UNIT II BANKING INSTITUTIONS

Banking institutions refer to financial organizations that provide a range of

services related to accepting deposits, granting loans, and facilitating various
financial transactions. They play a crucial role in the economy by helping to
mobilize savings, provide credit, and facilitate payments.

Key Characteristics of Banking Institutions:

1. Acceptance of Deposits: Banks accept funds from individuals,

businesses, and institutions, offering various types of accounts, such as
savings accounts, current accounts, and fixed deposits.
2. Loan Provision: They provide loans and credit to borrowers for personal,
business, or investment purposes, which is a primary source of income
for banks through interest.
3. Financial Intermediation: Banks act as intermediaries between savers
and borrowers, channeling funds from those who have excess capital to
those who need it.
4. Payment and Settlement Services: They facilitate transactions through
various payment methods, including checks, electronic transfers, and
debit/credit cards.
5. Risk Management: Banks offer products such as insurance and
derivatives to help individuals and businesses manage financial risks.
6. Regulation: Banking institutions are subject to regulatory oversight to
ensure stability, protect depositors, and maintain the integrity of the
financial system.

Types of Banking Institutions:

1. Commercial Banks: Offer a wide range of financial services to

individuals and businesses, including loans, savings accounts, and
payment services.
2. Investment Banks: Specialize in services related to capital markets, such
as underwriting, mergers and acquisitions, and advisory services.
3. Central Banks: National banks (like the Reserve Bank of India) that
manage the country's currency, money supply, and interest rates, also
overseeing the banking system.
4. Cooperative Banks: Financial institutions owned and operated by
members, often focusing on community and local development.
5. Development Banks: Provide long-term financing for economic
development projects, often in sectors like infrastructure and agriculture.
Conclusion

Banking institutions are essential to the functioning of modern economies,

providing critical services that facilitate economic growth, stability, and
financial inclusion. They help ensure the efficient allocation of resources and
contribute to overall economic development.

COMMERCIAL BANKS:

Commercial banks are financial institutions that provide a wide range of

services primarily aimed at individual consumers and businesses. They are the
most common type of bank and play a crucial role in the financial system and
economy. Here’s an overview of their functions, characteristics, and
significance:

Key Functions of Commercial Banks

1. Accepting Deposits:
o Commercial banks accept various types of deposits, including
savings accounts, current accounts, and fixed deposits. They
provide interest on certain deposits, encouraging saving.
2. Providing Loans:
o They offer loans for various purposes, such as personal loans,
home loans, auto loans, and business loans. This credit provision is
a major source of income through interest charged on loans.
3. Payment Services:
o Commercial banks facilitate transactions through checks,
debit/credit cards, electronic transfers, and online banking services,
making it easy for customers to make payments.
4. Foreign Exchange Services:
o Many commercial banks provide currency exchange services and
facilitate international trade by offering services like letters of
credit and remittances.
5. Financial Advisory:
o They often provide financial advisory services, helping customers
with investment decisions, savings plans, and wealth management.
6. Safe Custody:
o Commercial banks offer safe deposit boxes and custodial services
to protect valuable items and documents for their customers.
7. Insurance Products:
o Some commercial banks offer insurance products, including life
insurance, health insurance, and general insurance, either directly
or through partnerships.
Characteristics of Commercial Banks

 Profit-Oriented: Commercial banks aim to generate profit for their

shareholders by providing various financial services and earning interest
on loans.
 Regulated Institutions: They operate under the regulatory framework
established by the central bank and other regulatory authorities to ensure
stability and protect depositors.
 Multiple Branches: Most commercial banks have a network of branches
and ATMs, providing accessibility to customers.

Types of Commercial Banks

1. Public Sector Banks: Owned and operated by the government. Examples

include State Bank of India (SBI) and Bank of Baroda.
2. Private Sector Banks: Owned by private entities or individuals.
Examples include HDFC Bank, ICICI Bank, and Axis Bank.
3. Foreign Banks: Banks that are headquartered outside the country but
operate within the domestic market. Examples include Citibank and
HSBC.

Importance of Commercial Banks

1. Economic Growth: By providing loans and financing to businesses and

individuals, commercial banks stimulate economic activities and growth.
2. Financial Intermediation: They channel savings from depositors to
borrowers, enhancing the efficiency of capital allocation in the economy.
3. Facilitating Trade: Commercial banks support both domestic and
international trade through various financial instruments and services.
4. Employment Generation: They contribute to job creation through their
operations and by financing businesses that generate employment.
5. Consumer Confidence: By ensuring the safety of deposits and providing
essential financial services, commercial banks foster consumer
confidence in the financial system.

Conclusion

Commercial banks are vital to the financial system, providing essential services
that support individual and business financial needs. Their role in economic
development, financial intermediation, and maintaining the stability of the
financial system makes them a cornerstone of modern economies.
COOPERATIVE BANKS:

Cooperative banks are financial institutions that operate on a cooperative

basis, focusing on serving the needs of their members rather than maximizing
profits. They are established to promote savings and provide credit to their
members, primarily within a specific community, region, or occupation. Here’s
an overview of their characteristics, functions, and significance:

Key Characteristics of Cooperative Banks

1. Member-Owned: Cooperative banks are owned and operated by their

members, who are also their customers. Each member has a say in
decision-making, typically on a one-member, one-vote basis, regardless
of the amount of capital contributed.
2. Community Focus: These banks often serve specific communities or
groups, such as farmers, workers, or local residents, tailoring their
services to meet the unique needs of their members.
3. Not-For-Profit: The primary goal is not profit maximization but to
provide affordable banking services to members. Any profits generated
are usually reinvested into the cooperative or distributed among members
in the form of dividends or reduced interest rates.
4. Regulation: Cooperative banks are regulated by national and state laws
and operate under the supervision of the Reserve Bank of India (RBI) in
India, as well as state cooperative banks.

Functions of Cooperative Banks

1. Accepting Deposits: Cooperative banks accept deposits from members in

various forms, including savings accounts, recurring deposit accounts,
and fixed deposits.
2. Providing Loans: They offer loans to members for various purposes,
such as agriculture, small businesses, education, and housing, often at
lower interest rates compared to commercial banks.
3. Financial Services: Cooperative banks provide a range of financial
services, including money transfers, payment services, and insurance
products, catering to the needs of their members.
4. Promoting Financial Inclusion: By serving underbanked or rural
populations, cooperative banks play a crucial role in promoting financial
inclusion and access to banking services.
5. Community Development: Cooperative banks often engage in activities
that promote community development and welfare, supporting local
projects and initiatives.
Types of Cooperative Banks

1. Urban Cooperative Banks (UCBs): These banks operate in urban and

semi-urban areas, providing services to a diverse clientele, including
small businesses and individual customers.
2. State Cooperative Banks: These banks operate at the state level, serving
as a link between the cooperative banks at the district level and the
Reserve Bank of India.
3. District Central Cooperative Banks (DCCBs): These are cooperative
banks that operate at the district level, primarily focusing on providing
credit to agricultural and rural sectors.

Significance of Cooperative Banks

1. Financial Inclusion: Cooperative banks are instrumental in providing

banking services to underserved populations, including small farmers and
low-income groups.
2. Local Economic Development: By focusing on local communities,
cooperative banks contribute to regional economic development and
empowerment.
3. Affordable Credit: They offer competitive interest rates and flexible
repayment options, making it easier for members to access credit.
4. Promotion of Savings: Cooperative banks encourage saving habits
among members, contributing to financial stability and security.
5. Crisis Resilience: Cooperative banks often exhibit resilience during
economic downturns, as their focus on community support helps sustain
local economies.

Conclusion

Cooperative banks play a vital role in the financial landscape, particularly in

promoting financial inclusion and community development. Their member-
centric approach and commitment to serving local needs make them an essential
component of the banking system, contributing to the overall well-being of their
members and communities.

SMALL SAVINGS:

Small savings refer to savings made by individuals or households, often in

small amounts, with the objective of accumulating funds for future needs. In
many countries, including India, small savings schemes are promoted to
encourage savings among the general population, particularly among low- and
middle-income groups. Here’s an overview of the concept, features, and
importance of small savings:
Key Features of Small Savings

1. Accessibility: Small savings schemes are designed to be accessible to a

wide range of individuals, allowing them to save small amounts regularly.
2. Safety: These savings are typically backed by government guarantees,
making them a secure option for individuals concerned about the safety
of their funds.
3. Interest Earnings: Small savings accounts often offer interest rates that
are higher than regular savings accounts, providing an incentive for
individuals to save.
4. Flexibility: Many small savings schemes offer flexible deposit options,
allowing individuals to contribute varying amounts based on their
financial capability.
5. Encouragement of Financial Discipline: Regular savings habits instilled
through small savings schemes promote financial discipline and long-
term planning.

Common Small Savings Schemes

1. Public Provident Fund (PPF): A long-term savings scheme that offers

tax benefits and attractive interest rates, encouraging individuals to save
for retirement.
2. National Savings Certificate (NSC): A fixed-term investment scheme
that provides guaranteed returns and tax benefits under Section 80C of
the Income Tax Act.
3. Kisan Vikas Patra (KVP): A savings instrument designed for farmers
that allows for capital appreciation over time, maturing in a specific
number of years.
4. Savings Accounts: Offered by banks and post offices, these accounts
encourage individuals to save while earning interest.
5. Recurring Deposit Accounts: These accounts require individuals to
deposit a fixed amount regularly, fostering disciplined savings.

Importance of Small Savings

1. Promotes Financial Inclusion: Small savings schemes provide access to

formal financial services for those who may not have large amounts to
invest.
2. Encourages Savings Culture: By offering attractive returns, these
schemes encourage individuals to develop a habit of saving, contributing
to overall financial health.
3. Emergency Fund Creation: Small savings can act as a cushion during
financial emergencies, helping individuals manage unforeseen expenses.
 4. Wealth Accumulation: Over time, small savings can grow significantly,
allowing individuals to accumulate wealth for future goals, such as
education, home purchase, or retirement.
5. Economic Stability: A culture of savings contributes to the overall
stability of the economy, providing banks and financial institutions with
funds for lending and investment.

Conclusion

Small savings play a crucial role in promoting financial stability and economic
growth. By encouraging individuals to save, these schemes not only enhance
personal financial security but also contribute to the overall development of the
economy. They provide a foundation for long-term financial planning and
empowerment, particularly for low- and middle-income households.

UNIT TRUST OF INDIA:

Unit Trust of India (UTI) is one of the oldest and most prominent mutual fund
organizations in India. Established in 1963, UTI was the first mutual fund in the
country, aimed at mobilizing savings from the public and providing them with
an opportunity to invest in various financial instruments. Here's an overview of
UTI Mutual Funds, including its features, functions, and significance:

Key Features of UTI Mutual Funds

1. Diverse Investment Options: UTI offers a wide range of mutual fund

schemes, including equity funds, debt funds, hybrid funds, and tax-saving
schemes, catering to different investment objectives and risk profiles.
2. Professional Management: The funds are managed by experienced
professionals who analyze market trends and make informed investment
decisions to maximize returns for investors.
3. Regulatory Compliance: UTI is regulated by the Securities and
Exchange Board of India (SEBI), ensuring that it adheres to strict
guidelines to protect investors' interests.
4. Liquidity: Investors can redeem their units at any time, providing
liquidity and flexibility in accessing their funds.
5. Systematic Investment Plans (SIPs): UTI offers SIP options that allow
investors to invest small amounts regularly, making it easier to
accumulate wealth over time.
6. Tax Benefits: Certain UTI mutual fund schemes, such as Equity Linked
Savings Schemes (ELSS), offer tax benefits under Section 80C of the
Income Tax Act.
Functions of UTI Mutual Funds

1. Pooling of Resources: UTI collects funds from multiple investors,

pooling them together to create a larger corpus for investment in various
securities.
2. Investment Diversification: By investing in a diversified portfolio of
assets, UTI mutual funds reduce individual investment risk, helping to
achieve better risk-adjusted returns.
3. Performance Monitoring: UTI continuously monitors the performance
of its schemes and makes necessary adjustments to the portfolio based on
market conditions.
4. Investor Education: UTI engages in educating investors about mutual
funds, market trends, and investment strategies, promoting informed
decision-making.
5. Research and Analysis: The fund managers conduct extensive research
and analysis to identify the best investment opportunities and optimize
the fund's performance.

Significance of UTI Mutual Funds

1. Pioneering Role: As the first mutual fund in India, UTI has played a
crucial role in popularizing mutual fund investments and has contributed
significantly to the growth of the Indian mutual fund industry.
2. Financial Inclusion: UTI has facilitated access to investment
opportunities for a broader section of the population, encouraging savings
and investment among retail investors.
3. Economic Growth: By mobilizing savings and directing them into
productive investments, UTI contributes to capital formation and
economic development in India.
4. Wealth Creation: UTI mutual funds have enabled investors to
accumulate wealth over time, supporting financial goals such as
retirement planning, education, and home ownership.

Recent Developments

 UTI has embraced digital transformation, offering online platforms for

investors to manage their investments conveniently.
 The organization continues to innovate with new fund offerings and
investment strategies to meet the evolving needs of investors.
Conclusion

UTI Mutual Funds has been instrumental in shaping the mutual fund landscape
in India. With a wide range of investment options, professional management,
and a commitment to investor education, UTI remains a key player in
promoting savings and investment among the Indian populace. Its role in
enhancing financial literacy and inclusion continues to contribute to the overall
growth of the Indian economy.

NON-BANKING FINANCIAL INSTITUTIONS:

Non-Banking Financial Institutions (NBFCs) are financial entities that

provide various banking services but do not hold a banking license. They play a
crucial role in the financial system by providing credit and financial services to
individuals and businesses. Here’s an overview of NBFCs, including their
features, functions, types, and significance:

Key Features of NBFCs

1. Financial Services: NBFCs offer a range of financial services such as

loans, asset financing, leasing, hire purchase, and investment in securities.
2. No Banking License: Unlike traditional banks, NBFCs do not have a
banking license and are not allowed to accept demand deposits (like
savings accounts).
3. Regulation: In India, NBFCs are regulated by the Reserve Bank of India
(RBI), which sets guidelines and ensures compliance to maintain stability
in the financial system.
4. Diverse Funding Sources: NBFCs raise funds through various means,
including public deposits, debentures, and issuing shares.
5. Focus on Specific Sectors: Many NBFCs specialize in particular sectors,
such as infrastructure financing, housing finance, or microfinance,
catering to niche markets.

Functions of NBFCs

1. Providing Credit: NBFCs primarily focus on providing loans and credit

to individuals and businesses that may not have access to traditional
banking services.
2. Financial Intermediation: They act as intermediaries, channeling funds
from investors to borrowers, thus facilitating capital flow in the economy.
3. Investment Services: NBFCs may offer investment products, including
mutual funds and portfolio management services, to help clients grow
their wealth.
 4. Leasing and Hire Purchase: Many NBFCs provide leasing options for
equipment and vehicles, allowing businesses to acquire assets without
substantial upfront costs.
5. Insurance Services: Some NBFCs also offer insurance products, either
directly or through partnerships with insurance companies.

Types of NBFCs

1. Asset Finance Companies (AFCs): Focus on financing the purchase of

physical assets, such as vehicles, machinery, and equipment.
2. Loan Companies: Provide personal loans, business loans, and other
forms of credit to consumers and businesses.
3. Investment Companies: Primarily engaged in the purchase and sale of
securities and provide portfolio management services.
4. Microfinance Institutions (MFIs): Specialize in providing small loans
to low-income individuals or groups, often in rural areas, to support
entrepreneurship and livelihood.
5. Housing Finance Companies (HFCs): Focus on providing home loans
and financing for residential properties.

Significance of NBFCs

1. Financial Inclusion: NBFCs play a vital role in promoting financial

inclusion by providing credit to underserved segments of the population,
particularly in rural and semi-urban areas.
2. Support for Small and Medium Enterprises (SMEs): By offering loans
and financial services tailored to SMEs, NBFCs contribute to the growth
of this critical sector of the economy.
3. Alternative Financing: NBFCs provide an alternative source of
financing, especially for individuals and businesses that may find it
difficult to obtain credit from traditional banks.
4. Economic Growth: By facilitating credit flow and investment in various
sectors, NBFCs contribute to overall economic development and growth.
5. Job Creation: Through their lending activities, NBFCs help create jobs
and support livelihoods, particularly in the informal sector.

Recent Trends and Challenges

 Digital Transformation: Many NBFCs are embracing technology to

improve service delivery, enhance customer experience, and streamline
operations.
 Regulatory Scrutiny: Increased regulation and scrutiny by the RBI
following issues faced by some NBFCs, emphasizing the need for sound
governance and risk management practices.
  Economic Impact: NBFCs have been affected by economic downturns,
necessitating a focus on asset quality and risk management.

Conclusion

Non-Banking Financial Institutions (NBFCs) are essential components of the

financial ecosystem, providing crucial services that support economic growth
and financial inclusion. Their diverse offerings and focus on underserved
markets enable them to fill gaps in the traditional banking sector, making them
vital to the overall development of the economy.