Banking Banking Awareness Financial Institutions in India Financial Institutions in India

Financial Institutions in India

Category : Banking


Financial Institutions in India



It is the procurement (to get, obtain) of funds and effective utilization of funds. It is the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities. Finance consists of financial system which include the public, private and government spaces and the study of finance and financial instruments, which can relate to countless assets and liabilities.


Categorization of Finance

Finance can be categorised into three types according to their objectivity

  • Short Term Finance It is often referred to as bridging finance, which usually refers to loans mostly offered on terms of up to 15 months.
  • Mid Term Finance This type of finance is given for longer period. It is for period saying from 15 months to 5 yr. Prominently it is given for machines, land separation, etc.
  • Long Term Finance These are given for term extending more than 5 yr. It is given for creating permanent structures.


Financial Institutions

Financial institutions of Indian money market are


Organized Sector

Organised sector of Indian money market is that sector whose parts and activities are systematically coordinated by the monetary authority.

It comprises of the folio-wing institutions

  • Reserve Bank of India At the apex of India, money market is the Reserve Bank of India. It is the Central Bank of the country.
  • Commercial Banks The Commercial Banks dominate the organised sector. It includes Public Sector Banks (State Bank of India + its Associate Banks + Nationalised Banks + Regional Rural Banks) and Private Sector Banks (Scheduled Banks + Non-Scheduled Banks + Foreign Banks).
  • Co-operative Banks They are a part of co-operative credit institutions that have a three-tier structure. At the top, there are State Co-operative Banks. At the district level, there are Central Co-operative Banks. At local level, there are Rural Primary Co-operative Banks and Urban Co-operative Banks.


Unorganised Sector

The unorganised market is that market whose activites are not systematically coordinated by the monetary authority. It is largely made up of indigenous bankers, moneylenders, Chit funds, Nidhis, etc.


Sources of Finances

There are two types of sources


Institutional Sources

The organisation and institutes which are established to provide loan are called institutional sources of finance. The main purpose of these institution are to arrange the finance. Insurance companies, banks, co-operative societies, UTI are some of the examples of financial institutions.


Non-Institutional Sources

Loan taken from friends, relatives, money lenders, mahajans are called non-institutional sources of finance.


Financial Instruments

Financial instruments provides short term credit. These include Bills, Treasury Bills, Promissory Notes, Hundis, Certificates of Deposits (CD) and Commercial Papers.


Financial Institutions for Agriculture

For the purpose of giving loan to agricultural sector, many financial institutions have been created jointly by government of India and RBI. Few of these institutions are co-operative bank like RRBs, NABARD, etc.


Commercial Bank

From 1st Fob, 1969, the government imposed social control on banks by introducing certain provisions in the Banking Regulation Act, 1949. These were intended to ensure that the bank advances were not confined to large scale industries and big business houses, but were also directed, in due proportion to other important sectors like agriculture, small scale industries and exports.


Co-operative Credit Societies

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 in rural as well as in urban areas. The functions of these banks are just similar to that of Commercial Banks.


Land Development Bank

Special type of credit societies called Land Development Bank have been formed to meet the long term credit requirement of farmers. These banks are now called state co-operative Agricultural and Rural Development Bank (DB).

These banks were first established in the Jhang area of undivided Punjab and were called land mortgage bank. But its real start corresponds to the years 1929, when one central land development- bank was opened in Madras. The banks seizes long term loan against mortgage of land.


Regional Rural Bank (RRB)

In 1976, the Parliament enacted the Regional Rural Banks Act, 1976 to provide for the incorporation, regulation and winding up of Regional Rural Banks. The Act had been made effective from the 26th Sep, 1975 and the development process of RRBs started on 2 October, 1975.

Regional Rural Banks are available almost in every State and UTs. The states and UTs, where there is no presence of RRBs are Goa, Sikkim, Delhi, Chandigarh, Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haweli, Daman and Diu. The equity of the RRBs is contributed by the Central Government, concerned State Government and the sponsor bank in the proportion of 50:15:35.


First Five RRBs

  • Moradabad (UP)                      
  • Gorakhpur (UP)
  • Bhiwani (Haryana)                      
  • Jaipur (Rajasthan)
  • Malde (Paschimbanga)


Regional Rural Banks (Amendment) Bill, 2014

Parliament has passed Regional Rural Banks (Amendment) Bill, 2014. Key facts about Regional Rural Banks (Amendment) Bill, 2014 are-

  • This amendment bill increases the authorized capital of each Regional Rural Bank (RRB) from Rs. 5 crore to Rs. 2000 crore divided into Rs. 200 crore of fully paid share of Rs. 10 each. ,
  • It also provides that the authorised capital issued by any RRB's shall not be reduced below Rs. 1 crore. The Bill allows RRBs to raise capital from sources other than the central and state governments, and sponsor banks.

The Bill adds provision that any person who is a director of an RRB is not eligible to be on the Board of Directors of another RRB.


Important Committees of Regional Rural Bank

  • Committee on Rural Banks (Dantwala Committee, 1978) This committee suggested that the Commercial Banks functioning in the area of operation of RRBs should progressively entrust the credit business of their rural branches to RRBs keeping in view the capacity of RRBs to shoulder the added responsibility.
  • Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD, 1981) This committee underlined the importance of RRBs in strengthening of rural credit. According to it, the role of RRBs should be mannered as a multipurpose agencies in rural area.
  • Khusro Committee (1989) This committee gave the importance to the methodology of RRBs and has also done a remarkable work by providing the banking services to rural areas.
  • Advisory Committee on Flow of Credit to Agriculture and Related Activities (Dr Vyas Committee, 2004) All RRBs in the North Eastern states should be merged into a Zonal bank on stand alone basis, the equity of which is to be provided by NABARD, SBI and UBI in the ratio of 26:37:37 through a holding company.
  • Kelkar Committee (2004) This committee re-reviewed the objectives of RRB and also recommended to increase the capital base of each RRB.
  • Chakvarti Committee (2010) This committee was formed in 2010 to review the financial status of RRB. It recommended the recapitalisation of 40 RRBs.


Lead Bank Scheme

Lead Bank scheme was introduced in 1969, based on the recommendation of the Gadgil study Group.

The lead bank role is to act as a consortium leader for co-ordinating the efforts of all credit institutions in each of the allotted districts for expansion of branch banking facilities and for meeting the credit needs of the rural economy.                                

For the preparation of District Credit Plans and monitoring their implementation a Lead Bank Officer (LBO) now designated as Lead District Manager was appointed in 1979.         


National Bank for Agricultural and Rural Development (NABARD)

It is one of the subsidiaries where the majority stake is held by the Reserve Bank. NABARD is 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.


RIDF (Rural Infrastructure Development Fund)

Deficient, Rural infrastructure hinders both social and economic development. Economists have explicitly emphasised on the direct correlation between the index of infrastructure development and rural development. Rural roads and bridges under RIDF have improved market access to farmers. Check dams and irrigation structures have augmented their water resources.


Priority Sector Lending Policy (PSLP)

RBI introduced the system of priority sector lending to ensure that banks increase their involvement in the financing of priority sectors like agriculture, small industries, etc.

Presently, all domestic Commercial Banks and Foreign Banks with more than 20 branches are to lend 40% of their adjusted Net Bank Credit to priority sector. Banks who fail to achieve priority sector targets have to contribute funds to financial institutions like SIDBI/RIDF etc., as specified by RBI.


Kisan Credit Card Yojana

It was started by RBI and NABARD in August, 1998 to help the farmers across with credit timely and adequately. Since, 1998 about 10.78 crore KCCS has been issued upto 2011.


Financial Institutions for Industries Public Issues

Capital market constitutes primary (new issue market) and secondary (stock) market. The primary market helps the public and private sector companies in raising finance mainly for their new projects, expansion, modernisation and acquisitions. Secondary market provides liquidity for the financial instrument (equity, preference share, and debenture/land) through adequate market ability and price continuity.


Public Deposits

Public deposits are an important source of financing the medium term and long term requirement of company. It implies any money received by a company through deposit" or loan collected from public. The public includes the general public, employee and shareholders of company, but excludes the money received in the form of shares and debentures.


Commercial Banks

Banks are the dominant financial intermediaries in developing countries like India. It is an important source of industrial finance. The dependence on bank for finance could vary according to the size of the companies. The small scale industrial units have increased their dependence on banks for loans because they have virtually no access to capital market.


Industrial Bank

It is a financial institution with a limited scope of services. Industrial banks sell certificates that are labeled as investment shares and also accept customer deposits. They then invest the proceeds in instalment loans for consumers and small businesses. These banks are also known as Morns banks or industrial loan companies. The loans offered by industrial banks are often secured by a third party who acts as guarantor for the loan.


Financial Institutions for Specific Areas

Export-Import Bank of India (EXIM) Exim Bank of India established on 1st January, 1982 under the Export-Import Bank of India Act, 1981 is the premier export finance institution in India.

Function Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the small and medium enterprises.


Unit Trust of India (UTI)

Unit Trust of India is a financial organisation in India, which was created by the UTI Act passed by the Parliament in 30th Dec, 1963 and UTI established in 1963. UTI Bank changed its name to AXIS Bank with effect from 1st Aug, 2007.

Function It offers financial services to customer segments covering large and mid-corporates, MSME, agriculture and retail businesses.


Indian Industrial Development Bank of India (IDBI)

It was established in July, 1964 by an Act of Parliament.

Function To provide credit and other facilities for the development of the fledgling Indian industry. IDBI Bank is at par with nationalized banks and the SBI Group as far as government ownership is concerned.


Industrial Credit and Investment Corporation of India (ICICI)

ICICI Bank an Indian financial institution, was established by the Industrial Credit and Investment Corporation of India, as a wholly owned subsidiary in 1955. In 2002, ICICI managed with ICICI Bank.

Function It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life, non-life insurance, venture capital and asset management.


National Housing Bank (NHB)

It was setup on 9th July, 1988 under the National Housing Bank Act, 1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing.

NHB has been established to achieve, among other things, the following objectives

  • To provide a sound, healthy, viable and cost effective housing finance system to all segments of the population and to integrate the housing finance system with the overall financial system.
  • To make housing credit more affordable.
  • To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.


Small Industries Development Bank of India (SIDBI)

Small Industries Development Bank of India (SIDBI), setup on 2nd April, 1990 under an Act of Indian Parliament, acts as the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Coordination of the functions of the institutions engaged in similar activities. Currently the ownership is held by Government of India owned / controlled institutions.

SIDBI has founded Credit Guarantee Fund Trust for Micro and Small Enterprises, SIDBI Venture Capital Ltd. SME Rating Agency of India Ltd. (SMERA). Another entity founded by SIDBI is ISARC- India SME Asset Reconstruction Company in 2009, as specialised entities for NPA resolution for SME.


Change in the definition of Industrial Units

The definition of industrial units has been expended as per the SIDBI Amendment Act, 2012 and from now tourism related services, road development, entertainment, construction and floriculture etc have been termed as industrial units. Due to this the units limited investment will get direct Loan from SIDBI.

New initiative of SIDBI

On 18th Aug, 2015 Finance MinisterArun Jaitley launched two funds: the India Aspiration Fund (IAF) and SIDBI. Make in India Loan for Enterprises (SMILE) under Small Industries Development Bank of India (SIDBI) are in line to carter funding for startups and to aid small enterprises in India. The Union Cabinet has approved setting up of Fund of Funds for Startups (FFS) under SIDBI for extending support to Startups Yojana.


India Infrastructure Finance Company Ltd (IIFCL)

IIFCL is a wholly-owned Government of India company setup in 2006 to provide long term finance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called India Infrastructure Finance Company Ltd (IIFCL, broadly referred to as SIFTI.

IIFCL has been registered as a Non-Banking Financial Companies- non-deposit- Infrastructure Finance Companies (NBFC-ND-IFC) with RBI since September, 2013. IIFCL raises funds through long term resources from both domestic as well as global markets.


Industrial Finance Corporation of India (IFCI)

IFCI Ltd. a Statutory Corporation was set up on 1 July, 1948 through ' The Industrial Finance Corporation of India Act, 1948' of Parliament to provide medium and long term finance to industry.

IFCI is also a Systemically Important Non-Deposit taking Non-Banking Finance Company (NBFC-ND-S11) registered with the Reserve Bank of India. IFCI became a Government controlled company subsequent to enhancement of equity shareholding to 55.53% by Government of India on 21st Dec, 2012.


Irrigation and Water Resources Finance Corporation (IWRFC)

In the Budget speech of 2008-09, the Finance Minister announced that massive investments were required to be made in Irrigation Project and hence IWRFC was established with an initial capital of Rs. 100 crores.

The Company commenced its operations in the financial year 2012-13.Further the Government accorded its approval on 13th Dec, 2013 for making IWRFC a 100% subsidiary of India. Infrastructure Finance Company Limited (IIFCL) is a specialised NBFC-IFC Company wholly owned by Government of India.


Industrial Investment Bank of India (IIBI)

The Industrial Investment Bank of India is a 100% government of India-owned financial investment institution. It was established in 1971, The bank was headquartered at Kolkata.

IIBI was initially setup as Industrial Reconstruction Corporation Limited (IRCL) during 1971 when it was renamed Industrial Reconstruction bank of India with effect from 20th Mar, 1985 under RBI Act, 1984.

IIBI offered a wide range of products and services, including term loan assistance for project finance, short duration non-project asset-backed financing, working capital/other short term loans to companies, equity subscription, asset credit, equipment finance and investments in capital market and money market instruments.


Important Financial Institution of India


Regional Rural Bank (RRB)        

2nd Oct, 1975

Risk Capital and Technology Finance Corporation Ltd. (RCTFC)

March, 1975

Housing Development Finance Corporation Ltd. (HDFC)



12th July, 1982

Industrial Reconstruction Bank of India(IRBI)

20th Mar, 1985

Infrastructure Leasing and Financial Services Ltd. (ILFS)



Financial Stability and Development Council (FSDC)

Financial Stability and Development Council is apex-level body constituted by government of India.

The idea to create such a super regulatory body was first mooted by Raghuram Rajan Committee in 2008. FSDC deals with macro prudential and financial regularities in the entire financial sector of India.


Tit -Bits

  • NHB launched RESIDEX for tracking prices of residential properties in India in 2007,
  • Focus area of IWRFC is micro irrigation, contract farming, waste water, management and sanitation etc.
  • 28 state finance corporation are operating along with 28 state Industrial Development Corp (SIDC) (as on 2015),


Non-Banking Financial Company (NBFC)

It is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/ securities issued by government or local authority or other marketable securities of like nature, leasing, hire-purchase, insurance business, chit business.

NBFCs provide range of financial services to their clients. Types of services under non-banking finance services include the following

  • Hire purchase services
  • Leasing services
  • Housing finance services
  • Asset management services
  • Venture capital services
  • Mutual benefit finance services (Nidhi) banks.

Since, they perform the basic twin functions of attracting deposit from the public and are making loans. NBFCs are essentially banks, however, unlike Commercial Banks, they are not incorporated as a bank and are not governed by the provision of the Banking Regulation Act, 1949.


RBI directions for NBFCs functioning

  • With the enactment of RBI (Amendment) Act, 1997, the RBI now controls the functioning of NBFCs.
  • NBFCs as a whole account for 11.2% of assets of the total financial system.
  • Two broad categories of NBFCs are
  1. Deposit taking NBFCs (NBFCs-D)
  2. Non-deposit taking NBFCs (NBFCs-ND).
  • Capital to Risk-weighted Assets Ratio (CRAR) norms were made applicable to NBFCs-D in 1998. The CRAR norm for NBFC-D is 12% (15% in case of unrated NBFCs-D).
  • NBFCs-ND-SI are Non-Deposit taking systemically important NBFCs as they have asset size of 100 crore and above.
  • Mutual Funds are the most important among the newer capital market institutions. MFs function is to mobilise the savings of the general public and invest them in stock market securities.
  • Venture Capital Funds (VCFs) essentially give commercial support to new ideas for the introduction and adaptation of new technologies.
  • Government launched the National Venture Fund for Software and IT Industry (NVFSIT) to provide technology development especially for small and medium enterprises. NVFSIT is managed by SIDBI.


Difference between Bank and NBFCs

  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.


Financial Inclusion

It refers to the delivery of banking service at an affordable cost to the vast sections of disadvantaged and low income groups of the population. The purpose of financial inclusion is to provide access to banking, access to affordable credit and access to free information on money matters. This concept has become a part of public policy so as to make available banking and payment services to the entire population without discrimination. The primary aim is to avoid the pitfalls of financial exclusion in the form of social tension arising from lack of empowerment of the low income strata of the population.


Steps taken for Financial Inclusion

  • RBI opened No Frills accounts for poor people. It is later renamed as Basic Savings Bank Deposit Account (BSBDA).
  • RBI has ordered the banks to open at least 25% of their new branches in unbanked rural centres.
  • Government's introduced Direct Benefit Transfer (DBT) initiative. Money will be directly sent to beneficiary's bank account.
  • PMJDY, Payments Bank and small finance bank were started under the financial inclusion.
  • RBI relaxed Know Your Customer (KYC) norms for small value accounts. RBI allows customer accounts to be opened without any documentary proof of identity or current address if the amounts involved are less than Rs. 50000.
  • RBI permitted the use of Aadhaar card as a proof, for opening bank account. General purpose Credit Card (GCC) and Kisan Credit Card (KCC) help people to get loans easily.
  • Post office has tied up with LIC, offering variety of insurance schemes, particularly targeting rural junta e.g. Gram Surakha, Suvidha Sumangal, etc.



Co-operative Marketing

It is a term used in the world of business advertisements to mean marketing initiative that involves more than one institution. Market value means the probable price of a product or service in the market.


Co-operative Marketing Mechanism

  • NAFED (National Agricultural Cooperative Marketing Federation India Limited) It was established on 2nd Oct. 1958. It is registered under the Multistate Co-operative Societies Act. NAFED was setup with objective to promote co-operative marketing of agricultural produce to benefit farmers. It organises, promotes and develops marketing, processing and storage of agricultural, horticultural and forest produce.


  • TRIFED (Tribal Co-operative Marketing Development Federation of India Limited) It came into existence on 6th Aug, 1987 and got registered under the multistate co-operative societies Act, 1984. The main objective of TRIFED is to serve the interest of its member in more than one state for the social and economic betterment of its member by conducting its affair in professional, democratic and autonomous manner through self-help and mutual co-operation for undertaking marketing development of the tribal products.

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