2 Lesson 1 • PP-BL&P

INTRODUCTION
Banks form the back bone of a country’s financial system. Modern Banking system in India is more than two
centuries old. The Indian banking system consists of various constituent banks which mobilize savings from
several sources for lending to productive activities. These banks are regulated by Reserve Bank of India (RBI)
which came in to existence in 1935. RBI controls credit, issues currencies and regulates banks and other non-
banking financial companies. Besides these, the services offered by banks also have expanded over the years in the
light of various national and international developments. Keeping in mind all these, the Lesson covers evolution
of banking system in India, role of RBI and structure of banks which are a must for any student of Banking.

INDIAN BANKING SYSTEM - AN EVOLUTION

The Evolution of Indian Banking System encompasses Agency House Banks, Presidency Banks, Imperial Bank
of India, Reserve Bank of India, Private/Joint Stock Banks (Old generation private sector banks), State Bank of
India, Associate Banks, Nationalized Banks, Old and New Generation Private Sector Banks, Foreign Banks, Co-
operative Banks, Regional Rural Banks, Small Banks and Payments Banks and Financial Institutions known as
Development Banks and Non-Banking Financial Companies.

From the beginning till early 20th century

Agency House Banks/Presidency Banks/Imperial Bank of India

Though money lending and trade credits were known in India since Vedic period and subsequent times, seeds
of modern banking system was sown in India in the year 1776. Wwhen Bank of Hindustan at Kolkata (the then
capital of British in India) was established by the British agency house of Alexander and Company for catering
to the needs of British merchants operating in India. This bank can easily said to be the first commercial bank
in India. This was followed by General Bank of India in 1786. However, liquidation proceedings were started in
the year 1829 for winding up Bank of Hindustan and finally it was liquidated in 1832. The General Bank of India
survived only for five years and in the year 1791 it failed.
Thereafter, Bengal Presidency (equal to present day State Government) established a bank called Bank of
Calcutta in the year 1806 which was later rechristened as Bank of Bengal in 1809. The Bank was funded by the
Presidency of Bengal. This was later followed by two more Presidency Banks namely Bank of Bombay in the
year 1840 and Bank of Madras in 1843. All three Presidency banks were incorporated as joint stock companies.
Under Royal charter “these three banks received the exclusive right to issue paper currency till 1861 when, with
the Paper Currency Act, the right was taken over by the Government of India”.
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Later these three Presidency banks were merged to form Imperial Bank of India in 1921, which in 1955 was
renamed as State Bank of India. Until the birth of Reserve Bank of India in 1935, the Presidency Banks and later
Imperial Bank of India were acting as a sort of bankers to the government, by holding Government of India’s
balances”, a function which was later taken over by RBI upon its commencement.
During the period, British merchants established the Union Bank of Calcutta in 1829, first as a private joint
stock association, then converting it in to a partnership. Union Bank was incorporated in 1845 but failed in
1848, as it became insolvent. Bank of Upper India, which was established in 1863 and survived until 1913.

BRIEF OVERVIEW OF THE START OF RESERVE BANK OF INDIA (RBI)

In1927, the British government appointed a commission under Hilton-
Young (known as the Royal Commission on Indian Currency and Finance)
with the main objective to separate the control of currency and credit
from the government, as well as spread the banking network across the
country. The commission recommended setting up a central bank in
India known as Reserve Bank. However, initially the proposal was not
accepted. Later, with a few modifications it was reintroduced and finally
it was accepted in 1934. As a consequence, Reserve Bank of India (‘RBI’)
was established on 1935 as a banker to the central government. It was
initially head quartered in Kolkata and commenced its operations from
April 01, 1935. Later in the year 1937 it was shifted to Mumbai.
At the beginning of its operation, RBI was started as a privately owned entity with a share capital of Rs. 5
crores; almost fully subscribed by private shareholders excepting a token shareholding (2.2 per cent) of the
Central Government. In 1948, the Central Government took over the institution through an Act named Reserve
Bank (Transfer to Public Ownership) Act. All private shareholders were paid compensation. The complete
government take over took place in 1949 as RBI started in statutory role from January 01, 1949.

Private / Joint Stock Banks

There were many commercial banks that were started as Private/Joint stock banks in India. The Allahabad
Bank in 1865 was one of the earliest joint stock banks started in India. Subsequently it was nationalized in 1969
and continues its existence.
On 30 August, 2019, the Ministry of Finance announced that Allahabad Bank would be merged with Indian
Bank, another nationalized Bank. The proposed merger would create the seventh largest public sector bank in
the country with assets of Rs.8 lakh crore.
Oudh Commercial Bank was the first joint stock bank conducting its operations from 1881 to till it failed in
1958. In 1894, the Punjab National Bank was established at Lahore, is now one of the largest public sector
banks in India.
The period between 1906 and 1920 saw the establishment of banks inspired by the ‘Swadeshi’ movement.
Inspired by the movement, native Indians founded banks to serve the Indian community at large. A number of
banks established as joint stock banks then, have survived to the present day such as Bank of Baroda, Central
Bank of India, Catholic Syrian Bank, South Indian Bank, Bank of India, Corporation Bank, Indian Bank, Indian
Overseas Bank. The Swadeshi movement also had its impact in South Kanara district of present day Karnataka
State in which Syndicate Bank, Corporation Bank, Canara Bank, Vijaya Bank and Vysya Bank were founded.
Consequent upon nationalization of banks in 1969 and 1980, as well as economic liberalization ushered in
1991-92, there was a profound impact of expansion of bank/branch network of banks in India.
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Establishment of State Bank of India / Associate Banks

As indicated in the beginning, State Bank of India as we know today originated from the three Presidency banks
namely Bank of Bengal, Bank of Bombay and Bank of Madras and the successor to these Presidency banks viz.
Imperial Bank of India.
These banks were basically created by European masters
and served mostly to the common needs of local European
commerce in India. Though Imperial Bank of India was
recognized for its services and integrity, its contribution
was mainly confined to urban populace of India. And it
was “not equipped to respond to the emergent needs of
economic regeneration of rural areas. As this was an area
of concern for the Government of India, the All-India Rural
Credit Survey Committee recommended creation of a
Government partnered and sponsored bank by taking over
the Imperial Bank of India along with those princely states
owned banks. Through State Bank of India Act, in 1955 the
Government of India constituted State Bank of India that
had a 25% share of Indian banking resources at that time.
Subsequently through another enactment viz. State Bank
of India (Subsidiary Banks) Act in 1959, all the princely
state banks were taken over by State Bank of India. Thus
the focus of State Bank of India was concentrated towards
social purpose. It had a network of 480 offices, sub-offices,
Local Head Offices to service the planned economic development of the country to start with. Thus State Bank
of India was destined to be the prime mover of national development in the banking sphere.

The eight princely State Banks that became 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. In 1963 State Bank of Bikaner and State Bank of
Jaipur were merged to form State Bank of Bikaner and Jaipur. Subsequently on 13th August, 2008 State Bank of
Indore and State Bank of Saurashtra were merged with State Bank of India as a part of Government of India’s
plan for creating a “mega bank” by merging all associate banks with State Bank of India. On 15th February,
2017, the Union Cabinet approved the merger of five associate banks with SBI. Pursuant to this, from 1st April
2017 the remaining associate banks were merged with State Bank of India. Also along with its former Associate
Banks, the erstwhile Bharatiya Mahila Bank, an all-women bank established by the Government of India in
 Lesson 1 • Overview of Indian Banking System 5

2013 for “empowering women and instilling confidence among them to avail bank financing” was also merged.
Bharatiya Mahila Bank was set up to provide credit exclusively to women. Apart from India only two countries
viz, Pakisthan and Tanzania have a bank especially for women. Immediately before the merger, Bharatiya Mahila
Bank had 103 branches and business volume was Rs. 1600 crores. The merger of Bharatiya Mahila Bank was
made considering the large outreach of SBI and its record of establishing all women branches and providing
loan to women borrowers.
Over the years due to various regulatory developments and relaxations made available in permitted activities by
the banking regulator and the Government of India, State Bank of India has created the following non-banking
subsidiaries:
• SBI Capital Markets Limited.
• SBI Funds Management Pvt. Limited.
• SBI Factors & Commercial Services Pvt. Limited.
• SBI Cards & Payments Services Pvt. Limited. (SBICPSL)
• SBI DFHI Limited.
• SBI Life Insurance Company Limited.
• SBI General Insurance Company Limited.
Apart from the above, SBI has 190 overseas offices spread over 32 countries having the largest presence in
foreign markets among Indian banks.

Nationalization of Banks
Until 1968 excepting State Bank of India, all other joint stock banks were under private ownership. As these
banks were catering to the banking needs of urban India, a large number of them did not involve themselves
in the economic upliftment of rural areas, though they mobilized deposits from public at large. Looking at this
state of affairs, the Government of India brought in Social Control of Banks in 1967 with a view to make these
banks contribute to the economic regeneration of rural and semi-urban areas of the country.
The Banks which were operating under private ownership then were also given targets to be achieved in
extending loans to the rural segment. However, dissatisfied with the performance of private banks, the
Government nationalized 14 banks in July 1969 through Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance which was later made into a law in 1970.

Major reasons for nationalization can be summarized as under:

1. To curtail monopoly practices by the industrialists who were having close connections with owners of
these banks such that new entrants would not pose a threat by way of competition to established units.
Therefore, through nationalization this monopoly practice was sought to be curtailed.
2. Private banks did not participate effectively in social welfare measures of the Government. Some of the
banks were lukewarm in their approach and did not follow regulations given under social control. This
failure of social welfare front forced the Government to nationalize banks.
3. To prevent the misuse of resources mobilized from public: Banks collected deposits in the form of savings
deposits, term deposits etc. from the public at large. Since the controls over these funds were with private
hands, they neglected to apply these for specified sectors like agriculture, small-industries which were
treated as ‘Priority’ by the Government. Thus, through nationalisation of banks, the Government could
access to these funds so that they could be channeled for national development.
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4. Greater spread of branch network: Privately owned banks confined their operations in select geographical
areas that were convenient to them thus neglecting rural areas which also had business potential.
Nationalization was resorted to mobilize resources in the form of deposits through expansion of branch
network.
5. Financing of Agriculture was grossly neglected by privately owned banks. India’s economy primarily
depends upon agriculture in many ways. Private banks were reluctant to extend finance to agriculture
sector in which 70% of the population was involved. Thus, for providing increased finance to agriculture,
banks were nationalized.
6. For balanced development all regions: In our country due to various reasons, many areas remained
backward for lack of financial resources and credit. Private banks neglected these areas due to lack of
business potential and profitability. With a view to provide bank finance and resources for achieving
balanced growth and to remove regional disparities, nationalization was ushered in.
7. For implementing greater credit control and discipline: As credit was scarce in India, bank credit need to
be monitored and strict control has to be exercised by the regulator and government. If the ownership
of banks is under the control of the Government it would be smooth to exercise such control. Hence,
nationalization was brought in.
8. To provide greater Stability of banking structure. Due to historical reasons, the fear of failure of banks
under private ownership was perceived greater in comparison to banks under Government control. India
cannot afford such failures when it was in a crucial take off stage of economic revival. Therefore to provide
confidence to customers about the safety of their savings and funds, nationalization was resorted to.
Taking into account all the factors listed above,14 banks (as listed below), which had a demand and time
liabilities base of Rs. 50 crores and above were nationalized in the first phase of nationalization in 1969.
A similar exercise was also carried out in1980 and the Government took over the control of the following six
banks which had demand and time liabilities base of Rs. 200 Crores and above.
First Phase of Nationalization
 Lesson 1 • Overview of Indian Banking System 7

Second Phase of Nationalization

Till the start of liberalization period Government of India held 100% of the equity capital of banks. Post-
liberalization the Government had diluted its stake in several of these PSU Banks in such a way that it has just
majority stake in these institutions.

Consolidation of PSU Banks +

In view of stringent capital adequacy norms as well as mounting NPAs, especially among the Public Sector Banks
and also to arrest sliding performance in their contribution to the economic development of the country, the
Government of India took a decision in late 2018 to consolidate the PSU Banks. In pursuance of this objective
in April of 2019, Vijaya Bank and Dena Bank were amalgamated with Bank of Baroda. In effect, the operations
of Vijaya Bank and Dena Bank have been combined with Bank of Baroda. Ultimately the merged banks are now
working under the umbrella of Bank of Baroda brand. Their consolidated operations had commenced from
1st April 2019. As a consequence of these mergers RBI has excluded “Vijaya Bank” and “Dena Bank” from the
Second Schedule of the Reserve Bank of India Act, 1934 vide it’s circular dated November 28, 2019.
In addition to the above, in August 2019, the Union Finance Minister announced a second dose of consolidation
of PSU Banks which came intoeffect from 1st April,2020 to strengthen the banking system for a robust
performance. The details are as follows:

Details of merging PSU Banks

Accordingly the merged banks have started functioning
as a part of Anchor banks with effect from 1st April,
2020.
After merger of PSU banks the names of Syndicate
Bank, Oriental Bank of Commerce, United Bank of India,
Andhra Bank, Corporation Bank and Allahabad Bank
have been excluded from the Second Schedule to the
Reserve Bank of India Act, 1934 with effect from April
01, 2020 since these banks have ceased to carry on
banking business with effect from April 01, 2020.
 8 Lesson 1 • PP-BL&P

With this process of consolidation, the total number of PSU Banks will stand reduced to 12 as indicated below:
They are as follows:
1. Bank of Baroda 7. State Bank of India
2. Bank of India 8. United Commercial Bank
3. Bank of Maharashtra 9. Canara Bank
4. Central Bank of India 10. Indian Bank
5. Indian Overseas Bank 11. Punjab National Bank
6. Punjab & Sind Bank 12. Union Bank of India.

New Generation Private Sector Banks

The private sector banks which were operating in India prior to the liberalization year of 1991 are known
as Old generation private Sector banks. The banks that came into existence subsequent to Narasimham
Committee Report I and revised RBI guidelines in 1993 are known as new generation private sector banks.
The Narasimham Committee-I, recommended to allow private and foreign banks into the industry as a part of
economic liberalization policy of Government of India. In deference to the recommendations of the committee,
the RBI formulated guidelines for the establishment of the private sector banks on January 1993. These
guidelines prescribed that the private banks should be established as public limited companies under the then
Indian Companies Act,1956 (which amended in year 2013 and now it is Companies Act, 2013). The paid-up
capital shall not be less than Rs. 100 Crore. The new guidelines issued in 2001 raised the minimum paid-up
capital to Rs. 200 Crore, which should be enhanced to Rs. 300 Crore within three years after the commencement
of business. The promoters’ share shall not be less than 40 per cent and the voting right of a shareholder shall
not exceed 10 per cent.
Housing Development Finance Corporation Limited (“HDFC”) was the first private bank in India to receive
license from RBI, to set up a bank in the private sector in India.
Accordingly, nine banks were set-up in private sector including some by development financial institutions.
Prominent among them are ICICI Bank, Global Trust Bank, HDFC and IDBI bank. Another interesting development
was the merger of some banks. Bareily Corporation Ltd. merged with Bank of Baroda in 1999, Times Bank
merged with HDFC Bank in 1996, Bank of Madura Ltd. merged with ICICI Bank in 2001 and Nedungadi Bank
Ltd. merged with Punjab National Bank in 2003.
Presently the following new generation private Banks operate in India:
S. No. Name of the Bank Year of establishment
1 Axis Bank 1993
2 Development Credit Bank 1995 (See note 2 below)
3 HDFC Bank 1994
4 ICICI Bank 1990
5 Indus-Ind Bank 1994
6 Yes Bank 2004
7 Kotak Mahindra Bank 2001
8 IDFC First Bank** 2015
9 Bandhan Bank 2015
Note: 1. The new generation banks namely Times Bank, Centurion Bank, Global Trust Bank, Bank of Punjab
have merged with other banks and hence cease to exist.
2. Erstwhile Development Co-Operative Bank renamed into Development Credit Bank in 1995 after it got
Schedule Bank License. Again it is changed its name into DCB in 2014.
 Lesson 1 • Overview of Indian Banking System 9

** Consequent upon merging a NBFC named Capital First with itself in December 2018, IDFC Bank has changed
its name to IDFC First Bank.
As the name itself implies the majority of the equity is held by private promoters including permitted foreign
entities and other investing public in these institutions.

Foreign Banks
Foreign banks too started setting up their branches in India during late 19th century. The Chartered Bank of
India which later became Standard Chartered Bank, opened an office in Calcutta in 1858 after getting a Royal
Charter from the Queen of England. In Kolkata, Grindlays Bank commenced its operations by opening its first
branch in 1864.The arrival of the Hong Kong and Shanghai Banking Corporation (HSBC) was in 1859 after it
acquired a bank known as Mercantile Bank in India. The Comptoird’ Escompte de Paris, started operations in
Kolkata in 1860 which later was one of the constituent of BNP Paris which represented the French. American
banking companies entered India in 1902 through Citibank’s predecessor, The National City Bank of New York
and JP Morgan, a noted name in American banking entered India in 1922 through its affiliation with Andrew
Yule and Co. Ltd of Kolkata. The post-liberalization era saw several foreign banks enter India for business
opportunities. According to RBI, as of 31st May 2020 there were forty six licensed foreign banks operated in
India.

Co-Operative Banks
The beginnings of Indian Co-operative credit institutions can be traced back to the great Bengal famine of 1840s.
Problems of rural poverty and indebtedness and matters associated with such conditions of rural farmers forced
the then British government to set up a commission to suggest a holistic remedial measures. The Woodhead
Commission which enquired in to the famine, suggested many remedial measures to the British Government.
One such remedial measure suggested was to make available credit at low rate of interest to the needy people
(more so to farmers). The farmers found this proposition very attractive as their experience with private
money lenders not to their liking in view of exorbitant interest rates. Subsequently, the Rayat Commission
which was set up to look in to the matters including credit availability, suggested creation of Co-operatives as an
organizational means to extend credit to farmers in the year 1872. As a sequel to these developments, the first
Co-operative Land Mortgage Bank was started.
In order to strengthen the credit availability to agriculturists, in the year 1904 the Co-operative credit societies
Act was passed enabling establishment of co-operative credit societies for making available agricultural credit
through such societies. Further in 1912 a comprehensive Cooperative Societies Act was passed to facilitate
starting of non-credit related societies too, since the 1904 Act was oriented only towards “Credit” to the
exclusion of other activities.
With the passing of 1904 and 1912 Acts “a large number of Cooperative Credit societies, Central banks.
Provincial Cooperative Banks came into existence.” The reforms Act of 1919 made ‘Co-operation’ a provincial
(a State) subject. The Bombay Co-operative Societies Act, 1925 brought in the concept of one-man- one-vote. In
the year 1929 Land Mortgage Banks were also started for providing long term loans to agriculturists.
Since the subject of ‘Co-operation’ came under the purview of provinces, several thousand co-operative banks
had been set up in various provinces. In 1942, the British Government enacted the Multi-Unit Cooperative
Societies Act, 1942 with an object to cover societies whose operations extended to more than one state. After
independence in 1966 Co-operative Banks were brought under the supervision of RBI through The Banking
Regulation (Co-operative Societies) Rules, 1966. The co-operative banks were also brought under the provision
of Banking Regulation Act, 1949. From the year 2012 (through a Banking Law Amendment Act, 2012) a primary
Cooperative Society can carry on the business of banking only after obtaining a license from RBI. These banks
thus face dual control from State Governments / Central Government (in the case of multi-state co-operative
societies) and RBI which exercises control over their banking operations. Co-operative banks are owned by
members who subscribe to their shares.
 10 Lesson 1 • PP-BL&P

Regional Rural Banks

Close on the heels after Nationalization of private banks, Regional Rural Banks (RRBs) were established in 1975
under the provisions of an ordinance promulgated on September 26, 1975 which was followed by Regional
Rural Banks Act, 1976. This was done due to a perceived feeling “that even after nationalization, there were
cultural issues which made it difficult for commercial banks, even under government ownership, to lend to
farmers.”
The main objective for establishing these banks were “to develop the rural economy and to create a
supplementary channel to the ‘Cooperative Credit Structure’” so as to expand the scope of institutional credit
for rural and agriculture sector. The share capital of these banks was contributed in the proportion of 50%,15%
and 35% respectively by Government of India, the concerned State Government and the Sponsoring bank, of a
RRB. RRBs were permitted to engage in all permitted Banking activities with their area of operation restricted
to a few notified districts in a State. RRBs came in to existence in 1975 and as on March 31, 2020 only 43 exist
out of 196 established at different points in time from 1975.
For providing RRBs additional options for augmenting regulatory capital funds, so as to maintain the minimum
prescribed Capital to Risk weighted Assets Ratio, besides meeting the increasing business requirements, it RBI
has in November 2019 allowed RRBs to issue Perpetual Debt Instruments (PDIs) eligible for inclusion as Tier 1
capital under specified terms and conditions including the following:
They are not permitted to
• issue Perpetual Debt Instruments to retail investors / FPIs / NRIs.
• invest in the Perpetual Debt Instruments of other banks including RRBs.
RRBs shall issue the Perpetual Debt Instruments in Indian currency only.

Small Finance Banks and Payments Banks

To deepen and to develop a comprehensive monitoring frame work to track the financial inclusion, a Committee
on Comprehensive Financial Services for Small Businesses and Low Income Households (commonly known
as the Nachiket Mor Committee) was appointed in September, 2013 by RBI. The committee submitted its
final report on 7 January, 2014. One of the recommendations made by the committee was to establish Small
Banks and Payments banks - a new class of banks with an exclusive focus on small businesses and low income
households.

Note: The licensing conditions of Small Finance Bank and Payments Bank is elaborated in Lesson-3.
 Lesson 1 • Overview of Indian Banking System 11

Payments Banks
In July 2014, the RBI released the draft guidelines for payments banks, seeking comments from interested
entities and public at large. After taking in to account suggestions from respondents in November 2014,
RBI released the final guidelines for payments banks and invited applications for opening such banks from
interested parties, subject to the guidelines enunciated.
There were 41 applications from various applicants including some corporate houses. After a due process of
vetting these applications through an External Advisory Committee headed by Mr. Nachiket Mor, in August
2015, the RBI accorded ‘in-principle’ licences to the following eleven entities to launch payments banks.
1. Aditya Birla Nuvo Limited
2. Airtel M Commerce Services Limited
3. Cholamandalam Distribution Services Limited
4. India Post Limited.
5. FinoPayTech Limited.
6. National Securities Depository Limited.
7. Reliance Industries Limited.
8. Vodafone M-Pesa Limited.
9. Paytm Limited.
10. Tech Mahindra Limited.
11. Sun Pharmaceuticals Limited.
The “in-principle” license was valid for 18 months within which the entities must fulfill the requirements and
they were not allowed to engage in banking activities within that period. The RBI granted full licenses under
Section 22 of the Banking Regulation Act, 1949 after satisfactory compliances of requirements/conditions by
the banks.
The other terms and conditions are as follows:
• To be registered as a public limited company under the Companies Act, 2013.
• Payments Banks cannot form subsidiaries.
• For the first five years, the promoters stake to remain at 40% at minimum.
• Foreign shareholding will be allowed in these banks as per extant FDI norms.
• The voting rights will be regulated as per provisions of the Banking Regulation Act,1949. [Voting rights are
restricted at 10% for any one share holder. RBI has the discretion to raise this to 26% on merits.].
• If there is any acquisition of more than 5% shares this will require prior RBI approval.
• The majority of the bank’s board of directors should consist of independent directors, appointed according
to RBI guidelines.
• The bank should be fully networked from the beginning.
• Initially, the deposits will be capped at Rs. 1,00,000 per customer, but later it may be raised on the basis of
performance of the bank.
• No lending activity is permitted. Bank can accept utility bills.
• A quarter of its branches should be in unbanked rural areas. -
*Note: As of November 2019, Aditya Birla Idea Payments Bank Limited is put under liquidation.
 12 Lesson 1 • PP-BL&P

Small Finance Banks

These banks also have been established with an aim of financial inclusion “to sections of the economy not being
served by other banks, such as small business units, small and marginal farmers, micro and small industries and
unorganied sector entities.” These banks were expected to provide an institutional mechanism for promoting
rural and semi urban savings and extending credit for viable economic activities in the local areas.
In July 2014, draft guidelines for small finance banks, seeking comments from interested entities and the
general public was released by RBI. After receiving comments and submissions from public, the final guidelines
were released in November 2014 with the instructions that interested parties were to submit applications
before 16 January, 2015.
Thereafter, in February 2015, RBI released the list of 72 entities which had applied for a small finance bank
license. After a due screening of these applications by an External Advisory Committee headed by Mrs. Usha
Thorat, in September 2015, RBI had issued 10 provisional licences to entities, which were required to convert
themselves in Small Finance Banks within one year.
Small Finance Banks are -
1. Ujjivan Small Finance Bank Limited.
2. Jana Small Finance Bank Limited.
3. Equitas Small Finance Bank Limited.
4. AU Small Finance Bank Limited.
5. Capital Small Finance Bank Limited.
6. Fincare Small Finance Bank Limited.
7. ESAF Small Finance Bank Limited.
8. North East Small Finance Bank Limited.
9. Suryoday Small Finance Bank Limited.
10 Utkarsh Small Finance Bank Limited.

Salient Regulatory features of Small Finance Banks

• These banks can be promoted by individuals, corporate houses, trusts or societies.
• Promoters should have 10 years’ experience in banking and finance and they should have a capital stake
of 40% of equity which must be brought down to 26% over a period of 12 years.
• Joint ventures are not permitted. Foreign shareholding will be allowed in these banks as per the Foreign
Direct Investment rules in private banks in India.
• Existing Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFI) and Local Area
Banks (LAB) may convert themselves to become small finance banks by making applications to RBI.
• These Small Finance Banks need to be registered as Public Limited Companies under The Companies Act,
2013 and Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes, are
applicable to them.
• The banks will not be restricted to any region. 75% of its Net Credit should be lent to Priority Sector and
50% of its loans should be in the range of up to Rs. 25 lakhs.
• The Small Payments Banks should have capital of at least Rs. 100 crore.
• At net worth of Rs. 500 crore, listing will be mandatory within three years.
• Those small finance banks having net worth of below Rs.500 crore could also get their shares listed
voluntarily.
 Lesson 1 • Overview of Indian Banking System 13

The scope of business of a small finance bank, include “basic banking activities of acceptance of deposits and
lending to unserved and underserved sections including small business units, small and marginal farmers,
micro and small industries and unorganised sector entities”.
With prior approval of RBI, it can undertake risk less activities such as distribution of mutual fund units,
insurance products, pension products, etc. after complying with the requirements of the sectoral regulator for
such products. The small finance bank can also become a Category II Authorised Dealer in foreign exchange
business for its clients’ requirements. It cannot set up subsidiaries to undertake non-banking financial services
activities.
Initially the RBI had issued detailed guidelines for licensing of “Small Finance Banks” in the Private Sector
on November 27, 2014. The process resulted in licensing and granting in-principle approval to ten applicants
and they have since then successfully established the banks. It was also notified by RBI that result of gaining
experience in dealing with these banks, RBI will consider ‘on tap’ licensing of these banks. After a review of the
performance of the existing small finance banks and to encourage competition, it was announced in the Second
Bi-monthly Monetary Policy Statement, 2019-20 dated June 06, 2019 that the Reserve Bank would put out
draft guidelines for ‘on tap’ licensing of such banks. Accordingly, the RBI has circulated guidelines for licensing
of small finance banks in the private sector have been formulated for continuous authorization (i.e., “On Tap
licensing”).
These guidelines consist of the following:
1. Registration, licensing and regulations
2. Objectives
3. Eligible promoters
4. Scope of activities
5. Capital requirement
6. Promoters’ contribution
7. Foreign shareholding
8. Voting rights and transfer / acquisition of shares
9. Prudential norms
10. Additional conditions for NBFCs/MFIs/LABs converting into a bank
11. Business plan
12. Corporate governance
13. Other conditions
14. Transition path
15. Procedure for application
16. Procedure for RBI decisions.
Note: Please refer Lesson 3 for major aspects of detailed guidelines on licensing of Small Finance Banks.

Development Banks
The emerging economies of post-colonial era, assumed responsibilities of national economic development
activities such as industrial, financial, infrastructure, agricultural, exports etc. themselves. Financial institutions
which were created to address these issues of economic importance are called Developmental Financial
Institutions (‘DFI’). The basic emphasis of a DFI is to offer cheaper long-term financial assistance “for activities or
sectors of the economy where the risks may be higher than that the ordinary financial system is willing to bear.”
 14 Lesson 1 • PP-BL&P

In India soon after independence RBI was entrusted with the responsibility of establishing appropriate
institutions in the preferred sectors as per plans of the Government. The need of the hour was to establish
institutions to cater to the demand for long-term finance by the industrial sector. This was followed by the
formation of Industrial Finance Corporation of India (IFCI) in the year 1948.

The following represents a list in chronological order Development Banks set up in India over the years.
1. Industrial Finance Corporation of India (IFCI) 1948: IFCI was established for catering to the long term
finance needs of the industrial sector. It was provided access to low-cost funds through the RBI’s Statutory
Liquidity Ratio (SLR) which in turn enabled it to provide loans and advances to corporate borrowers at
concessional rates. This arrangement lasted till 1990s. Later it was decided to access capital markets for
its funds needs. For this purpose its constitution was changed to a company under The Companies Act
1956. IFCI’s main focus was project finance, financial services and corporate advisory service. It continued
to play its pioneering role. IFCI has been revamped over the years.
IFCI is also a Systemically Important Non-Deposit taking Non-Banking Finance Company (NBFC-ND-SI),
registered with the Reserve Bank of India. The primary business of IFCI is to provide medium to long term
financial assistance to the manufacturing, services and infrastructure sectors. Through its subsidiaries and
associate organizations, IFCI has diversified into a range of other businesses including broking, venture
capital, financial advisory, depository services, factoring etc. As part of its development mandate, IFCI was
one of the promoters of National Stock Exchange (NSE), Stock Holding Corporation of India Ltd (SHCIL),
Technical Consultancy Organizations (TCOs) and social sector institutions like Rashtriya Gramin Vikas
Nidhi (RGVN), Management Development Institute (MDI) and Institute of Leadership Development (ILD).
Industrial Credit and Investment Corporation of India (ICICI) 1956: For providing foreign currency
financing over medium term and long term for importing of capital goods for industries, ICICI was formed
at the initiative of the World Bank, the Government of India and Indian industry. From 1990s onwards,
ICICI focused on Project Finance. However due to liberalization of economic policies of the Government
of India, during the period1991- 2000, ICICI transformed itself as a diversified financial services group,
including commercial banking services through its subsidiary ICICI Bank. Later in the year 2002 through
the merger route, ICICI Ltd. along with two of its subsidiaries merged with ICICI Bank Ltd. to form a
single entity. Today, ICICI along with its subsidiaries, has moved close to being an Universal Bank and is
functioning under umbrella brand of ICICI Bank.
 Lesson 1 • Overview of Indian Banking System 15

2. Industrial Development Bank of India (IDBI) 1964: Government of India through an Act of parliament
established IDBI in the year 1964. IDBI has played a pioneering role in promoting industrial growth
through financing of medium and long-term projects from various sectors for the development of Indian
economy. IDBI has played a significant role, particularly in the pre-reform era period of 1964-1991. Right
from the beginning IDBI focused its objectives on long term financing of industries. Unlike IFCI which
focused on a few industries, IDBI had a broad based approach of a gamut of industries including core
sector. The basket of services provided included financial assistance in rupee and foreign currencies, for
green-field projects as also for expansion, modernization and diversification purposes.
In the wake of financial sector reforms unveiled by the Government since 1992, IDBI evolved an array of
fund and fee-based services for providing an integrated solution to meet the entire demand of financial
and corporate advisory requirements of its clients. IDBI also provided indirect financial assistance by
refinancing loans extended by State-level financial institutions and banks, and by rediscounting bills of
exchange arising out of sale of indigenous machinery on deferred payment terms.
In response to the felt need and on commercial prudence, IDBI was advised to transform itself in to a
Bank. Since IDBI was constituted through an Act of Government of India in 1964 as a Development bank,
to facilitate it’s conversion in to a bank, the Industrial Development Bank (transfer of undertaking and
Repeal) Act, 2003 [Repeal Act] was passed repealing the Industrial Development Bank of India Act, 1964.
“In terms of the provisions of the Repeal Act, a new company under the name of Industrial Development
Bank of India Limited (IDBI Ltd.) was incorporated as a Govt. Company under the Companies Act, 1956
on September 27, 2004. Thereafter, the undertaking of IDBI was transferred to and vested in IDBI Ltd.
From the effective date of October 01, 2004. In terms of the provisions of the Repeal Act, IDBI Ltd. has
been functioning as a Bank in addition to its earlier role of a Financial Institution. In view of changes
in the economic and corporate environment due to reforms, Government of India later decided to
transform IDBI into a commercial bank without sacrificing its development finance role and obligations.
The new structural change enables IDBI to have access to low-cost current, savings bank deposits, would
support the development finance obligations as also simultaneously enable it to expand its client/ asset
base.” Subsequently United Western Bank Ltd. a private sector bank which was under moratorium was
amalgamated with IDBI on October 3, 2006.
To truly reflect the multifarious functions it performed, the name of the Bank was changed to IDBI Bank
Limited effective from May 07, 2008. In 2011 two of IDBI’s wholly owned subsidiaries viz. IDBI Home
Finance Ltd. and IDBI Gilts Ltd. were amalgamated with IDBI Bank. After merger IDBI Bank has been able
to offer a comprehensive service to various clientele right from an individual to a giant corporate.
On account of NPAs from the year 2016-17 onwards, there was mounting losses recorded by IDBI Bank.
Due to this, the RBI placed IDBI Bank under Prompt Corrective Action (‘PCA’) restricting its credit disbursal.
Taking cognizance of the developments, in August 2018, the Union Cabinet “approved the acquisition of
controlling stake by Life Insurance Corporation (LIC) as a promoter” in IDBI Bank through “a combination
of preferential allotment and open offer of equity”.
Accordingly, LIC applied to Insurance and Regulatory and Development Authority (IRDA), for permission
as LIC’s primary business was that of Insurance. IRDA gave a technical go ahead for acquisition of 51% of
the stake of the IDBI Bank by LIC. The acquisition of 51% stake in IDBI Bank was completed on January
2019 making it a majority stake holder of the bank.
Later in March 21, 2019 by way of Press Notification, the RBI has informed the public as under:
“IDBI Bank Limited has been categorized as a ‘Private Sector Bank’ for regulatory purposes by Reserve
Bank of India with effect from January 21, 2019 consequent upon Life Insurance Corporation of India
acquiring 51% of the total paid-up equity share capital of the bank.”
 16 Lesson 1 • PP-BL&P

3. Industrial Investment Bank of India Ltd.: The Industrial Investment Bank of India, earlier known as
Industrial Reconstruction Bank of India is one of the oldest banks in India. It was earlier known as The
Industrial Reconstruction Corporation of India Ltd., (IRBI) which was set up in 1971 for rehabilitation of
sick industrial companies. It was reconstituted in 1985 under the IRBI Act, 1984. With a view to convert
the institution into a full-fledged development financial institution, IRBI was incorporated under the
Companies Act, 1956, as Industrial Investment Bank of India Ltd. (IIBI) in 1997. IIBI offered a wide range
of products and services, including term loan assistance for project finance, short duration non-project
asset-backed financing, working capital/ other short-term loans to companies, equity subscription, asset
credit, equipment finance as also investments in capital market and money market instruments However,
due to plethora of problems faced by this institution on account of impaired assets, IIBI was ordered to be
wound up in the year 2012.
4. Infrastructure Development Finance Company (1997): IDFC was founded in 1997 in terms of
recommendations of an expert group on commercialization of Infrastructure projects under the
Chairmanship of Dr. Rakesh Mohan. Later in the year 1998 it applied for a Non-Banking Finance Company
registration with RBI. In the year 1999 it was declared as a Public Financial Institution. In 2000 it registers
as a Merchant Banker and also as a debenture trustee in 2001. In subsequent years IDFC has forayed in
to overseas fund raising for private equity and through infrastructure bonds, investment banking, asset
management etc. In 2013 IDFC had applied for a Banking licence to RBI under new licencing policy. In April
2014 RBI had granted an in-principle approval to IDFC for setting up a bank. After 18 months IDFC got
a banking licence to commence Banking operations. It started operating Banking services from October
2015. Now, IDFC operates its banking operation through a separate entity called IDFC Bank.
Over the years IDFC had been building up its competence in various areas of financial services like providing
assistance by way of debt and equity support, mezzanine financing and advisory services. It encouraged
banks to participate in financing of infrastructure projects through ‘takeout’ financing for a specific term
and at a preferred risk profile, with IDFC taking out the obligation after a specific period. Also through its
guarantee structure, had helped to promote raising of resources from international markets. IDFC was s
actively involved in the process of policy formulation of Government of India, relating to infrastructure
sector development. However due to changes in Macro environmental factors globally as well as locally.
With a range of expertise under its belt IDFC can be said to be well settled to play a role of an Universal
Bank.
IDFC Bank and a NBFC called Capital First had announced completion of their merger on December 2018,
creating a combined loan asset book of Rs 1.03 lakh crore for the merged entity and renamed itself as IDFC
First Bank Limited. Their aim was stated to become a “Universal Bank” in providing banking services to
the public.
5. State Financial Corporations: The State Financial Corporation Bill passed by both houses of parliament,
received the concurrence of the Hon’ble President on 31st October,1951. It came on the statute book
as “The State Financial Corporation Act, 1951.” This Act empowered each state and union territory to
establish a state financial corporation with a view to provide financial assistance to house hold, small
and medium scale industries. The area of operation of each State Financial Corporation (SFC) falls within
the state, in which it has been established, but in some exceptional cases the activities may be extended
to neighbouring states or union territory, if there are no state financial corporations in the concerned
states. For example, Maharashtra State Financial Corporation’s activities extended to Goa, Daman & Diu.
Similarly, Delhi Financial Corporation, on reorganization of erstwhile Punjab Financial Corporation (PFC)
which was divided into four SFCs in 1967 was established and since then the DFC has been catering the
financial needs of the industries in UT of Delhi and Chandigarh. In terms of Section 13(1)(1) of SIDBI
Act,1989 SIDBI provides refinance to State Financial Corporations and other banks. Under the scheme,
SIDBI sanctions refinance against term loans sanctioned by the SFCs to industrial concerns in Micro, Small
and Medium Enterprises (MSMEs) sector for setting up of industrial projects and also for their expansion,
modernization and diversification. Based on the annual Business Plan and Resources Forecast (BPRF),
refinance limits are sanctioned to SFCs annually.
 Lesson 1 • Overview of Indian Banking System 17

The services of State Financial Corporations (SFCs), mainly aims at lending money for creation, technology
up-gradation, modernization, expansion and overall development of Micro, Small and Medium Enterprises
(MSME), including commercial vehicles. SFCs are also providing financial assistance to manufacturing and
service industries of their respective states. To diversify its activities, the SFCs are also contemplating to
offer their services through Non-Banking Financial Companies (NBFC). By the year 1955-56, only 12 SFCs
were set up and 1967-68, all the 18 SFCs came into existence and now are fully in operation. SFCs set up in
various states as regional institutions represent an attempt to diversify structure of development banking
in India so as to be able to cope up with requirements of wider sections of industrial enterprises.

NON-BANKING FINANCIAL COMPANIES (NBFC)

Financing of business by unorganized sector had been a long time practice in India. It dates back from 1930s
till 1965. In 1965 need was felt to bring in separate regulatory mechanism. As a consequence Chapter III-B
was inserted in the RBI Act. This was basically brought in to regulate the fiercely competitive car segment.
Thus began the regulation of the unorganized players in the financial market. In 1975 the RBI accepted the
recommendations of James Raj committee which went in to the working and regulation of finance companies in
the market. Certain recommendations made relating to the quantum of accepting deposits from public and also
regarding net-owned funds. In spite of this, there was quantum jump in the establishment of NBFCs in India.
The number of NBFCs went up from 7000 in 1980 to 30,000 in 1992. The sudden growth brought in its own set
of problems as well as certain unhealthy practices in these finance companies.
To address these issues RBI set up a committee under the Chairmanship of Mr. A.C. Shah, which recommended
compulsory registration and prudential norms. Subsequently, regulatory norms were put in place in
1997 incorporating the above norms. In the light of continuous changes in operating environment, further
amendments to NBFC regulations were made in subsequent years too on an ongoing basis.
According to RBI, the current definition of NBFC is “a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property. A non-banking institution which is a company
and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner, is also a non-banking financial company called
Residuary non-banking company.”
Technically a NBFC has also been defined by RBI as “ when a company’s financial assets constitute more than
50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross
income. A company which fulfills both these criteria will be registered as NBFC by RBI”.
NBFCs differ from Banks on following grounds:
i. NBFC cannot accept demand deposits; whereas banks can accept the same.
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself,
whereas banks can do so;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks.
iv. An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.).
v. An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase and Construction of
Immovable Property.
NBFCs play an important role in the Indian financial system by complementing and competing with banks and
by bringing in efficiency and diversity into financial intermediation. The Reserve Bank’s regulatory perimeter
is applicable to companies conducting non-banking financial activity, such as lending, investment or deposit
acceptance as their principal business.
 18 Lesson 1 • PP-BL&P

The regulatory and supervisory architecture is, however, focused more on systemically important non-deposit
taking NBFCs (with asset size Rs. 5 billion and above) and deposit accepting NBFCs with light touch regulation
for other non-deposit taking NBFCs.
Harmonisation of different categories of NBFCs: With effect from February 22, 2019, the RBI has decided to
harmonise three different categories of NBFCs into one, based on the principle of regulation by activity rather
than regulation by entity. Accordingly, three categories of NBFCs, that is, asset finance companies (AFCs), loan
companies (LCs) and investment companies (ICs) are to be combined into a single category NBFC Investment
and Credit Company (NBFC-ICC). Accordingly the categorization of NBFC will stand reduced from 12 to 10.

Classification of NBFCs based on Activity

Type of NBFC Activity
1. Investment and Credit Financing of physical assets supporting productive / economic
Company (NBFC- ICC) activities, including automobiles, tractors and generators.
(merged entity of Asset Providing of finance whether by making loans or advances or otherwise
Finance Company (AFC) /. for any activity other than its own but does not include an asset finance
Loan Company, Investment company.
Company)
Acquiring securities for purpose of selling.
2. NBFC- Infrastructure Finance Providing infrastructure loans.
Company (NBFC- IFC)
3. NBFC-Systemically Important Acquiring shares and securities for investment mainly in equity market.
Core Investment Company The Reserve Bank of India (RBI) on August 13, 2020 announced stricter
(CIC-ND-SI) guidelines for Core Investment Companies (CICs), mandating more
disclosures, better risk management and a simpler group structure.
While computing Adjusted Net Worth (ANW), the amount representing
any direct or indirect capital contribution made by one CIC in another
CIC, to the extent such amount exceeds 10% of Owned Funds of the
investing CIC, shall be deducted.
All other terms and conditions for computation of ANW remain the
same. The deduction requirement shall take immediate effect for any
investment made by a CIC in another CIC after date of issue of this
circular. In cases where the investment by a CIC in another CIC is already
in excess of 10 percent as on the date of this circular, the CIC need not
deduct the excess investment as on the date of this circular from owned
funds for computation of its ANW till March 31, 2023.
4. Infrastructure Debt Fund- For facilitating flow of long-term debt into infrastructure projects.
NBFC (IDF-NBFC)
5. NBFC-Micro Finance Extending credit to economically disadvantaged groups.
Institution (NBFC-MFI)
6. NBFC-Factor Undertaking the business of acquiring receivables of an assignor or
extending loans against the security interest of the receivables at a
discount.
7. NBFC- Non-Operative For permitting promoters / promoter groups to set up a new bank.
Financial Holding Company
(NOFHC)
8. Mortgage Guarantee Undertaking mortgage guarantee business.
Company (MGC)
 Lesson 1 • Overview of Indian Banking System 19

Type of NBFC Activity

9. NBFC-Account Aggregator Collecting and providing information about a customer’s financial
(NBFC-AA) assets in a consolidated, organized and retrievable manner to the
customer or others as specified by the customer.
10. NBFC-Peer to Peer Lending Providing an online platform to bring lenders and borrowers together
Platform (NBFC- P2P) to help mobilize funds.

Special liquidity scheme for NBFCs/HFCs

The Government of India has approved a scheme to improve the liquidity position of NBFCs/HFCs through a
Special Purpose Vehicle (SPV) to avoid any potential systemic risks to the financial sector. To be eligible under
the Scheme, the following conditions should be met:
a. NBFCs including Microfinance Institutions that are registered with the RBI under the Reserve Bank of
India Act, 1934, excluding those registered as Core Investment Companies;
b. Housing Finance Companies that are registered under the National Housing Bank Act, 1987;
c. CRAR/CAR of NBFCs/HFCs should not be below the regulatory minimum, i.e., 15% and 12% respectively
as on March 31, 2019;
d. The net non-performing assets should not be more than 6% as on March 31, 2019;
e. They should have made net profit in at least one of the last two preceding financial years (i.e. 2017-18 and
2018-19);
f. They should not have been reported under SMA-1 or SMA-2 category by any bank for their borrowings
during last one year prior to August 01, 2018;
g. They should be rated investment grade by a SEBI registered rating agency;
h. They should comply with the requirement of the SPV for an appropriate level of collateral from the entity,
which, however, would be optional and to be decided by the SPV.
As per the Government decision, SBICAP which is a subsidiary of the State Bank of India has set up a SPV
(SLS Trust) to manage this operation. The SPV will purchase the short-term papers from eligible NBFCs/HFCs,
who shall utilise the proceeds under this scheme solely for the purpose of extinguishing existing liabilities.
The instruments will be CPs and NCDs with a residual maturity of not more than three months and rated as
investment grade. The facility will not be available for any paper issued after September 30, 2020 and the SPV
would cease to make fresh purchases after September 30, 2020 and would recover all dues by December 31,
2020; or as may be modified subsequently under the scheme.

Financial Institutions in India

According to the Economic Survey of 2012-13 the Reserve Bank of India had declared the following institutions
as All-India Financial Institutions. They are-
 20 Lesson 1 • PP-BL&P

Export- Import Bank of India

Established in 1982 through an Act of Government of India viz. Export -Import Bank of India Act, 1981. It
was established to make available financial facilities for exporters and importers. Export-Import Bank of India
is the premier export finance institution of the country. Also EXIM Bank was intended to serve as principal
financial institution coordinating the functioning of those institutions engaged in financing export and import
of goods and services with a view to promote International Trade of our country . Commencing its role as a
purveyor of export credit, similar to some of its foreign counterparts, EXIM Bank over the period had evolved in
to a dependable institution for the global operations of various industries including that of Small and Medium
enterprises.
EXIM Bank offers a wide range of products for partner industries such as import of technology and export
product development, export production, export marketing, pre-shipment and post-shipment and overseas
investments.
The flagship schemes of EXIM Bank are as follows:

In addition to the above, EXIM Bank offers

• Marketing Advisory: To help Indian exporting firms in their globalisation efforts by proactively assisting in
locating overseas distributors/buyers/partners for their products/services as well as to identify overseas
opportunities for setting up plants or projects or for acquisition of overseas companies. In this EXIM Bank
plays a promotional role to create and enhance export capabilities and international competitiveness of
Indian companies. For this efforts, the Group leverages the Bank’s high international standing, in-depth
knowledge and understanding of the international markets and well established institutional linkages. Its
physical presence supports Indian companies in their overseas marketing initiatives on a success based
fee.
• Research & Analysis: A team of experienced economists and strategists with in-depth insights on
international economics, trade and investment monitors trends in global and domestic economies to
analyse their impact on Indian and other developing economies. Besides catering to the constituents
within the Bank, the Group also connects with the Government, RBI, exporters/importers, trade & industry
associations, external credit agencies, academic institutions and researchers. It also searches avenues to
enhance India’s international engagement and implements the research under a broad classification of
regional, sectoral and policy related studies etc. With an objective to provide up-to- date information to
Indian traders and investors, the Group publishes various bulletins regularly with information on export
opportunities and highlights developments that have a bearing on Indian exports.
• Export Advisory: Under this, EXIM Bank offers a diverse range of information, advisory and support
services, which enable exporters to evaluate international risks, exploit export opportunities and improve
competitiveness. Value added information and support services are provided to Indian projects exporters
on the projects funded by multilateral agencies.
 Lesson 1 • Overview of Indian Banking System 21

EXIM Bank undertakes customised research on behalf of interested companies in the areas such as establishing
market potential, defining marketing arrangements, and specifying market distribution channels. Developing
export market entry plans, facilitating accomplishment of international quality certification and display of
products in trade fairs and exhibitions are other services provided.
EXIM Bank provides a wide range of information, advisory and support services, which complement its financing
programmes. These services are provided on a fee basis to Indian companies and overseas entities. The scope of
services includes market-related information, sector and feasibility studies, technology supplier identification,
partner search, investment facilitation and development of joint ventures both in India and abroad.
Thus EXIM Bank has evolved itself as a single window service provider to international trading entities from India.

National Bank for Agriculture and Rural Development (NABARD)

Till late 1970s there was no institutional credit arrangement for Agriculture and Rural credit in India. The needs
were looked after by Reserve Bank of India and Agricultural Refinance and Development Corporation (‘ARDC’).
However, the importance of institutional credit in boosting rural economy has been clear to the Government
of India right from its early stages of planning. Therefore, the Reserve Bank of India (RBI) at the insistence
of the Government of India, constituted a Committee to Review the Arrangements For Institutional Credit
for Agriculture and Rural Development (CRAFICARD) to look into these very critical aspects. The Committee
was formed in 30 March 1979, under the Chairmanship of Shri B. Sivaraman, a former member of Planning
Commission, Government of India.
The Committee’s interim report, submitted in November 1979, outlined the need for a new institutional
arrangement for providing attention, direction and focus to credit related issues linked with rural development.
It recommended for formation of a unique development financial institution which would address these
aspirations and this lead to the formation of National Bank for Agriculture and Rural Development (NABARD)
as approved by the Parliament through Act 61 of 1981.
NABARD came into existence in July 1982 by transferring the agricultural credit functions of RBI and
refinance functions of the then ARDC. It was dedicated to the service of the nation by the then Prime
Minister in November 1982.
Set up with an initial capital of Rs.100 crore. Consequent to the revision in the composition of share capital
between Government of India and RBI, NABARD today is fully owned by Government of India. As on March 2019
the entire capital of NABARD which stands at Rs. 12,580 crores is fully held by Government of India. NABARD
is involved directly and indirectly in an extensive manner in financing of agriculture, rural development apart
from extension activities and supervisory roles. A brief on the same is as follows:
• Direct Finance in the form of Loans for Food Parks and Food Processing Units in Designated Food Parks,
• Loans to Warehouses, Cold Storage and Cold Chain Infrastructure,
• Credit Facilities to Marketing Federations, Rural Infrastructure Development Fund,
• Direct Refinance Assistance to Co-operative Banks,
• Financing and supporting Producer Organisations,
• More Direct Finance in the form of Infrastructure Development Assistance,
• Financing and developing Primary Agricultural Co-operative Societies and Umbrella Programme for
Natural Resource Management.
• Short term and long term refinancing of agriculture loans to various banks and other agencies apart from
refinancing under off-farm sector.
NABARD in its developmental role, is involved in efficient credit delivery system to service the needs of
agriculture and rural development. Since more than 50% of the rural credit is disbursed by the Co-operative
 22 Lesson 1 • PP-BL&P

Banks and Regional Rural Banks (RRBs) NABARD is responsible for regulating and supervising Co-operative
banks and RRBs. In this direction NABARD has been taking various initiatives in association with Government of
India and RBI to improve the health of Co-operative banks and Regional Rural Banks. Apart from this, NABARD
is also involved in Financial inclusion, Micro credit and Micro credit innovation, Core Banking Solution to Co-
operative Banks, Climate change, to name a few.
In its supervisory role as empowered by Section 35(6) of the Banking Regulation Act, 1949, NABARD conducts
inspection of State Cooperative Banks, Central Cooperative Banks and RRBs. On its own, on a voluntary basis
NABARD conducts periodic inspections of state level cooperative institutions such as State Cooperative
Agriculture and Rural Development Banks (SCARDB), Apex Weavers Societies, Marketing Federations etc.

Small Industries Development Bank of India (SIDBI) (1990)

The Small Industries Development Bank of India (SIDBI) came in to existence in 1990 through an Act of
Parliament (SIDBI Act, 1989) as a wholly owned subsidiary of IDBI. It was envisaged to be the principal financial
institution for promoting, financing the development of industries in the small-scale sector and also carries out
coordinating the functions of institutions engaged in similar activities.
SIDBI commenced its operations in April 1990 by taking over the outstanding portfolio and activities of IDBI
pertaining to the small-scale sector. By an amendment to the SIDBI Act in 2000, IDBI the majority stake holder,
diluted its holdings in SIDBI in favour of a few Public Sector Banks and other Central Government undertakings.
SIDBI’s operational domain consist of the entire domain of SSI sector, including the tiny, village and cottage
industries as defined under MSME Act, 2008. With appropriate tailor made schemes to meet setting up of new
projects, expansion, diversification, modernization and rehabilitation of existing units therein. SIDBI caters
the need of SSI sector. SIDBI also offers refinance, bills rediscounting, lines of credit and resource support
mechanisms to route assistance to SSI sector through a network of banks and State level financial institutions.
SIDBI also offers direct finance for meeting specific requirements of SSI sector. The Government also extends
line of credit to SIDBI to enable it to extend loans at more affordable rates to its traditional clientele. Over the
years SIDBI has carved for itself a ‘niche’ in financing of SSI and associated sectors.

National Housing Bank (NHB)

In India there was no institutional arrangement for long term financing of individuals’ housing, for a long time.
This short coming was identified by the Sub-Group on Housing Finance for the Seventh Five Year Plan (1985-
90) as a stumbling block, hindering the progress of the housing sector and recommended setting up of a nodal,
national level institution.
The Government of India, accepted the recommendation of the sub-group of the planning commission and a
High Level Group under the Chairmanship of Dr. C. Rangarajan, the then Deputy Governor of RBI, was set-up to
examine the proposal. The high level group recommended the setting up of National Housing Bank (‘NHB’) as
an autonomous housing finance institution which as accepted by the Government .
While presenting the union budget in 1987-88 the Hon’ble Prime Minister of India, on February 28, 1987
announced the decision to establish the NHB as an apex level institution for housing finance.
Following that, the legislative process for passing an Act was in progress and NHB bill was passed in the winter
session of 1987 and in December, 1987, became an Act of Parliament. The National Housing Policy, formulated
in 1988 envisaged the setting up of NHB as the Apex level institution for housing. All these steps resulted in
setting up of NHB on July 9, 1988 under the NHB Act, 1987.NHB is wholly owned by Reserve Bank of India,
which contributed the entire paid-up capital. However the RBI has divested its entire stake in NHB amounting
to Rs. 1450 crore on March 19, 2019 in favour of Government of India. With this, the Government of India now
holds 100% stake in NHB. This was done on the basis of the recommendation of Narasimham Committee II
Report and the Discussion Paper prepared by RBI on Harmonizing the Role and Operations of Development
 Lesson 1 • Overview of Indian Banking System 23

Financials Institutions and Banks. Based on the recommendation, RBI announced the proposal to transfer
ownership of its shares in SBI, NHB and NABARD to the Central Government in the Monetary and Credit Policy
for the year 2001-02.
The Preamble of the National Housing Bank Act, 1987 describes the basic functions of the NHB as -”… to operate
as a principal agency to promote housing finance institutions both at local and regional levels and to provide
financial and other support to such institutions and for matters connected therewith or incidental thereto.”
According to Section 14 of NHB Act, some of the important businesses which NHB is permitted to transact, are
the following:
“(a) promoting, establishing, supporting or aiding in the promotion, establishment and support of housing
finance institutions.
(b) making of loans and advances or rendering any other form of financial assistance whatsoever to housing
finance institutions and scheduled banks, [or to any authority established by or under any Central, State
or Provincial Act and engaged in slum clearance].
(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 mobilisation of resources and extension of credit for
housing.
(i) formulating one or more schemes for the economically weaker sections of society which may be subsidised
by the Central Government or any State Government or any other source etc.”
The operations of NHB include the following :
• Raising resources from various sources including from general public.
• Refinancing various Primary Lending Institutions.
• Extending Project Finance in terms of Section 14 (ba) of the NHB Act, 1987 to various public agencies like
State Housing Boards, State Slum Clearance Development Municipal Corporations, Urban Local Bodies,
etc.
• The power to Register, Regulate and Supervise Housing Finance Companies (HFC) of NHB has been now
taken over by RBI on account of the following:
On August 19, 2019 RBI had issued the following notification - “The Finance (No.2) Act, 2019 (23 of 2019) has
amended the National Housing Bank Act, 1987 conferring certain powers for regulation of Housing Finance
Companies (HFCs) with Reserve Bank of India. HFCs will henceforth be treated as one of the categories of Non-
Banking Financial Companies (NBFCs) for regulatory purposes. Reserve Bank will carry out a review of the
extant regulatory framework applicable to the HFCs and come out with revised regulations in due course. In the
meantime, HFCs shall continue to comply with the directions and instructions issued by the National Housing
Bank (NHB) till the Reserve Bank issues a revised framework. NHB will continue to carry out supervision of
HFCs and HFCs will continue to submit various returns to NHB as hitherto. The grievance redressal mechanism
with regard to HFCs will also continue to be with the NHB.” This effectively implies that RBI will exercise its
authority for registering, regulating and supervising HFCs from a date to be notified in future.
• Provides Equity Participation to various HFC.
• Participation in Government Schemes as a Nodal agency for the following schemes. o NHB introduce 1%
interest subvention scheme on 1.10.2009
NHB is one of the two nodal agencies for the Urban Poor (ISHUP) and heating and solar lighting systems in
renamed it as Rajiv Rinn Yojana (RRY)
NHB has been designated as an agency for administering and monitoring Capital Subsidy Scheme for Installation
of Solar Water Heating and Solar Lighting Systems in Homes
24 Lesson 1 • PP-BL&P

LESSON ROUND UP
• Under the British government, Agency banks gave rise to Presidency banks. Presidency Banks later
lead to the formation of Imperial Bank of India, which was succeeded by State Bank of India after
independence.
• Reserve Bank of India which was formed in 1935 started playing the roles of central bank and monetary
authority which until then were performed by Imperial Bank of India. Post-independence Reserve Bank
was nationalized and also is armed with Regulatory powers.
• According to the felt needs of the government, State Bank of India was established for taking over the
functions of Imperial Bank of India. Later banks of all princely States were amalgamated with State
Bank of India as its Associates.
• These Associates were again amalgamated in to State Bank of India and presently State Bank of India is
a single entity and its Associates having merged in SBI.
• Private Joint stock banks were being established from 1894 onwards in India; some of them continue to
function even today. Out of these 20 of them were nationalized in 1969 and 1980 respectively and they
became a formidable force in Indian banking, which is highly regulated by Government / RBI.
• In view of the stringent capital adequacy norms as well as to ensure a robust performance consolidation
of nationalised banks were initiated during 2018 / 19 resulting in the total number of PSU banks stand
at 12 as on date.
• Post-independence era saw the establishment of Development Banks at national level and at States
levels spanning across Industrial Development including Small Industries, Agriculture, Housing,
Export-Import etc., and some of them have converted themselves as commercial banks.
• Economic liberalization coupled with banking reforms saw the birth of New generation private sector
banks which have become a force to reckon with in Indian banking.
• Cooperative Institutions have emerged from a simple setup to one of the largest segments that finance
agriculture over the period of time.
• Private financing companies which were in existence from 1930s have been brought under a regulatory
frame work and today they function as NBFCs.
• To deepen Financial inclusion as well as financing of small businesses and also to track the same,
new categories of banks viz. Small Finance Banks and Payments banks were established from
2015/2016 onwards.

GLOSSARY
Indian banking System Indian Banking System encompasses Agency House Banks, Presidency Banks,
Imperial Bank of India, Reserve Bank of India, Private/Joint Stock Banks (Old
generation private sector banks), State Bank of India, Associate Banks, Old
Nationalized Banks, New Generation Private Sector Banks, Foreign Banks, Co-
operative Banks, Regional Rural Banks, Local Area Banks, Small Finance Banks
and Payments Banks and Financial Institutions known as Development Banks
and Non-Banking Financial Companies.
Reserve Bank of India It was established on 1935 as a banker to the central government.
Scheduled Bank A scheduled bank is one which is included in the Second Schedule of RBI Act
and enjoins it to have a minimum capital of Rs. 5 lacs and maintain reserves as
per the directions of RBI.
Lesson 1 • Overview of Indian Banking System 25

Non-Scheduled Bank Non-scheduled banks are those which are not listed in the Second schedule of
the RBI Act, 1934 having a reserve capital of less than 5 lakh rupees.
Private Sector Banks As the name implies the ownership of these banks rests with private individuals
and corporates including foreign entities.
State Bank of India State Bank of India originated from the three Presidency banks namely Bank
of Bengal, Bank of Bombay and Bank of Madras and the successor to these
Presidency banks viz. Imperial Bank of India.
Old Generation Private The private sector banks which were operating in India prior to the liberalization
Bank year of 1991 are known as Old generation private Sector banks.
New Generation The banks that came into existence subsequent to Narasimham Committee
Private Bank Report I and revised RBI guidelines in 1993 are known as new generation
private sector banks.
Co-operative Banks Cooperative Banks are registered under the Cooperative Societies Act, 1912.
And regulated by the Reserve Bank of India under the Banking Regulation Act,
1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.
Regional Rural Bank RRBs are scheduled banks (Government banks) operating at regional level in
(RRBs) different States of India. Regional Rural Banks (RRBs) were established in 1975
under the provisions of the Ordinance promulgated on September 26, 1975 and
followed by Regional Rural Banks Act, 1976.
Small Finance Banks These banks promote financial inclusion to sections of the economy not being
served by other banks, such as small business units, small and marginal farmers,
micro and small industries and unorganised sector entities.
Payments Bank A payments bank aims to further financial inclusion, especially through savings
accounts and payments services. Accordingly, a payments bank is not allowed
to give any form of loan or issue a credit card.
Development Finance Financial institutions which were created to is offer cheaper long-term financial
Institutions (DFIs) assistance “for activities or sectors of the economy where the risks may be
higher than that the ordinary financial system is willing to bear.” are called
Developmental Financial Institutions (‘DFIs’).
State Financial The services of State Financial Corporations (SFCs), mainly aims at lending
Corporations money for creation, technology up-gradation, modernization, expansion
and overall development of Micro, Small and Medium Enterprises (MSME),
including commercial vehicles. SFCs are also providing financial assistance to
manufacturing and service industries of their respective states.
Non Banking Finance NBFC is “a company registered under the Companies Act, 1956 engaged in
Corporations(NBFCs) the business of loans and advances, acquisition of shares/stocks/bonds/
debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance
business, chit business but does not include any institution whose principal
business is that of agriculture activity, industrial activity, purchase or sale of
any goods (other than securities) or providing any services and sale/purchase/
construction of immovable property.
Export Import Bank of Export-Import Bank of India is the premier export finance institution of the
India country. Established in 1982 through an Act of Government of India viz. Export
-Import Bank of India Act, 1981.
 26 Lesson 1 • PP-BL&P

National Bank for NABARD came into existence in July 1982 by transferring the agricultural credit
Agriculture and functions of RBI and refinance functions of the then ARDC
Rural Development
(NABARD)
Small Industries Small Industries Development Bank of India (SIDBI) was established in April
Development Bank of 1990 and it acts as the Principal Financial Institution for Promotion, Financing
India (SIDBI) and Development of the Micro, Small and Medium Enterprise (MSME) sector
as well as for co-ordination of functions of institutions engaged in similar
activities.
National Housing Bank NHB is an apex financial institution for housing. NHB has been established
(NHB) 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.

TEST YOURSELF
(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. Fill up the blanks.
a. RBI was established in the year _________________________.
b. As on date the total number of nationalized banks are _________________________.
c. The objectives of Payments Banks and Small Finance Banks are _________________________.
2. State whether the following is True of False.
a. Presidency Banks were amalgamated to form State Bank of India.
b. RBI plays the role of only Monetary Authority.
c. NBFCs come under the jurisdiction of Government of India.
d. Cooperative banks come under the regulatory jurisdiction of RBI only.
e. Payments Banks are allowed to issue credit card.
f. Small Finance Banks finance only entities in the unorganized sector.
3. Write Short note on -
i. State Bank of India iii. AIFI
ii. Reserve Bank of India iv. NHB
4. Explain the reasons for Nationalization of private banks.
5. Explain the reasons for establishing Small Banks and Payments banks.

For further reading

• RBI functions & Other materials - available in www.rbi.org,in
• Banking Law and Practice - P.N. Varshney , 25th Edition, Sultan Chand & Sons
• Law and Practice of Banking - M.L. Tannan
• Commercial Banking - Volume I, II &III - IBA Publication
• Various articles on History of Banking in India from internet.
• Evolution of SBI - www.sbi.co.in.