indian banking unit 1

BBA-III SEMESTER
Indian Banking System- UNIT- 1
Structure and Organization of Banks , Reserve
bank of India, Apex banking institutions,
Commercial banks , Regional rural banks , Co-
operative banks , Development banks.

STRUCTURE & ORGANISATION OF BANKS :
Indian banking structure can be broadly
classified in to two categories :
(i) ORGANISED SECTOR
(ii) UNORGANISED SECTOR

ORGANISED SECTOR BANKS

Main constituents of organized sector
banks are:
1. RESERVE BANK OF INDIA
2. COMMERCIAL BANKS
3. CO-OPERATIVE BANKS
4. SPECIALISED BANKS

Reserve Bank of India

Reserve Bank of India is the apex monetary
Institution of India which is responsible for the
regulation of currency, printing of banknotes
and minting coins. It is also called as the
central bank of the country. The bank was
established on April1, 1935 in Kolkata
according to the Reserve Bank of India act
1934 but was later shifted to Mumbai in 1937.
RBI was initially privately owned but since
nationalization in 1949, the Reserve Bank is
owned by the Government of India.

COMMERCIAL BANKS

Commercial Banking System
consists of :
(i) Scheduled Banks
(ii) Non scheduled Banks
Scheduled Banks : Scheduled banks
are included in the second Schedule
of the Reserve Bank of India under
Act, 1934. Every scheduled bank
must have a paid up capital &
reserves of an aggregate value of at
least Rs.5 lakhs.

CLASSIFICATION OF SCHEDULED
BANKS
(I) PUBLIC SECTOR BANKS: These
banks are owned & controlled by the
government . The public sector
commercial banking in India started with
setting up of State Bank of India in 1955. At
present 8 state banks & associate banks
are in the group of S.B.I. i.e. State bank of
Hyderabad, State Bank of Indore etc. as
well as 20 nationalized banks i.e. Bank of
Baroda , Allahabad Bank etc. Regional
Rural Banks are also the scheduled banks
which are governed by R.R.B. ACT,1976.

(II)
Private Sector Banks : Private sector
banks continued to operate in the banking
sector after nationalization of 20 banks in 1969
&1980. According to new policy framed in
January1993 by R. B. I. new banks were
formed in private sector . Such as :
The U.T.I. Bank Ltd., HDFC Bank Ltd., etc.

(III)
Foreign Banks : Foreign banks are working in
India from British days. ANG Grindlays Bank has
56 branches, The Standard Chartered Bank has 21
branches. New foreign banks are : Barclays bank,
Bank of Ceylon, Fuji bank etc.

CO-OPERATIVE BANKS: It mainly meets the
credit needs of rural areas & agriculture. Co-
operative banks has three tier functioning . State
Co-operative bank acts as an apex body at the
state level , District co-operative banks are
operating at the district level and co-operative
society (banks) are operating at villages & town

SPECIALISED BANKS
These institutions look after different
sectors of economy . For example:
IDBI,NABARD ,EXIM BANK ETC.

Unorganized Banking Sector

The unorganized sector of banking in
India consists of money lenders and
indigenous bankers known as
shroffs, sahukars, mahajans, chettis,
etc. These are individuals doing
banking business, along with trading
and commission business in many
cases. Their activities are not
organized. They follow rules of their
own. The rate of interest charged by
them is very high.

Organizational structure of
banks

Definition of organizational
structure of banks
According to G.Dessler, “ An organizational
set up consists of people who carry out
differentiated tasks which are co-ordinated
to contribute to organizations goals.”
Types of organizational structure of banks:
The organizational set up of a bank is
mainly based on departmentalization :
Departmentalization:- It is the process of
dividing the total activities of the bank in to
various departments, unit or sections. The
similar nature of bank activities are
grouped in one department.

Types of departmentalization
In banking system these two types of
departmentalization is followed:-
1. Departmentalization by territory:- The
organizational set up of a commercial bank on
the basis of territory is of following type :
(i)Central office: central office is main
controlling authority of a particular bank.it is
supreme body that determines the objectives ,
policies & frame rule & regulation.
(ii) Regional office: The regional office co-
ordinate the functions of the branches located in
a particular region. It is charged with
responsibilities of implementing the objectives
& policies of top management to the branches.

(iii)
Branch Office: The branch offices are the
centers that do the actual banking
business. They are in direct contact with
customers & cater to their needs.
2. Departmentalization by Function:
Functions include such activities as
lending, investing, trust services,
international banking, accepting
deposits etc. Line managers are
responsible for the direct functions of a
commercial bank.

Management of banks
According to George R. Terry, “management
is a distinct process consisting of planning,
organizing ,activating & controlling
performance to determine & accomplish the
objective by the use of people & resources.”
Objectives of bank management:
1.Maximisation of profit
2.Meet challenges of competitors
3.Improve the customer services
4.Introduction of new schemes
5. Manpower planning

Fundamental functions of
bank management

1.Planning
2.Organising
3.Staffing
4.Directing
5.Communication
6.Controlling

Functional areas of bank
management

1.Deposit mobilization
2.Financial management
3.Credit management
4. Profit evaluation
5.Liquidity management(CRR,SLR)
6.Marketing Management
7.Portfolio(Asset) Management

Commercial banks
According to the Banking Companies
(Regulation)Act of India ,1949, “Banking
means the accepting ,for the purpose of
lending or investment , of deposits of money
from the public, repayable on demand or
otherwise , and withdraw able by cheese ,
draft or otherwise.”
Features of commercial banks:
1.Commercial establishment
2.Accept deposits
3.Repayment of accepted deposits
4.Advancing loans to public
5.Earning profit

The role of commercial
banks
Commercial banks engage in the
following activities:
1. processing of payments by way of
telegraphic transfer, internet banking, or
other means
2. issuing bank drafts and bank cheques
3. accepting money on term deposit

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4. lending money by overdraft, installment
loan, or other means
5. providing documentary and standby
letter of credit, guarantees, performance
bonds, securities underwriting
commitments and other forms of off
balance sheet exposures
6. safekeeping of documents and other
items in safe deposit boxes
7. sales, distribution or brokerage, with or
without advice, of: insurance, unit trusts
and similar financial products as a

Functions of Commercial
Banks
The functions of a commercial banks
are divided into two categories:
(i) Primary functions, and
(ii) Secondary functions including
agency functions.
(iii) Modern Functions
(i) Primary functions:
The primary functions of a commercial
bank include:
(a) accepting deposits; and
(b) granting loans and advances;

(a) Accepting deposits
The most important activity of a
commercial bank is to mobilise deposits
from the public. People who have surplus
income and savings find it convenient to
deposit the amounts with banks .
Depending upon the nature of deposits,
funds deposited with bank also earn
interest. Thus, deposits with the bank grow
along with the interest earned. If the rate of
interest is higher, public are motivated to
deposit more funds with the bank. There is
also safety of funds deposited with the

Different Modes of Accepting
Deposits
Different modes of Acceptance of Deposits

Banks receive money from the public by way of deposits. The
following
types of deposits are usually received by banks:
i) Current deposit
ii) Saving deposit
iii) Fixed deposit
iv) Recurring deposit
v) Miscellaneous deposits

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i) Current Deposit

Also called „demand deposit‟, current deposit can be withdrawn by
the depositor at any time by cheques. Businessmen generally open
currentaccounts with banks. Current accounts do not carry any
interest as theamount deposited in these accounts is repayable on
demand withoutany restriction.
The Reserve bank of India prohibits payment of interest on current
accounts or on deposits upto 14 Days or less except where prior
sanctionhas been obtained. Banks usually charge a small amount
known asincidental charges on current deposit accounts depending
on the numberof transaction

Savings deposit/Savings Bank
Accounts

Savings deposit account is meant for
individuals who wish to deposit small
amounts out of their current income. It
helps in safe guarding their future and also
earning interest on the savings. A saving
account can be opened with or without
cheque book facility. There are restrictions
on the withdrawls from this account. To
open a savings account, it is necessary for
the depositor to be introduced by a person
having a current or savings account with
the same bank.

Fixed deposit

The term „Fixed deposit‟ means deposit
repayable after the expiry of a specified
period. Since it is repayable only after a
fixed period of time, which is to be
determined at the time of opening of
the account it is also known as time
deposit. The rate of interest on fixed
deposits depends upon the period of
deposits. The longer the period, the
higher is the rate of interest offered

Recurring Deposits

Recurring Deposits are gaining wide
popularity these days. Under this type of
deposit, the depositor is required to deposit
a fixed amount of money every month for a
specific period of time. Each instalment
may vary from Rs.5/- to Rs.500/- or more per
month and the period of account may vary
from 12 months to 10 years. After the
completion of the specified period, the
customer gets back all his deposits along
with the cumulative interest accrued on the
deposits.

Miscellaneous Deposits
Banks have introduced several
deposit schemes to attract deposits
from different types of people, like
Home Construction deposit scheme ,
Sickness Benefit deposit scheme,
Children Gift plan, Old age pension
scheme, Mini deposit scheme, etc.

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b) Grant of loans and advances
The second important function of a commercial bank is to grant
loans and advances. Such loans and advances are given to
members of the public and to the business community at a higher
rate of interest than allowed by banks on various deposit accounts.
The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment.
The difference between the rate of interest allowed on deposits
and the rate charged on the Loans is the main source of a bank‟s
income.

(I)LOAN
A loan is granted for a specific time period. Generally,
commercial banks grant short-term loans. But term loans,
that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lumpsum
or in instalments. However, interest is charged on the full
amount of loan. Loans are generally granted against the
security of certain assets. A loan may be repaid either in
lumpsum or in instalments

Different methods of Granting
Loans by Bank
The basic function of a commercial bank is to make loans and
advancesout of the money which is received from the public by way
of deposits.The loans are particularly granted to businessmen and
members of thepublic against personal security, gold and silver and
other movable andimmovable assets. Commercial bank generally lend
money in thefollowing form:

i) Cash credit
ii) Loans
iii) Bank overdraft, and
iv) Discounting of Bills

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i) Cash Credit :
A cash credit is an arrangement whereby the bank agrees to lend
money to the borrower up to a certain limit. The bank puts this
amount of money to the credit of the borrower. The borrower draws
the money as and when he needs. Interest is charged only on the
amount actually drawn and not on the amount placed to the credit of
borrower‟s account. Cash credit is generally granted on a bond of
credit or certain other securities. This a very popular method of
lending in our country

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ii) Loans :
A specified amount sanctioned by a bank to the customer is called a
„loan‟. It is granted for a fixed period, say six months, or a year. The
specified amount is put on the credit of the borrower‟s account. He
canwithdraw this amount in lump sum or can draw cheques against
thissum for any amount. Interest is charged on the full amount even if
theborrower does not utilise it. The rate of interest is lower on loans
incomparison to cash credit. A loan is generally granted against the
security of property or personal security. The loan may be repaid in
lump sum or in instalments. Every bank has its own procedure of
granting loans. Hence a bank is at liberty to grant loan depending on
its own resources.
The loan can be granted as:
a) Demand loan, or
b) Term loan

a) Demand loan

Demand loan is repayable on demand.
In other words it is repayable at short
notice. The entire amount of demand
loan is disbursed at one time and the
borrower has to pay interest on it. The
borrower can repay the loan either in
lump sum (one time)or as agreed with
the bank. Loans are normally granted
by the bank against tangible securities
including securities like N.S.C., Kisan
Vikas Patra Life Insurance policies
and U.T.I. certificates.

b) Term loans

Medium and long term loans are called „Term
loans‟. These loans are repayable over a period
of 5 years and maximum up to 15 years. Term
loan is required for the purpose of setting up of
new business activity, renovation,
modernization,
purchase of plant and machinery, vehicles,
land
or purchase of other immovable assets. These
loans are generally secured against the
mortgage of land, plant and machinery, building
and other securities. The normal rate of interest
charged for such loans is generally quite high.

ii) Advances

An advance is a credit facility provided by
the bank to its customers. It differs from
loan in the sense that loans maybe
granted for longer period, but advances
are normally granted for a short period of
time. Further the purpose of granting
advances is to meet the day to day
requirements of business. The rate of
interest charged on advances varies
from bank to bank. Interest is charged
only on the amount withdrawn and not on
the sanctioned amount.

Modes of short-term financial
assistance
Banks grant short-term financial assistance by
way of cash credit, overdraft and bill discounting.
a) Cash Credit
Cash credit is an arrangement whereby the bank
allows the borrower to draw amounts up to a
specified limit. The amount is credited to the
account of the customer. The customer can
withdraw this amount as and when he requires.
Interest is charged on the amount actually
withdrawn. Cash Credit is granted as per agreed
terms and conditions with the customers.

(b)Bank Overdraft

Overdraft is also a credit facility
granted by bank. A customer who has a
current account with the bank is
allowed to withdraw more than the
amount of credit balance in his
account. It is a temporary arrangement.
Overdraft facility with a specified limit
is allowed either on the security of
assets, or on personal security , or
both.

(c) Discounting of Bills

Banks provide short-term finance by
discounting bills, that is , making
payment of the amount before the due
date of the bills after deducting a
certain rate of discount. The party gets
the funds without waiting for the date
of maturity of the bills. Incase any bill is
dishonoured on the due date, the bank
can recover the amount from the
customer

Secondary functions

These are as follows -
1) Issuing letters of credit, travellers cheques,
circular notes etc.
2) Undertaking safe custody of valuables,
important documents, and
securities by providing safe deposit vaults or
lockers;
3) Providing customers with facilities of foreign
exchange.
4) Transferring money from one place to
another; and from one
branch to another branch of the bank.

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5) Standing guarantee on behalf of
its customers, for making
payments for purchase of goods,
machinery, vehicles etc.
6 Collecting and supplying business
information;
7) Issuing demand drafts and pay
orders; and,
8) Providing reports on the credit
worthiness of customers.

AGENCY & GENERAL UTILITY SERVICES

(i) Agency Services
Agency services are those services which
are rendered by commercial
banks as agents of their customers. They
include :
a) Collection and payment of cheques and
bills on behalf of the customers;
b) Collection of dividends, interest and
rent, etc. on behalf of customers, if so
instructed by them; c)
Purchase and sale of shares and securities
on behalf of customers;

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d) Payment of rent, interest,
insurance premium, subscriptions
etc. on behalf of customers, if so
instructed;
e) Acting as a trustee or executor;
f) Acting as agents or
correspondents on behalf of
customers for other banks and
financial institutions at home and
abroad.

ii) General utility services

These are available to the public on
payment of a fee or charge:-
a)Issuing letters of credit and travellers‟
cheques;
b) Underwriting of shares, debentures,
etc.;
c) Safe-keeping of valuables in safe
deposit locker;
d) Underwriting loans floated by
government and public bodies.

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e) Supplying trade information and
statistical data useful to customers;
f) Acting as a referee regarding the
financial status of customers;
g) Undertaking foreign exchange
business.

(iii)Modern functions
1. Automatic teller machines (ATM)
2. Credit Cards
3. Mail Transfer & Telegrafic Transfer
4. Tele Banking
5. Internate Banking
6.Round the clock Banking

Different Types of Banks -
These are various kinds of Banks :
Type 1. Saving Banks

Saving banks are established to create
saving habit among the people. These
banks are helpful for salaried people and
low income groups. The deposits collected
from customers are invested in bonds,
securities, etc. At present most of the
commercial banks carry the functions of
savings banks. Postal department also
performs the functions of saving bank

Type 2. Commercial Banks

Commercial banks are established with an objective
to help businessmen. These banks collect money
from general public and give short-term loans to
businessmen by way of cash credits, overdrafts, etc.
Commercial banks provide various services like
collecting cheques, bill of exchange, remittance
money from one place to another place.
In India, commercial banks are established under
Companies Act, 1956. In 1969, 14 commercial banks
were nationalised by Government of India. The
policies regarding deposits, loans, rate of interest,
etc. of these banks are controlled by the Central
Bank.

Type 3. Industrial Banks /
Development Banks

 Industrial / Development banks collect
cash by issuing shares & debentures and
providing long-term loans to industries.
The main objective of these banks is to
provide long-term loans for expansion
and modernisation of industries.
 In India such banks are established on a
large scale after independence. They are
Industrial Finance Corporation of India
(IFCI), Industrial Credit and Investment
Corporation of India (ICICI) and Industrial
Development Bank of India (IDBI).

Type 4. Land Mortgage / Land
Development Banks

Land Mortgage or Land Development banks
are also known as Agricultural Banks
because these are formed to finance
agricultural sector. They also help in land
development.
In India, Government has come forward to
assist these banks. The Government has
guaranteed the debentures issued by
such banks. There is a great risk involved
in the financing of agriculture and
generally commercial banks do not take
much interest in financing agricultural
sector.

Type 5. Indigenous Banks

Indigenous banks means Money Lenders
and Sahukars. They collect deposits from
general public and grant loans to the
needy persons out of their own funds as
well as from deposits. These indigenous
banks are popular in villages and small
towns. They perform combined functions
of trading and banking activities. Certain
well-known indian communities like
Marwaries and Multani even today run
specialised indigenous banks.

Type 6. Central / Federal /
National Bank

Every country of the world has a central bank.
In India, Reserve Bank of India, in U.S.A,
Federal Reserve and in U.K, Bank of England.
These central banks are the bankers of the
other banks. They provide specialised
functions i.e. issue of paper currency,
working as bankers of government,
supervising and controlling foreign
exchange. A central bank is a non-profit
making institution. It does not deal with the
public but it deals with other banks. The
principal responsibility of Central Bank is
thorough control on currency of a country.

Type 7. Co-operative Banks

In India, Co-operative banks are
registered under the Co-operative
Societies Act, 1912. They generally
give credit facilities to small farmers,
salaried employees, small-scale
industries, etc. Co-operative Banks
are available in rural as well as in
urban areas. The functions of these
banks are just similar to commercial
banks.

Type8. Exchange Banks

Hong Kong Bank, Bank of Tokyo, Bank of
America are the examples of Foreign Banks
working in India. These banks are mainly
concerned with financing foreign trade.
Following are the various functions of
Exchange Banks :-
1.Remitting money from one country to another
country,
2.Discounting of foreign bills,
3.Buying and Selling Gold and Silver, and
4.Helping Import and Export Trade

Type 9. Consumers Bank

Consumers bank is a new addition to
the existing type of banks. Such
banks are usually found only in
advanced countries like U.S.A. and
Germany. The main objective of this
bank is to give loans to consumers
for purchase of the durables like
Motor car, television set, washing
machine, furniture, etc. The
consumers have to repay the loans in
easy installments.

Features of organizational
structure of banks
1. High degree of Departmentation
2. Regional or zonal office
3. Hierarchal management
A- Top management
B- Middle management
C- Branch management

BOARD OF DIRECTORS
The Board of Directors is the apex management
of a commercial bank. The board of Directors
frame policies ,concentrate more on important
issues & take strategic decisions .
Functions of Boards of Directors :-
Following are the important functions-
1. Setting bank purpose & mission- Directors of a
bank is to determine the goals and objectives of
the banks business . The boards of directors has
to decide in the light of capital position, size of
deposits , demand for loan& investment .

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2. Formulating Bank Policies :- Board
has to formulate specific policies for
the successful attainment of the
objectives. The realization of objectives
is made easy with the help of policies .
3. Selection of bank executives :-
Banking activities require trained
executives with knowledge. Executives
must have knowledge of investments,
credits operations , people & machines.

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4. Determination of Duty & Authority of Executive
:- The executives must be given sufficient
training to enable them to cope with
administrative details & follow the policies.
5. Standing Committee:- Standing
committee is constituted by boards. It ensures
better co-ordination between various
departments .
6.Delegation of authorities :- Boards determine
authority and duties of executives to perform
their functions properly and efficiently.

Duties & liabilities of directors
Statutory Duties of Directors :- 1.Not to
pay commission , brokerage , discount
on shares in excess of the aggregate
2.5% the of paid up value of shares.
2.Not to create any charge upon the
unpaid capital of the bank.
3.Not to pay dividends unless all the
capitalized expenses are completely
written off .
4.To maintain not less than 20% of the total
time & demand liabilities of the bank in
form of cash , gold or securities.

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5. To ensure that the annual accounts
of the bank are prepared on last
working day of every calendar year as
given in the third schedule of the act.
6.To seek prior approval of Reserve
Bank before appointing or removing
any auditors of the bank.
7. To furnish three copies of account
and balance sheet and auditors
report with in three months of the of
the period they refer.

General duties of directors of a
bank
1. To supervise the general affairs of of
the bank
2. To direct and control its
subordinates
3. To attend board meetings
4. To examine reports and audit
records
5. To make best efforts to collect slow
& doubt full debts
6. To investigate credit worthy ness of
the applicant granting loan.

Liabilities of bank directors
a. Liable to outsiders for ultra-vires
act
b. Liability for mis-statement in
prospectus
c. Liability for breach of trust-
(i)liability for making secret profit
(ii)liability for loss caused by his
negligence

Organizational set up of
central office
1. Board of directors :- The board of
directors is the highest authority of
a commercial bank The board of
directors shall consist of not more
than two whole –time directors&
three directors to represent the
interest of farmers , workers &
artisans . One directors have to
represent the depositors.

2. Chairman –cum-managing
director
The chairman cum managing director is
the chief executive of the bank . He
presides over the meeting of board of
directors.
3. Executive director: He is the
executive head of the bank . He co-
ordinates & supervises all operational
responsibilities .
4. General managers of various
departments :- a- loans & advances
department b-investment department

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c. Foreign exchange department :- (
issue of letter of credit ,
rediscounting ,foreign securities.)
d. Audit department
e. Public relation department
f. Legal department
g. Organizational set up of zonal
offices

Regional Rural Bank

Establishment & Growth
1. Initially, five RRBs were set up on October 2, 1975
which were sponsored by Syndicate Bank, State
Bank of India, Punjab National Bank, United
Commercial Bank & United Bank of India . Capital
share being 50% by the central government, 15% by
the state government and 35% by the scheduled
bank.
2. Earlier Reserve Bank of India had laid down
ceilings on the rate of interest to be charged by
these RRBs. However from August 1996 the RRBs
have been granted freedom to fix rates of interest,
which is usually in the range of 14-18% for advances.
There are 84 RRB banks at present.

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3. Each RRB is sponsored by a public
sector bank‚ which provides assistance
in several ways‚ viz., subscription to its
share capital‚ provision of such
managerial and financial assistance as
may be mutually agreed upon and help
the recruitment and training of
personnel during the initial period of its
functioning.

Objectives of RRBs
RRBs was established with the
following objective :-
1. Bridging the credit gap in rural
areas
2. Check the outflow of rural deposits
to urban areas
3. Reduce regional imbalances and
increase rural employment ,
4.provide credit and other facilities‚
especially to the small and marginal
farmers‚ agricultural laborers,
artisans etc.

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5.will operate within the local limits
specified by notification.
6.establishing branches or
agencies at places notified by the
Government.

Functions of RRBs

1.Every RRB is authorized to carry on
to transact the business of banking as
defined in the Banking Regulation
Act:-
(a) granting loans and advances to
small and marginal farmers and
agricultural laborers‚ including
agricultural marketing societies‚
agricultural processing societies‚
cooperative farming societies &
primary agricultural credit societies.

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(b) granting loans and advances to artisans‚
small entrepreneurs and persons of small
means engaged in trade‚ commerce‚
industry or other productive activities‚
within its area of operation.
(c)The Reserve Bank of India has brought
RRB‟s under the ambit of priority sector
lending on par with the commercial banks.
They have to ensure that forty percent of
their advances are accounted for the
priority sector. Within the 40% priority
target, 25% should go to weaker section
or 10% of their total advances to go to
weaker section.

Regional Rural Banks in India

1.The State Bank of India is one of the
major commercial banks having
regional rural banks. There are 30
Regional Rural Banks in India, under
the State Bank of India and it is
spread in 13 states across India. The
number of branches the SBI Regional
Rural Banks is more than 2000.

2. Haryana State Cooperative
Apex Bank Limited
The main purpose of the Haryana
State Cooperative Apex Bank Limited
is to financially assist the artisans in
the rural areas, farmers and agrarian
unskilled labor, and the small rural
entrepreneurs of Haryana. Haryana
State Cooperative Apex Bank Limited
also referred as the HARCOBANK, is
one of the apex organizations in the
state of Haryana.

3. National Bank for Agriculture
and Rural Development
The main purpose of the National Bank
for Agriculture and Rural Development is
to provide credit for the development
and publicity of small scaled industries,
handicrafts, rural crafts, village
industries, cottage industries,
agriculture, etc.

4. United Bank of India

The role played by the United Bank of India
(UBI) as one of the regional rural banks is
phenomenal. The UBI has propagated the
network of branches in order to actively
take part in the rural improvement and
development.
5. Syndicate Bank
The development of the Syndicate Bank
was in accordance to the development of
the rural banking sector in India . The
Syndicate Bank has performed actively in
the development of the rural sector .

6. Regional Rural Banks in
Tamil Nadu
Indian Bank has sponsored two
Regional Rural Banks (RRBs) viz.,
Saptagiri Grameena Bank and
Pallavan GramaBank.
Pallavan Grama Bank with Head
Quarters at Salem is operating in 14
districts .

7. Regional Rural Banks in Uttar
Pradesh:
1.Allahabad UP Gramin Bank
2.Aryavart Gramin Bank
3.Ballia –Etawah Gramin Bank
4.Baroda Uttar Pradesh Gramin Bank
5.Kashi Gomti Samyut Gramin Bank
6.Kshetriya Kisan Gramin Bank
7.Prathama Bank
8.Sarva UP Gramin Bank
9.Shreyas Gramin Bank
10.Purvanchal Gramin Bank

----
Regional rural banks allowed to
start branches in Tier 2 cities
without RBI nod;-
The Reserve Bank of India allowed
regional rural banks (RRBs) to open
branches in Tier –ii cities without taking
its permission on August 2, 2012. It has
been decided to allow RRBs to open
branches without having the need to take
permission from Reserve Bank of India .

Organizational structure
of Regional Rural Banks
1. A Regional Rural Bank is sponsored by
a commercial bank. The sponsored bank
requests the Central Government for this
purpose which issues a notification after
consulting the concerned state
government.
2. Generally , regional rural bank covers
one district & maximum coverage of a
RRB has been eight district.
3. Only the Manipur RRB covers the entire
state of Manipur.

Board of Directors
The RRB is governed by a Board of
directors who exercises all the
powers and discharges all the
functions of RRB. It consists of :-
i- a chairman appointed by the Central
government for five years,
ii- three directors nominated by the
central government
iii- two directors nominated by the
concerned state
iv- three directors nominated by the
sponsor bank
V- NABARD is vested with powers of
inspection of RRBs.

Functions /objectives of RRBs
1. Provide loans to Rural population :-
RRB provides loans & advances to
weaker section of the society.
2. Grant loans to co-operative societies:-
RRBs also provides loans & advances
to co-operative societies including
marketing societies , co-operative
farming society etc.
3. Banking services:- RRB has to take the
banking services to the doorsteps of
the rural masses .

---

4. Mobilize Rural saving:- RRB mobilize
the rural savings by accepting
deposits & channelise them for
productive activities in the rural
areas.
5. Arrangement of credit :- RRB provide
credit to rural areas through
refinance.
6. Cheap supply of credit :- RRB is to
bring down the cost of supplying
credit in rural areas.
7. Generate Employment opportunities
:- RRB is major employment provider
in rural areas.

Recent position(
achievements)
In recent years RRBs performance is as
follows:-
1. Extend advances for purchase of
durable consumer goods.
2. Issue travellers’ cheques as agents of
their sponsor bank & provides locker
facility,
3. There are now 195 RRB in 23 states
with 14500 branches ,
4. Over 95% loans are provided to
weaker section of society.

Performance of RRBS by
March 2011
The following programmes were
included in the performance of RRB-
· Credit Flow to Agriculture;
· Current Viability;
· Non-Performing Assets (NPA)
position;
· Capital-To-Risk-Weighted Assets
Ratio (CRAR) position;
· Core Banking Solutions (CBS) IN
RRBs;
· Branch Expansion of RRBs, etc.

---
As on 31 March 2010, there were 82 RRBs with a network
of 15475 branches spread over 619 districts in 26 States
and 1 Union Territory. The following measures have
been initiated to expand the outreach of the RRBs:

1.The RRBs were given a target in 2007 to open 2000
branches by March, 2011;

2.RRBs are required to migrate to Core Banking
Solution (CBS) by September 2011 (As on date, 21 RRBs
have already achieved 100% CBS status);

3. The Sponsor Banks would provide the required
support to the RRBs sponsored by them for this purpose;

----
4. For up gradation of Technology for
Financial Inclusion, the RRBs are being
provided funds from Financial Inclusion
Fund (FIF) and Financial Inclusion
Technology Fund (FITF) by NABARD.

5.As on 31.03.2010, 3 RRBs out of 82 RRBs
were incurring losses. (Manipur Rural Bank
–Rs. 2.98 crore, Puduval Bharthiar Grama
Bank –Rs. 0.22 crore and Mahakaushall
Gramin Bank- Rs. 2.45 crore)

6.The profitability of RRBs, as a segment,
has been improving.

Factors responsible for losses
some of the factors responsible for losses in
RRBs are identified as :
1.low recovery,
2.High NPA,
3.low business level,
4.low productivity per branch and per staff,
5. high cost structure,
6.poor financial management,
7.limited area of operation,
8.non-viable level of operation in branches
located in resource-poor areas etc.
9.one of the RRBs, namely Puduval Bharthiar
Grama Bank, which was set up in March 2008,
has not yet reached a breakeven point;

What is co-operative bank :-
According to the International Co-
operative Alliance Statement of co-
operative identity, „a co-operative is
an autonomous association of
persons united voluntarily to meet
their common economic, social, and
cultural needs and aspirations
through a jointly-owned and
democratically-controlled enterprise.
Co-operatives are based on the
values of self-help, self-responsibility,
democracy, equality, equity and
solidarity.

Principles (functions)of co-
operative bank
The 7 co-operative principles are :
1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training and
information
6. Co-operation among Co-operatives
7. Concern for Community

features :
1. Customer's owned entities : In a co-
operative bank, the needs of the
customers meet the needs of the
owners, as co-operative bank members
are both. As a consequence, the first aim
of a co-operative bank is not to maximize
profit but to provide the best possible
products and services to its members.
Some co-operative banks only operate
with their members but most of them
also admit non-member clients to benefit
from their banking and financial services.

----
2. Democratic member control : co-
operative banks are owned and
controlled by their members, who
democratically elect the board of
directors. Members usually have equal
voting rights, according to the co-
operative principle of "one person, one
vote".
3.Profit allocation : In a co-operative
bank, a significant part of the yearly
profit/surplus is usually allocated to
constitute reserves. A part of this profit
can also be distributed to the co-
operative members.

--
4. Co-operative banks are deeply rooted
inside local areas and communities. They
are involved in local development and
contribute to the sustainable development
of their communities, as their members
and management board usually belong to
the communities in which they exercise
their activities. By increasing banking
access in areas or markets where other
banks are less present - farmers in rural
areas, middle or low income households
in urban areas - co-operative banks
reduce banking exclusion and foster the
economic ability of millions of people.

Organizational structure of co-
operative Bank
The structure of commercial banking is of
branch-banking type; while the co-
operative
banking structure is a three tier federal
one.
- A State Co-operative Bank works at the
apex level (i.e. works at state level).
- The Central Co-operative Bank works at
the Intermediate Level (i.e. District Co-
operative Banks ltd. works at district
level)
- Primary co-operative credit societies at
base level (At village level)

Difference between Co-operative banks &
Commercial bank

They differ from commercial banks in the
following respects
1. Commercial banks are joint-stock companies
under the companies‟ act of 1956 whereas co-
operative banks were established under the
co-operative society‟s acts of different states.

2. Commercial bank structure is branch
banking structure whereas co-operative
banks have a three tier setup, with state co-
operative bank at apex level, central /district
co-operative bank at district level, and
primary co-operative societies at rural level.

---
3. Only some of the sections of
banking regulation act of 1949 (fully
applicable to commercial banks),
are applicable to co-operative
banks, resulting only in partial
control by RBI of co-operative
banks and
4.Co-operative banks function on the
principle of cooperation and not
entirely on commercial parameters.

RBI Policies for co-operative
banks
The RBI appointed a high power committee in
May 1999 under the chairmanship of Shri. K.
Madhava Rao, Ex-Chief Secretary,
Government of Andhra Pradesh to review the
performance of Urban Co-operative Banks
(UCBs) and to suggest necessary measures
to strengthen this sector. With reference to
the terms given to the committee, the
committee identified five broad objectives:
1. To preserve the co-operative character of
UCBs
2. To protect the depositors‟ interest
3. To reduce financial risk

Types of Co-operative Banks

The co-operative banks are small-sized
units which operate both in urban and
non-urban centers. They finance small
borrowers in industrial and trade sectors
besides professional and salary classes.
Regulated by the Reserve Bank of India,
they are governed by the Banking
Regulations Act 1949 and banking laws
(co-operative societies) act, 1965. The
co-operative banking structure in India is
divided into following 5 components:

1. Primary Co-operative Credit
Society
The primary co-operative credit
society is an association of borrowers
and non-borrowers residing in a
particular locality. The funds of the
society are derived from the share
capital and deposits of members and
loans from central co-operative
banks. The loans are given to
members for the purchase of cattle,
fodder, fertilizers, pesticides, etc.

2. Central co-operative banks

These are the federations of primary
credit societies in a district and are of two
types those
having a membership of primary societies
only and those having a membership of
societies as well as individuals. The funds
of the bank consist of share capital,
deposits, loans and overdrafts from state
co-operative banks and joint stocks.
These banks provide finance to member
societies within the limits of the
borrowing capacity of societies. They also
conduct all the business of a joint stock
bank.

3.State co-operative banks

The state co-operative bank is a
federation of central co-operative
bank and acts as a
watchdog of the co-operative banking
structure in the state. Its funds are
obtained from share capital, deposits,
loans and overdrafts from the
Reserve Bank of India. The state
cooperative banks lend money to
central co-operative banks and
primary societies and not directly to
the farmers.

4. Land development banks

The Land development banks are organized
in 3 tiers namely:- state, central, and primary
level. They meet the long term credit
requirements of the farmers for
developmental purposes. They are governed
both by the state government and Reserve
Bank of India. Recently, the supervision of
land development banks has been assumed
by NABARD. The sources of funds for these
banks are the debentures subscribed by both
central and state government. These banks
do not accept deposits from the general
public.

5.Urban Co-operative Banks

The term Urban Co-operative Banks
(UCBs) refers to primary co-operative
banks located in urban and semi-urban
areas.. They mainly rely upon deposits
from members and non-members and in
case of need, they get finance from either
the district central co-operative bank to
which they are affiliated or from the apex
co-operative bank if they work in big cities
where the apex bank has its Head Office.
They provide credit to small scale
industrialists, salaried employees, and
other urban and semi-urban residents.

What are the functions of Cooperative
Banks in India?

1.Cooperative banks in India finance
rural areas under:

1.Farming
2.Cattle
3.Milk
4.Hatchery
5.Personal finance

11. Cooperative banks in India
finance urban areas under:-

1.Self-employment
2.Industries
3.Small scale units
4Home finance
5.Consumer finance
6.Personal finance

Meaning of Development
Banks
Development banks are those
financial institutions engaged in the
promotion and development of
industry, agriculture and other key
sectors.
In the words of A.G. Kheradjou :- “A
development bank is like a living
organism that reacts to the social-
economic environment and its
success depends on reacting most
aptly to that environment”.

Definition
D.M. Mithani states that “A
development bank may be defined
as a financial institution concerned
with providing all types of financial
assistance i.e. medium as well as
long-term ,to business units in the
form of loans, underwriting,
investment and guarantee
operations and development in
general and industrial.”

Features of a development
bank
A development bank has the following features or
characteristics:
1. A development bank does not accept deposits from
the public like commercial banks and other financial
institutions who entirely depend upon saving
mobilization.

2. It is a specialized financial institution which
provides medium term and long-term lending
facilities.
3. It is a multipurpose financial institution. Besides
providing financial help it undertakes promotional
activities also.

4. It helps an enterprises from planning to operational
level.

-----
5. It provides financial assistance to both
private as well as public sector
institutions.
6. The role of a development bank is of gap
filler. When assistance from other sources
is not sufficient then this channel helps.
7. Development banks primarily aim to
accelerate the rate of growth. It helps
industrialization specific and economic
development in general.
8. The objective of these banks is to serve
public interest rather than earning profits.
9. Development banks react to the socio-
economic needs of development.

Small Industries Development
Bank of India (SIDBI)
SIDBI was established as wholly owned
subsidiary of Industrial Development
Bank of India (IDBI) under the small
Industries Development of India Act
1989. It is the principal institution for
promotion, financing and development
of industries in the small-scale sector.
Capital:- SIDBI started its operations
from April 1990 with an initial
authorised capital of Rs. 250 crore, which
could be increased to Rs. 1000 crore.

What are the objectives of
SIDBI?
In the setting up of SIDBI, the main purpose of
the government was to ensure larger flow of
assistance to the small-scale units. To meet
this objective, the immediate thrust of the SIDBI
was on the following measures:
(i) initiating steps for technological upgradation
and modernisation of existing units;
(ii) expanding the channels for marketing the
products of the small scale sector; and
(iii) promotion of employment-oriented industries,
especially in semi- urban areas to create more
employ-ment opportunities and thereby
checking migration of population to urban
areas.

What are the functions of
SIDBI?
The major functions of SIDBI are given
below:
(i) It refinances loans and advances
provided by the existing lending
institutions to the small-scale units.
(ii) It discounts and rediscounts bills arising
from sale of machinery to and
manufactured by small-scale industrial
units.
(iii) It extends seed capital/soft loan
assistance under National Equity Fund,
Mahila Udyam Nidhi and Mahila Vikas
Nidhi and seed capital schemes.

----
(iv) It grants direct assistance and refinance
loans extended by primary lending
institutions for financing exports of products
manufactured by small-scale units.
(v) It provides services like factoring, leasing,
etc. to small units.
(vi) It extends financial support to State Small
Industries Corporations for providing scarce
raw materials to and marketing the products
of the small-scale units.
(vii) It provides financial support to National
Small Industries Corporation for providing;
leasing, hire pur-chase and marketing help to
the small-scale units.

Development Banks in India

Development banking was started
after the World War II. It provided
finance to reconstruct the buildings
and industries which were destroyed
in the war.
In India, development banking was
started immediately after
independence.
The arrangement of development

Development banks in India are
classified into following five groups:
1.Industrial Development Banks : It includes, for
example, Industrial Finance Corporation of India (IFCI),
Industrial Development Bank of India (IDBI), and Small
Industries Development Bank of India (SIDBI).
2.Agricultural Development Banks : It includes, for
example, National Bank for Agriculture & Rural
Development (NABARD).
3. Export-Import Development Banks : It includes, for
example, Export-Import Bank of India (EXIM Bank).
4. Housing Development Banks : It includes, for
example, National Housing Bank (NHB).
5.Industrial Finance Corporation of India (IFCI) is the
first development bank in India. It started in 1948 to
provide finance to medium and large-scale industries in
India.

NABARD
NABARD is set up as an apex Development
Bank with a mandate for facilitating credit
flow for promotion and development of
agriculture, small-scale industries, cottage
and village industries, handicrafts and other
rural crafts. It also has the mandate to
support all other allied economic activities in
rural areas, promote integrated and
sustainable rural development and secure
prosperity of rural areas. NABARD was set
up in the year 1982. The Agricultural
Refinance & Development Corporation
(ARDC) which was set up to look in to the
credit requirements in 1963 has also been
merged with NABARD.

Role of NABARD
NABARD is entrusted with the following role
:-
1.Providing refinance to lending institutions
in rural areas.

2.Bringing about or promoting institutional
development.

3.Evaluating, monitoring and inspecting the
client banks .

4.Acts as a coordinator in the operations of
rural credit institutions .

----
5.Extends assistance to the government,
the Reserve Bank of India and other
organizations in matters relating to rural
development
6.Offers training and research facilities for
banks, cooperatives and organizations
working in the field of rural development
7.Helps the state governments in reaching
their targets of providing assistance to
eligible institutions in agriculture and
rural development
8. Acts as regulator for cooperative banks
and RRBs.

Some of the milestones in
NABARD's activities are:
1. NABARD has been pursuing a policy of
promoting agricultural credit. NABARD
provides 70% of loans through co-
operatives & 30% through commercial
banks.
2. About 67% of the total disbursement of
the NABARD have been for minor
irrigation.
3. NABARD has created Rural
Infrastructural Development Fund to
accelerate the agricultural
development.

-----
4. NABARD also provides financial help
to small scale & cottage industry.
5. NABARD has set up Research &
Development Fund for granting
assistance to various institution
involved in rural credit.

Core banking

Core banking is a general term used
to describe the services provided
by a group of networked bank
branches. Bank customers may
access their funds and other simple
transactions from any of the
member branch offices.

Core banking definition
CORE stands for "centralized online real-time
environment".
Core Banking is normally defined as the
business conducted by a banking institution
with its retail and small business customers.
Many banks treat the retail customers as their
core banking customers, and have a separate
line of business to manage small businesses.
Larger businesses are managed via the
corporate banking division of the institution.
Core banking basically includes deposit
accounts, loans, mortgages and payments.
Banks make these services available across
multiple channels like ATMs, Internet
banking, and branches.

-----
A few decades ago it used to take at
least a day for a transaction to
reflect in the account because each
branch had their local servers, and
the data from the server in each
branch was sent in a batch to the
servers in the datacenter only at the
end of the day (E o D).

Core banking solutions
MEANING:- Core banking solutions are
banking applications on a platform
enabling a phased, strategic approach
that is intended to allow banks to improve
operations, reduce costs, and be prepared
for growth. Core banking solutions are
new terminology frequently used in
banking circles. The advancement in
technology, especially Internet and
information technology has led to new
ways of doing business in banking. These
technologies have also cut down time,
working simultaneously on different
issues and increasing efficiency.

DEFINITION
Gartner defines a core banking system as
a back-end system that processes daily
banking transactions, and posts updates
to accounts and other financial records.
Core banking systems typically include
deposit, loan and credit-processing
capabilities, with interfaces to general
ledger systems and reporting tools.
Strategic spending on these systems is
based on a combination of service-
oriented architecture and supporting
technologies that create extensible, agile
architectures.

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