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Financial Institutions and Banking is the 7th unit of Commerce UGC NET 2020. This article will introduce the concepts of the paper briefly and aid you in the preparation of Financial Institutions and Banking for Commerce UGC NET notes.
Overview of Indian financial system
A world financial system is a group of inter-related actions/services functioning collectively to attain some predetermined purpose. It comprises various markets, institutions, devices, amenities and mechanisms which affect the generation of savings, investment capital creation and development.
The Indian financial system is generally categorized into two sets: The organized sector and the unorganized sector.
Organized Indian Financial System
The organized financial system encompasses a remarkable system of banks, other economic and investment organizations and a variety of financial devices, which perform together in fairly advanced capital and money markets. Temporary funds are mostly offered by the commercial and cooperative banking system. Nine-tenth of such banking profession is managed by leading banks which belongs to the public sector. Other than commercial banks, there is the system of cooperative banks and land development banks at state, district and block stages. about two-thirds of share in the total assets in the financial system, banks perform an imperative role. Of late, Indian banks have also expanded into zones such as merchant banking, mutual funds, leasing and factoring. The organized financial structure includes the sub-systems given below:
- Banking system
- Cooperative system
- Development Banking system
- Money markets
- Financial companies
In the last few years, the form of financial establishments in India has advanced and become wide-ranging. The structure has advanced in 3 parts – state, cooperative and private. Rural and urban regions are well aided by the cooperative sector as well as by corporate institutions with national standing.
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Unorganized Financial System
On the other hand, the unorganized financial system includes comparatively less regulated moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders etc. This portion of the financial system is not directly controlled by the Reserve Bank of India. There is a multitude of financial firms, investment corporations, chit funds etc., which are also not controlled by the RBI or the government in an organized way. However, they are also governed by laws and guidelines and hence are within the circle of the financial authorities.
Financial Institutions
Financial institutions are the mediators who enable the smooth working of the fiscal system by arranging the meeting of investors and borrowers. They organize investments of the surplus units and assign them in fruitful activities pledging a better rate of return. Financial institutions also offer amenities to entities (people, companies, government) looking for guidance on different problems starting from rearrangement to modification of plans. They offer a complete assortment of services to the people/organizations who need to raise finances from the markets or somewhere else. Financial institutions are also called financial intermediaries as they work as intermediate between savers by collecting Funds from them and borrowers by loaning these funds. It also works as mediators as they take deposits from a set of clients (savers lend these funds to another set of customers (borrowers). Similarly investing organizations such ICCIC, mutual funds also gather savings and loan these to borrowers, thus accomplishing the role of financial mediators.
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Types of Financial Institutions
Financial institutions can be sorted into two groups: Banking Institutions and Non – Banking Financial Institutions
Banking Institutions
The Indian banking industry is under the control of the Central Bank. The Reserve Bank of India as the top establishment organizes, manages, supervises, regulates and develops the monetary system and the financial system of the country. The main legislation governing commercial banks in India is the Banking Regulation Act, 1949.
The Indian banking institutions can be broadly classified into two categories:
- Organized Sector
- Unorganized Sector
Organized Sector
The organized banking sector consists of commercial banks, cooperative banks and regional rural banks.
(a) Commercial Banks: The commercial banks could be scheduled banks or non–scheduled banks. Currently, only one bank is non-scheduled. All others are scheduled banks. The commercial banks comprise public sector banks, private sector banks and foreign banks. Before 1969, all main banks except the State Bank of India were in the private sector. A significant step to public sector banking was done in July 1969. 14 major private banks with a deposit base of 50 crores and above were nationalized. Later in 1980 additional 6 were nationalized increasing the total number of banks nationalized to 20.
(b) Co-operative banks: A significant section of the organized sector of Indian banking is co-operative banking. The section is embodied by a collection of societies registered under the Acts of the states connecting to co-operative societies. Co-operative societies can be credit societies or non-credit societies. Various kinds of cooperative credit societies are functioning in the Indian economy. These institutes can be categorized into two wide groups: (a) Rural credit societies (mainly for agriculture-related lending) (b) Urban credit societies (primarily for non-agriculture loans).
(c) Regional Rural Banks (RRBs): Regional Rural Banks were established by the state government with a commercial bank as the sponsor to evolve the rural economy. Regional rural banks offer banking services and loans to small farmers, minor entrepreneurs in the rural areas. The regional rural banks were established up with an opinion to deliver loan facilities to economically weaker groups.
(d) Foreign Banks: Foreign banks were present in India since the British days. Foreign banks are banks that have divisions in the foreign countries and the main Head Quarter in the Home Country. After the regulation (Elimination of Government Authority) in 1993, several foreign banks are coming to India.
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Unorganized Sector
In the unorganized banking segment, there are the Indigenous Bankers and Money Lenders.
- Indigenous Bankers
Indigenous Bankers are private firms or individuals who operate as banks and as such both accept deposits and given loans. As bankers, they are also financial mediators. They should be differentiated from professional money lenders whose main business is not banking and money lending.
- Money Lenders:
Moneylenders rely entirely on their funds. Money Lenders could be rural or urban, professional or non-professional. Their workings are wholly unregulated. They charge a very great rate of interest.
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Non – banking Institutions
The non–banking institutions may be categorized broadly into two groups: Organized Non – Banking Financial Institutions and Unorganized Non – Banking Financial Institutions.
Organized Non–Banking Financial Institutions
The organized non-banking financial institutions include:
- Development Finance Institutions.
The establishments like IDBT, ICICI, IFCI, IIBI, IRDC at all India level belongs to this category. The State Finance Corporations (SFCs), State Industrial Development Corporations (SIDCs) at the state level also belong to this category. Agriculture Development Finance Institutions such as NABARD, LDBS etc are also included. Development banks provide medium- and long-term investment to the corporate and industrial division and also take up advertising activities for economic growth.
- Investment Institutions.
These comprise of those financial organizations which mobilize savings at the public at large by different arrangements and invest these assets in corporate and government safeties. These include LIC, GIC, LTT, and mutual funds.
Unorganized Non-Banking Financial Institutions
The unorganized non-banking financial organizations comprise numerous non-banking financial companies (NBFCs) offering a whole variety of monetary services. These include hire-purchase consumer finance companies, leasing companies, housing finance companies, factoring companies, Credit rating agencies, merchant banking companies etc. NBFCs mobilize public assets and offer loan-able assets.
The above article should be considered a stepping stone before entering into the vast syllabus of Financial Institutions and Banking for Commerce UGC NET 2022 which contains many other subtopics as well. Try to understand the concepts of the paper well. Memorize the fact-based information that is abundant under the topic of Financial Institutions and Banking for Commerce UGC NET by regular revision. Download the Entri app to learn more about other topics under the unit Financial Institutions and Banking and other units under the syllabus for commerce UGC NET 2022.
