
Banks (DCCBs), voluntary inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and their off-
site surveillance.
• Promotional and developmental initiatives in the areas of farm, off-farm, micro finance, financial inclusion, convergence with
Govt sponsored programmes.
• Supporting the financial inclusion efforts of Regional Rural Banks and Cooperative Banks.
• Thrust on promotion of livelihood opportunities and Micro Enterprises.
• Capacity Building of Personnel and Board Members of Credit Cooperatives and Staff of Rural Financial Institutions.
• Support to research and development, rural innovations, etc.
 NATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
(NABARD)
Credit related:
• Refinance to Rural Financial Institutions for investment credit (long term loan) and production and marketing
credit (short term loan) purposes for farm and off-farm activities in rural areas.
• Loans to State Governments for developing rural infrastructure and strengthening of the Cooperative Credit
Structure
• Loans for warehousing infrastructure to State Governments, State/ Central government Owned/ assisted entities,
Cooperatives, Federation of cooperatives, Farmers’ Producers Organizations (FPOs), Federations of Farmers’
Collectives, Primary Agricultural Credit Societies (PACS) / Cooperative Marketing Societies (CMS) or similar
institutions, Corporates/ Companies, Individual entrepreneurs, etc.,
• Direct lending to Cooperatives and Producers’ Organization, support to State owned institutions /corporations
under NABARD Infrastructure Development Assistance and direct lending to individuals, partnership firms,
corporates, NGOs, MFIs, Farmers’ collectives etc. under Umbrella Programme for Natural Resource Management
(UPNRM)
• Pass through agency of select Government of India Capital Investment Subsidy Schemes.
 BHARATIYA RESERVE BANK NOTE MUDRAN PRIVATE
LTD (BRBNMPL)

It is a wholly owned subsidiary of Reserve Bank of India which is under

the jurisdiction of Ministry of finance of the Government of India.
It mints Indian bank notes.
It was established in 1995 to address the demand of bank notes and coins.
It operates in Indian and global markets, catering to security document needs of Central
banks and monetary authorities of the world by designing, printing and supplying
banknotes.
It supplies a major portion of bank note requirement in the country
The remaining requirements met through Security Printing and Minting Corporation of
India Limited (SPMCIL), a government agency wholly owned by Government of India.
BRBNMPL has two presses in Mysuru and Salboni, West Bengal
 STRUCTURE OFBank
Reserve BANKING
of India SECTOR

Small Payment
Commercial Cooperative Non-Banking Finance Banks – India
Specialized All India
Banks Banks Financial Banks – Post, PayTM,
Financial Financial
Institutions Companies Airtel
Institutions Payment
Public Private (NBFC)
Banks Banks Bank, Reliance
State Co- Jio Payment
Operative Industrial EXIM Bank, etc.
SBI & PSU Foreign Banks Finance
Associates Banks Indian Banks Bank Deposit Taking –
(Old/New) Corporation
Private of India (NBFC-D)
Bank (IFCI) National
(Old/New) Housing
District Bank
(NHB)
Non-Deposit Taking
Central –
Co-
Operative (NBFC-ND)
Industrial Small
Banks Credit and Industries
Investment Development
Bank of
Corporation India
Urban of India Residual Non-Banking
(SIDBI) Companies (RNBC)
Co- Primary (ICICI)
Operative Agricultur
Bank al Credit
Societies National Bank
(PACS) for Agriculture,
Tourism Reconstruction
Finance and
Corporation Development
of India (NABARD)
(TFCI)
 COMMERCIAL BANKING IN INDIA
• Commercial banking began with the establishment of Private/Joint Stock Banks
in India
• The Allahabad Bank in 1865 was one of the earliest joint stock banks started in
India.
• Oudh commercial Bank set up in 1881 but failed in 1958
• Punjab National Bank was established at Lahore, is now one of the largest
public sector banks in India
• Between 1906 and 1920 saw the establishment of banks inspired by the
‘Swadeshi’ movement.
• Inspired by the movement, Bank of Baroda, Central Bank of India, Catholic
Syrian Bank, The South Indian Bank, Bank of India, Corporation Bank, Indian
Bank were set up as joint stock banks
 STATE BANK OF INDIA
• Presidency Banks Act 1876 – brought 3 Presidency Banks under a common
statute
• No foreign exchange role – government patronage – unfair competition against
exchange banks existing then – RBI in 1935 had Foreign Exchange role
• 27th January 1921 – merger of 3 Presidency Banks – Imperial Bank of India -
based on Chamberlain Commission Report of 1914
• 1955 – State Bank of India – nationalized – recommendations of All India
Credit Survey Committee – SBI Act, 1955 – 25% share of banking resources at
that time – need for the economic regeneration of rural areas – 60% shares held
by RBI
• 1959 – Princely State Banks of India – nationalized - State Bank of India
(Subsidiary Banks) Act in 1959
 STATE BANK OF INDIA

• Eight princely-State Banks – associate banks of State Bank of India – were

State Bank of Patiala,
State Bank of Bikaner,
State Bank of Jaipur,
State Bank of Hyderabad,
State Bank of Saurashtra,
State Bank of Indore,
State Bank of Mysore and
State Bank of Travancore.
• Merchant Banking services – started in 1972 – SBI
• President of India – holds a share percentage – 57.6% - June 2022 - worth 2,64,351 crores
 STATE BANK OF INDIA
• SBI’s important role in financing and developing
a). Rural regions
b). Agriculture Industry
c). Animal Husbandry and Diary Industry
• Largest bank in India with a 23% market share in assets – one-fourth share
of the total loan and deposits market
• Balance sheet size of over Rs 35 lakh crore, over 24,000 branches and
59,000+ ATMs serving over 42 crore customers
• Agent of RBI – Acts as Banker’s Bank and Government’s Bank
• Operates on commercial principles + focus on co-operative institutions &
small scale industries in rural areas
 STATE BANK OF INDIA – BOARD OF DIRECTORS
(a) A Chairman and a Vice-Chairman are to be appointed by the Central
Government in consultation with RBI.
(b) Two Managing Directors are to be appointed by the Central Board with the
approval of the Central Government,
(c) Six directors are to be elected by the private shareholders.
(d) Eight directors are to be nominated by the Central Government in
consultation with the RBI to represent territorial and economic interests.
Not less than two of them should have special knowledge in the working of
cooperative institutions and of the rural economy,
(e) One director is to be nominated by the Central Government,
(f) One director is to be nominated by the Reserve Bank.
 STATE BANK OF INDIA
• SBI operates several foreign subsidiaries or affiliates – State Bank of India International
(Mauritius) Ltd – Sri Lanka – Nepal – USA – Nigeria – South Korea

• Non-banking subsidiaries - SBI Capital Markets Ltd. – SBI Mutual Funds

• Joint Ventures - SBI Cards & Payment Services Ltd. – SBI Life Insurance Ltd. – CIBIL
(Credit Information Bureau (India) Ltd.

• Merger and Unification of SBI and its Associates – 1963 – SB of Bikaner and SB of
Jaipur were merged together – 2008 – SB of Indore and Saurashtra merged with SBI – 1st
April 2017 – all associated merged with SBI

• Bhartiya Mahila Bank – All Women’s Bank – established in 2013 – Rs. 1600 crores –
business volume – 103 branches – merged with State Bank in 2017
 STATE BANK OF INDIA - FUNCTIONS
The SBI performs all kinds of commercial banking
functions:
(i) It receives deposits from the public.
(ii) It gives loans and advances against eligible securities including
goods, bills of exchange, promissory notes, fully paid shares of
companies, immovable property or documents of title,
debentures, etc.
(iii) It invests its surplus funds in government securities, railway
securities and securities of corporations and treasury bills.
 STATE BANK OF INDIA - FUNCTIONS
Other Functions:
The SBI also performs the following other functions:
(i) It buys and sells gold and silver.
(ii) It acts as agent of cooperative banks.
(iii) It underwrites issues of stocks, shares, debentures, and other securities in which
it is authorized to invest funds.
iv) It administers, singly or jointly, estates for any purpose as executor, trustee or
otherwise.
(v) It draws bills of exchange and grants letters of credit payable out of India.
(vi) It buys bills of exchange payable out of India with the approval of the Reserve
Bank; it subscribes buys, acquires, holds and sells shares in the capital of banking
companies.