Indian Financial System | Lucent for GK - UPSC PDF Download

Banks: The Pillars of Financial Stability

Banks are the lifeblood of any economy, and the Indian financial system boasts a robust banking sector comprising two main categories: commercial banks and cooperative banks.

Commercial Banks

Commercial banks function on profit-oriented principles and serve as key players in India's financial ecosystem. They are further divided into two types: scheduled commercial banks and non-scheduled commercial banks.

Scheduled Commercial Banks

Scheduled commercial banks hold a special status as they are listed in the second schedule of the RBI Act of 1934. To be recognized as scheduled banks, they must meet specific criteria, such as having a corporate structure and a minimum paid-up share capital of 500 crores of rupees. Scheduled banks enjoy the privilege of transacting in foreign exchange and maintaining reserve requirements with the RBI. The following categories fall under scheduled commercial banks:

• Public Sector Banks: These banks are majority-owned by the government, either at the central or state level. Well-known examples include SBI, Punjab National Bank, and Bank of India.
• Private Sector Banks: Privately held banks like ICICI Bank and Axis Bank are part of this category.
• Foreign Banks: These banks are established in India but owned by foreign entities, such as Citi Bank.
• Regional Rural Banks (RRBs): Created with the objective of boosting the rural economy, RRBs offer loans and other financial facilities to small and marginal farmers, artisans, and small business owners in rural areas.
• Payment Banks: Focused on serving the underprivileged and poor, payment banks accept demand deposits and provide current and savings account options. However, they are not allowed to lend money or issue credit cards.
• Small Finance Banks: These banks primarily engage in basic banking activities and cater to underserved and unserved groups, such as small business units and marginalized farmers.

Non-Scheduled Commercial Banks

Non-scheduled commercial banks operate on a limited scale and are not allowed to transact in foreign exchange. Despite not being under the purview of RBI's direct supervision, they must maintain reserve requirements.

Cooperative Banks: Serving the Community

Cooperative banks are rooted in the principles of cooperation, emphasizing service to members and the community. The Indian financial system includes two subcategories of cooperative banks:

• Urban Co-operative Banks (UCBs): Also known as Primary Co-operative Banks, UCBs are present in urban and semi-urban regions. They offer loans to small enterprises and borrowers and have expanded their operations to include a broader range of financial services.
• Rural Cooperative Banks: These banks play a crucial role in providing credit to the agricultural sector. The three-tier system governing the short-term cooperative credit framework consists of State Cooperative Banks (StCBs), (District) Central Cooperative Banks (DCCBs), and Primary Agricultural Credit Societies (PACS).

Non-Banking Financial Institutions (NBFIs): Bridging Financial Gaps

The Non-Banking Financial Institutions (NBFIs) form an integral part of the Indian financial system and are regulated by the RBI. These institutions cater to specific financial needs and operate alongside traditional banks. Let's explore the key players in this segment:

All India Financial Institutions (AIFIs)

AIFIs serve as specialized financial entities that provide long-term financing to various sectors. Several AIFIs are regulated by the RBI, and these Development Financial Institutions (DFIs) include:

• NABARD: National Bank for Agriculture and Rural Development focuses on promoting rural economic activities, including small-scale enterprises, handicrafts, and rural crafts.
• National Housing Bank (NHB): NHB aids and promotes housing finance institutions at both local and regional levels.
• EXIM Bank: The Export-Import Bank of India supports exporters and importers with financial assistance, coordinating operations related to international trade.
• Small Industries Development Bank of India (SIDBI): SIDBI fosters the development and financing of the Micro, Small, and Medium-Sized Enterprise (MSME) sector.
• MUDRA Bank: Micro Units Development and Refinance Agency Ltd. aims to provide funding to non-corporate small businesses, both in rural and urban areas, with financial requirements up to Rs. 10 lakhs.

Non-Banking Financial Companies (NBFCs)

NBFCs are organizations registered under the Companies Act of 1956, engaging in activities such as loans and advances, acquisition of securities, leasing, hire-purchase, insurance, and chit business. These institutions resemble banks in certain financial services but do not possess a banking license.

Primary Dealers (PDs)

Primary Dealers have the authority to buy and sell government securities, acting as intermediaries in the primary and secondary markets.

Peer to Peer (P2P) Lenders

P2P lending platforms facilitate lending and borrowing activities between individuals and businesses, connecting borrowers with potential lenders.

Credit Information Companies (CIC)

CICs play a crucial role in the financial ecosystem by collecting and disseminating credit-related information about individuals and businesses, enabling lenders to assess creditworthiness.