Indian Financial System

Question 1

Divided into 1. banks and 2. non banking Financial institutions (NBFI).

Basic difference between bank and NBFI is

• banks accept demand deposits and NBFI do not accept demand deposits
• Bank issue cheques but NBFI cannot issue cheque drawn on itself.

Answer 1

Banks divided into

1. Commercial banks - operate on commercial (profit) principles
2. Cooperative banks is on cooperative lines i.e.Service to its members and the society.
   * Cooperative banks provides higher rate of interest on deposits as compared to commercial banks.

Question 2

A. Commercial banks:-

1. Scheduled Commercial banks -
   * because they are included in 2nd schedule of rbi act,1934 and
   * it must be a corporation and paidup share capital should be at least 5 lakh .
   * Scheduled bank required to maintain reserve requirements with RBI as per RBI act ,1934.

Answer 2

2. Non-scheduled commercial banks -
   * Can carry out limited operation but not allowed to deal in foreign exchange.
   * Need to maintain reserve requirements (as per Banking regulation Act 1949) but may not be with RBI.

Question 3

B. Co-operative Bank:-

1. Urban cooperative banks further classified into schedule and non schedule categories,
   * also called primary cooperative bank
   * , located in urban and semi-urban areas and *were centered around communities, localities work place groups.
   * The essentially length to small borrowers and businesses.

Answer 3

2. Rural Co-operative bank is primarily mandated to ensure flow of credit to the agriculture sector.
   * Short term cooperative credit structures operates with the three tier system: state Central (district)and primary (villages).
   *it is outside the purview of the Banking regulation Act 1949 and not regulated by RBI.
   SCB / DCCB are under State cooperative societies act and hence under RBI.

*Urban cooperative banks need to provide 40% of the credit to priority sectors.

Question 4

Regional rural banks (RRB)

Answer 4

Established in 1975 under provisions of RRB act 1976 .
with a view to developing the rural economy by providing for the purpose of development of agriculture ,trade ,commerce, industry and other credit facilities.
*On the recommendation of narsimhan committee working group and
* in 50central :15 state :35 sponser.
*RRB need to provide 75% of lending to priority sector.
*First RRB the Prathama Bank, head office at Moradabad, UP.

Question 5

Non banking Financial institutions (NBFI) are divided into 3 segments:-
1. All india financial institutions (AIFI)
2. non banking financial companies (NBFC)and
3. primary dealers (PD)
Regulated and supervised by RBI.
*Credit information companies (CIC) are also a category of NBFI regulated by RBI.

Answer 5

AIFIs Constitute institutional mechanism entrusted with providing sector specific long term financing.

*Currently there are 4 AIFIs also called development Financial institutions (DFI) regulated and supervised by RBI.