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What is a bank; basic functions; Are lending and deposit taking the only functions of banks; Is an institution engaged in lending funds obtained from the public deemed engaged in banking business; Case – investment company; if accepting deposits and lending
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CONTENTS
MATERIALS CHECKED BY :
MATERIALS EDITED BY;
© National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
INSTRUCTIONS
Basic Readings
The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics included in the course. Experts in the area have collected the basic information and thoroughly analysed the same in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative provisions are also included. Care has been taken to communicate basic information required for decision making in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading information provided are to be selected by making marginal notes using markers. The first reading, therefore, necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the implications of those informations. In the second reading the reader has to critically analyse the material supplied and jot down in a separate note book points stated in the material as well as the critical comments on the same. A third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at every stage.)
Supplementary Reading
Several supplementary readings are suggested in the materials. It is suggested that the reader should register with a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National Library, any University Library where externals are registered for the purpose of library reading, any commercial library or any other public library run by Government or any private institution. Readers in Metropolitan and other big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her place may request the Course Coordinator to photocopy the material and send it by post for which charges at the rate of .50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in advance. The Course Coordinator shall take prompt action on receiving the request and the payment.
Case Law
The course material includes some case materials generally based upon decided cases. These cases are to be studied several times for, (a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified
It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/ appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence. Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the experts’ comment to the students. Through these exercises one can build up an effective dialogue with the experts of the Distance Education Department (DED).
Problems and Responses
After reading the whole module which is divided into several topics and sub-topics the reader has to solve the problems specified at the end of the module. The module is designed in such a manner that a reader can take about a week’s time for completing one module in each of the four courses. It is expected that after finishing the module over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared. After completing the exercise the student is directed to send the same to Course Coordinator for evaluation. Though there is no time stipulation for sending these responses a student is required to complete these exercises before he/she can be given the certificate of completion to appear for final examination.
1.1. Introductory Note.
1.2. History of Banking in India
1.3. Bank Nationalisation
1.4. Various types of Banking Services
1.5. Social control measures on bank
1.6. Narasimham Committee Report
1.7. Concluding Remark
In early societies functions of a Bank were done by the corresponding institutions dealing with loans and advances. The modern banking and its networking are the products of modern western civilization which rapidly developed with the advent of industrialization. Britishers brought with them this modern concept of banking in India. The Bank of England was started in 1694, when the Britishers were carrying on a long war with France. In 1708, the monopoly and the right to issue notes was given to Bank of England through an Act. Several joint stock banking companies started operating early in the nineteenth century. These banks primarily carried on functions which are presently known as commercial functions like receiving money on deposits, lending money, transferring money from place to place and bill discounting. Banking has now presently become a globally mobile service and it facilitates the capital movement from one part of the country to another, one part of the globe from another.
Obviously it is now difficult to understand the banking system of a nation in isolation. The present Indian banking system is required to be studied, viewed and reviewed in the context of global banking trends.
Early History
Banking in India has a very hoary origin. The Vedic period has literature which records the giving of loans to others. Banking was synonymous with money lending. The Manusmrithi speaks of deposits, pledges, loans and interest rate. Interest could be legally charged at between two and five per cent per month in order of class. The maximum amount of interest collectable on the principal was laid down by the State. Usury was not allowed. Payment of debt was made a pious obligation on the heir of a dead person. With the growth of trade and commerce, the trading community soon evolved a system of money transfer throughout the country.
The main instrument through which banking and transfer of funds was carried out was through the inland bills of exchange or the Hundi. Indian bankers lent money, financed the rulers and trade, acted as treasurers of the State and also as insurers of goods. They also acted as money changers due to the differing
coins circulating all over India. Business developed so well that certain castes or communities traditionally came to regard banking as their family business. The power and prestige of these banks rose and fell with the growth and decline of empires. ‘Jagirs’ were granted to select banks and some acted as revenue collectors for local rulers. However, tenets of modern banking were not practised as acceptance of deposits was not a regular part of the business.
Modern History Modern banking in India began with the rise to power of the British. The British consolidated their power and became the most powerful force in India after vanquishing Tipu Sultan in the battle of Srirangapattanam in 1799. The quest for power by Lord Mornington (Later Marquess of Wellesly). Governor General of Fort William in Bengal at that time led to a serious depletion of the resources of the East India Company. This led to the Company promoting the Bank of Calcutta in 1806 to raise resources. The situation prevailing at that time could be known by the writing of some Britishers, C.N. Cooke, Deputy Secretary and Treasurer of the Bank of Bengal, writing in his book “Banking in India”, has stated that usury prevailed in India more than in any other country in the nineteenth century. The native money lender lent to the farmers at 40, 50 and 60 per cent interest. The European community was relatively better off. He attributed the very high rates to the riskiness of many of the lendings and the difficulties in realising them. Indian businessmen very often acted as lender to the European businessmen with a rate of interest lower than the market rate. Till the advent of the three Presidency Banks, the European Agency Houses acted as bankers. They accepted deposits from British Officers serving in India and Europeans who had served in India and had returned to Europe. They financed trade with such funds and at certain times even helped the Government. There was a very effective credit network for flow of funds from one part of India to the other provided by the Indian banking firms. As the Agency Houses had prospered they also sought to operate Banks. Alexander & Company a leading Agency House started managing the Bank of Hindustan from 1770’s. The exact date of the founding of that bank is not known. The Bengal Bank and the General Bank of India, too, were started by the other Agency Houses in Bengal in the eighteenth century. In 1819 the Commercial Bank and in 1824 the Calcutta Bank were floated by the Agency Houses. None of these banks enjoyed limited liability nor were they proper joint stock banks. They were partnership firms with unlimited liability. The concept of limited liability was not put on the statute books till the 1860 Companies Act. Till that date Banks had to either obtain a special Charter from the Crown to operate or had to operate under unlimited liability.
1. THE EVOLUTION OF BANKING SERVICES AND
ITS HISTORY IN INDIA
The Bank of Calcutta started in 1806 was the precursor of the Bank of Bengal. In 1862 the right of note issue was taken away from the Presidency Banks. The Government also withdrew their nominees as Directors on their Board. However, they were given the privilege of managing the Government treasury at the Presidency Towns and at their branches.
The Bank of Bombay collapsed in 1867 and was put into voluntary liquidation in early 1868. It was finally wound up in 1872, but the bank was able to meet its liability in full to the general public.
Subsequently a new bank, aptly called the New Bank of Bombay, was started in 1867 to commence banking operations. The Presidency Banks Act of 1876 was passed in order to have a common law for all the three Banks in order to enable the government to regulate the working of these Banks. The Government had earlier withdrawn its shareholding from these three banks.
The Swadeshi Movement which prompted Indians to start many new institutions also provided an impetus for starting new banks. The number of joint stock banks increased remarkably during the boom of 1906-13. The People’s Bank of India Ltd., The Bank of India, The Central Bank of India, Indian Bank Ltd. and the Bank of Baroda were started during this period. This boom continued till it was overtaken by the crash of 1913-17, the first crisis that the Indian joint stock banks experienced.
In 1921 the three Presidency Banks at Calcutta, Bombay and Madras were merged into the Imperial Bank by the passing of the Imperial Bank of India Act 1920. This bank did not have the power of issuing bank notes,but was permitted to manage the clearing house and hold government balances. With the passing of the Reserve Bank of India Act of 1934, the Reserve Bank of India came into being to act as the Central Bank. It acquired the right to issue notes and acted as the banker to the Government in place of the Imperial Bank. However, the Imperial Bank was given the right to act as the agent of the Reserve Bank of India in places where the Reserve Bank had no branches.
By the passing of the State Bank of India Act 1955, the Imperial Bank was taken over and the assets vested in a new bank, the State Bank of India.
The Reserve Bank was originally a shareholder’s bank. It was nationalised by the Reserve Bank Amendment Act 1948, consequent to the nationalisation of the Bank of England in
The major historical event in the history of banking in India after independence is undoubtedly the nationalisation of 14 major banks on 19th July 1969. The imposition of social control on the banks in early 1969 was deemed unsuccessful as the government felt that the Indian commercial banks did not increase their lending to the priority sectors like agriculture, small scale industry etc., Nationalisation was deemed as a major step in achieving the socialistic pattern of society.
The nationalised banks were to increase lending to areas of importance to the government and to use their resources for subserving the common good. A detailed scheme of objectives, regulations, management, etc. was drawn up for these banks. In 1980 six more private sector banks were nationalised extending the public domain further over the banking sector. Nationalisation was a recognition of the potential of the banking system to promote broader economic objectives. The banks had to reach out and expand their network so that the concept of mass banking was given importance over class banking. Development of credit in the rural area was a prime objective. The benefits of nationalisation has indeed been impressive. The branch network of these banks have spread practically all over the country especially in the rural and previously unbanked areas. The branch network which was 8262 in June 1969 expanded to over 60000 by 1992 with a major expansion (80%) in rural areas. The average number of people served by a branch came down from over 60000 to 11000. The deployment of credit is more widely spread all over the country as against only in the advanced states. In 1969 deposits amounted to 13% of G.D.P and advances to 10%. By 1990 deposits grew to 30% and advances 25% of G.D.P. Rural deposits as a percentage of deposits grew from 3% to 15% making for increased mobilisation of resources from the rural areas. Deposits grew from a figure of Rs.4669 crores in July 1969 to Rs. 2,75, crores on 31.3.1993. 40% of the total credit was directed to the priority sector. More than 45% of the total deposits was used by the government to fund its five year plans. However, this growth did not come without its costs. The banking system has grown too large and unmanageable. Customer service has suffered due to increasing costs and lower productivity. The directed credit program has led to large overdues affecting the very viability of the banking system.
The flow chart given below shows the following types of banking services.
liberalisation. Banks were to be allowed to raise capital from the public. Also no further nationalisation of banks were to be made. New private sector banks were to be allowed and no distinction was to be made between private and public sector banks. Foreign banks were to be allowed freedom to open branches. The pattern of banking structure should be broadened with 3-4 large banks on a international level 8-9 large banks on a national level and the other as local banks. Control over the banking system should be centralised with the RBI and not split between the RBI and the department of banking of the government. A separate body, quasi autonomous, operating under the aegis of the RBI is to be formed to supervise the functioning of the banks. The SLR and the CRR should be reduced to prudent levels. Concessional lending should be phased out. Deposit interest rates should be raised along with the reduction of SLR. The capital base of banks should meet with international norms of capital adequacy; provision was to be made for bad debts with special tribunals to be formed for realising bank debts. The appointment of Chief Executive of
banks needs to be de-politicised and banks should be free to make their own recruitment of employees and officers. Some of the recommendations made have already been accepted and put into practice by the government while others are being considered. The wheel appears to have come full circle. While nationalisation has given immense benefits to the country, it has also exposed the defects in an excess of State control. At this present point, the future appears to be towards an open system based on increased private ownership.
The banking system in India is likely to undergo a major change. Restrictions imposed upon foreign banks to establish Indian branches are going to be gradually withdrawn. The GATT multilateral treaty emphasised the role of free operations in the services sector like banking and insurance. As a result, it is expected that there shall be more openings in the banking sector.
2.1. Role and functions of Central Bank
2.2. Advances to priority sectors and the credit guarantee schemes
2.3. Role & functions of Commercial Banks
2.4. Role & functions of Specialised and Institutional Banks
2.5. Role & functions of non-banking financial institutions
Central Bank:
Central Bantral Bank is an apex financial authority. The essential feature of a Central Bank is its discretionary control over the monetary system of the country. It occupies a pivotal position in the monetary and banking structure of the country. Thus it acts as the leader of the money market and in that capacity, it controls, regulates and supervises the activities of the Commercial banks. It is recognised as the highest financial authority and is a symbol of financial sovereignty and stability of the country. It holds the ultimate resources of the nation controls the flow of purchasing power and acts as the banker to the State.
The principles on which a Central Bank operates are different from the ordinary banking principles to the extent that :
a. The Central Bank unlike an ordinary Bank does not operate with the motive or objective of making a profit but is primarily meant to shoulder the responsibility of safe- guarding the financial and economic stability of the country.
b. The Central Bank being the reservoir of Credit and lender of last resort cannot look to or rely on other banking institutions to come to its aid in case of need and has to therefore keep its assets as liquid as possible so that other banks and financial institutions can approach it for accommodation.
c. The credit machinery of the country needs to be stabilised quite often. This is done by the Central Bank by manipulating the bank rate and open market operations. This power is vested only in the Central Bank.
Functions of Central Bank:
The functions of the Central Bank are briefly discussed below.
A Central Bank acts in the following capacities.
(i) As a currency issuing agency;
(ii) As a banker to the State;
(iii) As a banker’s bank;
(iv) As the lender of last resort;
(v) As the guardian of the money market through credit control; (vi) It undertakes exchange control operations and maintains the external value of the domestic currency and ensures the stability of the internal value of currency;
(vii)Ensures economic stability and promotes economic development; and (viii) Currency printing and management of mints. [Details of the functions of the Central Bank in India i.e. the Reserve Bank of India are discussed in the module on RBI.]
One of the major deficiencies in the banking system in the 60’s related to granting of advances. Bulk of the advances were being directed to the large and medium scale industries and big and established business houses while agriculture, small scale industries and exports were not receiving adequate attention, if not being neglected. The Reserve Bank’s credit policy of 1967- 68 sought to set right this anomaly in the system by channelising the flow of credit to the emerging priority sectors of the economy in the larger interests of the country. Though the emphasis of the 1967 credit policy was on overall restraint certain liberalisation was allowed on a selective basis with a view to enlarge the flow of credit to the areas of agriculture, exports and small scale industries. The banks were encouraged to increase their involvement in lending to the priority sectors by the extension of various relaxations and incentives in the form of refinance from the RBI at a concessional rate of interest or on other special terms not available for other bank lendings. In order to provide an incentive to lending to small borrowers the RBI set up the Credit Guarantee Corporation of India Ltd. in 1971. This institution is now named as the Deposit Insurance and Credit Guarantee Corporation. The main objective of this Corporation is to administer a comprehensive credit guarantee scheme for loans by banks to small individual borrowers in the priority and other neglected sectors. There are various schemes in operation which provide cover for direct lendings to small borrowers who without such support would find institutional credit highly inaccessible. The recommendations of the Tandon committee, which went into the working of the special credit schemes of Commercial Banks with special reference to their employment potential led the RBI to issue a set of guidelines which emphasised on need- based assistance to different categories of self-employed persons. Banks were asked to make efforts to arrange integrated financial and management assistance to borrowers, taking into account the totality of their requirements and the viability of the proposition being financed. Since 1977-78, export credit has been excluded for the purposes of computation of the total priority sector advances of banks, but it has continued to receive preferential treatment in matters, such as, refinance facilities from the Reserve Bank, concessional rates of interest on pre-shipment and post-shipment credit to exporters etc.
2. ROLE AND FUNCTIONS OF BANKING INSTITUTIONS
A Scheduled Bank is one which is included in the second schedule of the RBI Act. A non scheduled Bank is one which is not included in that schedule.
Utility of Banking Institutions
Banks are extremely useful and indispensable institutions for a modern community. They are the custodians and distributors of liquid capital the essential ingredient for commercial and industrial activities. The utility of banks can be summarised as follows :-
a) The banks create purchasing power, in the form of bank notes, cheques, bill, drafts, etc. and economise the use of metallic money which is very expensive and cumbersome.
b) Banks transfer funds, by bringing lenders and borrowers together, and by helping funds to move from place to place and from person to person in a convenient and inexpensive manner, through the use of cheques, bills and drafts. In this way, they help trade and industry.
c) The banks encourage the habit of saving among the people and enable small savings, which otherwise would have been scattered ineffectively, to be accumulated into large funds and thus made available for investments of various kinds. In this way, they promote economic development through capital formation.
d) By encouraging savings and investment, the banks increase the productivity of the resources of the country and thus contribute to general prosperity and welfare by promoting economic development.
e) The banks agency functions are very useful to the customers of the bank. They undertake to make payments of various kinds on behalf of their customers and also make several types of collections on their behalf.
Thus, banks are useful to both the community in general and the individual customer in particular.
Role of Banks in the Socio-economic development
Banks play a vital role in the economic development of the country as explained hereunder :
i) Banks promote capital formation :
In any plan of economic development capital occupies a position of crucial and strategic importance. Unless there is an adequate degree of capital formation, economic development is not possible. Deficiency of capital is a result of inadequate savings made by the community. The serious handicaps in economic development arise from capital deficiency. This is where the banks can play an useful role in making up the deficiency.
The role of banks in economic development is to remove the deficiency of capital by stimulating savings and investment. A sound banking system mobilises the small and scattered savings of the people and makes them available for investment in productive enterprises. In this connection, the banks perform two important functions.
a) they attract deposits by offering attractive rates of interest, thus converting savings which would have remained idle, into active capital; and b) they distribute these savings through loans among enterprises which are connected with economic development.
ii) Optimum Utilisation of Resources : In the absence of banks, it would have been very difficult to mobilise the small savings of the people and distribute these saving among entrepreneurs. It is through the agency of the banks that the community’s savings automatically flow into channels which are productive. The banks exercise a degree of discrimination which not only ensures their own safety but also makes for optimum utilisation of the financial resources of the community. iii) Financing the priority sectors : In order to meet additional demands arising out of economic development, the banking system has undergone changes in its structure and organisation. The banks and financial institutions operate in such a manner as to confirm to the priorities of development and not in terms of return on their capital. The banks now play a more positive role. Thus, the central bank does not merely stop at playing a regulatory role i.e., regulation of bank credit but it also plays a developmental role. It helps to create a machinery or agency for financial development plans. It ensures that the available finance is diverted to the right channels. For successful implementation of the development programmes, it becomes necessary to make credit facilities available to high priority sectors and to see that the available funds are not squandered away in non-essential or non-plan expenditure.
iv) Banks promote Balanced Regional Development : By opening branches in backward areas the banks make credit facilities available there. Also, the funds collected in developed regions through deposits may be channelised for investment in the under developed regions of the country. In this way, they bring about more balanced regional development.
v) Expansion of Credit : To maintain a high level of economic activity, it is imperative that credit must expand. In an era of economic developments, banks create credit more liberally and thereby make funds available for the development of various projects. Thus, banks make a valuable contribution to the speed and the level of economic development in the country.
vi) Banks promote growth with stability : Banks regulate the rate of investment by influencing the rates of interest. The primary function of the Reserve Bank of India was to regulate the issue of bank notes and keep adequate reserves to ensure monetary stability. Now, it has assumed wider
responsibility to help in the task of economic development. In addition to regulating currency and controlling credit, the RBI has been playing a vital role in the financing and supervision of the development programmes for agriculture, trade, transport and industry. It has created special funds for promoting agricultural credit and has created special Institutions for widening facilities for industrial finance. The other banks too have cooperated in these areas by opening new branches to tap the savings of the people and lend them to entrepreneurs.
Thus, banks come to play dominant and useful role in promoting economic development by mobilising the financial resources of the community and by making them flow into desired channels.
In recent years, commercial banks in India have been adopting the strategy of innovative banking in their business operations. This implies the application of new techniques, new methods and novel schemes in the areas of deposit mobilisation, deployment of credit and bank management. To attract more deposits, Banks have introduced many attractive saving schemes such as education deposit plan, perennial pension plan retirement schemes, loan linked recurring deposit schemes etc., Mobile bank branches have also been introduced by a number of banks. Innovations have also been made in the credit side by introducing education loan schemes, housing finance, credit cards, packing credit and post shipment credit for exporters, consumer credit, which pool the investors funds for investing in a diversified portfolio of securities so as to spread and reduce risks.
In addition to various activities like innovative banking, promoting entrepreneurship, retail banking and rural development, the commercial banks have promoted various schemes like advances to priority sectors and credit guarantee schemes. These are discussed in the role and functions of specialised banks.
The role and functions of the following institutional banks are discussed below. The role & functions of many other financial institutions shall be dealt with at the appropriate place of this module along with their structure. The few institutional banks that are discussed below operate under various schemes of the Government along with other Commercial Banks. Some of these schemes are given below :
(a) Lead Bank Scheme :
The Lead Bank Scheme, under which the leadbanks play the role of pace setter for banking and credit development, has had a special significance for banks as agents of change. It has imparted a new direction to the branch expansion policy. District credit planning exercises have made blockwise estimates of credit needs. The scheme has also focussed the attention of the
banks on the concept of the banking needs of the area. The scheme has opened up new vistas in the field of rural banking. The credit plans envisage schemes of credit extension, mainly for the development of priority sectors and for the benefit of the weaker sections. In terms of the guidelines issued by the Reserve Bank of India, the Annual Action Plans (AAP) cover Integrated Rural Development Programme (IRDP), and the lead banks have assumed a part of the responsibility for formulating plans which fit into the Rural Development schemes covering viable economic activities, and which can be pursued by the IRDP beneficiaries.
(b) Integrated Rural Development Programme : The Integrated Rural Development Programme (IRDP) is a major instrument to alleviate rural poverty. Its objective is to enable selected families in rural areas to cross the poverty line. This is achieved by providing productive assets and inputs to the target groups. The assets are provided through financial assistance in the form of subsidy by the government and term credit advanced by financial institutions, primarily by banks. Commercial banks have been the principle agents of IRDP implementation through their branch network. Commercial banks have looked upon the IRDP as an opportunity to take banking to the rural areas and have made earnest endeavors to contribute to its success.
(c) Poverty Alleviation Programme : Presently, the programme is limited to the financing of such traditional activities as dairy, poultry and village industries including basket making, carpentry, handlooms etc., where the scale of production is very small and the technology used in the production process is primitive. Commercial banks, State Bank of India, in particular, have taken a number of steps to enable the borrowers to increase the scale of production and improve the production processes by offering technical support, demonstration plots, financial and management consultancy etc., and by conducting management appreciation programmes and organising entrepreneurial development programmes. Some of the institutional banks operating these schemes are as follows:
1. Co-operative Banks: Cooperative Banks also played a limited but important role in the banking system of the country. There are a number of such banks which include State Cooperative Banks (SCB’s), Central Cooperative Banks (CCB), Primary Cooperative Banks (PCB’s), Land Development Banks (LDB’s), Primary Agricultural Credit Societies (PAC’s) etc.
a) Primary Co-operative Banks: Commonly called the Urban Cooperative Banks, they are small sized Cooperatively organized banking units which operate in metropolitan, urban and semi- urban centres to cater mainly to the need of small borrowers. The Reserve Bank is responsible for licensing of existing/new banks and branches, sanctioning
Country wise
State wise
All India Large scale
Agriculture
Mutual funds LIC, GIC including UTI and its subsidiaries SHCI CRSIL/ CARE / ICRA DFHI
EXIM BANK ECGC
Small Scale
State Level
Industrial Development
Export/Import
Capital Market
Housing ——> NHB & HB of Commercial Banks (HDFC)
Insurance & Credit guarantee ——> DICGC
NABARD National Bank for Agriculture and Rural Development
AFC Agriculture Finance Corporation
SLDB State Land Development Bank
RRB Regional Rural Banks
SEBI Securities and Exchange Board of India
SHC Stock Holding Corporation of India
CRISIL Credit Rating Information Service of India
ICRA Investment Information and Credit Rating Agency of India
DFHI Discount and Finance House of India
EXIM BANK Export Import Bank of India
ECGC Export Credit and Guarantee Commission
ICICI Industrial Credit and Investment Corporation of India
IDBI Industrial Development Bank of India
IFCI Industrial Finance Corporation of India
IRBI Industrial Reconstruction Bank of India
NSIC National Small Industries Corporation
SIDBI Small Scale Industrial Development Bank of India
SFC State Finance Corporation
SIDC State Industrial Development Corporations
SIIC State Industrial Investment Corporations
NHB National Housing Bank
Having regard to the nature and range of activities of the merchant bankers and their responsibilities to SEBI Investors and Issuers of securities it has been decided to have four categories of merchant bankers. Category I : Those authorised to act in the capacity of issue manager/co-advisor/consultant and portfolio manager to an issue and underwriter to an issue as mandatorily required. Category II : Those authorised to act in the capacity of co- manager, advisor or consultant to an issue or portfolio manager, and Category III : Those authorised to act only in the capacity of advisor or consultant to an issue. Category IV : Advisors and consultants who provide consultancy and guidance to certain terms of authorisation have also been specified for merchant bankers a few of which are listed below. a. All Merchant bankers must obtain the authorisation of SEBI b. SEBI may collect from the merchant bankers an initial authorisation fee an annual fee and a renewal fee. c. The Merchant bankers must have a minimum net worth which is based on the category into which they are classified. Category I - 1 Crore Category II - 50 Lakhs Category III - 20 Lakhs Category IV - NIL d. Lead Manager/Merchant bankers would be responsible for ensuing timely refunds and allotment of securities to the investor. e. The merchant banker shall make available to SEBI such information documents returns and reports as may be prescribed and called for. f. SEBI has already prescribed a code of conduct for merchant bankers, which they should adere to. The above terms of authorisation have been framed to make merchant bankers more responsible and liable and any negligence on the part of the merchant bankers can be proceed against legally. This will ensure that fake companies whose only intention is to defraud the Public do not have any access to the stock market and the investing public at large.
Merchant Banking :
In addition to the Commercial banking and specialised banking activities merchant banking has also grown in stature and gained an important place in the financial system of the country.
Merchant Bankers are governed by the Securities and Exchange Board of India (Merchant Bankers) Rules 1992. “Merchant Banker” is defined as any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as Manager, Consultant, Adviser or rendering corporate advisory service in relation to such issue management. Public money plays a vital role in financing a large number of projects both in public and private sectors. Hundreds of Crores of rupees are tapped from Capital market every year to finance industrial projects. To raise the money from the capital market, promoters have to bank upon merchant bankers who manage the issue.
Role of Merchant Bankers:
Merchant bankers are designated as managers to the issue. They are specialised agencies whose main business is to attract public money to Capital issues. They render the following services.
a) Drafting of prospectus and getting it approved from the stock exchanges.
b) Appointing, assisting in appointing bankers, underwriters, brokers, advertisers etc.
c) Obtaining the consent of all the agencies involved in public issue.
d) Holding brokers conference/investors conference.
e) Deciding the pattern of advertising
f) Deciding the branches where applications money should be collected.
g) Deciding the dates of opening and closing of the issue.
h) Obtaining the daily report of application money collected at various branches.
i) Obtaining subscription to the issue and
j) After the close of issue, obtaining consent of stock exchange for deciding basis of allotment etc.
Merchant Bankers charge a heavy fee for rendering the above mentioned services. The fees are so lucrative that many nationalised banks which had separate merchant banking divisions have now opened separate subsidiary companies for rendering merchant banking services.
DICGC Deposit Insurance and Credit Guarantee Corporation LIC Life Insurance Corporation of India GIC General Insurance Corporation of India UTI Unit Trust of India.
local board. The member of the local board shall hold office not exceeding 3 years but shall continue in office until the successor be nominated.
The local boards shall exercise all powers and perform all functions and duties of the SBI as may be approved by the Central board. All questions are decided by the majority. Similarly local boards are also to meet at such place and time and observe such rules and procedures as may be prescribed
The management of the EXIM, bank is nested in the board comprising :
(a) A Chairman and Managing Director appointed by the Central Government
(b) One Director nominated by the RBI
(c) One Director nominated by the Development Bank
(d) One Director nominated by the Export Credit and Guarantee Corporation.
(e) Not more than 12 Directors nominated by the Central Government of whom 5 are Government officials, not more than 3 are from schedule banks and not more than 4 are persons having special knowledge of professional experience in export and import of finance.
The Board may constitute such committees either wholly or partly by Directors and of other persons. The committees meet at such time and place and shall observe such rules and procedures and transact such business as may be prescribed. Directors of a Board hold office for a period not exceeding 6 years. Nominated Directors hold office during the pleasure of the authority nominating them. Chairman and Managing Directors hold office for such term not exceeding 5 years but eligible for the appointment.
Under Sec 9 of the Banking Companies (Acquisition of Transfer of Undertakings Act 1970 the Central Government was given the power to make schemes in consultation with the RBI for the purpose of :
(a) Management by board of Directors, the appointment of managing Directors, the holding of board meetings and allied matters. (b) Meetings of the Board (c) Appointment of Committees of the Board (d) Constitution of Regional Consultative Committees and their Boards. Nationalised Banks are managed by the Board of Directors having 15 nominated members including two fulltime Directors of whom one is the managing Director. The Composition of the Board is at follows : (a) Two whole time Directors including the Managing Director, (b) One Director from the employer, (c) One Director representing Workmen, (d) One Director representing depositors, (e) Three Directors representing farmers, workers and artisans, (f) One Director who is an official of the RBI, (g) One Director who is the official of the Central Government, and (h) not more than 5 Directors having knowledge or practical experience of the working of nationalised Banks. The Directors hold office during the pleasure of the Central Government for a period not exceeding 3 years. They may however be re- appointed. Clause 13 of the scheme provide provisions for constituting management of the Board. The Board may constitute advisory committees consisting Directors or partly with Directors or partly with other persons for advising the Board on matters refer to them. The Board has to meet atleast 6 times in a year and once in each quarter and the head office of the Bank or at such other place as the Board may decide. All questions are to be decided by majority votes. The scheme also provides for appointment of regional competitive committees for six regions specified by the Committee. The Committee shall consist of not more than three persons nominated by the Central Government and two representatives from each of the State in respective regions. One representative to be nominated by the Central Government as desired by the RBI. Meetings of the consultative Committee shall be presided over by Minister of Finance or his deputy. The functions of these committees shall be to review banking developments within the region and recommend on such matters as may be referred to it by the Central Government and the RBI.
4.1 Introductory Note
4.2 Industrial Finance Corporation of India (IFCI)
4.3 State Financial Corporations (SFC's)
4.4 The Industrial Credit and Investment Corporation of India (ICICI)
The economic development of a country depends inter alia on its financial system. In the long run, the larger the proportion of financial assets to real assets, the greater the scope for economic growth. Investment is a pre-condition for economic growth. In order to sustain the growth, continued investment is a prime importance, Finance is a major input in the growth process. This is where the financial institution play a vital role. The major function of financial institutions whether short term or long term, is to provide the maximum financial convenience to the public. This is achieved in the following manner.
a) Promoting the overall saving of the economy by widening the financial system.
b) Distributing the existing savings in a more efficient manner so that those in greater need from the social and economic point of view, get priority in allotment; and
c) Creating credit and deposit money and facilitating the transactions of trade, production and distribution in furtherance of the economy.
The integrated structure of the financial institution in the country comprises to 12 institutions at the National level and 44 at the State level. The structure consists of five All India Development Banks (AIDB’s) four Specialized Financial Institutions (SFI’s), three Investment Institutions, 18 State Financial Corporations (SFC’s) and 26 State Industrial Development Corporations (SIDC’s). The AIDB’s are Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Small Industries Development Bank of India (SIDBI) and Industrial Reconstruction Bank of India (IRBI). The SFI’s are Risk Capital and Technology Finance Corporation Ltd, (RCTC), Technology Development and Investment Company of India ltd., (TDICI), SCICI Ltd, and Tourism Finance Corporation of India Ltd (TFCI).
The investment activities are conducted by Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), and General Insurance Corporation of India (GIC) and its subsidiaries and various Mutual Funds.
Among the All India Development Banks, IDBI, IFCI, ICICI and IRBI provide assistance to medium and large industries and SIDBI to the tiny and small sector. They also undertake promotional and developmental activities. Among the specialised financial institutions, RCTC and TDIC are involved
in risk capital, venture capital and technology development financing. SCICI, which was originally set up for financing shipping, deep sea fishing and allied activities has diversified its operations to other industrial sectors also. TFCI is engaged in financing hotels tourism and related projects. Of the investment institutions, LIC and GIC which primarily take care of the life and general insurance needs of the society and UTI which is a mutual fund mobilising the savings of the community for channelising into productive sectors, are active participants in providing finance to industry both by way of term loans and subscription to equity and debentures. The SFC’s provide assistance mainly to small sector and SIDC’s to the medium and large sectors in their respective states besides undertaking promotional and development activities. The Financial Institutions, evolved over the years have been instrumental in providing term finance in the form of loan, underwriting and direct subscription to equity and debentures and guarantees. Looking to the emerging needs of the industrial sector they have also introduced a variety of financial products and services.
The need for speedier industrial expansion and for modernisation and replacement of obsolete machinery in already established industries paved the way for establishment of the Industrial Finance Corporation of India in 1948. IFCI was the first development bank to be established for providing medium and long term credits to industrial concerns. IFCI was established under such circumstances where normal banking accommodation was inappropriate and recourse to capital issue methods were impracticable. Capital: The Authorised capital of the IFCI was Rs.10 Crores it was subsequently raised to 20 crores by the IFCI Act, 1972. Presently the authorised capital is 250 crores Fifty percent of the share capital of IFCI is held by the IDBI and the remaining 50% is held by commercial and cooperative banks. The corporation is authorised to issue bonds and debentures in the open market within certain limits. Functions : The following are the major functions of the IFCI :
4. FINANCIAL INSTITUTIONS AND THEIR FUNCTIONS
