CU-BBA-SEM-III-Banking- Second Draft-converted

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER-III BANKING BBA111

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY 2 Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENTS Unit 1: Introduction To Indian Banking System........................................................................5 Unit 2: Commercial And Co-Operative Banks ........................................................................28 Unit 3: Introduction To Regional Rural Banks........................................................................63 Unit 4: Banking, Monetary Policy And Regulation.................................................................79 Unit 5: Accounts ....................................................................................................................111 Unit 6: Loans And Advances.................................................................................................130 Unit 7: Banking Ombudsman ................................................................................................157 Unit 8: Mergers And Acquistions ..........................................................................................165 Unit 9: Banking Acts .............................................................................................................179 Unit 10: Basel Norms.............................................................................................................195 Unit 11: Online Banking........................................................................................................201 Unit 12: Latest Technology In Banking.................................................................................215 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1: INTRODUCTION TO INDIAN BANKING SYSTEM Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning 1.3 Definition 1.4 Objectives of banking 1.5 Characteristics of a bank 1.6 Importance of banking 1.7 Role of banking 1.8 History of banking 1.9 Evolution of Banking in India 1.10 Stages in the evolution of banking in India 1.11 Structure of Indian banking system 1.12 Current Scenario 1.13 Recent trends in banking system 1.14 Challenges faced by the banks 1.15 Summary 1.16 Keywords 1.17 Learning activity 1.18 Unit End Questions 1.19 References 1.0 LEARNING OBJECTIVES After studying this unit, students will be able to • Explain the importance and characteristics of banking • Discuss the structure of Indian Banking System • Identify the impact of nationalization on banking industry. • Learn about recent trends in Banking System • Explain the challenges faced in the banking sector. 1.1 INTRODUCTION India's banking system has an illustrious history, a promising future, and a friendly current. The Indian banking system is evolving at a rapid pace. Banks are one of the most critical institutions for a country's economy and GDP to develop properly. It is also critical for a 5 CU IDOL SELF LEARNING MATERIAL (SLM)

community that relies on consumer confidence to keep their assets in the form of gold and money secure in banks. Banks have a responsibility to maintain stringent asset management policies. Banks also offer a variety of services to customers, necessitating a positive relationship between banker and consumer. We try to cover a variety of topics that clearly illustrate how India's banking system developed. History of Indian banking, nationalization of Indian banking, banking in the British period, banking in the post-independence era, globalization in the banking sector, and banking in the modern era are some of the topics covered. According to some sources, the word \"bank\" is derived from the Greek word \"banque,\" which means \"bench.\" Jews used to conduct money transactions while sitting on benches in a market place. When a banker was unable to fulfil his obligations, the ‘Bench' on which he used to sit and conduct his business was shattered, and he was declared bankrupt. As a result, both the words \"bank\" and \"bankrupt\" are said to derive from the term \"banque.\" Others claim that the word \"bank\" is derived from the German word \"back,\" which refers to a joint stock company. As the Germans invaded Italy, the word was Italized, and the word \"back\" became \"banco,\" and then \"bank\" when the English took over. Banks are regarded as the country's financial backbone, and they also play an important role in the country's economic growth. The primary duty of a bank is to accept deposits and use them for binding purposes. It essentially serves as a conduit between those with excess capital and those in need of that capital. In general, the nation's banking system improves the quality of economic transactions. The current global crisis, which has affected every nation, has brought up a number of issues concerning the efficiency and solvency of the banking system in the minds of policymakers. Now that the crisis is nearly over, the Government of India (GOI) and the Reserve Bank of India (RBI) are attempting to draw some conclusions. To ensure price stability in the economy, the RBI is making appropriate policy changes. The key goal of these reforms is to improve the overall performance of banking as well as the efficiency of individual institutions. As a result, it is important to assess the performance of Indian banks in order to take corrective action to improve the banking system's health. 1.2 MEANING The term 'bank' comes from the Latin word 'bancus' or 'banque.' Its English translation is \"table.\" The first bankers did their business on benches in a market place. Some authorities claim that the word bank was derived from the German word bank. It refers to a joint stock company. When a large part of Italy was controlled by the Germans, this term became known as \"banco.\" A bank is a type of financial institution that handles deposits, advances, and other financial services. It collects funds in the form of deposits from those who want to save and loans money to those who need it. A bank is a financial institution and a financial intermediary that accepts deposits and invests them in lending activities, either directly or indirectly through capital markets. A bank serves as a link between customers with capital 6 CU IDOL SELF LEARNING MATERIAL (SLM)

deficits and those who have capital surpluses. Banks are heavily controlled in most countries due to their influence within the financial system and economy. Most banks use a fractional reserve banking scheme, in which they keep only a small portion of the funds invested and lend out the remainder for profit. They are usually subject to minimum capital requirements based on the Basel Accords, an international set of capital rules. 1.3 DEFINITION F.E. Perry: “The bank is an establishment which deals in money, receiving it on deposit from customers, honoring customer’s drawings against such deposits on demand, collecting cheques from customers and lending or investing surplus deposits until they are required for repayment.” Walter Leaf: “A banker is an institution or individual who is always ready to receive money on deposits to be returned against the cheques of their depositors.” Dr. Herbert L. Hart: “A banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on current accounts.” The Indian Banking Companies Act, 1949: “Banking means the acceptance 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”. 1.4 OBJECTIVES OF BANKING Safeguard Deposits The primary function of a bank is to accept and safeguard public deposits. It provides consumers with assurances about the protection of their funds when they deposit money into their accounts. Provide Loans It provides loans to consumers on a short-term and long-term basis, depending on their requirements. Customers are charged interest on the amount borrowed by the bank, which is derived from the deposits they obtain. Encourage Savings Banking institutions play an important role in motivating people to save. It encourages people to save and invest their earnings in bank accounts by giving them a fixed rate of interest on the sum they deposit on a regular basis. Capital Formation 7 CU IDOL SELF LEARNING MATERIAL (SLM)

Banking increases the rate of capital creation in a region. It extends credit to different sectors of the economy on a regular basis, allowing all growth and development activities to continue uninterruptedly. Various sectors and companies turn to banks to meet their financial needs. Currency Issue Banking institutions are responsible for issuing currency that is used as legal tender in the country. Our country's central bank (RBI) prints and distributes all currency notes to the general public. Enhances Living Standards It provides credit to people to help them improve their quality of life. Customers can buy high-quality, expensive products on credit or via a hire purchase agreement with the bank. Generates Employment Banking institutions also contribute to the creation of a large number of job opportunities in the country. It assists businesses in expanding their operations by offering credit tailored to their needs. As a result, the demand for human resources for different roles will rise. In addition, the banking sector employs a sizable portion of the workforce. 1.5 CHARACTERISTICS OF A BANK A bank's characteristics can be summarized as follows: 1) Dealing with Money: A bank is a financial entity that deals with other people's money, such as money deposited by customers. 2) Person, Business, or Company: A bank may be an individual, a firm, or a corporation. A banking company is one that is involved in the banking industry. 3) Deposit Acceptance: A bank accepts money from citizens in the form of deposits, which are normally repayable on demand or after a set period of time has passed. It ensures the protection of its customers' deposits. It also serves as a custodian for its customers' funds. 4) Advances: A bank lends money to people who need it for various reasons in the form of loans. 5) Payment and Withdrawal: A bank provides its customers with convenient payment and withdrawal options in the form of cheques and draughts. It also allows for the movement of bank capital. This money is in the form of checks, draughts, and other similar instruments. 6) Agency and Utility Services: A bank offers its customers a variety of banking services. General utility services and agency services are among them. 7) Profit and Service Orientation: A bank is a profit-driven organization with a service- oriented approach. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

8) Increasing Functions: Banking is a phenomenon that has evolved over time. In terms of the functions, facilities, and activities of a bank, it is constantly expanding and diversifying. 9) Connecting Link: A bank serves as a link between money lenders and borrowers. Banks raise money from those who have extra cash and distribute it to those who are in need. 10) Banking Sector: A bank's primary business should be banking, and it should not be a subsidiary of another business. 11) Name Identity: A bank's name should always include the word \"bank\" to let people know that it is a bank that deals in money. 1.6 IMPORTANCE OF BANKING Bring Economic Stability The banking sector is critical to achieving economic stability. They are the ones that help to keep depression and inflation under control. Banks follow a cheap money strategy during a crisis to increase the flow of money in the economy. When there is inflation, however, it follows a strict money policy to reduce the flow of money. It raises the interest rate on borrowings to keep people's spending under control during inflation. Creates Money Banks create liquidity in an economy by extending loans to anyone who needs money. It's a company that gives credit to people using the money it collects from the general public. These organizations strive to keep a steady supply of funds. Facilitates Trade It facilitates both domestic and international trade. Banks help merchants conduct business by supplying them with adequate payment facilities, issuing letters of credit, discounting bills of exchange, and other guarantee papers. Money Transfer It allows people to send money quickly, even to far-flung locations. It has made the payment system easier by offering a variety of instruments such as draughts, checks, and bills of exchange. Paying with these instruments is safer and more convenient than paying with cash. Transfer Savings into Investment 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Banking serves as a means of moving capital from those who have it in abundance to those who do not. It collects people's savings and lends money to entrepreneurs and businesses to help them expand their businesses. People's ideal lying funds are converted into useful means by the bank. Ensures Liquidity Banks also play an important role in ensuring that the economy has enough liquidity. Banks monitor money flows by implementing a sound monetary policy. It reduces the money supply during inflation and raises the flow of money during deflation. 1.7 ROLE OF BANKING Banks are important in the development of a country because they provide funds for businesses. 1. Acts as an intermediary It serves as a go-between for people with extra cash and others who need money for different business purposes. 2. Economic development It contributes to national development by providing credit to farmers, small-scale industries, self-employed citizens, and large corporations, resulting in balanced economic growth in the region. 3. Capital formation Deposits accepted by banks are converted into loans and advances to businesses for manufacturing and trading operations. Banking turns savings into investment, resulting in capital formation and economic growth. 4. Services to business Banking assists businesses in a number of ways, including providing long- and short-term financing, coordinating money transfers, collecting checks and bills, and assisting in capital raising by serving as underwriters. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Reduces use of currency Instead of liquid money, banks allow depositors to pay with cheques, travelers cheques, credit cards, and other bank-issued instruments. As a result, problems with currency use are greatly reduced. 6. Mobilization of savings Banks enable deposits to be deposited in a variety of accounts, including current accounts, savings bank accounts, fixed deposit accounts, and so on, all of which pay various interest rates, encouraging people to save money and deposit it in banks. 1.8 HISTORY OF BANKING HISTORY Banking existed in India during the Vedic period (from 2000 BC TO 1400 BC). In those days, loans and usury were well-understood concepts. Money lending was thought to be an ancient practice. Money lending was practiced in the beginning. Money lending was once considered one of the four honest professions, along with tillage, trading, and harvesting. Lending and banking are mentioned in two epics, the Mahabharata and the Ramayana, which are concerned with life events that occurred between 1000 and 700 BC. At that time, banking evolved into a full–fledged industry. Most of the functions that banks perform in the modern era were already performed by bankers during the Smriti period, such as accepting deposits, granting secured and unsecured loans, acting as their customers' bailee, granting loans to kings in times of grave crisis, acting as the state's treasurer and banker, and issuing and managing the country's currency. Indigenous banking was at its peak during the Mughal era. In India, there was hardly a village that didn't have a moneylender or Sharoff who financed trade and commerce. Money lending was a highly lucrative company due to the currency and coinage scheme in place at the time. This was a time when indigenous bankers held a privileged role in society, serving as the community's primary source of funding. They were also heavily relied upon by the rulers and government, who appointed them as tax collectors. During this time, however, the banking system suffered a significant decline because Muslims considered taking interest to be a sin. In India, modern banking did not begin until the early nineteenth century. Employees of the East India Company founded the first commercial banks in India. 'Agency House' was the name given to these banks. They were mostly trading companies that mixed banking with other things including trading and speculation. Banking in India as we know it today began in the last decade of the 18th century, with the establishment of Bank of Hindustan in 1770. Banks of three presidencies viz. Banks of Calcutta, Bombay, and Madras were established in 1806, 1840, and 1843, 11 CU IDOL SELF LEARNING MATERIAL (SLM)

respectively. In 1809, the Bank of Calcutta was renamed the Bank of Bengal. On January 27, 1921, these three presidency banks merged to create the Imperial Bank of India. After independence, the Imperial Bank of India was renamed and became the State Bank of India in 1955. The State Bank of India is India's largest and oldest bank. Some \"State\" banks were established as subsidiaries of the State Bank of India under a special provision of the State Bank of India (Subsidiary Banks) Act of 1959. BANK CRISIS Banking in India suffered a serious setback between 1913 and 1917, when 108 banks collapsed, followed by 373 bank failures in 1922–36, and then 620 bank failures in 1937–48. Cooperative banks were founded in India in 1904 with the sole purpose of financing agriculture. There are now three types of cooperative banks: I Primary Cooperative Banks at the village level; (ii) Central Cooperative Banks at the district level; and (iii) State Cooperative Banks at the state level. The founding of the Reserve Bank of India in 1935 marked the start of a new period in the history of the Indian banking system. The Reserve Bank of India was given broad powers to govern, supervise, and establish the banking system under the Banking Regulation Act of 1949. In subsequent years, RBI's efforts were primarily focused on institutionalizing deposits, consolidating banking structures, and re-orienting the credit system to meet changing economic needs. BRITISH ERA During the British Empire, merchants established the Union Bank of Calcutta in 1869. It began as a joint stock company, but later partnered with others. The Allahabad Bank, which is still operational today, was established in 1865 and is India's oldest joint stock bank. The first bank, however, was the Bank of Upper India, which was founded in 1863 and lasted until 1913, when it was transferred to Alliance Bank of Shimla due to the failure of some of its assets and liabilities. The Oudh Commercial Bank was the first Indian joint stock bank to open, but it failed in 1958. The Punjab National Bank, which was established in 1894 in Lahore and is now India's second largest bank, was the next to open its doors. In the early twentieth century, India's banking system was not sufficiently established to compete effectively with presidency banks and foreign exchange banks that were well-equipped with technology and capital resources. Between 1906 and 1911, the Swadeshi Movement inspired the establishment of banks. PRE INDEPENDENCE PERIOD The \"Bank of Hindustan,\" established in 1770 in the then-Indian capital of Calcutta, was the country's first bank. However, this bank did not succeed and closed its doors in 1832. Over 12 CU IDOL SELF LEARNING MATERIAL (SLM)

600 banks were registered in the country prior to independence, but only a few managed to survive. Various other banks in India followed in the footsteps of the Bank of Hindustan. They were as follows: • The Reserve Bank of India (RBI) (1786-1791) • Commercial Bank of Oudh (1881-1958) • The Bengal Bank (1809) • Bank of Bombay (Bombay) (1840) • Madras Bank is a bank based in Madras, India (1843) During British rule in India, the East India Company founded three banks known as the Presidential Banks: Bank of Bengal, Bank of Bombay, and Bank of Madras. In 1921, these three banks were combined into one single bank known as the \"Imperial Bank of India.\" In 1955, the Imperial Bank of India was nationalised and renamed The State Bank of India, which is now the largest public sector bank in India. POST INDEPENDENCE PERIOD In India, a large number of institutions have emerged to provide financing to various sectors of the economy. Branch licensing and regulation norms limited the entry activities of private sector and foreign banks. The Indian government has taken the following steps to control banking: - The Reserve Bank of India (RBI) was nationalized in January 1949 under the terms of the RBI. The Banking Regulation Act was passed in 1949. The Banking Regulation Act of 1949 also stipulates that no new bank or branch of an existing bank may be established without first obtaining a license from the RBI. Directors could not be the same in two banks. NATIONALIZATION Mrs. Indira Gandhi announced the nationalization of banks in India in 1969. On July 19, 1969, it nationalized the 14 main commercial banks. The second round of nationalization of Indian banks began in 1980, with the government of India controlling approximately 91 percent of the banking sector. It was the only merger of nationalized banks, resulting in a decrease in the number of nationalized banks from 20 to 19. IMPACT OF NATIONALISATION 13 CU IDOL SELF LEARNING MATERIAL (SLM)

The government wanted to nationalise the banks for a variety of purposes. The following is an overview of the effects of nationalising banks in India: • This resulted in a rise in funds, improving the country's economic situation. • Increased Productivity • Assisting the country's rural and agricultural sectors to develop. • It provided a significant job opportunity for the people. • The government put bank profits to good use for the benefit of the people. • There was less competition, and work quality had improved. LIBERALISATION AND GLOBALISATION Due to the government's liberalization policies in the early 1990s, a number of small private banks were given licenses. More and more banks are benefiting from globalization and expanding at an unprecedented rate; publicly owned banks manage more than 80% of banking business in India, with the remainder in the hands of private sector banks. However, the new development known as ‘Globalization' is revolutionizing banking in both the public and private sectors. After the banks have been founded in the country, they must be monitored and regulated on a regular basis in order for the banking sector to continue to profit. The final phase of the banking sector's growth, or the current phase, is crucial. The government agreed to set up a committee under the leadership of Shri. M Narasimhan to oversee the various reforms in the Indian banking industry in order to provide stability and profitability to the Nationalised Public Sector Banks. The entry of private sector banks in India was the most significant growth. The Reserve Bank of India (RBI) has given permission to ten private sector banks to set up shop in the country. The following banks were among them: 1. Global Trust Bank 2. ICICI Bank 3. HDFC Bank 4. Axis Bank 5. Bank of Punjab 6. IndusInd Bank 7. Centurion Bank 8. IDBI Bank 14 CU IDOL SELF LEARNING MATERIAL (SLM)

9. Times Bank 10. Development Credit Bank The following are some of the other steps that have been taken: • The establishment of foreign bank branches in India • No further bank nationalisations are possible. • The committee stated that the RBI and the government must treat public and private banks equally. • Any foreign bank could form a joint venture with a bank in India. • Payments banks have emerged as a result of advancements in banking and technology. • Small finance banks were given permission to open branches all over India. • With internet banking and applications for fund transfers, a large portion of Indian banking has migrated online. 1.9 EVOLUTION OF BANKING IN INDIA During the British rule in India, the British introduced modern banking as it had developed in England. Naturally, today's Indian banking resembles that of the United Kingdom. However, this does not imply that India was unaware of banking. Lending for economic purposes is the core of banking. In reality, India was a major international trading partner and a major producer of steel, cloth, spices, and opulent goods. In the Manu smriti, there are references to interest rates and loan protection. In the ‘Artha Shastra,' Kautilya discusses interest rate control, deposit regulation, and even bill discounting. They became known as the 'Hundies.' In the Mughal and Maratha courts, major merchants, traders, and moneylenders known as \"Sresthis\" or \"Nagarseths\" held important roles. They had a well-developed courier system, numerous branches throughout India, and they also provided loans to kings. The British, on the other hand, were the ones who implemented modern banking, with its double-entry accounting scheme and insistence on deposit mobilization. The stages of banking in India evolved as British rule spread across the world. Modern banking has also expanded, displacing traditional banking. 1.10 STAGES IN THE EVOLUTION OF BANKING IN INDIA The following are some main stages in India's modern banking evolution: 1) Agency Houses: Due to the language barrier, English traders in India had difficulty raising working capital. As a result, they created Agency Houses that merged trading and banking. In 1770, a single 15 CU IDOL SELF LEARNING MATERIAL (SLM)

agency house established India's first bank, the Bank of Hindustan. Many banks were founded later. However, they vanished just as quickly as they appeared. Then everyone could open a bank. All was welcome on the field. 2) Presidency Banks: To meet its own demand for funds, the East India Company, the ruler of India, took the initiative in establishing Presidency Banks by contributing 20% of their share capital. As a result, in 1806, 1840, and 1943, the Bank of Bengal, Bank of Bombay, and Bank of Madras were founded, respectively. 3) Joint Stock Banks: In 1884, banks with limited liability were authorized to be formed. This eventually prompted the establishment of banks. Many banks were founded by the turn of the century on the initiative of Indians. Punjab National Bank, Allahabad Bank, and Bank of Baroda were among the banks that were established at the time. Many foreigners have also entered the Indian banking industry. 4) Imperial Bank of India: To compete with international banks, the three Presidency Banks were merged in 1921, resulting in the establishment of a dominant Imperial Bank of India with a nationwide network of branches. In 1955, this bank was nationalized, and it is now known as the State Bank of India. Since the government is a client, this is a prestigious bank. 5) Establishment of the Reserve Bank of India: Despite the boom in banking, there were frequent bank failures due to a lack of supervision and timely assistance. People developed a negative perception of banks as a result of this. They avoided banks at all costs. The Hilton Young Commission emphasized the need for a separate central bank. As a result, the RBI was established in 1935 to carry out all of the functions of a central bank. It was based on the Bank of England's pattern. However, it lacked significant regulatory authority. Due to the Great Depression and the ensuing Second World War, this was a crucial time. The Reserve Bank of India (RBI) was unable to intervene in the banking system. 6) Nationalization of the Reserve Bank of India and the Banking Regulation Act: 16 CU IDOL SELF LEARNING MATERIAL (SLM)

These two significant steps were taken in 1949. The RBI was granted broad regulatory and control powers soon after independence, and by putting those powers to good use, the RBI was able to make Indian banking more trustworthy. Bank defaults were soon a thing of the past, and India's banks progressed under the RBI's guidance. The RBI attempted to rectify a number of errors, flaws, and shortcomings. 7) Bank nationalization in 1969 and 1980: In 1969, 14 major Indian banks were nationalized, which was a huge move forward. In 1980, six more banks were nationalized. The nationalization of banks resulted in a significant shift in bank practices, behaviors, processes, functions, and coverage. Indian banks are now preparing to compete on a global scale. These are the stages in the development of Indian banking. 1.11 STRUCTURE OF INDIAN BANKING SYSTEM The Indian banking system is divided into four distinct categories: Figure:1.1 Structure of Indian banking system Reserve Bank of India: The Reserve Bank of India is the country's supreme monetary and banking authority, and it is responsible for overseeing and regulating the country's banking system. The Reserve Bank is 17 CU IDOL SELF LEARNING MATERIAL (SLM)

known as the \"Reserve Bank\" because it holds the deposits of all commercial banks. The Reserve Bank is a central bank that performs all of the functions of a central bank. Its main job is to keep the monetary system, which includes the currency, in check. For this, the Bank is granted a note-issuing monopoly and extensive powers over commercial banks. Simultaneously, the bank is actively involved in the creation of a banking system that is capable of meeting the needs of trade, manufacturing, agriculture, and commerce. A) Commercial Banks: Commercial banks are those that were established primarily to make a profit while also providing various types of services to their depositors. It allows massive payments over long distances to be made with minimal costs. It is the very lifeblood of a developed economic society. Commercial banks have a long and illustrious tradition dating back decades. Commercial banks mobilize urban savings and make these accumulated savings available to meet the working capital needs of various industries and trading units. Commercial banks are broadly defined as follows as a result of the nationalization of large commercial banks in 1969: 1) Public Sector Banks: There were 27 public sector banks in the Indian banking system in 1999. The public sector banks have broader goals of fast economic growth. They have been active in expanding banking quantitatively by opening more branches, increasing deposits, and increasing credit distribution. The public sector banks carry on significant social obligations. a) SBI and Its Associate Banks: The State Bank of India is the group's founder and most well-known member. The following are SBI's seven affiliate banks: 1) State Bank of Bikaner and Jaipur. 2) State Bank of Hyderabad. 3) State Bank of Indore. 4) State Bank of Mysore. 5) State Bank of Patiala. 6) State Bank of Saugashtra. 7) State Bank of Travancore. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

As a company, the SBI and its seven associates account for approximately 34% of total banking business. b) Nationalized Banks: The Central Government acquired the 14 major Indian banks' undertakings under the Banking Companies (Acquisition of Undertakings) Act, 1970. These banks are known as Nationalized Banks after that. There are the following: 1) The Central Bank of India. 2) The Bank of India. 3) The Punjab National Bank. 4) The Bank of Baroda. 5) The United Commercial bank. 6) Canara Bank. 7) The United Bank of India. 8) Dena Bank. 9) Syndicate Bank. 10) The Union Bank of India. 11) Allahabad Bank. 12) The Indian Bank. 13) Bank of Maharashtra 14) The Indian Overseas Bank. 2) Private Sector Banks: In India's mixed economy, the private sector plays an important role in economic growth and is expected to continue to do so. The availability of private sector banks has increased the number of options available to consumers. These banks are putting public sector banks to the test by implementing various innovations such as ATMs, 24 hour banking, and home banking. Banks in the private sector can be classified into two categories: a) Indian Banks: Indian banks are those with their headquarters in India and are owned, regulated, and operated by the Reserve Bank of India. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

b) Foreign Banks: Foreign banks are banks that have their headquarters in another country and are owned, regulated, and operated by people from that country. Banks that are either nationalized or public sector banks, as well as private sector banks. The State Bank of India and its associate banks, as well as another 21 nationalized banks, make up the public sector banks. Private sector banks include a small number of Indian scheduled banks that have not been nationalized and international bank branches operating in India. The term \"foreign exchange banks\" refers to banks that deal in foreign currency. B) Regional Rural Banks: Regional Rural Banks have existed in India since the middle of the 1970s. These banks were founded with the express purpose of providing credit and deposit facilities to small and marginal farmers, agricultural laborer’s, artisans, and small businesses. Regional Rural Banks (RRBs) of India are in charge of rural development in terms of agriculture, trade, commerce, and industry. These institutions are mostly commercial banks. Their service is, however, limited to a single district. C) Co-operative Banks: Co-operative banks are a vital part of India's banking system. The Cooperative Credit Societies Act of 1904 was the catalyst for its formation. Urban Co-operative Banks and Rural Co-operative Credit Institutions are the two types of cooperative banks. a) Urban Co-operative Banks: Urban co-operative banks represent the urban areas. The respective state governments have registered these banks under the Co-operative Societies Act. For these banks' banking activities, the RBI is the regulatory and supervisory authority. The RBI provides these banks with Bank Rate refinancing in exchange for their advances to small and cottage industrial units. 60 percent of overall loans and advances would go to priority markets, according to these banks. There are urban co-operative credit societies that operate in urban areas to provide credit to the semi-urban poorer parts of society at a low rate of interest. These are the co-operative societies that have been registered under the Co-operative Societies Act. They play an important role in urban credit provision. b) Rural Co-operative Credit Institutions: 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Rural co-operative credit institutions represent a substantial portion of the rural population. A three-tiered system exists, consisting of: a) The State Co-operative Banks at the apex level exist at the state level. b) The intermediate-level District Co-operative Banks that already operate at the District level. c) At the grassroots level, Primary Co-operative Credit Societies. Primary Cooperative Credit Societies are supported financially by State Cooperative Banks and District Central Cooperative Banks. The Reserve Bank's funds are distributed to the agricultural sector through State Cooperative Banks and Central Cooperative Banks. 1.12 CURRENT SCENARIO In terms of supply and scope, Indian banking was generally well-developed. Even so, reaching out to rural India remains a significant challenge for the private sector and rural areas. Since the RBI is a separate entity from the government, it is subjected to the least amount of government pressure. By 2013, the Indian banking sector employed approximately 12 lakh people, had 109,811 branches across the country, and approximately 180 branches abroad, and managed Rs.54 billion in deposits and Rs.52604.59 billion in bank credit. According to the financial year 2012-13, banks operating in India made a net profit of about Rs. 51 billion on a turnover of Rs.9148.59 billion. On the 28th of August 2014, Prime Minister of India Mr. Narendra Modi announced the launch of a new financial inclusion programme, the Pradhan Mantri Jan Dhan Yojana. On the day of the inauguration, the Ministry of Finance, which is run by the Department of Financial Services, opens 1.5 crore bank accounts. By the 10th of January 2015, 11.5 crore accounts had been opened, with a total deposit of Rs.8698 crores; there was also the option of opening a bank account with no balance. Online banking, online banking, tele banking, biometric and mobile ATMs, and other physical and virtual banking expansions have been underway for over a decade and have gained traction in recent years. Indian banks are clearly operating in an increasingly competitive environment. The Indian banking sector has also learned a great deal from its mistakes and is steadily following in the footsteps of other developed nations. People in the country are still reliant on banks to maintain their savings; instead, they tend to invest in illegal ways. Because of illiteracy and conservative views on tax evasion, this is the case. There is so plenty to be done to get our country's economy back on track. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Since ancient times, India has had an indigenous banking system. Shroffs, Seths, Sahukars, Mahajan’s, and Chettis are among the people who have been active in banking business practices. Shroffs, who owned huge businesses and operated large and specialized businesses, were among these indigenous bankers, which ranged from small-time money lenders to Shroffs, who owned huge businesses and ran large and specialized businesses. 1.13 RECENT TRENDS IN THE BANKING SYSTEM • Electronic Payment Services – e – Cheques: We've also heard about e-governance, e- mail, e-commerce, and e-tail in recent years. Similarly, in the United States, a new technology is being developed for the implementation of e-cheques, which will potentially replace paper cheques. The Negotiable Instruments Act in India has already been amended to include truncated cheques (a replacement electronic form for paper cheques) and E-cheque instruments as a forerunner to the implementation of e-cheque. • Real Time Gross Settlement (RTGS): The Real Time Gross Settlement system, which has been in use in India since March 2004, is a system in which banks can issue instructions to move funds from one bank account to another through the internet. The RBI maintains and operates the RTGS scheme, which allows banks to move funds more efficiently and quickly, easing their financial operations. Funds transfer between banks takes place in 'Real Time,' as the name implies. As a result, money will hit the beneficiary immediately, and the beneficiary's bank has two hours to credit the beneficiary's account. • Electronic Funds Transfer (EFT): This is a device that allows someone who wishes to pay another person/company/etc. to go to his bank and make a cash payment or provide instructions/authorization to transfer funds directly from his own account to the receiver/bank beneficiary's account. At the time of requesting such transfers, complete information such as the receiver's name, bank account number, account form (savings or current account), bank name, city, branch name, and so on should be given to the bank so that the money reaches the beneficiaries' account correctly and quickly. EFT is supported by the Reserve Bank of India. • Electronic Clearing Service (ECS): This is a retail payment system that can be used to make bulk payments/receipts of a similar nature, particularly when each individual payment is repetitive and of a relatively small amount. Rather than individual funds transactions, this facility is designed for businesses and government agencies to make/receive large amounts of payments. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

• Automatic Teller Machine (ATM): This is India's most common device, allowing customers to withdraw money 24 hours a day, seven days a week. It's a device that lets customers with an ATM card conduct regular banking transactions without having to deal with a human teller. Aside from cash withdrawal, ATMs can be used to pay utility bills, transfer money between accounts, deposit checks and cash into accounts, check balances, and so on. • Point of Sale Terminal: A POS terminal is a computer terminal that is connected to a bank's computerized customer information files via the internet and uses a magnetically encoded plastic credit card to identify the customer to the computer. During a sale, the machine debits the customer's account and credits the retailer's account for the value of the purchase. • Tele-banking: This service allows customers to conduct all non-cash banking transactions over the internet. For simplified questions and transactions, an Automatic Voice Recorder is employed. manned phone terminals are used for complex requests and transactions. • Electronic Data Interchange (EDI): It is the electronic exchange of business records between trading partners in a normal, computer-processed, widely agreed format, such as purchase orders, invoices, shipping notices, and obtaining advices. Financial data and payments can also be transmitted electronically using EDI. • Net Banking: Individuals and businesses use the internet to move money, book train tickets, shop, buy movie tickets, and buy stocks, among other things. • Mobile Banking: Mobile banking is a service offered by a bank or other financial institution that enables its customers to perform a variety of financial transactions remotely using a mobile device such as a phone or tablet and software provided by the financial institution for the purpose, typically referred to as an app. • Bank Amalgamation: Bank amalgamation is the process of merging two or more banks. On February 15, 2017, the Union Cabinet approved the merger of State Bank of India and five of its associate banks for improved operating performance and lower funding costs. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

1.14 CHALLENGES FACED BY THE BANKS The following are the main obstacles that banks face today: • Non-Performing Assets (NPAs): In today's globalized world, banks must contend with external forces while still strengthening their balance sheets. Banks are groaning under the weight of nonperforming assets (NPAs) these days. If nonperforming assets (NPAs) are not recovered, the banks' very existence would be jeopardized. Another big issue facing the banking industry is the high transaction costs associated with keeping Non-Performing Assets on their books. Greater corporate transparency, greater disclosure in the case of defaults, an effective credit information exchange system, and an adequate legal structure pertaining to the banking system are all required to resolve the NPA issue, allowing court proceedings to be simplified and actual recoveries to be made within a reasonable time frame. Since the banking industry cannot afford to support itself with such high levels of nonperforming assets, the motto for redemption should be \"lend, but borrowed for a reason and with a purpose.\" • Information technology (IT) in Banking: The Indian banking industry is undergoing an IT revolution at the moment. Complete banking automation is becoming increasingly important in the Indian banking industry due to a combination of regulatory and competitive factors. In banking, information technology has primarily been applied in two ways. Communication and Connectivity is one, and Business Process Reengineering is the other. Information technology facilitates sophisticated product creation, improved business infrastructure, and the application of reliable risk management strategies, as well as assisting financial intermediaries in reaching out to geographically remote and diverse markets. Today's Indian banks are under enormous pressure to succeed or die, as their very existence is at stake if they don't. In the banking industry, information technology (IT) is critical because it not only ensures the smooth passage of interconnected transactions through the electronic medium, but it also facilitates complex financial product innovation and growth. With the banking system moving towards virtual banking, IT and e-banking applications are becoming the standard. It's also a struggle to keep the banking workers up to date with the new software. • World Wide Banking (WWB): World Wide Banking (WWB) on the pattern of the World Wide Web (WWW) can be visualized as an extreme case of e-banking. As a result, all banks will be connected, and individual bank identities will no longer exist in the eyes of customers. The presence of a large number of physical bank branches and extension counters is unnecessary. There is no need for face-to-face physical contact or transactions. Customers will be able to conduct all of their financial 24 CU IDOL SELF LEARNING MATERIAL (SLM)

transactions from the comfort of their own offices or residences, using the internet. This is the case of banks reaching out to their clients. Our financial sector faces yet another challenge as a result of this. • Cybercrime: ATM frauds, bank account theft, Denial of Service, Credit Card frauds, phishing, and other cybercrimes that threaten the banking industry today are all threats to the banking industry. The exponential growth of global electronic crime, as well as the difficulty of investigating it, necessitates a global presence. 1.15 SUMMARY • India's banking system is one of the most critical organizational structures for the country's proper economic growth and GDP, as well as for society, as it relies on customer confidence to keep their assets secure. • Banks are regarded as the country's financial backbone, and they also play a critical role in the country's economic growth. • The primary duty of a bank is to accept deposits and use those deposits to lend money to people who need it. • Modern banking in India began in the early nineteenth century and was known as \"Agency House\" because it was established by employees of the East India Company. • Banks were nationalized in order to improve the country's rural and agricultural sectors, thereby improving the country's economic situation through increased efficiency and employment growth. • The importance of complete banking automation in the Indian banking industry is growing due to a combination of regulatory and competitive factors. 1.16 KEY WORDS • EDI - Electronic Data Interchange • RTGS - Real Time Gross Settlement • WWB - World Wide Banking • NPAs- Non – Performing Assets • EFT - Electronic Funds Transfer 1.17 LEARNING ACTIVITY 1. Collect Data on the Asset base, profitability, Growth and draw backs vis-à-vis on the performance of various Nationalized Banks after 1969 till date. ___________________________________________________________________________ ___________________________________________________________________________ 25 CU IDOL SELF LEARNING MATERIAL (SLM)

1.18 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by banking? 2. Define banking. 3. List the structure of Indian Banking System. 4. Write a note on Nationalization of Banks. 5. Compare the performance of Public Sector Banks vs Private Sector Banks. 6. Write a note on Non-Performing Assets (NPAs)of Banks & its impact on Country’s Economy. 7. Discuss the impact of nationalization Long Questions 1. Explain the importance of banking 2. Discuss the characteristics of banking 3. Enumerate the history of banking in India 4. Explain the stages in the evolution of banking in India 5. Discuss the recent trends in the banking sector 6. Elaborate the challenges faced in the banking sector 7. Give suggestions for controlling buildup of Non-Performing Assets in Public Sector Banks. B. Multiple Choice Questions : 1. Cybercrimes affect the ________ sector very badly. a. Defense b. Stock Market c. Banking Sector d. All the above 2. In the financial year 2012-13 net profit of banks operating in India was approx. Rs______ a. 51 Billion b. 45 Billion c. 60 Billion d. None of these 3. Small Finance Banks serve ________ 26 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Big Industries. b. Organized Sectors c. Big Farmers d. None of these. 4. Banking Reforms committee gave its recommendations in the year _______ a. 1991 b. 1995 c. 2001 d. 1998 5. Reserve Bank of India was established in the year ________ a. 1940 b. 1935 c. 1942 d. 1950 Answers 1 –d, 2- a, 3 – d, 4 – a, 5 –b. 1.19 REFERENCES Text Books • T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 • T2, A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management, Mittal Publication, New Delhi. Reference Books • R1, Muraleedharan, D, Modern Banking: Theory and Practice, PHI Learning, New Delhi, 2009. • R2, P Kandasamy , S Natarajan & R Parameswaran, Banking Law and Practice, Revised edition , S.Chand publication, New Delhi, 2012. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2: COMMERCIAL AND CO-OPERATIVE 28 BANKS Structure 2.0 Learning Objectives 2.1 Introduction 2.2 Meaning 2.3 Types of Banks 2.4 Functions of Commercial Banks 2.5 Significance of Commercial Banks 2.6 Banking Facilities 2.7 Banks and Economy 2.8 Role of foreign banks in India 2.9 History of Cooperative banks in India 2.10 Structure of Cooperative Banking 2.10.1 Short-term rural cooperative credit structure 2.10.2 Land development Banks 2.11 Importance of Cooperative Banks 2.12 Weakness of Cooperative banks 2.13 Reserve Bank and cooperative banking 2.14 Advantages of Cooperative Banking 2.15 Problems with Cooperative Banking in India 2.16 Dual regulations of urban cooperative banks 2.17 Summary 2.18 Keywords 2.19 Learning Activity 2.20 Unit End Questions 2.21 References 2.0 LEARNING OBJECTIVES After studying this unit, students will be able to • Explain the types of banks • Identify the functions of commercial banks • Explain the role of foreign banks in India • Discuss about cooperative banks and its structure • Infer the problems faced by cooperative banks in our country CU IDOL SELF LEARNING MATERIAL (SLM)

2.1 INTRODUCTION People can deposit their savings in banks with the guarantee that they will be able to withdraw money from the deposits anytime they need it. People who need money for business or other purposes may borrow money from banks at a fair interest rate. A bank is a legal entity that accepts deposits that can be withdrawn at any time. It also provides financial assistance to individuals and businesses in need. Banks also provide a variety of other services, such as bill collection, payment of international bills, safe-keeping of jewellery and other valuables, certifying a company's creditworthiness, and so on. Banks accept deposits from both the general public and company customers. Anyone who wants to put money aside for the future can do so in a bank. Businesspeople earn money from sales, which they must use to pay their bills. They can keep their sales earnings safe in banks and use them to meet their expenses as required. Depositors are given two guarantees by banks: a. Deposit safety as well as b. Withdrawal of funds from an account Banks pay interest on deposits whenever it is required, which is added to the original deposit number. It is a significant benefit to the depositor. It encourages people to save their money. Banks often give loans and advances to farmers, merchants, and businessmen for productive purposes based on deposits. As a result, banks contribute to the country's economic growth and the general well-being of its people. Loans are therefore subject to interest charges by banks. The interest rate is usually higher than the interest rate permitted on deposits. Banks also charge fees for a variety of other services they provide to the corporate sector and the general public. The key sources of income for banks to cover their operating costs are interest earned on loans and fees paid for services that surpass the interest permitted on deposits. Banking operation refers to the operations that banks engage in. The practice of ‘banking' entails accepting deposits and lending or investing capital. It helps businesses by supplying money and some resources that aid in the exchange of goods and services. As a result, banking is an important component of trade. It not only provides funds for the manufacture of products and services, but it also makes it easier for buyers and sellers to trade them. The following diagram illustrates the difference between a bank and a moneylender. 1. Moneylenders are individuals, whereas Entity Banks are organized entities. 2. Accepting deposits is one of the banking practices. Lending money is one of the moneylender's activities. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Clients Banks cater to the needs of the general public, as well as the needs and company of farmers and communities in particular. Poor citizens are catered to by money lenders. 4. For loans and personal protection, security banks consider tangible land as collateral. Moneylenders also accept gold and jewels as collateral for loans. 5. The loan recovery mechanism is adaptable. Rigid and strict in the case of money lenders. 6. The rate of interest charged by banks on loans is set by the Reserve Bank of India. Money lenders, on the other hand, are unregulated and have a high risk of default. 2.2 MEANING A commercial bank is a form of financial institution that handles all deposit and withdrawal operations for the general public, as well as offering investment loans and other services. These are profit-making institutions that conduct business solely for the purpose of making a profit. Lending and borrowing are the two most important features of a commercial bank. The bank accepts the deposits and distributes the funds to different ventures in order to gain interest (profit). The borrowing rate is the rate of interest that a bank provides to depositors, while the lending rate is the rate at which a bank lends money. 2.3 TYPES OF BANKS In our nation, various types of banks operate to meet the financial needs of various groups of people involved in agriculture, industry, professions, and other activities. Banking institutions in India can be classified into the following categories based on their functions: • Central Bank • Commercial Banks • Development Banks • Co-operative Banks • Specialized Banks Central Bank The Central Bank of a country is a bank that is charged with directing and controlling the country's banking system. A bank like this does not do business with the general public. It serves as the government's banker, maintaining all other banks' deposit accounts and advancing money to them as required. When other banks run into difficulties, the Central Bank offers assistance. As a result, it is known as the banker's bank. Our country's central bank is the Reserve Bank of India. Under different headings, the Central Bank keeps track of government revenue and expenditure. It also provides monetary and credit policy advice to the government and sets 30 CU IDOL SELF LEARNING MATERIAL (SLM)

interest rates on bank deposits and loans. The central bank is also in charge of determining foreign exchange rates. The issuance of currency notes, as well as the regulation of their circulation in the country, is another important role of the Central Bank. Only the Central Bank has the authority to issue currency. Commercial Banks Commercial banks are financial institutions that accept deposits and provide consumers with short-term loans and advances. Commercial banks provide short-term, medium-term, and long-term loans to businesses in addition to short-term loans. Some commercial banks are also offering long-term mortgage loans to individuals. Commercial banks also perform a variety of other tasks, which will be addressed later in this lesson. Types of Commercial banks Public sector banks, private sector banks, and foreign banks are the three categories of commercial banks. (i) Public Sector Banks: These are banks in which the Government of India or the Reserve Bank of India owns a majority stake. State Bank of India, Corporation Bank, Bank of Baroda, and Dena Bank are examples of public sector banks. (ii) Private Sectors Banks: In private sector banks, private entities own the bulk of the bank's share capital. These banks are incorporated as limited-liability corporations. The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd., Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, and others are examples of such banks. (iii) Foreign Banks: These banks are registered in a foreign country and have their headquarters there, but they have branches in our country. Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, and others are some of the foreign banks that operate in our country. After the 1991 financial sector reforms, the number of international banks operating in our country has increased. Development Banks Medium and long-term capital is often required by businesses for the procurement of machinery and equipment, the implementation of cutting-edge technology, or expansion and modernization. Development banks offer this type of financial assistance. They also engage in other forms of growth, such as Public Sector Banks. Development banks in India include the Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs). Co-operative Banks 31 CU IDOL SELF LEARNING MATERIAL (SLM)

Under the Co-operative Societies Act, people who come together to collectively represent their mutual interest also form a co-operative society. A Co-operative Bank is formed when a co-operative society enters the banking industry. Before beginning banking operations, the society must obtain a license from the Reserve Bank of India. Any co-operative bank must operate as a society under the oversight of the State Registrar of Co-operative Societies. In terms of banking, the society must adhere to the guidelines defined and issued by the Reserve Bank of India. Types of Co-operative Banks In our country, there are three types of cooperative banks. Primary credit societies, central co- operative banks, and state co-operative banks are the three types of cooperative banks. These banks are divided into three categories: village or town, district, and state. (i) Primary Credit Societies: These are established at the village or town level, with both borrowers and non-borrowers living in the same area. Every society's operations are limited to a specific area so that members get to know one another and can keep an eye on each other's activities to prevent fraud. (ii) Central Co-operative Banks: These banks work at the district level and have members who are members of some of the primary credit societies in the same district. These banks provide loans to their members (primary credit societies) and serve as a link between them and state co-operative banks. (iii) State Co-operative Banks: These are the apex (top level) co-operative banks in each of the country's states. They help to mobilize funds and ensure that they are properly channeled across different sectors. Individual borrowers receive funds from state co-operative banks through central co-operative banks and primary credit societies. Specialized Banks There are a few banks that respond to particular needs and have overall support for starting a company in specific fields. Such banks include EXIM Bank, SIDBI, and NABARD. They specialize in a particular field or operation and are thus referred to as specialized banks. Please inform us of their existence. i. Export-Import Bank of India (EXIM Bank): If you want to start a company exporting goods to other countries or importing products from other countries to sell in India, EXIM Bank will help you get started. The bank offers information about the foreign market as well as loans to exporters and importers. It provides information on the possibilities for export or import, the risks involved, and the competition to be met, among other things. ii. Small Industries Development Bank of India (SIDBI): If you want to start a small business or industry, SIDBI will provide you with a low-interest loan. It also funds the modernization of small-scale manufacturing units, as well as the implementation of new 32 CU IDOL SELF LEARNING MATERIAL (SLM)

technologies and business activities. SIDBI's mission is to encourage, finance, and grow small-scale businesses. iii. National Bank for Agricultural and Rural Development (NABARD): This is the apex or central bank for agricultural and rural development financing. If an individual is involved in agriculture or other activities such as handloom weaving, fishing, etc., NABARD may provide credit through regional rural banks, both short-term and long-term. It provides financial assistance in the fields of agriculture, small-scale manufacturing, cottage and village industries, handicrafts, and allied economic activities in rural areas, with a focus on co- operative credit. 2.4 FUNCTIONS OF COMMERCIAL BANKS Commercial banks have two types of roles. • Primary functions and • Secondary functions Primary functions A commercial bank's primary functions are as follows: a) Accepting deposits; and b) Granting loans and advances. a) Accepting deposits The primary function of a commercial bank is to collect deposits from the general public. It is easy for people with surplus income and investments to deposit their funds with banks. Deposits with banks will gain interest depending on the quality of the deposit. As a result, Business Studies 10's bank deposits rise in tandem with the interest received. When the interest rate is higher, people are more likely to deposit more money in the bank. The protection of funds deposited with the bank is also a factor. b) Grant of loans and advances A commercial bank's second major role is to make loans and advances. These loans and advances are made to members of the public and businesses at a higher interest rate than banks allow on different savings accounts. The rate of interest paid on loans and advances varies depending on the loan's intent, duration, and repayment method. i) Loans: A loan is provided for a fixed amount of time. Short-term loans are typically provided by commercial banks. However, term loans, or loans for more than a year, may be approved. The creditor can be offered the full amount up front or in instalments. Loans are typically secured by the protection of specific properties. In most cases, a loan is repaid in instalments. It can, however, be repaid in full at any time. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

ii) Advances: An advance is a type of credit that a bank offers to its customers. It varies from a loan in that loans are typically granted for a longer period of time, while advances are typically granted for a shorter period of time. Furthermore, the aim of granting advances is to meet business needs on a day-to-day basis. The interest rate paid on advances differs from one bank to the next. Only the amount withdrawn is subject to interest, not the sanctioned amount. Types of Advances: Cash credit, overdrafts, and bill discounting are also ways that banks provide short-term financial assistance. a) Cash Credit: A cash credit agreement is one in which the bank allows the borrower to withdraw funds up to a certain amount. The sum is credited to the customer's account. This money is available to the consumer whenever he needs it. On the amount actually withdrawn, interest is paid. Customers are given Cash Credit based on the terms and conditions that they have agreed to. b) Overdraft: An overdraft is a type of credit provided by a bank. A customer with a current account with the bank is permitted to withdraw an amount greater than the credit balance in his account. It's just a short-term arrangement. An overdraft facility with a fixed limit can be granted based on asset protection, personal security, or both. c) Bill Discounting: Banks offer short-term financing by discounting bills, which entails paying a sum before the bill's due date after deducting a discount rate. The party receives the funds without having to wait for the bills to mature. If a payment is not paid on time, the bank has the right to recover the money from the customer. Secondary functions Banks perform a variety of secondary functions in addition to their primary functions of receiving deposits and lending capital. • Issuing letters of credit, travellers' checks, and other similar documents. • Having safe deposit vaults or lockers for the safekeeping of valuables, important documents, and securities. • Providing foreign exchange trading services to customers. • Transferring funds from one account to another, as well as from one bank branch to another, through check, pay order, or demand draught. • A standing promise on behalf of its customers for payment of products, equipment, and automobiles, among other things. • Gathering and distributing market data. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

• Providing credit worthiness reports to customers • Providing consumer credit to individuals in the form of low-interest loans for the purchase of consumer durables such as televisions, refrigerators, and other similar products. • Educational loans at a fair interest rate to students pursuing higher education, especially technical courses. 2.5 SIGNIFICANCE OF COMMERCIAL BANKS Commercial banks are so vital to a country's economic growth that it is impossible to imagine a modern industrial economy without them. They are the country's nerve centre for demand, trade, and industry. “The bank is the heart and central point of modern exchange economy,” according to Wick- sell. The importance of commercial banks is highlighted by the following points: (i) They encourage people to save and increase the rate of capital formation. (ii) They provide trade and industry with financing and credit. (iii) By opening branches in underdeveloped areas, they foster balanced regional growth. (iv)Bank credit encourages entrepreneurs to innovate and invest, speeding up the economic growth process. (v) They aid in the promotion of large-scale development and the expansion of priority industries like agriculture, small-scale manufacturing, retail trade, and export. (vi) They generate credit in the sense that they can make more loans and advances than the depositors' cash balances allow. (vii)They assist commerce and industry in expanding their market. (viii) As a result, they allow for the most efficient use of resources. 2.6 BANKING FACILITIES Electronic banking (Electronic Banking) Banking services are now available via computer thanks to advances in information and communication technology. Computers are also used to monitor banking transactions in the majority of branches. Computers may provide information about the balance in your deposit account. Human or manual teller counters are being phased out of most banks in favour of Automated Teller Machines (ATM). Electronic banking, also known as e-banking, is a form of banking that takes place using computers and other electronic means of communication. The following are some of the most recent banking developments in India. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

• Automated Teller Machine: Banks have begun to build their own Automated Teller Machines (ATMs) in strategic locations throughout the country. Customers may deposit or withdraw money from their own account at any time using this method. • Debit Card: Banks now offer debit cards to consumers who have a savings or current account with them. Customers may use this card instead of cash to buy products and services at various locations. Customers' accounts are automatically debited (deducted) when they pay with a debit card. • Credit Card: The bank issues credit cards to people who may or may not have a bank account. Credit cards, like debit cards, are used to pay for purchases so that the individual does not have to carry cash. Banks offer credit cardholders a certain amount of time to pay off their credit balance. If a cardholder fails to repay the credit extended to him within the agreed-upon time frame, interest is paid. This interest rate is very high in general. • Net Banking: As the use of computers and the Internet has grown, banks have begun to conduct transactions over the Internet. A customer with a bank account can access his account by logging into the bank's website. He can pay bills, offer instructions for money transfers, fixed deposits, and bill collection, among other things. • Mobile Banking: Through phone banking, a bank customer with an account can obtain account information and conduct banking transactions such as fixed deposits, money transfers, demand draughts, bill collection and payment, and so on. Phone banking is now possible via cell phones, as more and more people use them. In addition to all of the functions available via phone banking, a customer can receive and send messages (SMS) from and to the bank via their mobile phone. 2.7 BANKS AND ECONOMY Banks contribute to a country's economic development in the following ways: 1. Accelerating the Capital Formation Process: People's savings are mobilized by commercial banks, which inspire them to be thrifty. These funds are efficiently distributed among the ultimate consumers of funds, namely investors, for profitable investment. People's savings result in capital accumulation, which is the foundation of economic growth. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Finance and credit provision: Commercial banks are a vital source of credit and financing for both trade and industry. Commercial banks' operations are not limited to domestic trade and commerce; they also include international trade. 3. Entrepreneurship Development: Banks encourage entrepreneurship by underwriting new and current company shares, assisting in the advancement of new projects, and funding promotional events. Banks provide funding to sick (loss-making) companies in order to transform them into profitable businesses. 4. Promoting Regional Development in a Balanced Way: Commercial banks open branches in underserved areas to offer credit to rural residents. The funds raised in developed areas could be used to finance projects in the country's underdeveloped areas. They achieve a more sustainable regional growth in this way. 5. Consumer Assistance: Commercial banks provide credit for the purchase of durable consumer goods such as automobiles, televisions, refrigerators, and other products that are out of reach for certain customers due to their limited financial resources. Banks contribute to the development of demand for certain consumer products in this way. 2.8 ROLE OF FOREIGN BANKS IN INDIA In India, foreign banks play the following roles: 1. Standard Chartered Bank, which entered India 150 years ago and now has 83 branches, is the oldest foreign bank in India. It is followed by HSBC, which entered India in 1867 and now has about 47 branches. 2. Foreign banks with branches in India are banks from other countries that have a presence in India. Currently, there are around 50 international banks with more than 250 branches in most of the country's major cities. These international banks are doing well and making a lot of money. International banks should not be permitted to operate in the country, according to some economists. However, on the basis of reciprocity, such banks must be granted permission to operate in the country. This is the Reserve Bank of India's role, and it is supported by the performance of Indian banks operating in other countries. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Some international banks, which improved the competitiveness and efficiency of the Indian banking system. • Abu Dhabi Commercial Bank is a bank based in Abu Dhabi, United Arab Emirates. • ABN Amro Bank • Commercial Bank • American Express Financial Services, Inc. • BNP Paribas is a French bank. • The CITI Bank • Barclays Bank (London) • Deutesche Bank is a German bank. 4. Foreign banks aim to improve the local banking system's productivity by putting in more advanced financial services. The key point is that the argument that foreign banks account for just 5% of India's loan market is false. Local banks have been borrowing money from other countries. They raised more than $12 billion between 2003 and 2006, which is one of the reasons India was able to sustain credit growth of 28.1 percent despite just 18.5 percent growth in deposits. 5. The entry of a foreign bank can improve financial stability by allowing for greater diversification of exposures and better risk management. It can also help to increase the amount of capital or liquidity available when required. Having a foreign bank presence can be especially beneficial during times of banking stress, as it can help to diversify against country-specific (systemic) risks that can seriously deplete the banking system's resources. Since international banks are less vulnerable to host country cycles, the fact that they are diversified across countries can well alter the cyclical behavior of the host country financial system. How useful this is in practice is determined by how closely the domestic economic cycle is linked to the global economy. Counter-cyclical changes in foreign bank lending may also help monetary policy become more competitive. During currency crises, foreign banks can also be more robust. They are not only more mindful of currency mismatches, but they may also request foreign currency liquidity from their parent organizations. 2.9 HISTORY OF COOPERATIVE BANKS IN INDIA The origins of the cooperative movement, as well as its current technological implementation, can be traced back to England's Industrial Revolution in the 18th and 19th centuries. During the economic crisis, Hermann Schulze and Friedrich Wilhelm Raiffeisen came up with the 38 CU IDOL SELF LEARNING MATERIAL (SLM)

concept of providing easy credit to small businesses and the needy, which has evolved into cooperative banks around the world today. Pre-independence period (prior to 1947) The Co-operative Credit Societies Act, 1904 was passed in British India, based on the advice of Sir Frederick Nicholson (1899) and Sir Edward Law (1901). It attempted to address the issues of rural indebtedness and the resulting conditions of the country's farmers. The Act encouraged the creation of credit cooperative societies, which resulted in the formation of the first urban co-operative credit society in Kancheepuram, now in Tamil Nadu. It was the beginning of India's Cooperative Banking system's institutionalization. However, there were some flaws in the Act that limited the scope of cooperatives' intended benefits. The Act only required credit societies to register, and there was no provision for non-credit societies or federal societies to be protected. The government recognized these flaws, and in order to address them, more stringent legislation, known as the Cooperative Societies Act of 1912, was enacted. Non-credit societies and central co-operative federations were acknowledged as well as their establishment and organization. The Montague Chelmsford Reforms were implemented in India in 1919, following the end of World War I, under the Treaty of Versailles, which made Cooperation a transferred subject to be controlled by the states. States recognized the need for separate acts for successful implementation and to expand the scope of cooperative banks. The Bombay Provincial Cooperative Societies Act, 1925, was the first to be passed by the Bombay Provincial Government. Following the Bombay Act, other state governments such as Madras, Bengal, Bihar, and Punjab passed their own legislation in the years that followed. The Multi-Unit Cooperative Societies Act, 1942, was passed by the British government in 1942, and it included societies with activities in more than one state. The Act stipulated that the affairs of such a society be governed by the laws of the cooperative societies act of the state in which the society's principal business is situated. Post-independence period (after 1947) After independence, the cooperative movement retained its momentum despite a number of setbacks, and it remained an important part of the country's economic growth. The importance of cooperatives in the implementation of development plans, especially for farmers and the weaker sections of society, was recognized in the First Five Year Plan. The Government of India formed the All India Rural Credit Survey Committee in 1954 to address the issue of rural credit and other financial issues that faced the rural community. It recommended that cooperative organizations have a well-defined institutional structure, particularly for meeting the needs of rural India. The committee's recommendations were accepted and implemented as part of the Second Five-Year Plan. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

The Second Five-Year Plan proposed broadening the reach of cooperative activities to include other areas, with a focus on warehousing. The Third Five-Year Plan placed a strong emphasis on cooperative sector training and expanding the cooperative movement's scope. For successful operation, the Fourth Five Year Plan proposed the consolidation of a cooperative structure. Farmers Service Societies were recommended as part of the Fifth Five- Year Plan. The Sixth Five-Year Plan established a focal point for a cooperative society in order to promote economic growth and extend the reach of cooperative societies. The Seventh Five-Year Plan also emphasized the extension and expansion of cooperative societies' reach in order to increase jobs and reduce poverty in the region. A cooperative bank is a financial institution that operates on a cooperative basis and conducts regular banking operations. Cooperative banks, like other banks, are formed by raising funds through shares, accepting deposits, and making loans. Cooperative banks, on the other hand, are distinct from joint stock banks in the following ways: • Cooperative banks issue unlimited liability shares, while joint stock banks issue limited liability shares. • In a cooperative bank, each shareholder has one vote, regardless of how many shares he owns. In a joint stock bank, a shareholder's voting power is measured by the amount of shares he owns. • Cooperative banks are primarily concerned with rural credit and offer financial assistance to farmers and rural businesses. Joint stock companies are mainly concerned with exchange and industry credit criteria. • In India, cooperative banking is organized on a federal level. Primary credit societies are at the bottom of the food chain. Then there are district-level central cooperative banks and state-level state cooperative banks. A federal system does not exist for joint stock banks. • Cooperative credit societies can be found in villages throughout the world. The majority of joint stock banks and their branches are located in urban areas, especially in major cities. In India, the cooperative movement was established primarily to address the issue of rural credit. The Cooperative Societies Act of 1904 marked the beginning of Indian cooperative banking. This Act aimed to create cooperative credit societies in order to “encourage thrift, self-help, and collaboration among agriculturists, artisans, and persons of limited means.” This Act spawned a slew of mutual credit societies. The Cooperative Societies Act of 1912 recognized the need to form new organizations for cooperative credit supervision, auditing, and distribution. It was the following organizations: (a) a federation of primary societies; (b) central banks; and (c) regional banks. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

While progress has been made in the direction of creating cooperative societies and expanding cooperative credit, the pre-independence period's progress was unsatisfactory. Even though it had been in existence for half a century, cooperative credit accounted for just 3.1% of total rural credit in 1951-52. 2.10 STRUCTURE OF COOPERATIVE BANKING In India, there are various types of cooperative credit institutions. These establishments can be divided into two categories: • Agricultural Credit Institutions (ACIs) and • Non-agricultural Credit Institutions Agricultural credit institutions control the cooperative credit system as a whole. Agricultural credit institutions are further classified into the following categories: • Short-term agricultural credit institutions and • Long-term agricultural credit institutions. The federal structure of short-term agricultural credit institutions, which cater to agriculturists' short-term financial needs, is three-tiered: (a) Each state's state cooperative bank is at the pinnacle. (b) Central cooperative banks exist at the district level. (c) Primary agricultural credit societies exist at the village level. The land development banks provide long-term agricultural credit. The diagram depicts the entire system of cooperative credit institutions. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure: 2.1 Structure of Cooperative Banks 2.10.1 Short Term Rural Cooperative Credit Structure A three-tier short-term rural cooperative system exists in rural India. Tier-I consists of state cooperative banks (SCBs) at the state level, Tier-II consists of district cooperative banks (CCBs), and Tier-III consists of main agricultural credit societies (PACSs). SCBs, CCBs, and PACSs make up a three-tier short-term cooperative credit system in 19 states. A two-tier short-term cooperative arrangement operates in 12 states. The structure in the north-eastern states, like Sikkim, is two-tiered, with only SCBs and PACSs. The number of SCBs was 31, the number of CCBs was 370, and the number of PACSs was 92432 as of March 31, 2013. As of March 31, 2012, SCBs had advanced Rs. 75600 crore, CCBs Rs. 14400 crore, and PACSs Rs. 91200 crore in loans. 1. State Cooperative Banks (SCBs): State cooperative banks, which operate at the state level, are the apex institutions in the three- tier cooperative credit system. A state cooperative bank exists in every state. Because of their three essential roles, state cooperative banks hold a unique role in the cooperative credit structure: (a) They act as a conduit through which the Reserve Bank of India extends credit to cooperatives, thereby contributing to rural finance. (b) They serve as balancing centres for central cooperative banks by making surplus funds from certain cooperative banks available. The central cooperative banks are prohibited from borrowing or lending to one another. (c) They fund, supervise, and manage the central cooperative banks and the primary credit societies by them. Capital: Own reserves, loans, borrowings, and other sources of working capital are used by state cooperative banks: (i) Own assets are made up of share capital and various reserves. The majority of the share capital comes from member cooperative societies and central cooperative banks, with the state government contributing the remainder. Individual contributions to the capital are insignificant; (ii) Cooperative societies and central cooperative banks are also major depositors. Individuals, municipal authorities, and others contribute the remaining deposits. 42 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) The Reserve Bank provides the majority of the state cooperative banks' borrowings, with the remainder coming from state governments and other sources. Loans and Advances: The primary goal of state cooperative banks is to provide loans and advances to cooperative societies. These societies receive more than 98 percent of loans, with only 75 percent of them being for a limited period of time. The majority of the loans are for agricultural purposes. State cooperative banks increased in number from 15 in 1950-51 to 21 in 1960-61 and 28 in 1991-92. These banks' loan portfolio grew from Rs. 42 crore in 1950-51 to Rs. 260 crore in 1960-61, and then to Rs. 7685 crore in 1991-92. 2. Central Cooperative Banks (CCBs): The three-tier cooperative credit system places central cooperative banks in the centre. There are two types of central cooperative banks: (a) Cooperative banking unions may be established with only cooperative societies as members. Haryana, Punjab, Rajasthan, Orissa, and Kerala all have cooperative banking unions. (b) Mixed central cooperative banks may exist, with membership open to individuals as well as cooperative societies. This is the sort of central cooperative bank found in the remaining states. The central cooperative banks' primary role is to provide loans to primary cooperative societies. Individuals and others, on the other hand, are given some loans. Capital: Working capital is raised by central cooperative banks from their own reserves, deposits, borrowings, and other sources. The majority of the own funds are made up of share capital allocated by cooperative societies and the state government, with the remainder consisting of reserves. Individuals and cooperative societies account for the majority of deposits. Local bodies and others have some of the deposits. The central cooperative banks' deposit mobilization varies from state to state. Gujarat, Punjab, Maharashtra, and Himachal Pradesh, for example, have much higher rates than Assam, Bihar, West Bengal, and Orissa. The Reserve Bank and apex banks are the main sources of funding. Loans and Advances: In 1991-92, there were 361 central cooperative banks, and the total amount of loans advanced by them was Rs. 14226 crore. Cooperative societies receive about 98 percent of loans, with 43 CU IDOL SELF LEARNING MATERIAL (SLM)

about 75 percent of such loans being short-term. The majority of the loans are for agricultural purposes. Approximately 80% of the loans issued to cooperative societies are unsecured, with the remaining loans secured by goods, agricultural produce, immovable property, government and other securities, among other things. Problem of Overdues: The most distressing aspect of the central cooperative banks' operations is the high and growing number of unpaid loans. The ratio of overdues to demand at the central cooperative level was 34 percent in 1997-98. The key causes of these overdues, according to the Reserve Bank of India's Analysis of the Cooperative Movement in India, 1974-76, are: (a) Natural disasters such as floods, draughts, and other events that affect the borrowers' ability to repay; (b) Bank monitoring that is insufficient and ineffective; c) The poor management and efficiency of societies and banks; (d) There is no connection between credit and marketing; e) Aversion to coercive measures; and (f) Where punitive methods were used, the machinery's inability to carry out the decrees quickly. The Central Sector Plan Scheme, which provides semi-financial assistance to write off bad debts, losses, and irrecoverable overdues against small and marginal farmers, was created to support poor Central cooperative banks. 3. Primary Agricultural Credit Societies (PACSs): In the three-tier cooperative credit system, the primary agricultural credit society is the foundation. It is a village-level organization that works directly with rural residents. It encourages agriculturists to save, accepts deposits from them, and provides loans to needy borrowers while collecting repayments. It acts as the final connection between the ultimate creditors, i.e. the rural citizens, and the higher agencies, such as the Central cooperative bank, state cooperative bank, and the Reserve Bank of India. A primary agricultural credit society can be established by a group of ten or more people from a village. The membership fee is low enough that even the most impoverished farmer will join. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

Members of the society have unlimited liability, which ensures that each member is fully responsible for the society's entire loss in the event of its failure. An elected body is in charge of the society's administration. Capital: The primary credit societies' working capital is derived from their own funds, investments, borrowings, and other sources. Share capital, membership fees, and contingency funds are all part of the company's own funds. Members as well as non-members may make deposits. The majority of the loans come from central cooperative banks. Borrowings are, in practice, the societies' primary source of working capital. People typically do not deposit their savings with cooperative societies due to poverty, poor saving practices, and the lack of better assets available to savers in terms of rate of return and riskiness from these societies. Coverage: There were 88 thousand primary agricultural societies in 1999-2000, representing more than 96% of rural areas. These societies had a total membership of 8.68 crore people. Various steps have been taken by the Reserve Bank, in cooperation with state governments, to reorganise viable primary credit societies and amalgamate non-viable societies with large- sized multipurpose societies over the last few decades. Except for Gujrat, Maharashtra, and Jammu and Kashmir, almost all states have completed the work of reorganising primary societies into solid and viable units. The number of primary societies decreased from 105 thousand in 1950-51 to 212 thousand in 1960-61 as a result of reorganization, falling to 92 thousand in 1999-2000. Loans Advanced: The number of loans advanced by primary credit societies has been steadily growing. They increased from Rs. 23 crore in 1950-51 to Rs. 202 crore in 1960-61 to Rs. 13600 crore in 1999-2000. Members of the communities are the only ones who can borrow money from them. The majority of the loans are for agricultural purposes and are for a limited period of time. The loans are offered at low interest rates. The societies are expected to increase loan amounts to the rural community's weaker segments, especially small and marginal farmers. However, there is a significant issue with the societies' unpaid loans, which have risen from Rs. 6 crores in 1950-51 to Rs. 44 crore in 1960-61 and Rs. 2875 crore in 1991-92. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

2.10.2 LDB/CARDBs Land Development Banks (LDBs) or Cooperative Agricultural and Rural Development Banks (CARDBs): Cooperative Agricultural and Rural Development Banks (CARDBs) or Land Development Banks (LDBs): Agriculturists need long-term credit in addition to short-term credit for permanent land improvements, debt repayment, and the purchase of agricultural machinery and other implements. Agriculturists' long-term financing needs were traditionally met mostly by money lenders and a few other organizations. However, this source of credit has been found to be defective and has resulted in farmer exploitation. Since their deposits are mostly demand (short-term) deposits, cooperative banks and commercial banks are unable to offer long-term loans by their very design. As a result, there was a pressing need for a specialized institution to provide long-term credit to farmers. In this direction, land development banks, now known as cooperative and rural development banks (CARDBs), have been created. Structure: The land development banks are incorporated as cooperative societies, but their liability is minimal. The composition of these banks is two-tiered: (a) At the state level, State or central land development banks, now known as state cooperative agricultural and rural development banks (SCARDBs), exist at the state level, with one for each state. Previously, they were known as central land mortgage banks. (b) At the local level, State land development banks (SCARDBs) and primary land development banks (now known as primary cooperative agricultural and rural development banks) have local branches (PCARDBs). There are no main land development banks in some states, but there are branches of the state land development bank. The state cooperative bank in Madhya Pradesh also serves as the state land development bank. There are several state land development banks in other states such as Andhra Pradesh, Kerala, and Maharashtra. Similarly, the main land development banks in various states have different organizational structures. Land development banks have also established an All-India Land Development Banks' Union at the national level. Capital: 46 CU IDOL SELF LEARNING MATERIAL (SLM)

Share stock, reserves, deposits, loans and advances, and debentures are all used to finance land development banks. Debentures are the most common type of financing. The state land development banks are the issuers of the debentures. They have a fixed rate of interest, a maturity of 20 to 25 years, and are backed by the state government. Co-operative banks, commercial banks, the State Bank of India, and the Reserve Bank of India all subscribe to these debentures. Aside from standard debentures, land development banks also issue rural debentures with terms of up to seven years. Farmers, panchayats, and the Reserve Bank all subscribe to these debentures. The Reserve Bank makes a significant contribution to land development bank financing by extending funds to state governments for share capital contributions and by subscribing to ordinary and rural debentures. Growth: The first cooperative land mortgage bank in India was founded in Jhang, Punjab, in 1920. However, the successful start was made in Madras in 1929 with the establishment of a central land development bank. Other states followed suit and founded similar institutions. SCARDBs (state cooperative agricultural and rural development banks) increased from five in 1950-51 to twenty in 2013. In 2013, there were 697 primary cooperative agricultural and rural development banks (PCARDBs). Loans and Advances: SCARDBs, or land development banks, offer long-term loans to agriculturists for a variety of purposes, including (a) for redemption of old debt, (b) for the improvement of land and farming practices, c) buying high-priced machinery; and d) under exceptional circumstances, for land acquisition. These banks include loans secured by a land mortgage, with terms ranging from 15 to 30 years. These banks approved Rs. 2520 crore in loans in 1999-2000, with Rs. 11670 crore in loans outstanding. SCARDBs had loans outstanding of Rs. 19400 crore and PCARDBs had loans outstanding of Rs. 12000 crore at the end of March 2012. Defects of Land Development Banks: Despite the fact that the number of land development banks has increased over time, they have not been able to make significant progress in providing long-term financing to farmers. The following are the factors that contribute to land development banks' poor performance: 47 CU IDOL SELF LEARNING MATERIAL (SLM)

i. Uneven Growth: The growth of land development banks has been uneven. In states like Andhra Pradesh, Tamil Nadu, Karnataka, Maharashtra, and Gujarat, these have made some development. Other states have not made any progress. A land development bank is not present in about half of the states. ii. Problem of Overdues: The presence of high overdues is the main problem that land development banks face. Furthermore, overdues have been steadily increasing over time. The percentage of overdue 6f the land development banks was estimated to be between 42 and 44 percent in 1991-92. The key causes of unsatisfactory levels of overdues are faulty loaning practices, insufficient oversight, over-utilization of loans, ineffective rehabilitation measures, deliberate defaulters, and so on. Given the gravity of the situation, state governments have been urged to develop and introduce time-bound special recovery programmes. iii. Lack of Trained Staff: Despite the land development banks' quantitative progress, they have not shown much qualitative improvement in the field of loan granting, owing to a lack of technical and supervisory personnel. If cooperative institution lending activities are to be diversified for non-traditional developmental purposes and on the basis of non-landed protection, necessary changes in cooperative institution legislation are also needed. iv. Other Defects: The following are some of the land development banks' other flaws: (a) The interest rates on the loans issued by these banks are extremely high. (b) Loans are granted slowly and with a lot of red tape. (c) If the first loan is not repaid, the second loan is not advanced. (d) Loan instalments and repayment terms are not determined based on the borrowers' ability to repay. (e) The process of obtaining a loan from these banks is so difficult that the farmer is forced to seek assistance from a money lender. (f) Weaker sections of rural society, such as landless labourers, village artisans, and marginal farmers, are typically unable to obtain loans from these banks for their productive activities due to a lack of land or sufficient protection to give as collateral. (g) The majority of loans are provided for the repayment of previous loans as well as for growth. v. Report of Rural Credit Survey: 48 CU IDOL SELF LEARNING MATERIAL (SLM)

The unsatisfactory performance of the land mortgage banks (now known as land development banks) was highlighted in the report of the Committee of Direction of the All-India Rural Credit Survey as follows: (a) These banks collect insufficient funds in an unsuitable manner for demand, and they typically lend them in an uncoordinated manner with development; (b) They behave as if prior debts, rather than output, have a claim on the attention of the company; and (c) They only meet the big cultivator, and they arrive late. 2.11 IMPORTANCE OF COOPERATIVE BANKS The cooperative banking system, which is uniquely adapted to Indian circumstances, must play a critical role in fostering rural finance. The following are some of the benefits of cooperative credit institutions: Alternative Credit Source: The key goal of the cooperative credit movement is to provide an efficient alternative to the village money lender's conventional faulty credit system. The rural population is generally protected by cooperative banks from the clutches of money lenders. Money lenders have dominated rural areas to this point, exploiting the poor by charging exorbitant interest rates and manipulating accounts. Cheap Rural Credit: Both directly and indirectly, the cooperative credit system has lowered the cost of rural credit: (a) Directly, because cooperative societies have low interest rates, and (b) indirectly, because cooperative societies have low interest rates. (b) Indirectly, because the presence of cooperative societies as an alternative entity has disrupted the monopoly of money lenders, pushing them to lower interest rates. Productive Borrowing: One of the most significant advantages of the cooperative credit scheme is that it changes the structure of loans. Previously, cultivators would borrow money for personal use and other non-productive purposes. However, they now mostly borrow for constructive purposes. Unproductive borrowing is discouraged in cooperative societies. Encouragement to Saving and Investment: 49 CU IDOL SELF LEARNING MATERIAL (SLM)

The cooperative credit movement has inspired agriculturists to save and invest by instilling thrifty habits in them. Rural people prefer to invest their savings in cooperatives or other banking institutions rather than hoarding money. Improvement in Farming Methods: Cooperative societies have also aided in the adoption of more efficient farming practices. Improved seeds, chemical fertilizers, new implements, and other items may be purchased with cooperative credit. The marketing and processing societies have aided members in obtaining low-cost inputs and selling their products at a profit. Role of Cooperative Banks before 1969: Cooperative societies were effectively the only institutional sources of rural credit until the nationalization of major commercial banks in 1969. Agricultural and other rural operations received very little credit from commercial banks and other financial institutions. As a percentage of overall agricultural credit, cooperative credit to agriculturists rose from 3.1 percent in 1951-52 to 15.5 percent in 1961-62, and then to 22.7 percent in 1970-71. Role of Cooperative Banks after 1969: After 1969, what role do cooperative banks play? The government has taken a multi-agency approach since nationalizing commercial banks in 1969. To fund the rural sector, both cooperative banks and commercial banks (including regional rural banks) are being established under this strategy. However, because of the following factors, this new strategy also acknowledged the importance of cooperative credit institutions in financing rural areas: (a) Co-operative credit societies are ideally adapted to Indian village socio-economic conditions. (b) Over time, a large network of cooperative credit societies has been developed across the world. This network cannot be easily duplicated or exceeded. (c) Cooperative organizations have gained a thorough understanding of rural conditions and problems. Suitable Federal Structure of Cooperative Banking System: The federal structure of the cooperative banking system is as follows: a) Village-level primary agricultural credit societies (b) Higher-level funding institutions, such as central and state cooperative banks, 50 CU IDOL SELF LEARNING MATERIAL (SLM)