CU- SEM III -BCM112- Management of Financial Institutions and Services

 They expect more from financial services companies. Hence a wide variety of services, are being provided under this head.  They include : i. Managing die capital issue — i.e. management of preissue and post-issue activities relating to the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to market their issue. ii. Making arrangements for the placement of capital and debt instruments with investment institutions. iii. Arrangement of funds from financial institutions for the clients' project cost or his working capital requirements. iv. Assisting in the process of getting all Government and other clearances. Modern Activities : • Beside the above traditional services, the financial intermediaries render innumerable services in recent times. • Most of them are in the nature of non-fund based activity. • In view of the importance, these activities have been in brief under the head 'New financial products and services'. • However, some of the modern services provided by them are given in brief hereunder. i. Rendering project advisory services right from the preparation of the project report rill the raising of funds for starting the project with necessary Government approvals. ii. Planning for M&A and assisting for their smooth carry out. iii. Guiding corporate customers in capital restructuring. iv. Acting as trustees to the debenture holders. v. Recommending suitable changes in the management structure and management style with a view to achieving better results. vi. Structuring the financial collaborations / joint ventures by identifying suitable joint venture partners and preparing joint venture agreements, vii. Rehabilitating and restructuring sick companies through appropriate scheme of

reconstruction and facilitating the implementation of the scheme. viii. Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by using swaps and other derivative products. ix. Managing [In- portfolio of large Public Sector Corporations. x. Undertaking risk management services like insurance services, buy-hack options etc. xi. Advising the clients on the questions of selecting the best source of funds taking into consideration the quantum of funds required, their cost, lending period etc. xii. Guiding the clients in the minimization of the cost of debt and in the determination of the optimum debtequity mix. Undertaking services relating to the capital market, such as a. Clearing services b. Registration and transfers, c. Safe custody of securities d. Collection of income on securities xiv. Promoting credit rating agencies for the purpose of rating companies which want to go public by the issue of debt instrument; 6.4 IMPORTANCE AND FEATURES OF FINANCIAL SERVICES Importance of Financial Services :  Facilitates Transactions: Financial services facilitate the smooth functioning of transactions in an economy. Various financial instruments such as debit cards, credit cards, cheque, bill of exchanges and many more assist people in doing payments.  Ensures liquidity: These services ensure proper liquidity by facilitating free movement of funds among people. Financial services enable people to easily acquire the required funds through credit cards or loan facilities.  Ensures liquidity: These services ensure proper liquidity by facilitating free movement of funds among

people. Financial services enable people to easily acquire the required funds through credit cards or loan facilities.  Mobilizes Savings: Mobilization of people’s savings is another important role played by financial services. It brings together those who have excess ideal lying resources and one who are in need of funds for investing into productive means.  Risk Minimization: Financial services reduce the effect of risk to customers through diversification. Insurance policies offered by companies provide protection to people against various losses.  Allocates Capital Funds: It enables people to allocate their fund into efficient sources. Financial services provide various investment options to customers like mutual funds, stocks, saving and fixed deposits which can generate income for them.  Generates Employment: Financial services helps in creating more employment opportunities in a country. There are large numbers of people who are associated with financial institutions selling these services. Such institutions via selling financial services generate their income and pay remuneration to their employees.  Economic Growth: These services enable the overall development of all sectors of the economy. Financial services provide sufficient funds to all key sectors that is a primary sector, secondary sector and tertiary sector. It results in a balanced growth of the whole economy. Features of Financial Services:  Funds Intermediary- Financial services act as fund intermediaries between the borrowers and investors in the market. It enables bringing together the one having an excess of funds and one who is in need of funds. Financial services offered by banking institutions like loans and credit facilities channelizes the funds of depositors to borrowers generating revenue.  Client Oriented-

These services are tailored in accordance with the requirements of peoples seeking to avail them. Financial institutions acquire all key information about customers such as amount of credit required, time period, and their source of income. After considering all needs of their clients, financial institutions decide various elements of these services like cost, liquidity and maturity period in an attempt to design them as per the customer specific needs.  Inseparable- Financial service are of inseparable nature which means that the producer of these services can’t be separated from them. Production of financial services and offering them to customers take place at the same time simultaneously. These services cannot be produced and stored in advance of their demands. Financial services are designed by the institutions right at the moment when the customer is willing to take them as per his suitability.  Avoids Fund Crisis- These services avoid any situation of fund shortage in an economy by promoting proper movement of funds in between the peoples. Financial services facilities free movement of funds in market that leads to proper liquidity. People are easily able to acquire required funds whenever the need arises using these services such as loan facilities and credit cards.  Support Financial Transactions- Financial services support the smooth functioning of all financial transactions taking place in an economy. It assists people in doing transaction by providing easy access to distinct financial instruments like credit cards, debit cards, bill of exchange, cheque etc.  Facilitates Economic Development- These services have a major contribution in upliftment of economy. Financial services ensure a proper supply of funds among all key sectors of economy that is primary, secondary and tertiary. These sectors with the availability of optimum funds are easily able to grow and expand their operations. Growth in these important sectors of economy leads to the overall economic development.  Enhance living Standards- Financial services provide a facility of using high quality goods to customers by lending credit

facilities. People who are not economically strong and not in a position to acquire products on cash basis, have access to credit facilities from financial institutions for purchasing the required products. When people use high quality goods in their daily life, their living standards would improve. 6.5 TYPES OF FINANCIAL SERVICES Financial service institutions render a wide variety of services to meet the requirements of individual users. These services may be summarized as below: 1. Provision of funds: (a) Venture capital (b) Banking services (c) Asset financing (d) Trade financing (e) Credit cards (f) Factoring and forfaiting 2. Managing investible funds: (a) Portfolio management (b) Merchant banking (c) Mutual and pension funds 3. Risk financing: (a) Project preparatory services (b) Insurance (c) Export credit guarantee 4. Consultancy services: (a) Project preparatory services (b) Project report preparation (c) Project appraisal (d) Rehabilitation of projects (e) Business advisory services (f) Valuation of investments (g) Credit rating

(h) Merger, acquisition and reengineering 5. Market operations: (a) Stock market operations (b) Money market operations (c) Asset management (d) Registrar and share transfer agencies (e) Trusteeship (f) Retail market operation (g) Futures, options and derivatives 6. Research and development: (a) Equity and market research (b) Investor education (c) Training of personnel (d) Financial information services 6.6 SUMMARY Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer- finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services are specialized at managing funds of people. These services enable peoples in allocating their idle lying funds into useful means for earning revenues. Financial intermediaries have been offering a large range of services traditionally. Related to capital and money market activities. These services are classified into 2 groups: – Fund based activities and Non-fund based activities. Few of the modern activities are listed below: oMerger and acquisition planning and helping with their smooth carry out. oProviding guidance in capital reconstructing to corporate customers. oAssisting in rehabilitation and reconstruction of sick companies. oPortfolio management of large public sector corporations.

o Providing recommendations in management style and structure for attaining better results. o Acting as trustees to the debentures-holders. o Providing project advisory services ranging from project preparation to capital raising. 6.7 KEY WORDS/ABBREVIATIONS Intangibility Inseparable Traditional. Modern Risk Activities activities Minimization Funds Venture Banking Asset financing Trade Intermediary capital services financing Factoring and forfaiting 6.8 LEARNING ACTIVITY Discuss with your teammates about the Non-Fund Based/Fund Based Financial Services running in India 6.9 UNIT END QUESTIONS (MCQ AND DESCRIPTIVE) A. Descriptive Types Questions 1. Explain Financial Services and its nature in detail? 2. Describe the Scope of Financial Services in india? 3. Describe the importance of Financial Services? 4. Explain in details about the types of Financial Services? 5. Describe the features of Financial Services?

B. Multiple Choice Questions 1. ___________ provide services on the basis of non-fund activities also a. Financial Intermediaries b. Insurance Intermediaries c. Mutual fund Intermediaries d. Government of India 2. _____________facilitate the smooth functioning of transactions in an economy. a. Insurance b.Financial Services c. Government Services d. None of the above 3. ______________ are specialized at managing funds of people a. Financial Services b. Insurance Services c. Mutual Funds d. Share market. 4. Financial Services can be grouped under two heads viz. Fund based activities and b. Non-fund based activities. a. True b. False 5. The Reserve Bank of India (“RBI”), established under a. The Reserve Bank of India Act, 1934 (“RBI Act”), b. The Reserve Bank of India Act, 1947 (“RBI Act”) c. The Reserve Bank of India Act, 1935 (“RBI Act”) d. The Reserve Bank of India Act, 1975 (“RBI Act”)

6.10 REFERENCES Text Books: T1 Fabozzi - Foundations of Financial Markets and Institutions (Pearson Education,3rdEd.). T2 Khan M Y - Financial Services (Tata Mc Graw Hill). Reference Books: R1 Machiraju H R - Indian Financial System (Vikas Publication). R2 Bhole L M - Financial Institutions and Markets (Tata McGraw-Hill).

UNIT - 7: MANAGEMENT OF COMMERCIAL BANKS BANKING INDUSTRY IN INDIA Structure 7.0. Learning Objectives 7.1. Introduction 7.2. Structure of Commercial Banks 7.3. Functions of Commercial Banks 7.4. Motives of Investment Policy 7.5. Factors determining Liquidity of Banks 7.6. Asset Structure of Commercial Banks 7.7. Summary 7.8. Key Words/Abbreviations 7.9. Learning Activity 7.10. Unit End Questions (MCQ and Descriptive) 7.11. References 7.0 LEARNING OBJECTIVES After studying this unit, students will be able to:  Describe the Role of commercial banks.  Describe the Structure of commercial banks in India.  Explain the Functions of commercial banks.  Describe the sources of funds of commercial banks  Explain the investment norms in commercial banks.  Describe the Assets structure of commercial banks.  Outline the Motives of investment policy.

 Describe the Factors determining liquidity. 7.1 INTRODUCTION Commercial banks are a part of an organized money market. They perform all the activities of typical bank. Commercial banks collect mobile savings from urban and rural areas and make it available to large, medium and small undertakings for their capital requirements. A significant part of this impressive record of financial development in India is attributable to the crucial role played by banks in the financial intermediation process. In India the financial sector comprises the banking system (i.e. commercial and cooperative banks), financial institutions (which include term lending institutions, i.e. IDBI, NABARD, ICICI, IRBI, IFCI, EXIM Bank and NHB at the all-India level and SFCs and SIDCs at the state level, besides investment institutions, i.e. UTI, LIC and GIC and other institutions including DICGC and ECGC), non-banking financial intermediaries and the capital market. Banking sector in India has got a long history and has traversed a long path to reach at the modern stage. The growth of banking industry and banking practices had not been easy. It involved many hurdles and impediments which appeared as obstacles in the path of its growth.

7.2 STRUCTURE OF INDIAN COMMERCIAL BANKS Having established the pivotal role performed by the banking system in the Indian financial sector and by implication, in the overall financial intermediation process, thus supporting the real sector of the economy. The strong points of the financial system are its ability to mobilize savings, its vast geographical and functional reach and institutional diversity. Between 1965 and 1990, the household sector’s gross savings in the form of financial assets rose from 5.5 per cent to 12.2 per cent of net domestic product. Since 1969 when major banks were nationalized, the number of commercial bank branches increased from about 8,300 to well over 65,000 by 2005. The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial banks constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act. Indian banks can be broadly classified into nationalized banks/

public sector banks, private banks and foreign banks. The Indian banks include 27 public sector banks excluding 196 Regional Rural Banks (RRBs). 7.3 FUNCTIONS OF COMMERCIAL BANKS Prof. Syers, defined banks as “institutions whose debt—usually referred to as ‘bank deposits’— are commonly accepted in final settlement of other people’s debts”. According to Banking Regulation Act of 1949, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”. From the above definitions we can analyze that the primary functions of banks are accepting of deposits, lending of these deposits, allowing deposits to withdraw through cheque whenever they demand. The business of commercial banks is primarily to keep deposits and make loan and advances for short period up to one or two years made to industry and trade either by the system of overdrafts of an agreed amount or by discounting bills of exchange to make profit to the shareholders. From the above discussion, we can say that the following are the functions of commercial banks. 1. Receiving deposits from the public: The primary function of commercial banks is receiving of deposits in the form of savings bank account, current account and term deposits from the savers usually from the public. People usually prefer to deposit their savings with the commercial banks because of safety, security and liquidity. The aggregate deposits of scheduled commercial banks in India rose rapidly from Rs. 822 crores in 1951 to Rs. 3,763 crores in 1967. The total deposits of commercial banks was Rs. 4,661 crores in 1969 that increased to Rs. 34,237 crores by 735 per cent by 1979. The total deposits of commercial banks increased in the decade of 1981 to 1991 from Rs. 40,413 crores to Rs. 2,00,569 crores by 5 times. Out of which the proportion of current, saving and fixed deposits were Rs. 6,286, Rs.11,805 and Rs. 22,322 crores which is almost 1: 2: 3 ratio increased to Rs. 30,335, Rs. 56,152 and Rs. 114082 crores i.e., almost 5 times during one decade with almost same

proportion. The total deposits with commercial banks by the end of 2005 increased to Rs. 21,00,000 crores. 2. Giving loans and advances : The second major function of the commercial banks is giving loans and advances to the all types of persons, particularly to businessmen and investors, against personal security, gold and sliver and other movable and immovable assets. The bank advances loans in the form of cash credit, call loans, overdraft and discounting bills of exchange to businessmen. After reforms in banking sector and establishment of new private sector banks and foreign banks, the other commercial banks also started giving loans and advances not only to their traditional businesses but also for vehicles, housing, consumer durables, etc. by increasing the base of lending activities. 3. Use of cheque system and credit cards : The commercial banks will allow the depositors of the bank to withdraw and make payment of their amount in their bank account through cheques. Now the banks are allowed to use debit and credit cards for making their payments. 4. Credit creation : Credit creation is one of the most important functions of the commercial banks. Like other financial institutions, they aim at earning profits. For this purpose they accept deposits and advance loans by keeping small cash in reserve for day-to-day transactions. When a bank advances a loan, it opens an account in the name of the customer and does not pay him in cash but allows him to draw the money by cheque according to his needs. By granting a loan, the bank creates credit or deposit. 5. Financing foreign trade : The commercial banks finance foreign trade of its customers by accepting foreign bills of exchange and collecting them from foreign banks. It also transacts other foreign exchange business and buys and sells foreign currency. 6. Transfer of funds : Commercial banks will help the customers to transfer their money from one account to another

account, from one place to another place through cheques. Now the transfer of funds from one place to another place, or from one party account to another party account or one bank to another bank is done through Electronic Fund Transfer (EFT). This facility helps in transferring funds from one bank to another bank or to another party account easy. The technology like MICR helps the banks to have innovative banking like anywhere banking, anytime banking, and virtual banking and so on. 7. Agency functions : The commercial banks act as agents for customers to buy and sell shares, securities on their behalf. It pays subscriptions to insurance premiums, mutual funds, rent, water taxes, electricity bills etc on behalf of its clients. It also acts as a trustee and executor of the property and will of its customers. 8. Miscellaneous functions : The miscellaneous functions performed by the commercial banks are: it provides safety locker facility, making and receiving payments on behalf of its depositors, issuing letters of credit and traveler’s cheques etc. Advances. A bank makes investments for the purpose of earning profits. First it keeps primary and secondary reserves to meet its liquidity requirements. Banks invest in securities either for fulfilment of SLR/CRR requirements or for earning profit on the idle funds. Banks invest in “approved securities” (predominantly Government securities) and “others” (shares, debentures and bonds). The values/rates of these securities are subject to change depending on the market conditions. Some securities are transacted frequently and some are held till maturity. The Ghosh Committee recommended that “a bank’s investment portfolio should be bifurcated into two parts, namely, ‘permanent investment’ and ‘current investment’. The committee recommended that banks should make necessary provision for the depreciation in the value of current investment and there is no need to provide for permanent investment. RBI has also advised the banks to classify the existing investment in approved securities into two categories. Initially from the accounting year 1992-93, banks should not keep more than 70% of their investment in permanent category, and 30% of the portfolio as current investments to facilitate valuing all the investments on fully ‘marked to market’ basis. Guidelines were laid down for

transfer of approved securities from ‘current’ to ‘permanent’ and ‘vice versa’ in 1992. These guidelines ensure that latent losses are provided for at the time of such transfer. In 1993 the entire investment portfolio of banks other than investments classified as ‘permanent’ has to be classified into six categories for the purpose of valuation. The valuation will be done for each category of investments. While net depreciation has to be provided by debit to the profit and loss account, net gains have to be ignored. Permanent investments can be carried at book value. Premium will have to be amortized over the life of the investment but discount cannot be recognized as income. In between 1993 to 1998 the said minimum ratio of 30 per cent has been increased in a phased manner to 60 per cent as on March 31, 1998. It has further been decided to increase the ratio to 70 per cent for the year ending March 31, 1999. New private sector banks are required to market their entire investments in approved securities since March 31, 1997. 7.4 MOTIVES OF INVESTMENT POLICY The commercial banks have to follow the guidelines issued by RBI for investments. The following are the motives of investment policy of RBI. 1. Safety and security. Safety and security of the funds which are deposited by the customers of the bank is very important in banks. The money which is deposited by the customers in banks should be safe and they should get back whenever they require. The banks should see that the money which is deposited in commercial banks should not be misused by the banks through its unscrupulous management or mismanagement and lead to loss and consequently lead to bankruptcy. Hence the RBI will guide the commercial banks through its monetary policies and issues guidelines to follow in their investment policies. To safeguard the interests of the depositors in commercial banks the deposits are insured up to Rs. 1,00,000. 2. Liquidity of funds in banks. Commercial banks have to maintain liquidity of funds deposited by the depositors of the banks. The banks should see that the money deposited is allowed by the banks to withdraw whenever the customers require during working hours of the bank. This will ensure more confidence among the customers of the bank. There are several cases where Indian commercial banks ensured liquidity to the depositors of the bank. Recently during 2001 the rumours spread among the customers of the ICICI Bank in Maharashtra that there is no cash in the bank. Hence many customers went for withdrawing of the funds deposited and the ATM counters were

flooded with customers. The bank also made arrangements for cash and also assured the customers not to panic. Immediately the RBI assured that there is no liquidity problem in the bank. Hence liquidity in banks is a very important motive of the investment policy. Therefore banks are directed to keep some percentage of the funds in the form of Cash Reserve Ratio in RBI and also insist to invest in Statutory Liquid Ratio to convert into easy liquidity. 3. Profitability of the bank. The soundness of any bank is measured by its profitability. The customers will come forward to deposit their funds with banks on the basis of the profitability of the banks. Hence the banks have to earn profits. 7.5 FACTORS DETERMINING LIQUIDITY OF BANKS The liquidity of a bank is determined by the top management of the bank on the basis of the nature of business conditions in a country. This is also guided by the central bank of that country to ensure liquidity in an economy. The extent of liquidity is ensured on the basis of the following factors. 1. The size of liquid reserves. The size of the liquid reserves will depend upon the extent of liquid reserves considered essential by the banking community. If the liquid reserves in a bank will increase the liquidity position of the banks but the amount available for lending will decrease. During the year 1991 to 1995 the CRR of the commercial banks with the RBI was 15 to 14.5 percent on Net Demand and Time Liabilities (NDTL), hence the amount available with the banks for lending was less hence it hampered the growth of our economy. By realizing this problem RBI after accepting reform process in the economy reduced this ratio. Since then the amount available for lending with the banks has increased, consecutively the Credit Deposit (CD) ratio also increased. It was around 56 percent during 2004 it went up to 71 per cent during the month of February 2006 by showing good symptom of growth in the credit activities in an economy. 2. Banking habits of the people. Liquidity of a bank depends upon the banking habits of people. 3. Well organized money market. Well organized and developed money market is another factor which will have its influence on the liquidity position of the banks. If the money market is well organized, the commercial banks will borrow and lend their cash in the money market which

reduces the idle money with the banking sector and also supports the liquidity position in the banking sector and also in an economy. 7.6 ASSET STRUCTURE OF COMMERCIAL BANKS Assets structure will reflect the deployment of sources of funds of commercial banks. The main source of funds of commercial banks is deposits. The other sources of funds are borrowings from other banks, capital, reserves and surplus. The deposits of commercial banks are from savings deposits, current account deposits and term deposits. These deposits constitute 80 per cent of the total sources of funds. Out of the total deposits, term deposits constitute 50 per cent. Borrowings are around 5 per cent of the total liabilities of the commercial banks. These sources are deployed by the commercial banks mainly on its financial assets i.e, loans and advances which constitute 48.6 per cent of the total assets of the banks. The investments is another important component of the assets of commercial banks which is around 40 per cent of the total assets of the banks during the year 2005. This is because of pre-emptions like SLR and CRR requirements in the banking sector. The investments in commercial banks have increased also because of surplus liquidity in Indian banks during this period due to reduction of SLR and CRR to 25 and 4.5 respectively during that period and less demand for loans and advances from credit-worthy customers. This scenario is changing in India due to increasing demand in credit from industrial, agriculture sector and also the growth of FMCG market. The assets structure of the banks is governed by certain principles, like liquidity, profitability, shiftability and recklessness. Now let us examine each of the important assets of the commercial bank.

1. Cash in hand and balances with RBI. From the point of the liquidity in the commercial banks cash in hand is a very important asset but it is idle and it will not fetch any earnings to the banks. Cash in commercial banks depends upon various factors like uncertainty in the economy due to wars, famine, internal disturbance, the growth of banking system, network of branches, networking of banks, automation in banks and so on. The cash reserve requirements in the commercial banks was more during pre-reform period it was 15 per cent during the year 1994- 95. Gradually RBI reduced it to 4 per cent based on the requirements of credit and it is now 5 per cent on Net Demand and Time Liabilities. 2. Money at Call and Short Notice. It is second line of defense of the commercial banks in cases of emergencies. If the call money market is well developed the commercial banks can lend their surplus funds in the call market for a day or up to 14 days it is called call market or over night market without keeping their surplus money idle. It can also lend for short period, where the borrower has to return the money borrowed from the banks when short notice is given by the banks. This is becoming a good business in the money market and constitutes around 4 per cent of the total assets of the commercial banks. The banks instead of keeping the money idle lend their surplus funds for short periods in the call market. 3. Investments. Investments constitute one of the important assets of the bank next to loans and advances. A bank makes investments for the purpose of earning profits. First, it keeps primary and secondary reserves to meet its liquidity requirements. Banks invest in securities either for fulfilment of SLR/CRR requirements or for earning profit on the idle funds. Banks invest in “approved securities” (predominantly Government securities) and “others” (shares, debentures and bonds). The values/rates of these securities are subject to change depending on the market conditions. Some securities are transacted frequently and some are held till maturity. Total investments during the year 2005 by the commercial banks in India were Rs. 8,43,081 crores which is 37 per cent of the total assets. During the month of February and March 2006 the investments in Indian commercial banks have reduced because of heavy demand for credit. Some banks even sold their surplus investments in government securities which was more than SLR requirements and converted them into cash for lending. 4. Loans and Advances.

The commercial banking industry in India has been playing a very important role in intermediating between the economic units, which have surpluses and deficits in their current budgets. By mobilizing financial surpluses in the economy and by channeling these resources into various sectors and segments of the economy, they are guiding the pattern of utilization of a large proportion of the economy. The Government of India which owns a large segment of the industry, and the RBI, which is the central banking authority of the country, have been persuading the commercial banks to deploy larger and larger volumes of financial resources into certain identified priority sectors, for the purpose of accelerating the growth of these sectors. The total advances of commercial banks include bills purchased and discounted, cash credits, overdrafts, loans, unsecured loans, and priority sector advances. The component of loans and advances in the total assets of commercial banks is 48 to 50 per cent—in fact still growing in India. The management of this asset is a very important aspect in the banking sector. The non-performing assets in banks is increasing. In addition to this banks are exposed to various risks such as credit risk, liquidity risk, market risk and operational risk. 5. Fixed Assets and other assets. The component of fixed assets and other assets do not form an important aspect in the funds of commercial banks since deals are more in financial assets than real assets. 7.7 PROFITABILITY OF COMMERCIAL BANKS Profitability is a key parameter in assessing the performance of any business firm. Even in the banking sector after the banking sector reforms the priorities in banking operations underwent far reaching changes. There had been a shift in the emphasis from development or social banking to commercially viable banking. Profitability became the prime mover of the financial strength and performance of banks; hence the performance of the bank is measured on the basis of its profitability. Now the main agenda is to enhance the profitability and reduce the hurdles which are faced by the banks in their profit maximization and to develop strategies to achieve this objective. In this changed scenario, profitability and productivity are the twin indicators of the competitive edge of the banking industry. The main reason for the fundamental paradigm shift in the banking from social banking to “profit banking” was the introduction of capital adequacy requirements.

There are four ways to achieve and sustain the required capital adequacy: a.Fresh equity issue, b.Ploughing back of profit, c. Debt offering and d. Revaluation of assets. Raising capital through equity route is very difficult because servicing the equity base, offering reasonable returns, raising fresh capital when the capital market is not favorable and when the performance of banks is not good. Similarly debt raising also will have the limitations too, as tier II capital cannot exceed tier I capital and subordinated debt cannot exceed 50% of the tier II capital. Unit Specific factors 1. Banking structure. Structure of the banking system will have its impact on the profitability of banks. The diversified banking structure with operations spread across regions having different economic/business profiles, like Indian public sector banks will have higher operating costs in view of a larger network, lower margins due to greater competition. 2. Size of Bank. Indian situation suggests that when banks are considered groups in terms of big, medium and small, the bigger banks have greater scope for economies of scale The per centages of total expenses to working funds are lower for bigger size banks than for small size banks. Whereas in other countries like European Investment Banks, a study of American and Japanese banks have observed that there is no convincing correlation between the size of banks and earning power. 3. Branch network or Franchise strength. A large network of branches located at potential centres provides access to low cost deposits as well as increased scope for earning more fee-based income in the form of commission on remittance services and bills for collection. 7.8 SUMMARY  Commercial banks are a part of an organized money market. They perform all the activities of typical bank.  Commercial banks collect mobile savings from urban and rural areas and make it available to large, medium and small undertakings for their capital requirements.

 The state bank of India constituted under the state Bank of India Act .1955  A subsidiary bank as defined in the state bank of India (subsidiary banks)Act 1959.  The sources of funds of commercial banks are : The various financial institutions like IFCI, IDBI, SFC etc. And other sources like public deposits, trade credit, foreign capitals etc  Public Sector Banks: It refers to commercia banks which are owned by the central government directly or through the reserve bank of India. They are also called as National Banks. They are established by special acts Passed by the parliament.  Private sector banks refers to commercial banks other than public sector commercial banks. i.e they are owned and controlled by private entrepreneurs.  The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade.  Letter of credit is issued by the importer’s bank to the exporters to ensure the payment. The banks also arrange foreign exchange.  A bank is a business organization engaged in the business of borrowing and lending money.  A bank can earn income only if it borrows at a lower rate and lends at a higher rate. The difference between the two rates will represent the costs incurred by the bank and the profit.  Bank also provides a number of services to its customers for which it charges commission. This is also an important source of income.  The financial position of a commercial bank is reflected in its balance sheet. The balance sheet is a statement of the assets and liabilities of the bank. 7.9 KEY WORDS/ABBREVIATIONS Structure of Regional Rural Banking Credit creation Transfer of Commercial Banks(RRBs) Regulation Act funds Banks of 1949 Liquidity of Money at Call Loans and Fixed Assets Raising capital funds Advances and other

assets A subsidiary Letter of bank credit 7.10 LEARNING ACTIVITY Activity 1 : Prepare the List of Foreign Banks currently running in India 7.11 UNIT END QUESTIONS (MCQ AND DESCRIPTIVE) A. Descriptive Types Questions 1. Describe the Role of commercial banks. 2. Describe the Structure of commercial banks in India. 3. Explain the Functions of commercial banks. 4. Describe the sources of funds of commercial banks 5. Explain the investment norms in commercial banks. 6. Describe the Assets structure of commercial banks. B. Multiple Choice Questions 1. ______________ are a part of an organized money market. a. Federal Bank b. Commercial Bank c. RBI d. Central Bank 2. The primary function of commercial banks is receiving of deposits in the form of savings bank account, current account and term deposits from the savers usually from the public. a. True b. False

3. _____________________ will help the customers to transfer their money from one account to another account, from one place to another place through cheques. a. Federal Bank b. Commercial Bank c. RBI d. Central Bank 4. The liquidity of a bank is determined by the _____________ on the basis of the nature of business conditions in a country. a. Top Management of the bank b. Government of India c. Share Market d. IRDAI 5. A __________________ as defined in the state bank of India (subsidiary banks)Act 1959. a. Subsidiary Bank b. Reserve Bank of India c. Indian Institute of Banking d. Insurance Banking 6. ____________________ is issued by the importer’s bank to the exporters to ensure the payment. a. Credit Policy b. Letter of Credit c. Saving Credit d. Bankers Deposit Note. 7. A ____________________ is a business organization engaged in the business of borrowing and lending money. a. Insurance Company b. Lending Company c. Bank d. Jewellery.

7.12 REFERENCES Text Books: T1 Fabozzi - Foundations of Financial Markets and Institutions (Pearson Education,3rdEd.). T2 Khan M Y - Financial Services (Tata Mc Graw Hill). Reference Books: R1 Machiraju H R - Indian Financial System (Vikas Publication). R2 Bhole L M - Financial Institutions and Markets (Tata McGraw-Hill).

UNIT - 8: MANAGEMENT OF NON – BANKING FINANCIAL INSTITUTIONS Structure 8.0. Learning Objectives 8.1. Introduction 8.2. DFIs in India 8.3. Types of Non-Banking Financial Companies 8.4. Functions of NBFCs 8.5. Regulations of NBFCs 8.6. Summary 8.7. Key Words/Abbreviations 8.8. Learning Activity 8.9. Unit End Questions (MCQ and Descriptive) 8.10. References 8.0 LEARNING OBJECTIVES After studying this unit, students will be able to:  Understand the concept of non-banking financial companies  Explain the guidelines of non-banking financial companies  Discuss the progress of non-banking financial companies

 Describe the prospects of non-banking financial companies  Explain Industrial Finance Corporation of India (IFCI)  Know about State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs)  Define Small Industries Development Bank of India (SIDBI) Explain the operational policies of SIDBI 8.1 INTRODUCTION The Reserve Bank of India defines a non-banking financial company as, \"A Non-banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).\" Concept of Non-banking Financial Companies : Non-banking financial companies frequently acts as: 1. Suppliers of loans and credit facilities, 2. Supporting investments in property, 3. Trading money market instruments, 4. Funding private education, 5. Wealth management such as managing portfolios of stocks and shares and underwrite stock and shares, TFCs and other obligations, 6. Retirement planning, 7. Advise companies in merger and acquisition, 8. Prepare feasibility, market or industry studies for companies, 9. Discounting services e.g., discounting of instruments. However they are not allowed to take demand deposits from the general public and consequently have to find other means of funding their operations such as issuing debt instruments.

Depending upon their nature of activities, non-banking finance companies can be classified into the following categories: 1. Development finance institutions 2. Leasing companies 3. Investment companies 4. Housing finance companies 5. Venture capital companies 6. Discount and guarantee houses 7. Underwriting practitioners. Guidelines of Non-banking Financial Companies : Recent years have witnessed significant increase in financial intermediation by the NBFCs. This is reflected in the proposal made by the latest Working Group on Money Supply for a new above. For regulatory purposes, NBFCs have been classified into three categories: 1. those accepting public deposits, 2. those not accepting public deposits but engaged in financial business, and 3. core investment companies with 90 per cent of their total assets as investments in the securities of their group/holding/subsidiary companies. The focus of regulatory attention is on NBFCs accepting public deposits. As per the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, the quantum of public deposit in respect of NBFCs was linked to credit rating from an approved agency so as to enable the depositor to make informed decision.

The NBFCs were also encouraged to broad-base their resources through borrowings from banks and financial institutions, inter-corporate deposits/ loans, secured bonds/debentures, etc., which were exempted from the definition of \"public deposit\". However, the Associations of NBFCs and the apex trade bodies brought to the notice of both the Government and the RBI the problem of asset-liability mismatches caused by frequent downgrading of the credit ratings of NBFCs and the consequent reduction in quantum of permissible public deposits. They also suggested that smaller NBFCs could be exempted from the requirement of credit rating for having public deposits up to a particular limit while larger NBFCs could be allowed higher limits of public deposits subject to minimum investment grade credit rating and higher capital adequacy requirements. The Task Force on NBFCs appointed by the Government of India submitted its report in October, 1998, which recommended rationalisation of regulations for NBFCs, improvement of the legislative framework for protecting the interests of depositors and development of NBFCs on sound and healthy lines. 8.2 DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS) IN INDIA Development Financial Institutions (DFIs) were established with the Government support for underwriting their losses as also the commitment for making available low cost resources for lending at a lower rate of interest than that demanded by the market for risky projects. In the initial years of development it worked well. Process of infrastructure building and industrialization got accelerated. The financial system was improved considerably as per the needs of projects. Appraisal system of long term projects had also been strengthened due to improvement in availability of information and skills. Thus, the DFIs improved their appetite for risk associated with such projects. “The intermediaries like banks and bond markets became sophisticated in risk management techniques and wanted a piece of the pie in the long term project financing. These intermediaries also had certain distinct advantages over the traditional DFIs such as low cost of funds and benefit of diversification of loan portfolios”. The government support to DFI was also declining due to fiscal reasons or building the market more competitive and efficient. Fiscal imperatives and market dynamics have forced the government to undertake reappraisal of its policies and strategy with regard to the role of DFIs in Indian system. However, it is important to note that our country has not achieved its development goals even then due to unavoidable circumstances like economic reforms we have started the restructuring process of DFIs after 1991.

Role of development finance may be evaluated in following ways: (i) It is supposed to identify the gaps in efficacy of institutions and markets and act as a ‘gap-filler’. (ii) It makes up for the failure of financial markets and institutions to provide certain kinds of finance to economic agents who are really interested to improve the working of economy. (iii) It targets at economic activities or agents, which are rationed out of market. It motivates the agent to take risky business with venture finance. (iv) It helps the funds seekers by providing concessional funds at lower rate of return. Social return of DFIs is quite high. Keeping these facts in mind central banking system also supports development financial institutions. (v) It is specialized in nature and involved long term finance. It is exclusively meant for infrastructure and industry, finance for agriculture and small and medium enterprises (SME) development and financial products for certain sections of the people who needs funds for development perspectives. Forms and Types of DFIs in India: DFIs can be broadly categorized as all-India or state/regional level institutions depending on their geographical coverage of operation. Functionally, all-India institutions can be classified as: (i) Term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending long- term finance to different industrial sectors, (ii) Refinancing institutions (NABARD, SIDBI, NHB) extending refinance to banking as well as non-banking intermediaries for finance to agriculture, SSIs and housing sectors, (iii) Sector-specific/specialised institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.), and (iv) Investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management Co. Ltd.). State/regional level institutions are a distinct group and comprise various SFCs, SIDCs and NEDFi Ltd. The DFIs were set up in India on the following rationale: (i) Improving Rates of Savings and Investment:

In initial years rate of capital formation was low. At the time of independence saving rate was around at 5 per cent of national income. India had a fairly diversified industrial base for a developing country, with a number of well-established industrial houses at the time of independence. So necessary guarantee was expected from the DFIs otherwise entrepreneurs and promoters would have not been able to generate resources from the market. (ii) Infancy Stage of Capital Market: The capital market was at infancy stage and industries had to depend on their own profits and banks for financing for further development programmes. That is why these funds institutions, investment institutions, other trusts, etc. has been declared as DFIs in terms of public financial institutions (PFI) under Section IV-A of Companies Act, 1956. (iii) Risk Averse Commercial Bank: Commercial banks were not interested in venture financing as they are quite risky one. DFIs are specialised financial institutions and well equipped in risky venture. (iv) Arrangement of Loan in Foreign Currency: Earlier, DFIs had access to lines of credit in foreign currencies from various multilateral and bilateral agencies at low rates of interest mainly for project financing. The Central Government had assumed all foreign currency risks due to fluctuation in the exchange rates. (v) Specialized Credit Support System: DFIs could sanction and disburse credit at fixed/assured rates spread over their borrowing rates till the early 1990. Moreover, under the existing industrial licensing policy system obtaining a license itself was taken as license to get credit from DFIs, without the investor going through the elaborate procedures normally associated with projected appraisal for credit sanction based on commercial judgment and viability. (vi) Arrangement of Priority Sector Financing: DFIs did not have competition in deploying their funds to public companies. However, some commercial banks had started providing term capital as priorities for investments in various sectors in the economy were given, along with targets set in successive plans. (vii) Project Evaluation and Funding: Some DFIs had also conducted economic potential surveys of regions or states and provided considerable support to a number of development projects. When project costs were high and could not be financed by one DFI, they formed loan consortia with commercial banks whereby DFIs could provide large sized loans thereby reducing the incidence of risks. (viii) Coordinating Financing Agencies:

The DFIs were expected to work as conduits between the government/other financing agencies and the ultimate borrowers for an assured margin. They also acquired skills and expertise to study the viability and technical efficiency of projects which was called as the directly productive activities. 8.3 TYPES OF NON – BANKING FINANCIAL COMPANIES NBFCs are classified in two ways (1) Classification as per RBI and (2) Classification on the basis of activities performed or General Classification Classification as per RBI According to RBI, the NBFCs are classified into three categories viz., (1) Asset Financing Companies, (2) Investment Companies and (3) Loan Companies. Asset Financing Companies These are the companies whose business is to provide finance for purchase of physical assets like automobiles, tractors, earth moving and material handling equipments, etc. (Example - Bajaj Auto Finance Corporation, Fullerton India). Investment Companies These are the companies whose business is to acquire and trade in industrial as well as government securities like shares, stocks, bonds, debentures etc., mainly in the capital market. (Example – Stock Broking Companies, Gilt Firms) Loan Companies These are the companies whose business is to give loans to activities other than their own. They give different kinds of loans like housing loans, gold loans, etc. (Example –

Mannappuram Gold Finance, Muthoot Finance, Atica Gold Finance, HDFC, etc.) Classification on the basis of activity performed or General classification On the basis of activities performed or according to general classification, the NBFCs are classified into four categories viz., (1) Development Institutions, (2) Specialized Institutions (3) Investment Institutions and (4) Other Institutions Development Institutions They are the institutions that provide long term finance for agriculture and industrial development purposes. These are multipurpose institutions that provide not only credit facility but also assist in discovering investment projects, preparing project reports, arranging technical advice, managing industrial units, underwriting, promotional activities, etc. Basically they are intended to develop backward regions as well as small and new entrepreneurs. They provide medium and long term finance to business units mainly for acquisition / development of basic facilities like land and buildings, plant and machinery, etc. These institutions generally do not accept deposits from the public. IDBI, ICICI, IFCI, SIDBI, SFCs & SIDC fall under this category. The main features of development institutions are:  They are specialized financial institutions  They provide medium- and long-term finance  Generally, they do not accept deposits from the public  They provide multipurpose financial assistance  Their primary objective is to promote the economic development of the country  They encourage small and new entrepreneurs and work in the general interest of the country Specialized Institutions They are the institutions that provide assistance to special sectors like housing, infrastructure, agriculture, etc. These institutions generally do not accept deposits from the public. NABARD, NHB, NHAI & EXIM Bank fall under this category Investment Institutions They are the institutions that acquire and trade in securities mainly in the capital market. They mobilize savings of public in various forms other than in the form of demand deposits

and utilize the same for investment activities mainly in the capital market. LIC, GIC & UTI fall under this category Other Institutions They are the institutions that carry a particular activity like Core Investment, Micro Financing, Equipment Leasing, Hire Purchasing Finance, Housing Finance, Mutual Benefit (Nidhi) Company, Chit Fund Company, etc. Factors contributing to the growth of NBFCs 1. The banking companies were controlled through a comprehensive and detailed regulation over their activities. However, there were no such comprehensive and detailed regulations over the non-banking financial institutions in the past. This has become the main reason for the growth of non-banking financial institutions.  Non-banking financial institutions were more easily accessible by the customers than the banking institutions in the past. This is another reason for the growth of NBFCs  Non-banking institutions followed much less formalities during the pre and post sanction requirements. Their services were less complicated, fast and tailor made. This also has led to the growth of NBFCs  The monetary policy and credit policy announced by the RBI sometimes keeps away some borrowers from approaching the banking institutions. NBFCs cater to the needs of such borrowers who remain outside the purview of commercial banks. This also has led to the growth of NBFCs.  Generally, the rate of interest offered on the deposits by the NBFCs is higher when compared to the banking institutions. This also has led to the growth of NBFCs. 8.4 FUNCTIONS OF NBFCS The NBFCs mainly perform the functions of receiving of deposits, lending of money and investment of money. Receiving deposits – NBFCs receive mainly two types of deposits. They are: a) Regulated Deposits – The deposits on which there is a ceiling limit or certain other restrictions prescribed by the RBI are called regulated deposits. For example, hire purchase companies and equipment leasing companies can receive deposits only upto

ten times of their net-owned funds. b) Exempted Deposits – The deposits on which there are no ceiling limits or other restrictions by any controlling authority are called exempted deposits. These deposits include borrowing from other banks and financial institutions, money received from Government, intercompany borrowings, security deposits, money received from local authorities, directors, etc. Lending of money – NBFCs lend money in various forms like hire purchase finance, leasing finance, consumption finance, finance for social activities, housing finance, development finance, etc. Investment of money – NBFCs invest their surplus funds in various forms of securities like shares, stock, debentures, bonds, etc. Services rendered by NBFCs The important services rendered by NBFCs are: 1. Mobilization of savings by offering attractive schemes and attractive rates of interest 2. Timely provision of adequate credit facility in a easy and simple way 3. Act as financial supermarket where credit facility is available for diversified activities. 4. Channelize funds for productive purposes by financing the capital intensive industries 5. Encourage thrift and develop savings habit among general public by receiving deposits in various attractive forms. 6. Enable asset creation by providing housing finance 7. Increase standard of living of people by providing installment facilities to buy consumer durables 8. Render expert advice on investment of funds 9. Promote economic development by providing wider choice to both borrowers and investors 8.5 REGULATIONS OF NBFCS As already discussed, in the earlier days, there were no comprehensive and detailed regulations over the functioning of NBFCs. However, in 1960 the RBI made an attempt to

regulate NBFCs through issuing directions in respect of the following: 1. Maximum amount of deposits that can be accepted by a NBFC 2. The period of deposits 3. The rate of interest 4. Maintenance of certain percentage of funds in the forms of liquid assets 5. Creation of reserve funds 6. Transfer of certain percentage of profits to reserve fund every year, etc. The amendment made to the RBI Act in the year 1997 gave comprehensive powers to the RBI to regulate the functioning of NBFCs. Accordingly the NBFCs are controlled by RBI and the important regulations in respect of NBFCs are: 1. It is mandatory for every NBFC to obtain a certificate of registration and have minimum net owned funds. 2. Ceilings are prescribed for acceptance of deposits, capital adequacy, credit rating and net-owned funds. 3. RBI is entrusted with the development of a comprehensive system to supervise NBFCs. 4. Statutory auditors are required to report all kinds of non-compliance of specific rules and regulations. Overall contributions of NBFCs to the Indian Economy 1. Development of infrastructure facility 2. Generation of employment opportunity 3. Creation of wealth 4. Meet the requirements of economically weaker sections of the society 5. Balanced growth of different regions and industries Industrial Development Bank of India (IDBI): Constitution of IDBI The IDBI was constituted as a wholly owned subsidiary of the RBI in July 1964 under the

IDBI Act, 1964 as a Development Financial Institution. Later on, in the year 1975 it was taken over by the Central Government under the Public Financial Institutions Law (Amendment) Act, 1975. The Central Government de-invested around 28% of its holding in the year 1995 by selling the shares to the public. Presently about 72% of the share capital of the IDBI is held by the Government. IDBI served as a Development Financial Institution (DFI) for 40 years and in the year 2004, the IDBI was transformed into a Bank through forming a new company called Industrial Development Bank of India Limited (IDBI Ltd.,) as a wholly owned subsidiary of IDBI under the Companies Act, 1956. The company was incorporated on September 27, 2004 and the undertaking of IDBI was transferred and vested in IDBI Ltd., with effect from October 1, 2004. IDBI took over the business of United Western Bank Ltd., in the year 2006 and the merger came into effect from October 3, 2006. Effective from May 7, 2008 the name of IDBI Ltd., was changed to IDBI Bank Ltd., and presently the bank is functioning in the same name. Role of IDBI 1. The primary role of IDBI is to act as the principal financial institution for coordinating the activities of various financial institutions that are engaged in the financing, promoting and developing of various industries. 2. It plans, promotes and develops industries keeping in mind the national priorities. 3. It also provides technical and administrative assistance for promotion, management, expansion activities of the industry. 4. It undertakes market and investment research and surveys and techno- economic studies to contribute to the development of the industry and attempts to bring a balanced growth of the industries in all corners of the country. Objectives of IDBI 1. Coordination, regulation and supervision of the working of other financial institutions such as IFCI, ICICI, UTI, LIC, Commercial Banks and SFCs. 2. Supplementing the resources of other financial institutions and thereby widening the scope of their assistance. 3. Planning, promotion and development of key industries and diversification of industrial growth.

4. Developing and enforcing a system of industrial growth that conforms to national priorities. Functions of IDBI 1. IDBI provides direct as well as indirect financial assistance to industrial enterprises like IFCI, SFCs or any other financial institution by way of refinancing. The IDBI grants loans and advances to industrial concerns. There is no restriction on the upper or lower limits for assistance to any concern itself. The bank guarantees loans raised by industrial concerns in the open market from the State Co-operative Banks, the Scheduled Banks, the Industrial Finance Corporation of India (IFCI) and other ‘notified’ financial institutions. It also refinances the term loans to industrial concerns repayable within 3 to 25 years given by the IFCI, the State Financial Corporation and some other financial institutions and to SIDCs (State Industrial Development Corporations), Commercial banks and Cooperative banks which extend term loans not exceeding 10 years to industrial concerns. IDBI subscribes to the shares and bonds of the financial institutions and thereby provide supplementary resources 2. It promotes institutions engaged in industrial development. In fulfillment of its developmental role, the bank performs a wide range of promotional activities relating to developmental programs for new entrepreneurs, consultancy services for small and medium enterprises and programs designed for accredited voluntary agencies for the economic upliftment of the underprivileged. These include entrepreneurship development, self- employment and wage employment in the industrial sector for the weaker sections of society through voluntary agencies, support to Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing Centres for small industries. 3. It provides technical and administrative assistance for promotion, management or expansion of industry. With a view to making available at a reasonable cost, consultancy and advisory services to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other All-India Financial Institutions, has set up a network of Technical Consultancy Organizations (TCOs) covering the entire country. TCOs offer diversified services to small and medium enterprises in the selection, formulation and appraisal of projects, their implementation and review. Realizing that entrepreneurship development is the key to industrial development, IDBI played a prime role in setting up of the Entrepreneurship Development Institute

of India for fostering entrepreneurship in the country. It has also established similar institutes in Bihar, Orissa, Madhya Pradesh and Uttar Pradesh. 4. It undertakes market and investment research and surveys in connection with development of industry. IDBI also extends financial support to various organizations in conducting studies or surveys of relevance to industrial development. 5. It also performs other functions like, discounting or rediscount bills of industrial concerns, underwriting or subscribing to shares or debentures of industrial concerns, subscribing to or purchasing stock, shares, bonds and debentures of other financial institutions, granting a line of credit or loans and advances to other financial institutions such as IFCI, SFCs, etc., guaranteeing deferred payment due from any industrial concern, guaranteeing loans raised by industrial concerns in the market or from institutions, providing consultancy and merchant banking services in or outside India, debenture trusteeship, forex services, depository participant service, establishment of subsidiaries, etc. Industrial Credit and Investment Corporation of India ICICI Industrial Credit and Investment Corporation of India (ICICI) is a financial institution in India and was established in 1955 as a public limited company. The Indian Company Act governs it. ICICI is incorporated for developing medium and small industries of the private sector. Initially, the equity capital of ICICI was owned by companies, institutions, and individuals. At present, it has been owned by public sector institutions like— Banks, LIC, CIC, and its associated companies. In March 2002, the ICICI merged with the ICICI Bank and become a first universal bank in India. Due to this merger, ICICI does not exist anymore as a financial institution. Financial Assistance of ICICI To achieve its goals, ICICI gives financial assistance in various forms such as:  Provides long term and medium term loans both in terms of the rupee and foreign currency.  ICICI participates in equity capital and in debentures.  Underwriting new issues of shares and debentures ofcompanies.  Provides guarantee to suppliers of equipment and foreign loaners. Activities of ICICI Bank

The activities of ICICI are: Project Finance ICICI provides project finance to industries for establishment cost, modernization or expansion of manufacturing and processing activities. This assistance provided in the form of the rupee and foreign loans, underwriting, subscription to shares and debentures and guarantees to supply of equipment and foreign donors. The rupee loan is provided for the purchase of various equipment and machinery, construction and preliminary expenses. The foreign currency loans are provided for the purchase of imported equipment. Leasing The ICICI commenced its leasing operations in 1983. Leasing assistance is provided for computerization, modernization/replacement, equipment of energy conservation, export orientation, pollution control activities, etc. Project Advisory Services ICICI provides project advisory services to the Central and State Governments and public sector and private sector companies. It provides advice to the governments on policy reforms and on value chain analysis and to private sector companies on strategic management. Facilities for Non-resident Indians ICICI gives information regarding facilities and incentives by the Government of India to the non- resident Indians for judicious investing inIndia. Provision of Foreign Currency Loans The ICICI provides foreign currency loans and advances to enable Indian Industrial concerns to secure essential capital goods from foreign countries. Other Institutions Promoted (a) ICICI promoted the Housing Development Finance Corporation (HDFC) to make available long-term finance to individuals in middle and lower income groups, co-operation, etc. Its primary objective was the construction and purchase on ownership basis of residential houses all over the country. (b) Credit Rating Information Services of India Ltd. (CRISIL) was also set up by ICICI in

association with Unit Trust of India (UTI) to provide credit rating services to the corporate industries. (c) ICICI promoted technology Development and Information Company of India Ltd. (TDICI), to finance the transfer and Up gradation of technology and provide technical information. (d) Programmers for the Advancement of Commercial Technology (PACT) set up by ICICI with a grant of US $10 million provided by USAID (United States Aid) to assist market- oriented R&D activity by Indian and US companies. ICICI has been entrusted with the administrative activities and management activities of PACT. (e) Programme for Acceleration of Commercial Energy Research (PACER) funded by USAID with a grant of US $ 20 million to provide assistance to selected research and technology development proposals in the Indian energy sector. PACER was also launched by ICICI. Objectives:  To provide loans to various industrial projects in the privatesector.  To stimulate the promotion of various new industries.  To provide assistance the expansion and modernization ofexisting industries.  To provide Technical and managerial aid to increase production of industries. Industrial Finance Corporation of India (IFCI) Industrial Finance Corporation of India (IFCI) is actually the first financial institute the government established after independence. The main aim of the incorporation of IFCI was to provide long-term finance to the manufacturing and industrial sector of the country. Let us study more about IFCI. Initially established in 1948, the Industrial Finance Corporation of India was converted into a public company on 1 July 1993 and is now known as Industrial Finance Corporation of India Ltd. The main aim of setting up this development bank was to provide assistance to the industrial sector to meet their medium and long-term financial needs. The IDBI, scheduled banks, insurance sector, co-op banks are some of the major stakeholders of the IFCI. The authorized capital of the IFCI is 250 crores and the Central

Government can increase this as and when they wish to do so. Functions of the IFCI  First, the main function of the IFCI is to provide medium and long-term loans and advances to industrial and manufacturing concerns. It looks into a few factors before granting any loans. They study the importance of the industry in our national economy, the overall cost of the project, and finally the quality of the product and the management of the company. If the above factors have satisfactory results the IFCI will grant the loan.  The Industrial Finance Corporation of India can also subscribe to the debentures that these companies issue in themarket.  The IFCI also provides guarantees to the loans taken by such industrial companies.  When a company is issuing shares or debentures the Industrial Finance Corporation of India can choose to underwrite such securities.  It also guarantees deferred payments in case of loans taken from foreign banks in foreign currency.  There is a special department the Merchant Banking & Allied Services Department. They look after matters such as capital restructuring, mergers, amalgamations, loan syndication, etc.  It the process of promoting industrialization the Industrial Finance Corporation of India has also promoted three subsidiaries of its own, namely the IFCI Financial Services Ltd, IFCI Insurance Services Ltd and I-Fin. It looks after the functioning and regulation of these three companies. IFCI as a Business Facilitator: In the last few decades, the Industrial Finance Corporation of India has made a significant contribution to the development of our economy. Also, it is responsible for the growth, expansion, and modernization of our industrial sector. The Industrial Finance Corporation of India has also been beneficial for the import and export industry, the cause of pollution control, energy conservation, import substitution, and many such initiatives and industries. Some sectors, in particular, have seen a lot of benefits. Some of these are  Agricultural Based Industries like paper, sugar, rubber, etc.

 Service Industries like restaurants, hospitals, hotels, etc.asic industries in any economy like steel, cement. Chemicalsetc.  Capital and goods industries like electronics, fibers, telecom services, etc. National Bank for Agriculture and Rural Development (NABARD) The Indian economy post independence was an agricultural economy. After independence, the focus was mainly on manufacturing and trade sector of the economy to boost development. However, a major part of the population in India live in the rural sector and so it is important to develop rural financial activities. This is why the government set up NABARD. NABARD is instrumental in the development and efficiency of the current rural credit system. Over half the credit in the rural region comes from Co-operative banks and Regional Rural Banks. NABARD is responsible for regulating and supervising the functioning of such banks. Over the years NABARD has been pushing for development in the credit schemes for rural populations to meet their new credit requirements. Other than meeting credit requirements of the rural sector NABARD is also instrumental in social innovations and projects. It partners with various organizations for many innovative projects such as SHG-Bank linking, innovative schemes for water and soil conservation. Over the last three decades, the institution has gained goodwill and trust in the farmers and rural communities. Objectives of NABARD The main objects of NABARD are as follows: 1. NABARD provides refinance assistance for agriculture, promoting rural development activities. 2. It also provides all necessary finance and assistance to small scale industries. 3. NABARD in coordination with the State Governments, provides agriculture. 4. It improves small and minor irrigation by way of promoting agricultural activities. 5. It undertakes R&D in agriculture, rural industries. 6. NABARD promotes various organizations involved in agricultural production by contributing to their capital. Thus, the objects of NABARD can be brought under three major heads:

 Credit function.  Development function.  Promotional function. Functions of NABARD 1. NABARD provides refinancing facilities to Commercial banks, State co- operative banks, Central Co-operative banks, Regional rural banks and Land Development banks. 2. It provides refinancing to agriculture, small scale industries and other village and cottage industries by lending to commercial banks. 3. It promotes rural industries, small scale and cottage industries including tiny sectors by providing loans to commercial and co-operative banks. 4. Special assistance is given by the bank for the promotion of small scale, cottage and village industries under service area approach. 5. The bills of commercial and co-operative banks are discounted to enable them to finance for agricultural operations. 6. The bank provides funds to State governments for undertaking developmental and promotional activities in rural areas. In order to promote rural development and to help the weaker sections, the bank refinances especially regional rural banks which are set up in backward areas in most of the States. 7. Towards long-term loan, the bank is providing loans to institutions involved in long-term agricultural loan against guarantee of State government.

8. The bank is also financing research and development of agricultural and rural industries. 9. The bank implements the policy of the Central Government and the RBI with regard to agricultural credit. 10. Provides finance for promoting non-form activities and employment in non-farm sectors for the purpose of reducing rural unemployment. 11. It strengthens the co-operative structure in the States by providing loans to both State co- operative banks and also to Land Development Banks. 12. It promotes minor irrigation projects by financing State Government’s sponsored irrigation projects. 13. The bank is undertaking inspection work of Co-operative banks and Regional rural banks. 14. The bank has opened branches at all District headquarters by which it co- ordinates the District development programmes along with the district officials. 15. The bank also helps in the annual credit plan of the commercial banks and co- ordinates the activities of commercial and co-operative banks at the district level. 16. During natural calamities, such as droughts, crop failure and floods, the bank helps by refinancing commercial and cooperative banks so that the farmers tide over their difficult period. Thus, the bank is providing short-term, medium term and long-term loans for agriculture and rural development Ever since the setting up of NABARD, there has been a considerable increase in the distribution of agricultural credit both by commercial and co-operative banks. NABARD has also strengthened up the working of Regional rural banks. Thus, we find that the role of RBI in agricultural finance has been not only taken over by NABARD but it has been discharging it to the atmost satisfaction of all the parties concerned. Role of NABARD NABARD is set up as 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. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with: 1. Providing refinance to lending institutions in rural areas, 2. Bringing about or promoting institutional development, and

3. Evaluating, monitoring and inspecting the client banks. Besides this pivotal role, NABARD also: 1. Acts as a coordinator in the operations of rural credit institutions. 2. Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development. 3. Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development. 4. Helps the State Governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development. 5. Acts as regulator for cooperative banks and RRBs. Some of the milestones in NABARD's activities are: 1. Refinance disbursement under ST-Agri & Others and MT- Conversion/Liquidity support aggregated 16952.83 crores during 2007- 08. 2. Refinance disbursement under Investment Credit to Commercial Banks, State Cooperative Banks, State Cooperative Agriculture and Rural Development Banks, RRBs and other eligible financial institutions during 2007-08 aggregated 9046.27 crores. 3. Through the Rural Infrastructure Development Fund (RIDF) 8034.93 crores were disbursed during 2007-08. With this, a cumulative amount of 74073.41 crores has been sanctioned for 280227 projects as on 31st March 2008 covering irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection, forest management etc. 4. Under Watershed Development Fund with a corpus of 613.71 crores as on 31st March 2008 , 416 projects in 94 districts of 14 states have benefited. 5. Farmers now enjoy hassle free access to credit and security through 714.68 lakh Kisan Credit Cards that have been issued through a vast rural banking network. 6. Under the Farmers' Club Programme, a total of 28226 clubs covering 61789 villages in 555 districts have been formed, helping farmers get access to credit, technology and extension services. Achievements of NABARD After the setting up of NABARD, there has been considerable increase in the rural finance and

development of small scale and cottage industries. By way of short-term credit, nearly Rs. 4,000 crores has been distributed during 90’s compared to Rs. 1,200 crores during 80’s. By way of medium term finance, nearly Rs. 400 crores have been provided and they have been utilized mainly by States affected by natural calamities. In long- term loan, more than Rs. 240 crores have been sanctioned for contributing to the share capital of co-operative institutions. NABARD has also played a significant role in improving storage facilities for agricultural commodities in the country. It has also promoted the export of agricultural commodities which include vegetables and fruits. It has played a supplementary role in sustaining Green Revolution in the country. White Revolution and Blue Revolution in the form of increased milk production and fisheries have also been contributed by the sustained efforts of NABARD. India stands the top most country in the world in production of dairy milk. Regional Rural Banks (RRBs) 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. History of Regional Rural Banks (RRBs): The Regional Rural Banks were established on the recommendations of Narsimha Committee on Rural Credit. The committee was of the view that RRBs would be much better suited than the commercial banks or Co-Operative Banks in meeting the needs of rural areas. Considering the recommendations of the committee the Government of India passed Regional Rural Banks Act 1976. After passing the Act within a year at least 25 RRBs were established in different parts of India. The Regional Rural Banks were established with a view to develop such type of banking institutions which could function as a commercial organization in rural areas. The Regional Rural Banks Act 1976 provide for incorporation, regulation and winding up Regional Rural Banks with a view to developing the rural economy by providing for the purpose of development of Agriculture, Trade, Commerce, Industry and other productive activities in the

rural areas, credit and other facilities, particularly to the small and marginal farmers, Agricultural Labourers, Artisans and small entrepreneurs and for matters connected therewith and individuals thereto. The Objectives of Regional Rural Banks: In view of the above preamble of the Act the objects and activities of RRBs can be briefed as under: 1) Bridging the credit gaps in rural areas. 2) To develop such measures which could restrict the outflow of rural deposits to urban areas. 3) To reduce regional imbalances and increase rural employment generation activities. For achieving its objectives the RRBs provide financial assistance to different segments of rural population engaged in rural activities. Area of Functioning of Regional Rural Banks: The Regional Rural Banks are required to function within a limited area for which they are established. Usually the functional area of Each RRB is confined to a few districts of the state in which they are set up. The area of functioning of RRBs is decided by central government in consultation with NABARD and the Sponsor Banks by way of a notification issued in this regard. It is therefore necessary for RRBs to establish their Head Office in central place of their notified area of functioning because they are also authorized to open their branches or appoint agency within their specified areas. Sponsorship of Regional Rural Banks: Each Regional Rural Bank is sponsored by a Public Sector Bank. A sponsor bank in relation to a Regional Rural Bank is a Bank by which such a RRB is sponsored. It is duty of a sponsor bank to aid and assist the RRB sponsored by it. A sponsor bank helps RRB by: a) Subscribing to the share capital. b) Training personnel of Regional Rural Bank. c) Providing managerial and financial assistance to RRB.

A sponsor bank provides such managerial (staff) and financial assistance during the first 5 years of its functioning. The central government may, either on its own motion or on the recommendations of NABARD extend such period of 5 years for such further period(not exceeding 5 years at a time) as may be deemed fit. The authorized capital of Regional Rural Banks is Rs. 5 crores which is contributed by Central Government, State Government and the Sponsor Bank in ration of 50:15:35. Functions of Regional Rural Banks: All the Regional Rural Banks are authorized to carry on to transact the business of a banking as defined in the Banking Regulation Act 1949. RRBs grant loans to small and marginal farmers, Agricultural labourers, Co-operative societies and to individuals including artisans, small entrepreneurs and persons of small means. In brief RRBs do all such functions as are done by domestic banks like accepting deposits from public, providing credit, remittance services etc. They can also invest in Government securities and deposit schemes of Banks and Financial Institutions. Regional Rural Banks may also seek refinance facilities provided by NABARD for the loans sanctioned and disbursed by them. All the RRBs are covered under DICGC scheme and they are also required to observe the RBI stipulations for Cash Reserve Ratio and Statutory Liquidity Ratio. The Reserve bank of India has brought all the RRBs under the ambit of Priority Sector lending w.e.f April 1997. Like all other commercial banks RRB are bound to provide 40% of their Net Bank Credit to Priority Sector. Out of which 25% of PS advances or 10 % of Net Bank Credit is to be given to weaker sectors.

8.6 SUMMARY  A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).\"  For regulatory purposes, NBFCs have been classified into three categories: 1. those accepting public deposits, 2. those not accepting public deposits but engaged in financial business, and 3. core investment companies with 90 per cent of their total assets as investments in the securities of their group/holding/subsidiary companies.  Development Financial Institutions (DFIs) were established with the Government support for underwriting their losses as also the commitment for making available low cost resources for lending at a lower rate of interest than that demanded by the market for risky project.  It helps the funds seekers by providing concessional funds at lower rate of return. Social return of DFIs is quite high.  Term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending long- term finance to different industrial sectors,  Refinancing institutions (NABARD, SIDBI, NHB) extending refinance to banking as well as non-banking intermediaries for finance to agriculture, SSIs and housing sectors.  Sector-specific/specialised institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.)  Investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management Co. Ltd.). State/regional level institutions are a distinct group and comprise various SFCs, SIDCs and NEDFi Ltd.  NBFCs are classified in two ways (1) Classification as per RBI and (2) Classification on the basis of activities performed or General Classification  Asset Financing Companies are the companies whose business is to provide finance for purchase of physical assets like automobiles, tractors, earth moving and material handling equipments, etc. (Example - Bajaj Auto Finance Corporation, Fullerton India).