The document provides a comprehensive overview of banks and Non-Banking Financial Companies (NBFCs) in India, detailing the different types of banks like regional rural banks (RRBs), their functions, and their regulatory framework. It highlights the establishment and importance of RRBs for rural credit, their recapitalization needs, and issues faced due to organizational and management challenges. Additionally, the document touches on various banking regulations, the roles of private and foreign banks, and initiatives like Mudra Bank aimed at supporting micro enterprises.

1. Unit 4 : Banks and NBFCs
Banks and NBFCs: Types of Banks & NBFCs:
Central Bank, Nationalized & Co Operative
Banks, Regional Rural Banks, Scheduled
Banks, Private Banks & Foreign Banks, Mudra
Bank, Small Finance Banks, Specialized Banks,
NBFCs.
Types of Banking: Wholesale and Retail
Banking, Investment Banking, Corporate
Banking, Private Banking, Development
Banking.

2. Regional Rural Banks, Scheduled Banks,

3. REGIONAL RURAL BANKS (RRB)
RRBs are financial institutions which ensure
adequate credit for agriculture and other rural
sectors.
They were conceived as low cost institutions
having a rural ethos and pro poor focus, but
with expertise of commercial banks.
It was set up on the basis of the recommendations
of the Narasimham Working Group (1975), and
after the legislations of the Regional Rural Banks
Act, 1976 statutory backup
The sources of funds of RRBs comprise of owned
fund, deposits, borrowings from NABARD,
Sponsor Banks and other sources including
SIDBI and National Housing Bank.

4. REGIONAL RURAL BANKS (RRB)
RRBs are at par with commercial banks as far as
compliance requirements to CRR and SLR is
concerned.
The RRBs combine the characteristics of a
cooperative in terms of the familiarity of the rural
problems and a commercial bank in terms of its
professionalism and ability to mobilise financial
resources.
Each RRB is owned by three entities with their
respective shares as follows:
Central Government → 50%
State government → 15%
Sponsor bank→ 35%
However, PSL target of RRBs is 75% of total
outstanding advances (PSL norm is 40% for a
commercial bank).

5. History of Regional Rural Banks in India
The Narasimhan Committee on Rural Credit under
the rule of PM Indira Gandhi made certain
recommendations for formation RRBs, which
would be beneficial for the rural population as
compared to commercial banks.
– An Ordinance for the establishment of Regional Rural
Banks was passed on September 26, 1975, this being
the date of establishment of RRBs.
– The Regional Rural Banks Act (RRB Act) was passed
in 1976.
– Five RRBs were first established on the occasion of
Gandhi Jayanti, on October 2nd, 1975. Later, many
RRBs were established by the Government of India
and respective state governments.

6. The RRB Act 1976 states the functions of RRBs to
provide financial assistance to farmers, Medium
and Small Enterprises (MSMEs), local craftsmen
and artisans, for agriculture, industries, trade,
commerce, and their economic development. 25
RRBs were established within a year from the
passing of this Act.
There are currently 43 Regional Rural Banks in
India.

7. Recapitalisation of RRBs
Due to defaulting and non- repayment of loans,
banks often run into debts. To prevent this,
the Government, as it is the largest
shareholder in RRBs, invests capital in the
banks.
The minimum prescribed Capital to Risk-
Weighted Assets Ratio (CRAR), also known
as the Capital Adequacy Ratio, for any
Scheduled Commercial Bank (which includes
RBIs) is supposed to be 9%. The banks
unable to maintain this ratio have to be
considered for recapitalisation.

8. In 2009, a committee was formed under the
chairmanship of K. C. Chakrabarty, to analyse the
situation of RRBs. In 2010, it suggested many
measures to increase the Capital to Risk-
Weighted Assets Ratio (CRAR), one of them
being recapitalisation of the banks.
The Government was supposed to release Rs 1100
crore in 2010-11 and 2011-12 for this purpose, but
the state government and the sponsor banks also
have to release an amount proportionate to the
shares held by them.
The Government, in collaboration with NABARD,
started a corpus building fund for the improvement
of skills of the staff of RRBs with an initial corpus
of Rs 100 crore.

9. In 2020, the Government announced the
continuation of recapitalisation of RRBs. It
has reserved Rs 1340 crore and will
release of Rs 670 crore out of this fund for
the same.
It preconditioned that the proportionate
amount is invested by the State
government and sponsor banks.
This move was to protect the farmers, local
businessmen, trader, etc. affected
economically by COVID- 19.

10. The amalgamation of Regional Rural Banks
The merging of two or more banks together is
known as amalgamation. In the 1990s, more
than 190 RRBs existed. The amalgamation of
these banks was done in a phase-wise
manner.
In January 2013, 25 RRBs were merged into
ten banks, reducing the number to 67 banks
in the first phase. It was further reduced to 56
banks in March 2016 in the second phase. In
the third phase, it was reduced to 43.

11. Functions of Regional Rural Banks
Since a Regional Rural Bank is a Scheduled
Commercial Bank, its primary functions are to
accept deposits and to disburse loans. The
important functions of Regional Rural Banks
are discussed below.
1. Accept Deposits
RRBs accept deposits from their members who
hold an account in the bank.
Deposits can be made in current or savings
accounts.
Depositors can also be made in fixed or
recurring forms.

12. Loan Extension
The RRB Act of 1975 states that the RRB can extend loans and credit
services to the Priority Sector (PS). The loans to this sector are
classified under PSL or Priority Sector Lending. The RBI
announced the coverage of RBBs in PSL from FY 1997.
The priority sector comprises of small and marginal farmers, craftsmen
and artisans, local traders, medium and small scale businesses,
education, housing, renewable energy, etc. which needs
development and financial investment.
75% of the total Bank Credit has to be provided to the Priority Lending
Sector. Out of this total credit, 10% has to be given to the
economically weaker sections.
Hence, short- term loans on a low rate of interest are extended by these
banks to the priority sector. RRBs cannot, however, extend large or
long- term loans to its customers.

13. Wage disbursement
The Regional Rural Banks in India perform
the important function of distribution of
wages under the MGNREGA (Mahatma
Gandhi National Rural Employment
Guarantee Act), the Pradhan Mantri
Gram Sadak Yojana (PMGSY).
The pensions provided under the poverty
alleviation schemes and pension schemes
of India are also distributed through these
banks.

14. Secondary functions of RRBs
Similar to commercial banks, the secondary
functions of the Regional Rural Banks in
India are providing agency services and
general utility services to their customers.
Agency services like foreign exchange, bill
payments, money wire transfer, etc. are
performed by RRBs.
Utility services like ATM, UPI, issuance of
debit cards, locker facilities, etc. are also
provided by RRBs in India.

15. Objectives of the RRB
• To develop the rural economy by providing, for the
purpose of development of agriculture, trade,
commerce, industry and other productive activities in
the rural areas, credit and other facilities, particularly
to small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs, and for matters
connected therewith and incidental thereto.
POLICY OF CURRENT GOVERNMENT ON RRB
• The Modi Government has put hold on further
amalgamation of the Regional Rural Banks.
• The focus of the new government is to improve their
performance and explore new avenues of
investments in the same.
• Currently, there is a bill pending to amend the RRB Act
which aims at increasing the pool of investors to tap
capital for RRBs.

16. NEED FOR RRBS
• To ensure adequate credit in rural areas during the
lockdown due to the COVID-19
• RRB helps to bring the financial inclusion in the
primary level of the nation
• To provide banking services to rural and semi-
urban areas.
• Locker, debit and credit card facilities to the
countryside
• To enhance employment opportunities by
promoting trade and commerce in rural areas.
• To support entrepreneurship in rural areas.
• Pension and MGNREGA wages distribution

17. ISSUES WITH RRBS
Organisational problem – multi agency control of RRBs
led to a lack of uniformity in their performance.
Recruitment process as well as training of staff of RRB
hasn’t received sufficient attention
Problems of loan recovery
Mounting losses resulting into non-viability
Management Problems pertain to involvement of three
agencies.
The Cabinet Committee on Economic Affairs has given
its approval for continuation of the process of
recapitalization of RRBs by providing minimum
regulatory capital to RRBs for 2020-21 for those RRBs
which are unable to maintain minimum CRAR
(Capital-to-risk Weighted Assets Ratio) of 9%, as
per the regulatory norms prescribed by the RBI

18. Capital-to-risk Weighted Assets Ratio
CRAR or Capital Adequacy Ratio (CAR) is the
ratio of a bank’s capital in relation to its risk
weighted assets and current liabilities.
It is decided by central banks and bank
regulators to prevent commercial banks from
taking excess leverage and becoming
insolvent in the process.
The Basel III norms stipulated a capital to risk
weighted assets of 8%.
However, as per RBI norms, Indian scheduled
commercial banks are required to maintain a
CRAR of 9%.

19. RRB Viz-a-viz COMMERCIAL BANKS
Ownership – they are owned by three
different entities – Central govt, state govt
and sponsor bank.
Regulation – They are regulated by
NABARD
Statutory Background – RRBs have a
separate law behind them viz. RRB Act,
1976.
Statutory pre-emptions – RRBs don’t need
to maintain CRR and SLR like other
banks.

20. Scheduled Banks

21. The scheduled bank means which bank
those are identified in the particular name
list of banks under the rule of the central
bank.
Every commercial bank has to be scheduled
under the central bank. These banks are
usually private, foreign, and nationalized
banks operating in a country.
There are some rules and conditions for
commercial banks to be scheduled.
Normally bank means scheduled bank

22. Scheduled banks are banks that are listed in
the 2nd schedule of the Reserve Bank of
India Act, 1934. The bank's paid-up capital
and raised funds must be at least Rs5 lakh to
qualify as a scheduled bank. Scheduled
banks are liable for low-interest loans from
the Reserve Bank of India and membership
in clearinghouses.
They must, however, meet certain
requirements, such as maintaining an
average daily CRR (Cash Reserve Ratio)
balance with the central bank at the rates set
by it. The RBI allows Scheduled Banks to
raise debts and loans at bank rates.

23. SCHEDULED COMMERCIAL BANKS (SCB)
Governed by the Banking Regulation Act-1949.
Scheduled banks are those mentioned in the
2nd schedule of RBI Act, 1934.
Scheduled commercial banks (SCBs) account
for a major proportion of the business of
the scheduled banks.
Private sector banks include the old private
sector banks and the new generation
private sector banks– which were
incorporated according to the revised
guidelines issued by RBI regarding the entry
of private sector banks in 1993.

24. Scheduled Banks
All commercial banks, including nationalized,
international, cooperative, and regional rural
banks, fall under scheduled banks.
Scheduled Commercial Banks can be divided
into:
―Scheduled Commercial Public Sector Banks
―SBI and its associates
―Scheduled Commercial Private Sector Banks
―Old Private Banks
―New Private Sector Banks
―Scheduled Foreign Banks in India

25. The features are given below:
Member of Central Bank: Scheduled banks
are enlisted and governed by the central
bank. So, a scheduled bank means a
member of the central bank.
Member of Money Market: The Central bank
is the parent of the money market of a
country. The bank is a financial institution
which deals with other people’s money i.e.
money given by depositors. So, these banks
are considered as a member of the money
market.

26. Minimum Paid-Up Capital and Reserve Fund:
Scheduled banks have to keep a definite amount
of paid-up capital and reserve fund in the central
bank. In many countries, the amount is selected
by the central bank. A bank’s main activity should
be to do a business of banking which should not
be subsidiary to any other business.
Legal Entity: Every scheduled bank is formed under
the Banking Company Act-1991 of respective
counts and registered by the central hank. So,
every bank has own legal entity. A bank should
always add the word “bank” to its name to enable
people to know that it is a bank and that it is
dealing in money.

27. Liquidity Conditions: Banks can develop its
liquidity condition by following the advice given by
the central bank. To maintain the liquidity ration
balanced, the commercial bank has to know the
required CRR and the SRR ratios. It gives safety
to the deposits of its customers. It also acts as a
custodian of funds of its customers.
Member of Clearing House: Every scheduled bank
is a member of the central bank and those banks
can enjoy every advantage provided by the
clearinghouse in inter-banking activities. It also
brings bank money in circulation. This money is in
the form of cheques, drafts, etc.

28. Relation of Cooperation: Central banks and
scheduled banks are cooperatively related.
Central bank helps at its level best in time of need
and scheduled bank help by maintaining rules and
regulations. Banking is an evolutionary concept.
There is continuous expansion and diversification
as regards the functions, services, and activities of
a bank
Adequacy of provision: The bank has to maintain
the provision against the classified loans. In other
words, this is required for the covering of any loan
loss. A bank acts as a connecting link between
borrowers and lenders of money. Banks collect
money from those who have surplus money and
give the same to those who are in need of money.

29. Agency: The central bank and the
scheduled bank work as an agent of each
other in time of need. A bank provides
various banking facilities to its customers.
They include general utility services and
agency services.
Submission of Weekly Report: Every
scheduled bank has to submit the weekly
bank needs to be the report of their
activities. It is mandatory for all scheduled
banks.

30. Private Banks &
Foreign Banks

31. PRIVATE SECTOR BANKS
• These are banks whose majority of share
capital of the bank is held by private
individuals. These banks are registered
as companies with limited liability.
Examples of private sector banks are:
ICICI Bank, Axis bank, HDFC, etc.
• In private sector banks, most of the capital
is in private hands.
• There are two types of scheduled
commercial (private sector) banks in India
viz.

32. Old Private Banks New Private Banks
These are those which
existed in India at the
time of nationalization
of major banks but
were not nationalized
due to their small size
or some other reason.
These banks were incorporated as
per the revised guidelines issued by
the RBI regarding the entry of
private sector banks in 1993. At
present, there are seven new
private sector banks viz. Axis Bank,
Development Credit Bank (DCB
Bank Ltd), HDFC Bank, ICICI Bank,
IndusInd Bank, Kotak Mahindra
Bank, Yes Bank.

35. FOREIGN BANKS
Foreign banks are present in the country
either through complete branch/subsidiary
route presence or through their
representative offices.
These banks are registered and have their
headquarters in a foreign country but
operate their branches in our country.
Examples of foreign banks in India are:
HSBC, Citibank, Standard Chartered
Bank, etc

36. • RBI POLICY TOWARDS FOREIGN BANKS IN
INDIA
• RBI policy towards presence of foreign banks in
India is based upon two cardinal principles viz.
– Reciprocity
– Single mode of presence.
• By reciprocity, it means that overseas banks are
given near national treatment in India only if
their home country allows Indian banks to open
branches there without much restrictions.
• By single mode of presence, it means that RBI
allows either of the branch mode or a wholly
owned subsidiary (WOS) mode in India.

37. • Some other policy guidelines of RBI towards
foreign banks are as follows:
– Banks have to adhere to mandated Capital
Adequacy requirements as per Basel Standard.
– They should meet the minimum capital requirement
of INR 500 cr.
– They should maintain minimum CRAR at 10% .
– Priority sector targets for foreign banks in India is
40%.
– Further, the foreign banks have to follow other norms
as set by the Reserve Bank of India.
SHARE OF FOREIGN BANKS IN INDIA
• Foreign Banks account for less than 1% of the
total branch network in the country. However, they
account for approximately 7% of the total
banking sector assets and around 11% of the
profits.

38. •Mudra Bank, Small
Finance Banks

39. MUDRA BANKS
The GoI launched (April 2015) the Micro Units Development and
Refinance Agency Bank (MUDRA Bank) with the aim of funding
these unfunded non-corporate enterprises. This was launched as
the PMMY (Prime Minister Mudra Yojana).
MUDRA bank is a subsidiary of SIDBI.
According to the GoI, large industries provide employment to only
1.25 crore people in the country while the micro units employ
around 12 crore people.
There is a need to focus on these 5.75 crore self-employed people
(owners of the micro units) who use funds of Rs. 11 lakh crore, with
an average per unit debt of merely Rs. 17,000.
Under this banking model, the micro units can avail up to Rs. 10
lakh loan through refinance route (through the Public and private
sector banks, NBFCs, MFIs, RRBs, District Banks, etc).

40. The products offered-
TYPES OF LOAN COVERAGE OF LOAN
1. Shishu loan up to Rs. 50,000
2. Kishor Rs. 50,000 to Rs 5 lakh
3. Tarun Rs. 5 lakh to Rs. 10 lakh
• Though the scheme covers the traders of fruits
and vegetables, in general, it does not refinance
the agriculture sector.
• There is no fixed interest rate in this scheme.
As per the GoI, presently, banks are charging the
interest rates between Base Rate plus one per
cent to 7 per cent per annum.
• Interest rates on the loans are supposed to
vary according to the risk involved in the
enterprises seeking loans.

41. • There is no general subsidy offered on
interest rates except if the loan is linked
to some other government scheme.
• The loans are basically for people having
a business plan in a Non-Farming
Sector with Income generating
activitieslike the following:
– Manufacturing
– Processing
– Trade
– Service Sector
– Or any other fields whose credit demand is
less than Rs. 10 lakhs.

43. SMALL FINANCE BANKS (SFB)
According to RBI guidelines, small and payment banks
are ‘niche’ or ‘differentiated’ banks with a common
objective of increasing financial inclusion.
These are private financial institutions for the
objective of financial inclusion without any
restriction in the area of operations, unlike the
RRBs or Local Area Banks.
They can provide basic banking services like
accepting deposits and lending to the unbanked
sections such as small farmers, micro business
enterprises, micro and small industries and
unorganised sector entities.
They were proposed by the Nachiket Mor Committee
of RBI as one of the differentiated banking systems
for credit outreach and announced in the annual
Budget of 2014.

44. SMALL FINANCE BANKS (SFB)
Currently, SFBs constitutes 0.2% of the total
deposits of all scheduled commercial banks
and makes up 0.6% of the total lending
undertaken by the scheduled commercial
banks in India.
Some of the operational Small Finance Banks
in India are: Ujjivan SFB, Janalakshmi SFB,
Equitas SFB, AU SFB, and Capital SFB.
They focus and serve the needs of a certain
demographic segment of the population.
SFBs was recommended by the Nachiket Mor
committee on financial inclusion.

45. OBJECTIVE OF THE SFB
To increase financial inclusion by provision of
savings vehicles to under-served and unserved
sections of the population
Supply of credit to small farmers, micro and small
industries, and other unorganised sector entities
through high technology low-cost operations.
The purpose of the small banks will be to provide a
whole suite of basic banking products such as
deposits and supply of credit, but in a limited area
of operation.
The provision of savings vehicles
Supply of credit to small business units; small and
marginal farmers; micro and small industries; and
other unorganised sector entities, through high
technology-low cost operations.

46. NEED FOR SFB
To cater large population – India has the second-largest
unbanked population in the world where more than 200
million people do not have a bank account and many rely on
cash or informal financing.
Priority sector lending – SFBs play a key role in the priority
sector lending space as their main focus is the unserved
and underserved segment.
Financial inclusion of women – To provide loans to women.
female customers can avail full banking solutions.
Social Impact – The SFBs are now looking beyond the simple
metric of “income improvement” to other indicators of
positive social impact,
SFBs not only serve to provide banking solutions but empower
the socio-economic progress of its consumers.
RBI states that small banks will act as a savings vehicle to
these segments of the population.

47. GUIDELINES FOR SFB
They cannot set up subsidiaries to undertake
non-banking financial service activities.
75% of its ANBC should be advanced to the
priority sector as categorized by RBI.
It must have 25% of its branches set up in
unbanked areas.
Minimum capital requirement – 100 crore.
Promoter contribution – at least 40% for first 5
years
Excess shareholding – brought down to 90% by end of 5 th year,
30% by end of 10 th year and to 26% in 12 years from
commencement of business.

48. GUIDELINES FOR SFB
Foreign shareholding as per current FDI policy.
Voting rights – same as according to existing guidelines
for private banks.
Entities other than promoters would not hold share in
excess of 10%.
They must comply with the corporate governance
guidelines, including ‘fit and proper’ criteria for
directors as issued by RBI.
They will be subject to all prudential norms and
regulations of the RBI as applicable to existing
commercial banks – maintaining CRR and SLR.
It can transform into a full-fledged bank, but only after
RBI’s approval.