Exclusive material on Bank and Financial Institutions

1. FINANCIAL MARKET & INSTITUTIONS
UNIT IV : BANKS & FINANCIAL INSTITUTIONS
Prepared by
Mr. Basavaraj M. Naik M.com, UGC NET, KSET
Teaching Assistant,
Department of Studies in Commerce,
Rani Channamma University, Post Graduate Centre, Jamkhandi.

2. Topic covered
❖ Commercial banks and industrial finances
❖ Working capital finance by commercial banks
❖ Term lending
❖ Industrial finance by financial institutions
❖ Performance of Indian banking
❖ Regulatory aspects of banking.

3. What is Bank?
A bank is a financial institution licensed to receive deposits and make loans. Banks
may also provide financial services such as wealth management, currency exchange,
and safe deposit boxes. ... In most countries, banks are regulated by the national
government or central bank.
Commercial Bank:
The term commercial bank refers to a financial institution that accepts deposits,
offers checking account services, makes various loans, and offers basic financial
products like certificates of deposit (CDs) and savings accounts to individuals and
small businesses.

4. Structure of Banks in India

5. Commercial Banks:
Scheduled banks is a banking corporation whose minimum paid up capital
is Rs. 5 lakhs and does not harm the interest of the depositors and that is
under the second schedule of the RBI Act 1934.
Non-scheduled banks are the banks which do not comply with the rules
specified by the Reserve Bank of India, or say the banks which do not come
under the category of scheduled banks.

6. Public Sector Banks (PSB’s)
These banks are the banks where majority stake is held by the government of India.
Examples : SBI, BOI,Canara Bank etc
Private Sector Banks:
These are the banks majority of share capital of bank is help by private individuals
Examples: ICICI, Axis, HDFC etc.
Foreign Banks:
These banks are registered and have their headquarters in a foreign country but operate
in their branches in other country ( like India)
Ex: HSBC, Citibank,Standard Chartered Bank etc.

7. RRB’s
Regional Rural Banks (RRBs) are Indian Scheduled Commercial Banks
(Government Banks) operating at regional level in different States of India. They
have been created with a view of serving primarily the rural areas of India with
basic banking and financial services. However, RRBs may have branches set up
for urban operations and their area of operation may include urban areas too.
Ex: Karnataka Gramin Bank, Karnataka Vikas Grameena Bank

8. CO-Operative Banks:
Cooperative banking is retail and commercial banking organized on a cooperative basis.
Ex:
Primary Urban Coop. Banks
Primary Agriculture Credit Societies
District Central Coop. Banks
State Coop. Banks etc

9. Role/Importance of Commercial banks
● Financial Assistance to Corporate Sector
● Encourage Entrepreneurship
● Ensures to balanced development of the Country
● Development of Industry and trade
● Helps in monetary decision making

10. Industrial Finance:
Finance is considered as the life-force of industry. Without getting adequate
finance industrial development is not at all possible. ... Industries require both
short term, medium term and long term finance for meeting their requirements of
fixed capital expenditure and also to meet their working capital needs.
At the india’s independence, the Indian capital market was under the developed
and commercial banks were not equipped to provide long term finance in such
kind of situation the GOI was established IFCI in July 1948.
This is the only 1st Indian FI’s which was established to finance for industry
sector development.

11. Later, IFCI starts to provide the funds to the institutions which are
engaged in:
➔ Manufacturing Areas
➔ Generating and distributing power
➔ Textile industries
➔ Hotel Industries
➔ Transportation etc.

12. Sources of Industrial Finance:
➢ Shares and Debentures:
Indian industries are normally raising a major portion of their
capital by selling shares in low denominations of Rs. 10 each.
Share may be a preference share or an ordinary share. Debentures
are also issued in the capital market by the companies and in recent
years convertible debentures are gradually becoming more
popular.

13. ➢ Public Deposits : Another source of industrial finance is the deposit
raised from the public.
➢ Commercial Banks: commercial banks are also offering short-term
loans on cash-credit basis on the security of stock and on the
additional guarantee of the managing agent.
➢ Indigenous Bankers:In India indigenous bankers have been rendering
important services to industry in time of their difficulty.

14. Financial institutions which are established for Industrial
Finance?
★ IFCI
★ SFC’s
★ SIDC’s ( State Industrial Development Corporations)
★ ICICI
★ IDBI
★ UTI

15. Working capital Finance by Commercial banks
Working capital is the fund invested in current assets and it is
needed for meeting day to day expenses. Working capital is that
portion of firms capital which is employed in short term operations.
One of the most important function of a commercial bank is to
provide working capital requirement to industries.

16. Forms of Working Capital by Commercial Banks
❏ Cash Credit: cash credit is a loan given to borrower against his current assets
like shares, stock, bonds etc. Here Interest is charged on the amount actually
withdrawn.
❏ Overdraft: Excess funds then the actual balance
❏ Loans: Interest should pay on the total amount of loan irrespective of how much
he withdrawn.
❏ Bill of Exchange: while selling to debtors,
❏ Letter of Credit: A letter issued by bank to another bank to serve as guarantee
for payments made a specified person under specified conditions
❏ Working Capital loans: Additional loan under working capital demand loan
account
❏ Factoring: It is a financial transaction and a type of debtor finance in which a
business sells its accounts invoices to third party at a discount.

17. Securities Required in working capital Finance by Banks
● Hypothecation is the practice where you pledge an asset (in this case, a car) to a
bank when applying for a loan. The bank keeps the car as collateral or security until
you pay it off. Your bank technically “holds” your car during your loan's tenure,
though you physically have possession of it.
● Pledge:a thing that is given as security for the fulfilment of a contract or the payment
of a debt and is liable to forfeiture in the event of failure.
● Lien: A lien is a claim or legal right against assets that are typically used as collateral
to satisfy a debt.
● Mortgage :A mortgage is a debt instrument, secured by the serviceable of specified
real estate property, that the borrower is obliged to pay back with a predetermined set
of payments.

18. Term Lending:
Term lending is a small business Loans.
A term lending is monetary loan that is respond in regular payments
over a period of time.
It is helpful for small business loans, New or expanding the
enterprises and to increase the capital.

19. Industrial Finance By Financial Institutions:
★ IDBI
★ IFCI
★ EXIM Bank
★ NABARD
★ SIDBI
★ NHB
★ UTI
★ LIC
★ Technology Development and information Company India Ltd(TDICI)
★ Indian Infrastructure Finance Company limited etc

20. Benefits of Financial Institutions to the Industrial sector:
● Provide Long, mid and short term funds to industrial sector
● Consultancy and technical services
● Helps to save money and time
● Financial institutions pays all dues on behalf of company and also receive the
receipts which are receivable.
● These financial institutions made available of funds even in the period of recession,
financial crisis etc.

21. Drawbacks of the Financial Institutions regarding
Industrial Finance:
❖ Complexity in issuing the loans
❖ FI’s requires securities to the issue the loans to the industries
❖ FI’s are imposing high rate of interest, transaction costs, fines etc
❖ FI’s take long time to issue the loans
❖ A lot of documents are needed, document verification, signatures, physical
verifications etc. are mandatory.
❖ FI’s will not pay the funds on time whenever you needed irrespective of clearing all
the procedures.

22. Performance of Indian Banking:
The RBI releases the statutory reports for progress of banking sectors. The recent
information about the performance which is released by RBI is as follows:
➢ The regulatory and supervisory policies are prepared to reform, and recapitalisation
(to make bank more strengthen and to meet Capital adequacy norm) of public sector.
➢ Prefer for strengthening the liquidity standards of banks
➢ RBI is monitoring the banks to overcome from the NPA.
➢ Digitalised banking system
➢ Developments in Co-operative Banking

23. Rugulatory aspects of Banking:
RBI regulates and monitor the banking system in India through the provisions of RBI act
1934, and Banking Regulations Act 1949.
The central bank of India issues various guidelines, notifications, and policies time to time
to regulate the banking sector in addition to the foreign exchange management Act 1999
which regulates cross border exchange transactions by Indian entities including banks.

24. Other Regulatory Aspects of Indian Banking are;
● The negotiable Instruments act 1881
● The recovery of ‘Debt Due’ to banks and financial institutions act 1993
● The bankers book evidence act 1891
● The payment and settlement system act 2007
● The securitisation & Reconstrction of financial assets and enforcement of security
interest act 2002
● The deposits insurance and credit guarantee corporation act 1961 etc

25. Banking Ombudsman Act
❖ It's a quasi judicial authority which was introduced by Government of India in
the year 2006.
❖ The banking Ombudsman is a senior official appointed by the RBI to address
customer complaints against deficiency in certain banking services covered
under the grounds of complaint specified under Clause 8 of the Banking
Ombudsman Scheme 2006 ( as amended upto July 1 2017.
❖ The Reserve Bank may appoint one or more of its officers in the rank of
Chief General Manager or General Manager to be known as Banking
Ombudsman to carry out the functions entrusted to them by or under the
Scheme.

26. Ombudsmen are independent, free and impartial – so they don't take sides. You
should try and resolve your complaint with the organisation before you complain to an
ombudsman.