1. CONTENT
1. Money, Process of Capital Formation
2. Banking and Financial Institutions and
economic development
3. Role of Development Banks in Industrial
Financing
4. DFIs
2. Financial System
• A financial system may be defined as a
set of institutions , instruments and
markets which fosters savings and
channels them to their most efficient use.
4. Functions of a Financial System
• Mobilize and allocate savings – Link
between investors and savers.
• Helps to monitor corporate performance.
• It provides a payment and settlement
system.
• It provides diversified investment
opportunities.
6. Capital Formation
Capital formation implies diversion
of the productive capacity of the
economy to the making of capital
goods which increase future
productive capacity.
7.
8. Process of Capital Formation
• Increase in Savings
1.Power and will to save
2.Perpetuation of income inequalities
3.Increasing Profits
4.Government Measures
• Mobilization of Savings
1.Money Market
2.Capital Market
• Investment of Savings
9. Prior Saving Theory ( PST)
•Saving is a perquisite or a determinant of
investment.
•There should be appropriate monetary and
fiscal policy for promoting and mobilizing
savings.
•Investment which is not financed by prior
savings generates inflation.
10. Prior Saving Theory ( PST)
….cont.
• The financial system increases the rate of
growth of savings and investments and
makes their composition , allocation and
utilization more optimal and efficient.
• Financial system activates savings and
reduces idle saving.
11. Process of Capital Formation
ECONOMIC
DEVELOPMENT
SURPLUS
CAPITAL
FORMATION
INCOMECONSUMPTIONINVESTMENT
DEFECIT
INCOMECONSUMPTIONINVESTMENT
NEGATIVE
SAVING
SAVING
FINANCIAL
SYSTEM
13. Definition of Banking
Banking is defined in section 5(b) of the
Banking Regulation Act as the
acceptance of deposit of money
from the public for the purpose of
lending or investment. Such deposits
may be repayable on demand or
otherwise and withdraw able by
cheque, draft or otherwise.
14. Some Interesting Facts….
• U/s 49A of Banking regulation act, no
person other than a bank is authorized
to accept deposits withdrawable by
cheque.
• Every banking company has to use the
word “bank” as a part of its name (Sec 7
of Banking regulation act)
15. Money Multiplier effect of Banks
• Let's follow the step-by-step process of money creation in the
banking sector.
• Suppose Rs 10,000 of reserves have been created and
deposited into Bank A.
• These demand deposits are matched by the same amount of
reserves.
• But in a fractional-reserve system, we don't need Rs 10,000
reserves to back up Rs 10,000 of demand deposits.
• Suppose the required reserves are only 10% of the demand
deposits.
• The required reserves are only Rs1000.
• The rest (Rs 9000) is excess reserves which could be loaned
out to earn interest.
16. • Let's assume that the loan will be spent and
the recipient deposits the Rs 9000 into his
Bank B account.
• Again, only 10% of the reserves needs to be
kept at Bank B to back up the new demand
deposits of Rs 9000.
• The rest (Rs 8100) could be loaned out to
earn interest.
• Let's assume that the loan will be spent and
the recipient deposits the Rs 8100 into his
Bank C account.
17. • Again, only 10% of the reserves needs to be kept at Bank C
to back up the new demand deposits of
Rs 8100.
• The rest (Rs 7290) could be loaned out to earn interest.
• Let's assume that the loan will be spent and the recipient
deposits the Rs 7290 into his Bank D account.
• And so on.
• After many rounds, a total of Rs 90,000 of demand deposits
has been created through loans.
• In all, the injection of Rs 10,000 reserves into the banking
system results in 10 times the amount of demand deposits.
18. Progress of banking in India
• Nationalization of banks in 1969: 14 banks were
nationalized basic objective of which was to ensure that
credit was channeled to various priority sectors of the
economy
• Branch expansion: Increased from 8260 in 1969 to
71177 in 2006
• Population served per branch has come down from
64000 to 16000
• A rural branch office serves 15 to 25 villages within a
radius of 16 kms
• However, at present only 32,180 villages out of 5 lakh
have been covered
19. Progress of banking in India
• Deposit mobilisation:
– 1951-1971 (20 years)- 700% or 7 times
– 1971-1991 (20 years)- 3260% or 32.6 times
– 1991- 2006 (11 years)- 1100% or 11 times
• Expansion of bank credit: Growing at 2030% p.a. thanks to rapid growth in
industrial and agricultural output
• Development oriented banking: priority
sector lending
22. Retail banking refers to the dealing of
commercial banks with individual customers
both on the liabilities and the assets sides of
the balance sheet.
Deposits being liabilities and Advances
being assets.
23. • Retail banking is for the mass
• Wholesale banking is for corporate.
24. Wholesale Banking
• Wholesale banking refers to doing
business with industrial and business
entities.
• It includes corporates, trading houses,
multinationals, domestic business houses
and public sector companies.
25. Universal Banking
• Universal banking means offering all
types of financial products like banking,
,insurance, mutual funds, capital market
related product, commodity broking,
government and corporate bonds and
merchant banking services all at one
place.
26. Non Banking Finance Companies
• According to the Reserve
Bank(Amendment Act ) 1997, A NBFC
means:
i. A financial institution which is a company
ii. A non-banking institution which is a
company and which has its principal
business the receiving of deposits under
any scheme or arrangement or in any
other manner or lending in any manner
27. iii. Such other non-banking institution or
class of such institutions as the RBI may
with the previous approval of the Central
government specify
