Types of financial institutions

Financial institutions can be classified into two categories:
A. Banking Institutions
B. Non-Banking Institutions

A. Banking Institutions 
Indian banking industry is subject to the control of the central Bank (i.e. Reserve bank of India). The RBI as the apec institution organises, runs, supervises, regulates and develops the monetary system and the financial system of the country. The main legislation governing commercial banks in India is the Banking Regulations Act, 1949. The Indian Banking institutions can be broadly classified into two categories:
1.Organised Sector
2. Unorganised Sector

1. Organised Sector
The organised banking sector consists of commercial banks, cooperative banks and the regional rural banks.
(a) Commercial Banks. The commercial banks may be scheduled banks or non-banks. At present only one bank is a non-scheduled bank. All other banks are scheduled banks. The commercial banks consist of 27 public sector banks, private sector banks and foreign banks. Prior to 1969, all major banks with the exception of State Bank of India were in the private sector. An important step towards public sector public sector banking was taken in July, 1969, when 14 major private banks with a deposit base of ₹ 50 crores or more were nationalised. Later in 1980 another 6 were nationalised bringing up the total numbers of banks nationalised to twenty. One of the objective of nationalisation of banks was to make the banking system mass oriented. As a result there was massive branch expansion and high rate of growth. The total number of scheduled banks stood at 92 in 1951 which rose to 273 in 1986 and further to 297 in June, 1997. Commercial banking system in India consisted of 297 scheduled banks (including foreign banks) and one non-scheduled bank at the end of December 2000.
          Traditionally, commercial banks accepted deposits and met the short and medium term funding needs of the industry. But now, since 1990's, banks are also finding the long term needs of the industry particularly the infrastructural sector. The liberalisation measures initiated in the Indian economy, led to the entry of large private sector banks in 1993. This has increased competition among public and private sector banks and quality of services has improved. A major development in the Indian banking industry was the entry of major banks in merchant banking. The merchant bankers are financial intermediaries providing a range of financial services to the corporates and investors. Some of the merchant banker's activities include issue management and underwriting, project counseling and finance, mergers and acquisition advice, portfolio management services etc. Structure of commercial banks, their investment policies etc.

(b) Co-operative Banks: An important segment of the organised sector of Indian banking is the co-operative banking. The segment is represented by a group of societies registered under the Acts of the States relating to co-operative societies. In fact, co-operative societies may be credit societies or non-credit societies.
      Different types of co-operative credit societies are operating in the Indian economy. These institutions can be classified into two broad categories : (a) Rural credit societies which are primarily agricultural ; (b) Urban credit societies which are primarily non-agricultural. For the purpose of agricultural credit there are different co- operative credit institutions to meet different kinds of needs. For example, short and medium term credit is provided three tier federal structure. At top is the apex body I.e.  State co-operative banks, at the grass root level I.e., village level there are primary agricultural credit societies. For medium to long term loans to agricultural, specialized co-operatives societies have been formed. These are called  'Land Development Banks'. The Land development Banks movement started in 1929. In the beginning they were named 'Central Land Mortgage Banks'. Land development banking is a two-tier structure. At the state level there are state or central and development banks. At local level there are branches of these banks and primary land development banks. These land development banks deal with agriculturists directly and also through primary land development banks. At the national level they have formed all-India Land Development Banks' union. 

(c) Regional Rural Banks (RRBs). Regional Rural Banks were set by the state government and the sponsoring commercial banks with the objective of developing the rural economy. Regional rural banks provide banking services and credit to small farmers, small entrepreneurs in the rural areas. The regional rural banks were set up with a view to provide credit facilities to weaker sections. They constitute an important part of the rural financial architecture in India. There were 196 RRBs at the end of June 2002, as compared to 107 in 1981 and 6 in 1975.
      RBI extends refinance assistance at a concessional rate of 3 percent below the bank rate. IDBI, NABARD and SIDBI are also required to provide managerial and financial assistance to RRBs under the Regional Rural Bank Act.
    Government decided to restructure the RBB's on the recommendation of Bhandari Committee on 1994-95. As a result, an amount of ₹ 360 crores was allocated towards the restructuring programme. The State Bank of India took several masures of managerial and financial restructuring including enhancement of issued capital and placements of officers of proven ability to head the RRBs. 175 out of total of 196 RRBs were fully recapitalized by 1998-99.
    NABARD took several policy measures such as quarterly/half yearly review of RRBs by the sponsor banks, framing of Appointment and promotion Rules (1998) for the staff of RRBs, introduction of Kissan Credit Cards, introduction of self-help groups etc. for improving the overall performance of RRBs.

(d) Foreign Banks. Foreign Banks have been in India from British days. ANZ Grindlays Bank has its presence in number of places with 56 branches. The Standard and Chartered Bank has 24 branches and Hongkong Bank 21. All other foreign banks have branches less than 10. Obviously, these banks have concentrated on corporate clients and have been specialising in areas relating to international banking. With the deregulation of banking in 1993, a number of foreign banks are entering India or have got the licenses.
     Such new foreign banks are-
        (1) Barclays Banks
        (2) Bank of Ceylon
        (3) Bank Indonesia International
        (4) State Commercial Banks of Mauritius
        (5) Development Bank of Singapore
        (6) Chase Manhattan Bank
        (7) Dresdner Bank
        (8) Overseas Chinese Bank Corporation
        (9) Chinatrust Commercial Bank
        (10) Krug Thai Banking Public Company Ltd.
        (11) Cho Hung Bank
        (12) Commerz Bank
        (13) Fuji Bank
        (14) Toronto Dominition Bank
         The list is indicative of the fact that India is going to have greater presence of foreign banks in future. However, despite low deposits these foreign banks reflect greater degree of efficiency and productivity .

2. Unorganised sector
In the unorganised banking sector are the indigenous bankers, money lenders, Seths, sahukars carrying out the functions of banking.
(a) Indigenous Bankers. Indigenous bankers are the forefathers of modern commercial banks. These are the individuals or partnership firms performing the banking functions. They also act as financial intermediaries. As the term indigenous indicates, they are the local bankers. The geographical area covered by the indigenous bankers is much larger than the area covered by commercial banks. They can be found in all parts of the country although their names, styles of functioning and functions performed by them may differ. In west india they may be known as Gujrati sheriffs or Marwari, in South India, they may be called Chettiars, in North India they may be called sahukars, etc.
   
      The history of indigenous banking in India dates back to ancient times. The dominance of indigenous bankers can be seen from the fact that they not only provided credit to trade and commerce but at times to the government of the day also. However, with the arrival of the Britishers, the European bankers with the patronage of the rulers started dominating. With the advent of joint stock commercial banking and co-operative banking, the area of operation of indigenous bankers shrank further. Still there are thousands of families consisting mainly of particular communities who are in the business of indigenous banking.

     According to the Indian Central Banking Enquiry Committee (1931), an indigenous banker is any individual or private firm receiving deposits and dealing in hundreds or lending money. Although deposit side is emphasised, these banks do not necessarily depend upon this source entirely, like modern commercial banks. Many among them also use large funds of their own. As against this, money lenders are those whose primary business is money-lending ; such essential banking functions as receiving of deposits or/and dealing in hundreds are outside their operations.

    It may be clarified here that although in common parlance indigenous bankers and money lenders are considered to be the same, the two should not be confused. Money lenders are not the bankers, their business is money lending only, i.e. a pure money lender lends only from his own funds, whereas an indigenous banker raises funds from the public also.

    There is no certainty about the exact number of indigenous bankers operating all over the India. While the banking commission, 1972, estimated their number around 2,000 to 2,500, Tinberg and Aiyer estimated their number to be more than 20,000 in 1980. This figure does not include indigenous bankers of Central and Eastern India but includes the bankers of Calcutta city.

   Taken together money-lenders and indigenous bankers function to lend money to various categories of borrowers and under varying conditions. Money lenders, though also found in urban areas, predominate in villages and themselves conduct agricualture, trade and retail business. Loans are extented to villagers of small means, etc., Loans, if small, are given on the basis of a mere entry in their account books or even on verbal promise, but if large, promissory notes or mortgage of crops or land, or ornaments, etc., are insisted upon. Interest rates are generally very high. since many loans are unproductive purposes, these pile up into big indebtedness, involving heavy burden to generation to generation. Despite attempts at regulating them, restricting their operations and lately of liquidating them, they continue to keep their hold on agriculturists and small borrowers. However, their importance is sure decline as and when such modern institutions as co-operative societies, commercial banks, regional rural banks, etc., are able to make their facilities available easily and in a simple and flexible manner.

      Indigenous bankers provide finance for productive purposes directly to trade and industries, and indirectly, through money-lenders and traders to agriculturists with whom they find it difficult to establish direct relations. They keep in touch with traders and small industrialists and finance marketing on a sizeable scale. Lending is conducted on the basis of promissory notes, or receipts signed by borrowers acknowledging loans, and stating the agreed rate of interest, or bonds written out on stamped legal forms, or through signing of bankers' books by borrowers. For large loans land, houses or other property are held as mortgage.

(b) Money Lenders. Money lenders depend entirely on their own funds for the working capital. Money lenders may be rural or urban, professional or non-professional. They include large framers merchants, traders, arhatias, goldsmiths, village shopkeepers, sradars of labourers, etc. The methods and areas of operation differ from money lender to money lender.
The main characteristics of money lenders are the following.

  1. Their funds are own funds.
  2. Their clients are mainly the weaker sections of society.
  3. Their loans are highly exploitative. They charged very high rates of interest.
  4. Their operations are entirely unregulated.
  5. The credit is prompt and flexible. 
They are able to exploit the weaker sections because of their dependence on them. They enjoy monopoly in their areas of operation.
B. Non-Banking Institutions
The banking institutions may be categorised broadly into two groups.
    (a)Organised Financial Institutions
    (b)Unorganised Financial Institutions


(a) Organised Financial Institutions
The organised non-banking financial institutions include :

1. Development Financial Institutions.
     (i) The institutions like IDBI, ICICI, IIBI, IRDC all India          level.

     (ii) State Finance Corporations (SFCs), State Industrial                Corporations (SIDCs) at the state level.

     (iii) Agriculture Development Finance Institutions as                NABARD, LDBS etc.
      
     Development banks provide medium and long term finance to the corporate and industrial sector and also takes up promotional activities for economic development of the country.

2. Investment Institutions. It includes those financial institutions which mobilise savings of the public at large through various schemes and invest these funds in corporate and government securities. These include LIC, GIC, UTI, and mutual funds.
        
(b) Unorganised financial institutions
       The unorganised non-banking financial institutions include number of non-banking financial companies (NBFCs) providing whole range of financial services. These include hire-purchase and consumer fianance companies, leasing companies, housing finance companies, factoring companies, credit rating agencies, merchant banking companies etc. NBFCs mobilise public funds and provide loanable funds. There has been remarkable increase in the number of such companies since 1990's. The regulatory framework of NBFCs as prescribed by RBI has been discussed in detail in a separate chapter on 'Non-Banking Financial Institutions'.  


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