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Money & Banking- 2
Banking reforms suggested by the Damodaran Committee
The following reforms were recommended to improve customer protection, transparency and accessibility of banking services:
- There should be no restriction of maintaining minimum balance in a savings account for obtaining facilities such as a cheque book and ATM/debit card.
- Fixed deposits should not be automatically renewed without the written permission or explicit request of the depositor.
- The present limit of deposit insurance cover of Rs. 1 lakh for deposits in savings accounts should be raised to Rs. 5 lakh.
- Home-loan customers should not be penalised for closing their accounts before maturity if they obtain a lower interest home loan from another bank or financial institution.
- All documents held as security against home loans should be returned to the borrower within 15 days from the date of full repayment of the loan.
- A common, toll-free call centre number should be established for complaints against banks, with calls routed to the concerned bank for resolution.
- Each bank branch should maintain a separate counter earmarked for senior citizens and physically challenged customers, who should receive priority service at that counter.
- Senior citizens are presently offered an additional interest of up to 1% on fixed deposits.
- The same additional interest benefit should be extended to senior citizens on their savings deposits as well.
- If a penalty is levied on premature withdrawal of deposits, it should not be applied to senior citizens or physically challenged customers; they should receive the normal rate of interest applicable for the period for which the deposit ran, without deductions.
Major financial institutions in India
The table below lists important financial institutions, with their year of establishment or notable dates.
| Major Financial Institutions in India | |
| Institution | Year / Notes |
| Imperial Bank of India | 1921 |
| Reserve Bank of India (nationalisation took place on 1 January 1949) | 1 April 1935 |
| Industrial Finance Corporation of India (IFCI) | 1948 |
| State Bank of India | 1 July 1955 |
| Unit Trust of India (UTI) | 1 Feb 1964 |
| Bifurcation of UTI (UTI-I & UTI-II) | Feb 2003 |
| IDBI | July 1964 |
| NABARD | 12 July 1982 |
| IRBI (renamed as IIBIL since 6 March 1997) | 20 March 1985 |
| SIDBI | 1990 |
| EXIM Bank | 1 January 1982 |
| National Housing Bank (NHB) | July 1988 |
| Life Insurance Corporation (LIC) | September 1956 |
| General Insurance Corporation (GIC) | November 1972 |
| Regional Rural Banks | 2 Oct 1975 |
| Risk Capital and Technology Finance Corporation Ltd. | March 1975 |
| Technology Development & Information Co. of India Ltd. | 1989 |
| Infrastructure Leasing & Financial Services Ltd. | 1988 |
| Housing Development Finance Corporation Ltd. (HDFC) | 1977 |
Securities and Exchange Board of India (SEBI)
SEBI is the regulator for the securities market in India. Its primary mandate is to protect investor interests, promote and regulate the securities market, and develop necessary infrastructure.
- SEBI was initially constituted on 12 April 1988 as a non-statutory body through a Government resolution to advise on, develop and regulate the securities market and to protect investors.
- SEBI was given statutory status and powers through an ordinance promulgated on 30 January 1992.
- Its statutory powers and functions were strengthened via the Securities Laws (Amendment) ordinance promulgated on 25 January 1995, later replaced by an Act of Parliament.
Recognised stock exchanges in India
- Ahmedabad Stock Exchange Ltd.
- Bangalore Stock Exchange Ltd.
- Bhubaneswar Stock Exchange Ltd.
- Bombay Stock Exchange Ltd.
- The Calcutta Stock Exchange Ltd.
- Cochin Stock Exchange Ltd.
- The Delhi Stock Exchange Ltd.
- The Gauhati Stock Exchange Limited
- Interconnected Stock Exchange of India Ltd.
- Jaipur Stock Exchange Ltd.
- The Ludhiana Stock Exchange Ltd.
- Madras Stock Exchange Ltd.
- Madhya Pradesh Stock Exchange Ltd.
- MCX Stock Exchange Ltd.
- National Stock Exchange of India Ltd.
- OTC Exchange of India
- Pune Stock Exchange Ltd.
- U.P. Stock Exchange Ltd.
- United Stock Exchange of India Ltd.
- Vadodara Stock Exchange Ltd.
Derecognised stock exchanges
- Hyderabad Stock Exchange
- Magadh Stock Exchange
- Saurashtra Kutch Stock Exchange
- Mangalore Stock Exchange
- Coimbatore Stock Exchange
Functions of SEBI
- To safeguard the interests of investors and regulate the capital market through suitable measures.
- To regulate the business of stock exchanges and other securities markets.
- To regulate the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers, underwriters, portfolio managers etc., and to mandate their registration.
- To register and regulate collective investment schemes and mutual funds.
- To encourage self-regulatory organisations in the securities market.
- To eliminate malpractices in the securities market and ensure fair dealing.
- To provide training and encourage investor education.
- To check and deter insider trading in securities.
- To supervise the working of market intermediaries and ensure systematic and orderly dealings.
- To promote research and investigations to support the attainment of the above objectives.
Mistry Committee Report
The Mistry Committee proposed several reforms aimed at financial liberalisation, regulatory restructuring and global integration.
- Full capital account convertibility by end of 2008.
- Eliminate securities transaction tax by 2007 and stamp duties by 2008.
- Open up purchase of rupee-denominated government debt to all buyers.
- Focus the monetary authority exclusively on the single task of managing the key short-term base rate by 2009-10.
- Set up an independent Public Debt Management Office by 2009.
- Shift the financial regulatory regime from rules-based regulation to principles-based regulation by 2011.
- Permit unrestricted entry of well-known global accounting firms operating in international financial centres by 2008.
- Transfer all regulation/supervision of any type of organised financial trading to SEBI by 2008.
Industrial Development Bank of India (IDBI)
IDBI was established under the Industrial Development Bank of India Act, 1964 as a principal development financial institution to provide long-term finance and other facilities for industrial development.
- IDBI was originally established as a Development Finance Institution under the IDBI Act, 1964.
- Subsequent legislative changes and corporate restructuring converted IDBI into a banking company.
- Parliament passed an Act enabling the cancellation of the IDBI Act, 1964 and permitting the registration of the new banking company.
- IDBI received a certificate of commencement of business on 28 September 2004 and was transformed into IDBI Ltd. on 1 October 2004 as a company under the Companies Act, 1956.
- IDBI became a Scheduled Bank under the RBI Act on 11 October 2004.
Small Industries Development Bank of India (SIDBI)
SIDBI was established as a wholly owned subsidiary of IDBI under the Small Industries Development Bank of India Act, 1989 to serve as the principal financial institution for promotion, financing and development of the small-scale sector.
- SIDBI coordinates the activities of agencies that provide finance to small enterprises.
- SIDBI commenced operations on 2 April 1990.
- The headquarters of SIDBI is situated at Lucknow.
- SIDBI operates through regional and branch offices across the country; initially it started with 5 regional and 21 branch offices.
- Functions and duties related to small enterprises that were earlier performed by IDBI have been shifted to SIDBI.
- SIDBI provides assistance to the small-scale industrial sector through institutions such as State Financial Corporations (SFCs), commercial banks and State Industrial Development Corporations.
Industrial Finance Corporation of India Ltd. (IFCI)
- IFCI was established in 1948 under a special Act on the recommendation of the Central Banking Enquiry Committee to arrange medium- and long-term credit for industrial enterprises.
- The basic aim of IFCI is to provide medium- and long-term finance for industrial development across sectors.
- Initially the authorised capital of the Corporation was Rs. 10 crore, divided into equity shares.
- The authorised capital was subsequently increased to Rs. 20 crore.
- Since 1 July 1993 the Corporation has been converted into a company and given the status of a limited company under the name Industrial Finance Corporation of India Ltd.
Export-Import Bank of India (EXIM Bank)
EXIM Bank was established on 1 January 1982 to finance, facilitate and promote India's foreign trade, and to coordinate activities of financial institutions involved in export-import finance.
- EXIM Bank provides finance for export and import of goods and services and also extends project and buyer's credit to overseas borrowers for importing Indian goods and services.
- The Bank also manages lines of credit and financial assistance to developing countries for trade with India.
- EXIM Bank of India is wholly owned by the Government of India. During 2009-10 the Government provided share capital of Rs. 300 crore to the Bank.
- On 31 March 2010 the paid-up capital of EXIM Bank was Rs. 1,700 crore.
- For the year ended 31 March 2010, EXIM Bank sanctioned loans amounting to Rs. 38,843 crore and disbursed Rs. 33,249 crore.
- Profit after tax of EXIM Bank for 2009-10 amounted to Rs. 513 crore.
National Housing Bank (NHB)
- NHB was established in July 1988 as a wholly owned subsidiary of the Reserve Bank of India to serve as the apex institution for housing finance.
- NHB's statutory mandate covers promotional, developmental and regulatory aspects of housing finance, with a focus on developing a sound housing finance system.
- The NHB Act was amended through the NHB (Amendment) Act, 2000, which came into force on 12 June 2000.
- NHB has undertaken initiatives to promote supply of real resources such as land and building material and to encourage availability of long-term housing finance.
Important insurance policies and schemes
The table below summarises selected insurance schemes, their target groups and principal features.
| Important Insurance Policies | |
| Policy | Special features |
| Social Security Group Scheme | ♦ Administered by LIC. ♦ Fulfils insurance requirements of economically weaker and vulnerable sections of society. ♦ Covers persons aged 18-60 years. |
| Jana Shree Bima Yojana | ♦ Provides insurance cover for rural and unorganised sector members. ♦ Insurance of Rs. 20,000 on natural death and Rs. 50,000 on accidental death; on partial permanent disability due to accident the benefit is Rs. 25,000. ♦ Premium is Rs. 200 per member (50% of premium met by Central Government from the Social Security Fund). ♦ Scheme in operation from 10 August 2000; it replaced earlier Social Security Group Insurance Scheme (SSGIS) and Rural Group Life Insurance Scheme (RGLIS). |
| Krishi Shramik Samajik Suraksha Yojana | ♦ Sales of new policies discontinued from December 2003. ♦ Minimum group membership of 25 (minimum 20 at commencement according to some operational rules). ♦ Commenced 1 July 2001. ♦ Provides life insurance protection, periodic lumpsum survival benefit and pension to agricultural workers aged 18-50 years. ♦ On natural death before age 60, Rs. 20,000 plus accumulated amount with interest is payable; on accidental death Rs. 50,000 is payable. |
| Shiksha Sahyog Yojana | ♦ Premium of Rs. 365 per annum. ♦ Launched on 31 December 2001. ♦ Provides educational scholarship of Rs. 300 per quarter per child for a maximum period of four years for up to two children of a member covered under Jana Shree Bima Yojana. |
| Mediclaim Insurance Policy | ♦ Provides reimbursement of hospitalisation and related medical expenses. ♦ Policy age coverage stated as 5-80 years in this record. ♦ (Document records "No premium is charged" for this policy; verify current terms from the insurer as features and premium requirements vary.) |
| Jan Arogya Bima Policy | ♦ Aims to cover those who cannot afford high medical costs. ♦ Income-tax benefit under section 80D up to Rs. 10,000 (for senior citizens this limit recorded as Rs. 15,000). ♦ Premium for adults up to age 45 recorded as Rs. 70 and for children Rs. 50 (check current rates with provider). |
| Overseas Medical Policy | ♦ Coverage against medical expenses while abroad. ♦ Includes personal accident cover in flight up to US10,000andpassportlosscoveruptoUS150 (as recorded). |
| Videsh Yatra Mitra Policy | ♦ Commencement recorded as 1 January 1998. ♦ Provides supplementary benefits and indemnity for medical expenses during overseas travel. ♦ Introduced by four General Insurance Companies. |
| Bhagya Shree Child Welfare Bima Yojana | ♦ Commenced 19 October 1998. ♦ Covers one girl child in a family up to age 18 years provided parents' ages do not exceed 60 years. ♦ Premium recorded as Rs. 15 per annum. |
| Raj Rajeshwari Mahila Kalyan Yojana | ♦ Commenced 19 October 1998. ♦ Provides security for women aged 10-75 years irrespective of income or occupation. ♦ In case of death of both or either parent, Rs. 25,000 is deposited in the name of the girl child. |
| Ashray Bima Yojana | ♦ Introduced w.e.f. 10 October 2001. ♦ Provides insurance cover of Rs. 25,000; premium Rs. 15 per annum. ♦ Provides short-term assistance up to Rs. 3,000 to a worker till alternative employment is found. |
| Jaid Rahat Yojana - Personal Accident Insurance | ♦ Introduced to expedite payment of compensation to road accident victims. ♦ Covers Kisan Credit Card (KCC) holders up to age 70 (scheme for KCC introduced from 10 October 2001). ♦ Provides Rs. 50,000 insurance cover against accidental death or permanent disability and Rs. 25,000 for partial disability. ♦ Premium recorded as Rs. 17.85 per person per year; for a 3-year policy the premium recorded is Rs. 45 per person. |
This chapter summarised committee recommendations for banking reform (Damodaran), important financial institutions and their origins, the role and functions of SEBI, recommendations from the Mistry Committee on financial liberalisation, descriptions of development finance institutions (IDBI, SIDBI, IFCI, EXIM Bank, NHB), and a consolidated list of significant insurance policies and schemes. Together these items form core reference material on India's monetary and financial institutions, regulatory framework and social-security oriented insurance schemes relevant to public policy and competitive examinations.
The document Money & Banking- 2 is a part of the UPSC Course Indian Economy for UPSC CSE.
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FAQs on Money & Banking- 2
| 1. What is the role of central banks in the money and banking system? |  |
Ans. Central banks play a crucial role in the money and banking system. They are responsible for key functions such as issuing currency, regulating commercial banks, implementing monetary policy, and maintaining price stability. Additionally, central banks act as lenders of last resort to provide liquidity to banks during times of financial instability.
| 2. How does the fractional reserve banking system work? | |
Ans. Fractional reserve banking is a system where commercial banks keep only a fraction of their deposits as reserves and lend out the rest. This allows banks to create money through the process of lending. For example, if a bank has a reserve requirement of 10% and receives a $100 deposit, it can lend out $90 while keeping $10 as reserves. This process continues as the newly created money is deposited in other banks, leading to an expansion of the money supply.
| 3. What is the difference between monetary policy and fiscal policy? | |
Ans. Monetary policy and fiscal policy are two tools used by governments to manage the economy. Monetary policy is controlled by the central bank and involves adjusting interest rates, managing the money supply, and influencing borrowing costs. On the other hand, fiscal policy is controlled by the government and involves changes in government spending and taxation to influence aggregate demand and stabilize the economy.
| 4. How do banks create money through the process of lending? | |
Ans. Banks create money through a process called credit creation. When a bank receives a deposit, it keeps a fraction of it as reserves and lends out the rest. The borrower then spends the loan amount, which eventually gets deposited in another bank. This bank can also lend out a fraction of the deposit, and the process repeats. As a result, the initial deposit leads to multiple rounds of lending, creating new money in the economy.
| 5. What is the role of the Federal Reserve in the United States? | |
Ans. The Federal Reserve, often referred to as the Fed, is the central bank of the United States. Its main role is to promote maximum employment, stable prices, and moderate long-term interest rates. The Fed conducts monetary policy by adjusting interest rates, managing the money supply, and providing liquidity to banks. It also supervises and regulates banks to ensure the stability and efficiency of the banking system.
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