The document provides an overview of the financial and banking system in India, detailing the structure, characteristics, and operational frameworks of various banking institutions, including commercial banks, regional rural banks, and cooperative banks. It explains payment and settlement systems like NEFT, RTGS, and IMPS, along with their features and applications, and discusses the functions of development banks such as NABARD, SIDBI, and IFCI in supporting industrial and agricultural development. Additionally, it covers monetary policy tools used by the Reserve Bank of India to manage the economy and the role of the money market in facilitating short-term borrowing and investment.

1. Unit 04
Dr. Vasim Ahmad
(Associate Professor)

2. Structure and Characteristics of Financial &
Banking System in India
• Overview of the Indian Banking System:
o The Indian banking system is structured into different categories: Commercial Banks,
Regional Rural Banks (RRBs), Cooperative Banks, and the Reserve Bank of India
(RBI) at the top.
o Commercial Banks: These are further divided into public sector banks (like State
Bank of India), private sector banks, and foreign banks operating in India.
o Regional Rural Banks (RRBs): These are banks that focus on rural areas to provide
financial services to small and marginal farmers, artisans, and rural traders.
o Cooperative Banks: Operate in urban and rural areas, catering to the needs of
agriculture, small-scale industries, and trade.

3. Characteristics:
▪ Diverse Institutions: Includes a mix of public, private, foreign,
and cooperative banks.
▪ Regulatory Framework: Governed by the Reserve Bank of
India which ensures stability and efficiency.
▪ Example: The RBI controls the issuance of currency and
manages the country’s monetary policy.

4. Payment and Settlement System: NEFT, RTGS,
IMPS
o NEFT (National Electronic Funds Transfer):
▪ Used for transferring funds from one bank to another across India.
▪ Operates on a deferred settlement basis (batches processed at regular intervals).
▪ Example: A customer in Mumbai can transfer money to someone in Delhi using
NEFT.
o RTGS (Real-Time Gross Settlement):
▪ Used for high-value transactions where funds are transferred in real-time and on a
gross basis.
▪ Ideal for large-value transfers that need immediate clearing.
▪ Example: Businesses use RTGS to make large payments, such as buying
machinery.

5. o IMPS (Immediate Payment Service):
▪ Provides 24/7 real-time fund transfer, including on weekends
and holidays.
▪ Popular for small, quick transactions like paying utility bills.
▪ Example: Sending money instantly via mobile banking.

6. Feature
NEFT (National Electronic Funds
Transfer)
RTGS (Real-Time Gross
Settlement)
IMPS (Immediate Payment
Service)
Settlement Type
Deferred net settlement (transactions
are settled in batches)
Real-time settlement (transactions
are settled individually in real-time)
Real-time settlement (transactions
are settled individually in real-time)
Timings
Available 24x7 with 48 half-hourly
batches throughout the day
Available 24x7 including weekends
and holidays
Available 24x7 including weekends
and holidays
Transfer Speed
Transactions are processed in
batches, so it may take a few hours
Immediate transfer, usually within
seconds
Immediate transfer, typically within
seconds
Transaction Limits
No minimum limit; maximum limit
depends on the bank’s policy
Minimum limit: Rs. 2 lakhs; No
maximum limit
No minimum limit; maximum limit
depends on the bank’s policy
Use Case
Suitable for regular transactions like
paying bills, transferring money
between accounts, etc.
Ideal for high-value transactions that
need instant settlement, such as large
business payments
Suitable for small and instant
transactions, like mobile payments,
bill payments, and personal transfers
Service Availability
Operates on a 24x7 basis but
processes transactions in half-hourly
batches
Operates on a 24x7 basis, providing
immediate funds transfer
Operates on a 24x7 basis, providing
immediate funds transfer
Charges
Nominal charges, typically lower
than RTGS
Higher charges due to the immediate
and large-value nature of
transactions
Nominal charges, typically very low
or free depending on the bank
Example
A customer transfers Rs. 10,000 to a
friend’s account in another bank; the
amount is credited within a few
A business transfers Rs. 5 lakhs to a
supplier; the amount is credited
A person pays Rs. 500 to a
shopkeeper via mobile banking; the

7. • Examples:
• NEFT Example: Suppose Ramesh needs to transfer Rs. 10,000 to his
sister's account in another bank. He initiates the NEFT transaction at 10
AM, and the money is typically credited to her account by 1 PM
(depending on the batch timing).
• RTGS Example: A company wants to pay Rs. 5 lakhs to a vendor
immediately. The company uses RTGS to transfer the amount, and the
vendor receives the funds within seconds.
• IMPS Example: Priya needs to send Rs. 1,000 to her friend immediately
to pay for a bill. She uses IMPS via her mobile banking app, and the
money is transferred instantly, even though it’s late at night.

8. E-wallet Concept
• What is an E-wallet?
o Definition: An E-wallet is a digital wallet that stores payment information
securely and allows users to make transactions electronically.
o How it Works: Users load money into the wallet via bank transfer or credit
card and then use the wallet to pay for goods and services online or in-
store.
o Popular E-wallets in India:
▪ Paytm: Widely used for mobile recharges, bill payments, and online
shopping.
▪ Google Pay: Integrated with UPI (Unified Payments Interface) for
seamless bank-to-bank transfers.

9. ▪ Advantages:
▪ Convenience: No need to carry cash; payments can be made
directly from the phone.
▪ Security: Encrypted transactions and the ability to set limits
reduce the risk of theft.
▪ Example: Paying for groceries using Paytm at a local store.

10. Banking Services
• Core Banking Services:
o Deposit Accounts: Savings accounts, current accounts, and fixed deposits
where customers can store their money securely.
o Loan Services: Personal loans, home loans, and business loans provided
based on credit assessment.
o Remittance Services: Sending money domestically or internationally using
services like NEFT, RTGS, and IMPS.

11. o Additional Services:
▪ ATM Services: Access cash, check balances, and transfer funds through
Automated Teller Machines.
▪ Online Banking: Manage accounts, pay bills, and transfer money using
the internet.
▪ Mobile Banking: Access banking services using mobile apps.
o Example: A customer uses online banking to pay their electricity bill and
checks their account balance using mobile banking.

12. Indian Money Market and Banks
o What is the Money Market?
▪ A segment of the financial market where short-term borrowing, lending,
buying, and selling with original maturities of one year or less take place.
o Key Instruments in the Money Market:
▪ Treasury Bills (T-Bills): Short-term debt instruments issued by the
government.
▪ Commercial Papers (CPs): Unsecured, short-term debt instruments
issued by corporations.
▪ Certificates of Deposit (CDs): Issued by banks for a specified period at a
specified interest rate.

13. Treasury Bills (T-bills)
Treasury Bills (T-bills) are short-term government securities issued by the Reserve
Bank of India (RBI) on behalf of the Indian government. They are used to raise
funds for short-term needs and have maturities of 91 days, 182 days, and 364
days. T-bills are issued at a discount to their face value, and the investor receives
the full face value upon maturity.
Example:
Face Value of T-bill: ₹100,000
Discounted Price: ₹98,500 (the price at which the investor buys the T-bill)
Maturity: 91 days (for example)
When the T-bill matures in 91 days, the government will pay the investor the face
value of ₹100,000. The difference between the discounted price and the face
value is the investor’s return, which in this case would be ₹1,500.
T-bills are considered a safe investment as they are backed by the Indian
government, and their returns are exempt from state and local taxes.

14. Comercial Papers (CPs)
Commercial Papers (CPs) are unsecured, short-term debt instruments issued by
corporations, financial institutions, or other large entities to raise capital for short-
term financial needs like working capital or to cover other operational expenses. They
are typically issued at a discount and have maturities ranging from 7 days to 1 year.
Example:
A company might issue a Commercial Paper with the following terms:
Face Value of CP: ₹10,00,000
Discounted Price: ₹9,80,000
Maturity: 90 days
In this case, the company raises ₹9,80,000 today by issuing the CP. Upon maturity, the
company will pay ₹10,00,000 to the investor, and the difference of ₹20,000
represents the investor's return

15. Certificate of Deposit (CD)
A Certificate of Deposit (CD) is a short-term, fixed deposit instrument issued by
banks and financial institutions to raise capital. It is a negotiable instrument,
meaning it can be transferred or sold in the secondary market. In India, CDs are
typically issued in denominations of ₹1 lakh and multiples thereof, with maturities
ranging from 7 days to 1 year (short-term).
The issuing bank pays a fixed interest rate, which is determined at the time of
issuance, and the investor receives the principal amount along with the interest at
the time of maturity.
Example:
Face Value of CD: ₹5,00,000
Interest Rate: 6% per annum
Maturity: 1 year
In this case, the investor would invest ₹5,00,000 in the CD at an interest rate of 6%
for one year. At the end of the year, the investor would receive ₹5,00,000 +
₹30,000 (interest for one year), totaling ₹5,30,000.

16. Differences from Other Instruments:
Unlike Treasury Bills (T-Bills), which are issued by the government,
CDs are issued by banks, making them slightly riskier.
Compared to Commercial Papers (CPs), which are unsecured, CDs
are typically secured by the issuing bank's assets, adding an
additional layer of safety.
In India, CDs are mainly used by institutional investors for short-
term investments and are an important part of the money market.
They offer a fixed return, making them a relatively low-risk
investment option.

17. o Role of Banks in the Money Market:
▪ Banks participate actively by issuing CDs and investing
in T-Bills.
▪ Example: A bank might issue a certificate of deposit to
a corporate customer seeking a safe place to park excess
funds for three months.

18. Indian Monetary Policy & System
• What is Monetary Policy?
o Definition: The process by which the Reserve Bank of India (RBI) manages the supply of money in the
economy primarily through interest rates to achieve macroeconomic objectives like controlling inflation,
consumption, growth, and liquidity.
o Key Components of Monetary Policy:
▪ Repo Rate: The rate at which the RBI lends money to commercial banks. Lowering the repo rate
can stimulate economic growth by making borrowing cheaper.
▪ Reverse Repo Rate: The rate at which the RBI borrows money from commercial banks. Increasing
this rate encourages banks to park their funds with the RBI, thus reducing the money supply in the
economy.
▪ CRR (Cash Reserve Ratio): The percentage of a bank’s total deposits that must be held in reserve
with the RBI.
• Example: To control inflation, the RBI might increase the repo rate, making loans more expensive, which
reduces spending and curbs inflation.

19. Development Banking
• What are Development Banks?
o Definition: Financial institutions that provide long-term capital for the development
of industry and infrastructure.
o Key Functions:
▪ Project Finance: Providing funds for large infrastructure projects like roads,
bridges, and power plants.
▪ Technical Assistance: Offering expertise and advice on project management and
execution.
▪ Promoting Industrial Growth: Supporting new industries by providing the
necessary financial resources.
o Example: Industrial Development Bank of India (IDBI) was established to provide
credit and financial support for the growth of industries.

20. Financial Institutions: NABARD, SIDBI, IFCI
• NABARD (National Bank for Agriculture and Rural Development):
o Role: Focuses on the development of agriculture and rural areas by
providing financial support to farmers, rural artisans, and agricultural
cooperatives.
o Key Activities: Refinancing institutions that provide credit to rural
sectors, supporting rural infrastructure development, and promoting
sustainable agricultural practices.
o Example: NABARD provides low-interest loans to farmers for
purchasing seeds and fertilizers.

21. NABARD (National Bank for Agriculture and
Rural Development):
• Established: 1982
• Headquarters: Mumbai, India
• Role:
o NABARD is focused on the development of agriculture and rural areas in India.
o It provides financial support to farmers, rural artisans, and agricultural cooperatives.
o NABARD refinances institutions that provide credit to rural sectors and supports rural infrastructure development.
• Key Activities:
o Providing low-interest loans for agricultural activities.
o Supporting sustainable agricultural practices.
o Promoting rural development through financial inclusion.
• Example: NABARD provides credit to rural banks and cooperatives that offer loans to farmers for purchasing seeds,
fertilizers, and equipment.

22. • SIDBI (Small Industries Development Bank of India):
o Role: Aims to promote, finance, and develop small-scale industries
in India.
o Key Activities: Offering credit to small businesses, supporting
entrepreneurship, and facilitating the growth of the micro, small,
and medium enterprises (MSME) sector.
o Example: SIDBI offers loans to a small business owner looking to
expand their production capacity.

23. SIDBI (Small Industries Development Bank of
India):
• Established: 1990
• Headquarters: Lucknow, India
• Role:
o SIDBI is dedicated to promoting, financing, and developing small-scale industries in India.
o It provides financial assistance to the micro, small, and medium enterprises (MSME) sector.
o SIDBI plays a vital role in fostering entrepreneurship and supporting the growth of small businesses.
• Key Activities:
o Offering direct loans to small and medium enterprises (SMEs).
o Providing equity support and refinancing facilities to MSMEs.
o Facilitating the availability of credit and capital for small-scale industries.
• Example: SIDBI extends loans to a small business owner who wants to purchase new machinery to increase
production.

24. • IFCI (Industrial Finance Corporation of India):
o Role: Provides financial support for industrial development in India.
o Key Activities: Financing large-scale industrial projects, providing loans, and
underwriting the issue of shares and debentures.
o Example: IFCI finances the expansion of a steel manufacturing plant by
providing long-term loans.

25. IFCI (Industrial Finance Corporation of India):
• Established: 1948
• Headquarters: New Delhi, India
• Role:
o IFCI was set up to provide long-term financial support for industrial development in India.
o It offers financial assistance for the establishment and expansion of industrial projects.
o IFCI also underwrites and subscribes to shares and debentures of companies.
• Key Activities:
o Financing large-scale industrial projects, including infrastructure and manufacturing.
o Providing loans and credit facilities for industrial growth.
o Underwriting the issue of stocks and bonds to support industrial ventures.
• Example: IFCI finances the expansion of a manufacturing plant by providing long-term loans and financial advice.