Banking Sector: Money & Banking

Table of Contents
1. Introduction
2. Classification of Banks
3. Reserve Bank of India
4. Securities and Exchange Board of India (SEBI)
5. Development Finance Institutions
6. Payment Banks
7. Non -Performing Assets (NPAs)
8. Resolution Measures for Bank NPAs
9. Some Important Terms and Concepts
10. Milestone Schemes for Financial Inclusion
11. Conclusion
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Introduction

A commercial bank is a financial intermediary that channels funds from savers to borrowers. Commercial banks accept deposits, provide payment services and credit, and thereby support consumption, investment and trade in the economy. The banking system in India is anchored by the Reserve Bank of India (RBI), which was established in 1935 and nationalised in 1949. The Government of India nationalised major private commercial banks in two waves, in 1969 and 1980, with the stated objective of shifting from class banking (serving a limited clientele) to mass banking (providing wider financial access across regions and social groups).

Classification of Banks

By ownership

• Public sector banks - banks owned by the government.
• Private sector banks - banks owned and managed by private entities or shareholders.
• Cooperative banks - banks organised on cooperative principles and managed by members; typically operate at local or regional level.

By principal function

• Central bank - the apex monetary authority responsible for currency issue, monetary policy, banker to the government and banks (example: RBI).
• Commercial banks - accept deposits and provide short- and medium-term credit to households, firms and traders.
• Development finance institutions (DFIs) - provide medium- and long-term finance for industrial, infrastructure and priority sectors (examples: IDBI, IFCI, EXIM Bank, SIDBI, NHB).
• Cooperative banks - primarily serve agricultural and small-business borrowers at local level.
• Payment banks - specialised banks created to further financial inclusion by providing deposit and payment services with certain restrictions on lending and deposit instruments.

Reserve Bank of India

The RBI functions as the central bank of India. Its principal roles include issuing currency, conducting monetary policy, acting as banker and advisor to the Central Government, regulating and supervising banks, maintaining financial stability and acting as custodian of foreign exchange reserves.

Securities and Exchange Board of India (SEBI)

SEBI (Securities and Exchange Board of India) was initially constituted on 12 April 1988 as a non-statutory body by the Government of India to develop and regulate the securities market and to protect investors. It was given statutory status through an ordinance promulgated on 30 January 1992. The statutory powers were further strengthened by an ordinance on 25 January 1995, subsequently replaced by a Parliamentary Act.

Functions of SEBI

• Investor protection - safeguard interests of retail and institutional investors in the securities market.
• Regulation of capital markets - frame rules for market intermediaries and market architecture.
• Registration and supervision - register and regulate stockbrokers, sub-brokers, transfer agents, trustees, merchant bankers, underwriters, portfolio managers and other intermediaries.
• Mutual funds - register and regulate collective investment schemes and mutual funds.
• Self-regulation - encourage the establishment and strengthening of self-regulatory organisations (SROs).
• Prevention of malpractices - detect and eliminate insider trading, market manipulation and other malpractices.
• Capacity building - promote market research, investor education and training for market participants.
• Market supervision - supervise organisations and trading systems to ensure orderly and transparent dealings.

Development Finance Institutions 

Industrial Development Bank of India (IDBI)

IDBI was established under the Industrial Development Bank of India Act, 1964 as a Development Finance Institution to provide credit and other facilities for industrial development. IDBI was later converted into a banking company.

• Parliament passed legislation to repeal the IDBI Act, 1964 and enable registration of IDBI as a banking company.
• IDBI received the certificate of commencement of business on 28 September 2004.
• IDBI was transformed into IDBI Ltd. on 1 October 2004 and became a scheduled commercial bank under the RBI Act on 11 October 2004.

Small Industries Development Bank of India (SIDBI)

SIDBI was established under the Small Industries Development Bank of India Act, 1989 as a wholly-owned subsidiary of IDBI and as the principal financial institution for promotion, financing and development of the small-scale sector.

• SIDBI commenced operations on 2 April 1990.
• Headquarters: Lucknow.
• Initial network included 5 regional and 21 branch offices located across the country.
• SIDBI coordinates activities of agencies that finance small enterprises, and provides refinance and institutional support to state financial corporations, commercial banks and other intermediaries dealing with micro, small and medium enterprises (MSMEs).

Industrial Finance Corporation of India Ltd. (IFCI)

IFCI was established in 1948 under a special Act on the recommendations of the Central Banking Enquiry Committee to provide medium- and long-term finance to industrial enterprises.

• Initial authorised capital was Rs. 10 crore, with later increases (authorised capital rose up to Rs. 20 crore subsequently).
• On 1 July 1993 the corporation was converted into a limited company and became Industrial Finance Corporation of India Ltd.

Export-Import Bank of India (EXIM Bank)

EXIM Bank was established on 1 January 1982 for financing, facilitating and promoting India's international trade. The bank provides finance for exports and imports, offers export credit, and coordinates activities of institutions supporting foreign trade. EXIM Bank also extends financial assistance to developing countries to promote trade links.

National Housing Bank (NHB)

NHB was established in July 1988 as a wholly owned subsidiary of the RBI and functions as the apex institution for housing finance in India. NHB's statutory mandate covers promotional, developmental and regulatory aspects of housing finance, with a focus on creating and strengthening housing finance institutions and delivering housing credit across income groups.

• The NHB (Amendment) Act, 2000 came into force on 12 June 2000.
• NHB promotes availability of land, building materials and credit facilities for housing through refinance and market development measures.

Payment Banks

Payment banks were introduced to extend financial inclusion to low-income households, migrant workers and unorganised sector workers. Their design is focused on safe deposit and payment services with restrictions on certain banking activities.

Key features

• Can accept deposits up to Rs. 1 lakh per customer.
• Can issue debit cards and provide various payment and remittance services.
• Cannot issue credit cards.
• Cannot provide loans or advance credit facilities.
• Cannot accept fixed deposits or recurring deposits.
• Required to invest a minimum percentage of demand deposits (as prescribed) in government securities/treasury bills; the input states 75 percent.

Application for technology students and practitioners: payment banks emphasise digital platforms, mobile banking and lightweight KYC processes - areas relevant to software engineers and digital payments systems design.

Non -Performing Assets (NPAs)

Non-Performing Asset (NPA) - a loan or advance where the borrower has not paid interest or principal for a specified period. Under prevailing regulatory practice, a credit asset typically becomes an NPA when interest or principal remains overdue for a continuous period (commonly monitored at 90 days for term loans and overdues; refer to current RBI directives for precise operational definition).

Causes of NPAs

• Poor lending or credit appraisal practices.
• Fraudulent practices or wilful default by borrowers.
• Economic slowdown reducing cash flows of businesses.
• Project delays, cost overruns and market risks in infrastructure and industrial projects.
• Adverse changes in demand, commodity prices or foreign exchange rates.

Consequences

• Reduced profitability and capital erosion for banks.
• Restrained credit supply, especially to productive sectors.
• Stress on the financial system and fiscal costs in case of recapitalisation of public sector banks.

Resolution Measures for Bank NPAs

Indradhanush (2015)

The Indradhanush reform programme (2015) aimed to revive public sector banks and improve governance. Key elements of the seven-point programme included:

• Capitalisation - ensure adequate capital for banks through market and government support.
• Bank Board Bureau - an agency to recommend appointments of public sector bank boards and to encourage professional management.
• Consolidation - encourage mergers and consolidation among banks to build scale and capability.
• Empowerment - delegate decision-making to boards for quicker resolution and credit decisions.
• Accountability - impose performance standards and accountability for board and management.
• Governance reforms - strengthen internal controls, risk management and compliance.
• Transparent appointments - ensure open and merit-based selection of senior management.

Insolvency and Bankruptcy Code (IBC), 2016

The Insolvency and Bankruptcy Code, 2016 consolidated and reformed the insolvency framework in India to enable time-bound resolution for insolvent borrowers. It created institutional structures and legal processes for insolvency resolution and bankruptcy.

Features

• Insolvency resolution - separate resolution processes for companies, limited liability partnerships, individuals and partnership firms.
• Insolvency Regulator - establishment of the Insolvency and Bankruptcy Board of India (IBBI) (the input notes it has 10 members at conception) to regulate the insolvency framework.
• Insolvency professionals - regulated professionals who manage the resolution process and estates.
• Adjudicating authorities- a two-track structure:
  • National Company Law Tribunal (NCLT) - adjudicates company and LLP insolvency cases.
  • Debt Recovery Tribunal (DRT) - handles insolvency cases for individuals and partnership firms (as per the input).

Some Important Terms and Concepts

• Bank run - when a large number of customers simultaneously attempt to withdraw deposits due to loss of confidence in a bank's ability to meet obligations; bank runs deplete liquidity and may cause otherwise solvent banks to fail.
• Twin balance sheet problem - a situation where both corporate balance sheets (companies unable to repay loans because of poor investment returns) and bank balance sheets (high NPAs and stressed assets) are weak, creating a cyclical credit and investment contraction.
• Seigniorage - the difference between the face value of currency issued and the cost of producing it. This difference represents a surplus accruing to the monetary authority; in India, part of the central bank's surplus is transferred to the government as dividend.

Milestone Schemes for Financial Inclusion

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Pradhan Mantri Jan Dhan Yojana (PMJDY) is a major financial inclusion programme launched by the Government of India on 28 August 2014. It aims to provide universal access to basic banking services for all Indian citizens. Key features include:

• Provision of bank accounts for individuals including minors (minors aged 10 years and above may open accounts with a guardian).
• Access to remittance facilities, credit, insurance and pension products through formal banking channels.
• Support for financial literacy and easier enrolment into government transfer schemes.

Conclusion

The banking sector in India comprises a diverse set of institutions - central bank, commercial banks, development finance institutions and specialised banks - each playing a distinct role in monetary stability, credit allocation, industrial and infrastructure finance, housing finance and financial inclusion. Regulatory bodies such as the RBI and SEBI and reform measures such as Indradhanush and the IBC are central to strengthening the financial system, containing NPAs and ensuring that banks can continue to support investment and growth. For students and practitioners in engineering and technology disciplines, an understanding of banking structures, credit processes and digital finance models is essential when engaging with infrastructure projects, financial modelling and fintech development.