Banking & financial institutions

1. BANKING AND
FINANCIAL INSTITUTION

2. Module I : Transformation of Indian Financial system
• Money, Process of capital formation, Financial System, Evolution of
the Indian Financial/ Banking system and its structure in India.
Types of banking: Retail banking, Wholesale banking, Universal
banking, near banking, rural banking, cooperative banking,
Introduction to specialized financial institutions (ECGC, EXIM,
NABARD, SIDBI etc), Development Financial Institutions.

3. Definition
Van Horne defined a financial system as, “the system to allocate savings efficiently in an economy to
ultimate users either for investment in real assetsor for consumption”. It is a complex, integrated
set of subsystems. These subsystems are Financial Institutions, Markets and Instruments.
According to Prasanna Chandra, “financial system consists of a varietyof institutions, markets and
instruments related in a systematic manner and provide the principal means by which savings are
transformed into investments”.

4. Functions of Financial System
• i. Saving mobilisation: An important function of a financial system is to mobilise savings
and channelise them into productive activities. A financial system helps in obtaining funds
from the savers or surplus units such as household individuals, business firms, public
sector units, central government and state governments.
• ii. Liquidity: In a financial system, liquidity means the ability to convert into cash. The
financial market provides investors the opportunity to liquidate their investments, which
are in instruments such as shares, debentures and bonds. The price of these instruments is
determined daily according to the operations of the market force of demand and supply.

5. • iii. Payment function: A financial system offers a very convenient mode of payment for
goods and services. The cheque system and credit card system are the easiest methods of
payment in an economy. The cost and time of transactions are considerably reduced.
• iv. Capital formation: This promotes the process of capital formation by bringing
together the supply of savings and the demand for investible funds.
• v. Risk protection: Financial markets provide protection against life, healthand income-
related risks. These risks can be covered through the sale of life insurance, health
insurance and property insurance and various derivative instruments.

6. Role of Financial System in Economic Development
• The economic development of a nation is reflected by the progress of the
various economic units, broadly classified into corporate, government and
household sector. While performing their activities, these units will be placed
in a surplus/ deficit/ balanced budgetary situations. A financial system or
financial sector functions as an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit.
• Thus, a Financial System is a composition of various institutions, markets,
regulations and laws, practices, money manager, analysts, transactions and
claims and liabilities. Economic growth and development of any country
depends upon a well-knit financial system. Financial system comprises a set of
sub-systems of financial institutions financial markets, financial instruments
and services which help in the formation of capital. Thus a financial system
provides a mechanism by which savings are transformed into investments and

7. • The financial system is characterized by the presence of integrated, organized
and regulated financial markets, and institutions that meet the short term
and long term financial needs of both the household and corporate sector.
Both financial markets and financial institutions play an important role in the
financial system by rendering various financial services to the community.
They operate in close combination with each other.

8. EVOLUTION OF INDIAN FINANCIAL SYSTEM
• 1. Pre-Independence (Before 1947)
• Colonial Rule and the Early System: Before India gained independence, the
financial system was largely shaped by the British colonial government. The
British introduced a banking system that was centered around colonial interests.
The first bank of India, the Bank of Hindustan, was established in 1770, but it
collapsed in 1830. Later, the Imperial Bank of India (which later became State
Bank of India) played a crucial role in the financial system.
• Currency: The Indian government adopted the British pound as the official
currency, and the Reserve Bank of India (RBI) was established in 1935 to manage
currency and monetary policy.

9. • 2. Post-Independence and Early Years (1947-1960s)
• Foundation of the Financial System: After independence, India faced the challenge of
building a financial system that could promote industrialization and economic development.
The Reserve Bank of India became the central authority for managing the country’s
monetary system. The Indian government nationalized major banks (like the Imperial Bank
of India, which became State Bank of India in 1955).
• Planned Economy: During this period, India followed a planned economy model
influenced by the Soviet model. The government controlled many sectors, and the financial
system primarily focused on funding public-sector enterprises and infrastructure projects.
• Regulation and Control: The government introduced various policies like the Industrial
Development Bank of India (IDBI), which was established in 1964, to finance industries.

10. 3. Liberalization and Reform (1991-2000s)
• Economic Liberalization: In 1991, India faced a balance of payments crisis, which led to
major economic reforms. The government moved towards liberalization, privatization, and
globalization, opening up the economy to foreign investment.
• Banking Reforms: The RBI introduced key banking reforms, including the introduction of
more private sector banks. The National Stock Exchange (NSE) was established in 1992,
boosting the development of equity markets.
• SEBI (Securities and Exchange Board of India): To regulate and streamline the capital
markets, SEBI was given more powers to oversee market activities, ensuring transparency
and investor protection.
• Financial Products: New financial products like mutual funds, insurance, and non-banking
financial companies (NBFCs) gained prominence.

11. • 4. Post-Reform Growth (2000s-Present)
• Financial Inclusion: The Indian government has made efforts to extend banking services to the
rural population through initiatives like Pradhan Mantri Jan Dhan Yojana (2014), which aimed at
opening bank accounts for all citizens, especially in rural areas.
• Digitization: The rapid growth of technology has transformed the financial landscape. The advent
of digital banking, mobile payments, and platforms like UPI (Unified Payments Interface)
revolutionized the payments system in India, making transactions faster and more accessible.
• Financial Sector Diversification: The Indian financial system has diversified further with increased
participation from the private sector. New products such as exchange-traded funds (ETFs), REITs
(Real Estate Investment Trusts), and growing interest in cryptocurrencies have emerged.
• Corporate and Financial Sector Regulation: The introduction of the Insolvency and Bankruptcy
Code (IBC) in 2016, along with measures for stricter banking regulation and governance under the
RBI, has aimed to address the problem of bad loans and non-performing assets (NPAs).
• Financial Technology (Fintech): The rise of fintech companies has also reshaped the Indian
financial system. Digital lending platforms, online investment tools, and peer-to-peer lending are
examples of the sector's rapid innovation.

12. STRUCTURE OF INDIAN FINANCIAL SYSTEM

13. BANKING SYSTEM
• Banking systems refer to a structural network of institutions that provide
financial in a country. It deals with the ownership of banks, the structure of
banking system, functions performed and the nature of business. The
elements of the banking system include:
a) Commercial banks
b) Investment banks
c) Central bank. The commercial banks accept deposits and lend loans and
advances; the investment banks deal with capital market issues and trading;
and the central bank regulates the banking system by setting monetary
policies besides many other functions like currency issue.

14. STRUCTURE OF INDIAN BANKING SYSTEM
•

15. • 1. Retail Banking
• Retail banking, also known as personal banking, operates directly with individual customers,
addressing their personal financial needs. These banks play a pivotal role in collecting
customer deposits, which serve as a significant source for facilitating loans to retail clients.
Key products in retail banking encompass deposits, credit cards, mortgages, personal loans,
and various savings and investment options. They focus on delivering a broad range of
consumer-oriented financial services, providing convenience through branches, online
platforms, and ATMs.
• Key Features:
• Mass Market Services: Retail banks focus on providing services to a broad consumer base,
including individuals and small businesses.
• Convenience: Accessibility is prioritized through local bank branches and user-friendly online
banking apps.
• Personalized Offerings: Tailored financial solutions cater to the diverse needs of individual

16. 2.Wholesale Banking
• Wholesale banking, often referred to as capital markets, caters to corporate and institutional
clients with specialized financial services. These services encompass corporate lending, sales
and trading of financial instruments, underwriting of securities, and facilitating complex
financial transactions. Wholesale banks play a crucial role in facilitating capital flow and
supporting the financial needs of large enterprises and institutional investors.
• Key Features:
• Bulk Transactions: Focus on handling large-scale transactions and providing financial
services tailored for institutional clients.
• Sophisticated Products: Offering advanced financial products such as trade financing, cash
management, and foreign exchange services.
• Institutional Focus: Catering exclusively to corporate and institutional clients with
specialized financial requirements.

17. 3. Universal Banking
• Universal banks provide a holistic suite of financial services, seamlessly combining retail,
commercial, and investment banking. This integrated approach allows them to serve a diverse
clientele, offering tailored solutions for individual customers, small businesses, and large
corporations. Universal banks leverage their comprehensive capabilities to provide end-to-end
financial solutions, ranging from basic banking services to complex investment strategies.
• Key Features:
• Broad Spectrum of Services: Comprehensive offerings cover retail, corporate, investment,
and wealth management services.
• Comprehensive Clientele: Serving both individual and corporate clients, providing a one-stop
shop for diverse financial needs.
• Integrated Banking Solutions: Offering an integrated approach with a wide array of financial
products and services.

18. 4. Cooperative Banking
• Cooperative banks stand out as member-owned and member-operated entities, emphasizing
community-based financial services. These banks offer a diverse range of financial products,
including savings and loans, and operate with a cooperative structure where members are both
customers and owners. Cooperative banks often foster a strong sense of community and social
responsibility, contributing to local economic development.
• Key Features:
• Customer Ownership: Cooperative banks operate as member-owned entities, fostering a sense
of community ownership where members have a stake in the institution.
• Focus on Community Development: Emphasizing community-focused initiatives, cooperative
banks actively contribute to the economic and social development of the areas they serve.
• Tailored Financial Services: Cooperative banks design financial products and services to meet
the specific needs of their member-owners, ensuring a personalized approach to banking.

19. 5. Rural Banking
• Rural banks specialize in meeting the unique financial needs of rural communities. Beyond
traditional banking services, they often play a vital role in promoting financial literacy,
providing agricultural financing, and supporting local economic development. Rural banks
contribute to fostering financial inclusion by extending services to underserved rural areas,
facilitating economic growth and resilience in these communities.
Key Features
• Microcredit Initiatives: Providing small-scale financial support to rural populations and
promoting economic activities.
• Financial Inclusion: Focusing on extending basic banking services to underserved rural and
semi-urban areas.
• Relaxed Eligibility Norms: Adapting eligibility criteria to accommodate the specific economic
conditions of rural populations.

20. Export Credit Guarantee Corporation of India (ECGC)
• The Export Credit Guarantee Corporation of India (ECGC) is a government-owned organization that provides credit insurance
and risk management services to Indian exporters. It plays a crucial role in promoting exports by safeguarding exporters against
financial losses that may arise due to non-payment by foreign buyers or political risks in foreign countries.
•Export Credit Insurance:
•ECGC offers insurance coverage to exporters against the risk of non-payment by foreign buyers. This includes risks such as insolvency of
buyers, default on payments, and other unforeseen financial problems.
•The organization provides insurance for both short-term (e.g., export credit extended to buyers for goods with shorter repayment periods)
and long-term credit (for larger projects or goods that have longer repayment timelines).
•Credit Guarantee:
•It provides credit guarantees to banks and financial institutions that offer working capital or export financing to exporters. This reduces the
risk for lenders and encourages them to offer credit to exporters.
•This, in turn, makes it easier for exporters to access financing to expand their business or meet working capital requirements.

21. • Political Risk Cover: ECGC provides coverage for political risks, such as war, civil
disturbances, or government-imposed restrictions that could prevent the collection of
dues from foreign buyers. This type of insurance helps exporters mitigate the risks
associated with political instability in foreign countries.
• Export Promotion: By offering risk mitigation services, ECGC supports the growth of
exports from India. It encourages Indian businesses to enter new, potentially risky
markets without fearing major financial losses.ECGC also assists in finding new buyers and
markets, which contributes to the overall growth of the Indian economy through increased
exports.
• Export Credit Ratings: ECGC also conducts credit assessments of foreign buyers and
offers credit ratings, which help exporters assess the risk of doing business with particular
buyers or countries. This is essential for making informed decisions in international trade.

22. Types of Policies Offered by ECGC
1.Packaged Policies:
•Aimed at small and medium-sized exporters, these policies offer comprehensive coverage for a wide range
of export activities and risks, including political and commercial risks.
2.Specific Policies:
•These are tailored policies for individual exporters or specific transactions, offering protection against
specific risks in international trade.
3.Buyer-wise Policies:
•This covers a specific buyer or group of buyers, offering protection from risks associated with that buyer's
non-payment.
4.Foreign Projects:
•ECGC also provides coverage for exporters engaged in foreign project exports, which typically involve
long-term contracts for goods and services.

23. Key Benefits of ECGC
•Risk Mitigation: Helps reduce the financial risks associated with non-payment
and political instability in international trade.
•Increased Export Opportunities: Exporters can confidently expand into new
and emerging markets, knowing that they have insurance protection.
•Credit Access: By reducing risk, ECGC makes it easier for exporters to secure
financing from banks and financial institutions.
•Boosts India's Exports: By providing risk coverage and supporting exporters,
ECGC helps increase the overall volume of Indian exports, which strengthens
the economy.

24. • EXIM Banks:
• Purpose: EXIM banks are financial institutions established by governments to facilitate international trade by
offering financing solutions such as loans, guarantees, and insurance. These banks aim to promote exports,
support domestic businesses in global markets, and reduce the risks associated with international transactions.
• Functions:
• Export Financing: EXIM banks provide loans or credit facilities to domestic companies so they can expand their
operations internationally, whether by funding production or offering them working capital.
• Insurance & Risk Mitigation: EXIM banks provide insurance against risks like non-payment, currency
fluctuations, political instability, or other uncertainties that may arise in the course of international trade.
• Trade Financing: They can provide trade credits, facilitating payments for goods and services across borders, and
improving cash flow for exporters and importers.
• Examples of EXIM Banks:
• Export-Import Bank of the United States (EXIM Bank): Provides financing to support U.S. businesses exporting
goods and services.
• Export-Import Bank of India (EXIM India): Promotes exports and supports the development of Indian companies
globally.

25. • Key EXIM Terms:
• Export Financing: Financial products that help exporters cover the costs of producing and
shipping goods abroad. This might include loans, lines of credit, or advance payments.
• Import Financing: Similar to export financing, but focused on helping businesses pay for
goods imported from other countries. This could include trade credit, letters of credit, or
bank guarantees.
• Letters of Credit (L/C): A financial instrument issued by a bank to guarantee payment to the
seller once goods are shipped. It ensures the seller is paid, and the buyer receives the goods.
• Trade Credit Insurance: Insurance that protects exporters from the risk of non-payment by
foreign buyers. This is important when dealing with unfamiliar or unstable markets.

26. Benefits of EXIM Activities:
• Economic Growth: EXIM activities help businesses access international markets, boosting overall economic
growth. They can increase exports, create jobs, and contribute to higher national income.
• Risk Mitigation: EXIM banks provide mechanisms to reduce the risks associated with international trade, such
as political instability, currency fluctuations, and the potential default of foreign buyers.
• Global Trade Promotion: EXIM activities enable businesses to take part in global trade and participate in the
international value chain, often increasing their competitiveness.
Challenges in EXIM Trade:
• Payment Risks: There is always a risk of delayed payments or default when dealing with foreign buyers. This
is why many businesses use services like letters of credit or insurance from EXIM banks.
• Regulatory Barriers: International trade often faces regulations, tariffs, and quotas that can make it difficult
to move goods across borders.
• Political and Economic Instability: Trade with countries facing political instability or economic downturns
can be risky, as there’s a higher chance of defaults, non-payment, or loss of investment.

27. NABARD
• NABARD stands for the National Bank for Agriculture and Rural Development, which is
an apex development financial institution in India. It plays a pivotal role in promoting
sustainable and inclusive rural development, with a particular focus on agriculture and
rural welfare. Established in 1982 by an Act of Parliament, NABARD's main objective is to
provide and promote credit and financial services to agriculture and rural development
projects.

28. Key Functions and Roles of NABARD
• Agriculture and Rural Credit.
• Promoting Rural Development.
• Refinancing and Credit Facilities.
• Regulation of Rural Banks.
• Financial Inclusion.
• Support for SHGs and Microfinance.
• Research and Policy Advocacy.
• Climate Change and Sustainability Initiatives.

29. Key Programs and Schemes by NABARD
•Kisan Credit Card (KCC): A scheme to provide short-term credit to
farmers for their agricultural activities.
•Rural Infrastructure Development Fund (RIDF): A fund aimed at
supporting rural infrastructure development.
•NABARD’s Rural Non-Farm Sector (RNFS) Programs: NABARD
provides financial assistance for non-farm sector activities such as rural
enterprises, micro and small industries, etc.
•Development of Watershed Areas: NABARD supports watershed
management programs that help conserve water and improve agricultural
productivity in drought-prone areas.

30. SIDBI
• SIDBI stands for Small Industries Development Bank of India. It is a development bank
that primarily focuses on promoting and financing the growth of micro, small, and medium
enterprises (MSMEs) in India. Established in 1990, SIDBI’s primary objective is to provide
financial and developmental support to small and medium-sized businesses, which are
considered vital to India’s economic growth, employment generation, and innovation.

31. Key Functions and Roles of SIDBI:
• Financial Support to MSMEs.
• Promoting Entrepreneurship.
• Refinancing for MSME Credit.
• Development of Infrastructure and Technology.
• Regulatory and Policy Advocacy:
• MSME Development and Awareness Programs:
• Specialized Financing Schemes: