BBA III Year Banking V Semester

Types of Banks
1. Definition, Objective & functions of Commercial Bank,
2. EXIM Bank, Co-operative Bank, RBI, NABARD, State Bank of India

Introduction:
Commercial Banks are the oldest and the largest banking institutions in India. Some
of them are more than hundred years old. Their branches are spread all over the
country and have penetrated in the countryside as well.
Commercial Banking has passed through three distinct phases in India since
Independence. The period 1955- 1970.
Witnessed the genesis of public sector in Indian Banking commencing with the
setting up of the State Bank of India in 1955 and ending with the nationalization of
14 major banks in 1969.
The two decades after nationalization of banks i.e. the seventies and eighties
witnessed the conversion of class banking into mass banking. During this period
branch expansion took place on a large-scale, followed by recruitment of large
number of bank employees.
Expansion in priority sector advances, especially for the poor and neglected sectors.
Loan Mela were the main feature of this period.
The Post-nationalization era wins not without its resultant problems. With poor
training, employee efficiency and productivity went down, problem of non-recovery
of loans cropped up, and pre-emption of funds in meeting statutory requirement went
up, resulting in reduced profitability of banks, it was such a situation in 1991 when
the new economic policies were launched by the Government.
A Committee on financial sector under the Chairmanship of Shri M, Narashimham
was appointed which suggested measures of far-reaching significance to improve
efficiency, productivity and profitability of banks. These measures have been largely
implemented.

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BBA III Year Banking V Semester

Meaning of Commercial Banks:

A commercial bank is a financial institution which performs the functions of
accepting deposits from the general public and giving loans for investment with the
aim of earning profit. In fact, commercial banks, as their name suggests, axe profit-
seeking institutions, i.e., they do banking business to earn profit.
They generally finance trade and commerce with short-term loans. They charge high
rate of interest from the borrowers but pay much less rate of Interest to their
depositors with the result that the difference between the two rates of interest
becomes the main source of profit of the banks. Most of the Indian joint stock Banks
are Commercial Banks such as Punjab National Bank, Allahabad Bank, Canara
Bank, Andhra Bank, Bank of Baroda, etc.
Definition of Commercial bank:
Commercial banks are financial institutions that are primarily engaged in accepting
deposits from individuals and businesses and providing loans and credit facilities to
borrowers.
They are profit seeking organizations that operate with the primary objective of
generating profit for their shareholders.
Objectives of Commercial bank:
1. To establish as an institution for maximizing profits and to conduct overall
economic activities.
2. To collect savings or idle money from the public at a lower rate of interests
and lend these public money at a higher rate of interests.
3. To build up capital through savings.
4. To create propensity of savings amongst the people. To assist the Government
for trade & business and socio-economic development.
5. To motivate people for investing money with a view to bringing solvency in
them.
6. To create money against money as an alternative for enhancing supply of
money.
7. To expedite investments. To extend services to the customers.
8. To maintain economic stability by means of controlling money market.
9. To extend co-operation and advices to the Govt. on economic issues.

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Functions of Commercial Banks:

The two most distinctive features of a commercial bank are borrowing and lending,
i.e., acceptance of deposits and lending of money to projects to earn Interest (profit).
In short, banks borrow to lend. The rate of interest offered by the banks to depositors
is called the borrowing rate while the rate at which banks lend out is called lending
rate.
The difference between the rates is called ‘spread’ which is appropriated by the
banks. Mind, all financial institutions are not commercial banks because only those
which perform dual functions of
1. Accepting deposits and
2. Giving loans are termed as commercial banks.
For example, post offices are not bank because they do not give loans. Functions of
commercial banks are classified in to two main categories,
(A) Primary Functions:
1. Accepting deposits.
2. Loans and advances.

(B) Secondary functions.

1. Agency functions
2. Utility Functions

(A)Primary Functions:

1. Accepting deposits:
A commercial bank accepts deposits in the form of current, savings and fixed
deposits. It collects the surplus balances of the Individuals, firms and finances the
temporary needs of commercial transactions. The first task is, therefore, the
collection of the savings of the public. The bank does this by accepting deposits from
its customers. Deposits are the lifeline of banks.

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Deposits are of three types as under:

(i) Current account deposits:
Such deposits are payable on demand and are, therefore, called demand deposits.
These can be withdrawn by the depositors any number of times depending upon the
balance in the account. The bank does not pay any Interest on these deposits but
provides cheque facilities. These accounts are generally maintained by businessmen
and Industrialists who receive and make business payments of large amounts
through cheques.
(ii) Fixed deposits (Time deposits):
Fixed deposits have a fixed period of maturity and are referred to as time deposits.
These are deposits for a fixed term, i.e., period of time ranging from a few days to a
few years. These are neither payable on demand nor they enjoy cheque facilities.
They can be withdrawn only after the maturity of the specified fixed period. They
carry higher rate of interest. They are not treated as a part of money supply Recurring
deposit in which a regular deposit of an agreed sum is made is also a variant of fixed
deposits.
(iii) Savings account deposits:
These are deposits whose main objective is to save. Savings account is most suitable
for individual households. They combine the features of both current account and
fixed deposits. They are payable on demand and also withdraw able by cheque. But
bank gives this facility with some restrictions, e.g., a bank may allow four or five
cheques in a month. Interest paid on savings account deposits in lesser than that of
fixed deposit.
Difference between demand deposits and time (term) deposits:
Two traditional forms of deposits they are demand deposit and term (or time) deposit
- Deposits which can be withdrawn on demand by depositors are called demand
deposits, e.g., current account deposits are called demand deposits because they
are payable on demand but saving account deposits do not qualify because of
certain conditions on withdrawal. No interest is paid on them. Term deposits, also
called time deposits, are deposits which are payable only after the expiry of the
specified period.
- Demand deposits do not carry interest whereas time deposits carry a fixed rate of
interest.
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- Demand deposits are highly liquid whereas time deposits are less liquid.
- Demand deposits are chequable deposits whereas time deposits are not.

2. Loan and Advances:

The second major function of a commercial bank is to give loans and advances
particularly to businessmen and entrepreneurs and thereby earn interest. This is, in
fact, the main source of income of the bank. A bank keeps a certain portion of the
deposits with itself as reserve and gives (lends) the balance to the borrowers as loans
and advances in the form of cash credit, demand loans, short-run loans, overdraft as
explained under.
(i) Cash Credit: An eligible borrower is first sanctioned a credit limit and within
that limit he is allowed to withdraw a certain amount on a given security. The
withdrawing power depends upon the borrower’s current assets, the stock
statement of which is submitted by him to the bank as the basis of security.
Interest is charged by the bank on the drawn or utilized portion of credit (loan).
(ii) Demand Loans: A loan which can be recalled on demand is called demand
loan. There is no stated maturity. The entire loan amount is paid in lump sum
by crediting it to the loan account of the borrower. Those like security brokers
whose credit needs fluctuate generally, take such loans on personal security
and financial assets.
(iii) Short-term Loans: Short-term loans are given against some security as
personal loans to finance working capital or as priority sector advances. The
entire amount is repaid either in one instalment or in a number of instalments
over the period of loan.

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(B) Secondary Functions:

Apart from the above-mentioned two primary (major) functions, commercial banks
perform the following secondary functions also.
1. Agency functions:
The bank acts as an agent of its customers and gets commission for performing
agency functions as under:
(i) Transfer of funds:
It provides facility for cheap and easy remittance of funds from place-toplace
through demand drafts, mail transfers, telegraphic transfers, etc.
(ii) Collection of funds:
It collects funds through cheques, bills, bundles and demand drafts on behalf of its
customers.
(iii) Payments of various items:
It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its
customers.
(iv) Purchase and sale of shares and securities:
It buys sells and keeps in safe custody securities and shares on behalf of its
customers.
(v) Collection of dividends:
Interest on shares and debentures is made on behalf of its customers.
(vi) Acts as Trustee:
Acts as Trustee and Executor of property of its customers on advice of its customers.
(vii) Letters of References:
It gives information about economic position of its customers to traders and provides
similar information about other traders to its customers.

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BBA III Year Banking V Semester

 Discounting bills of exchange or bundles:

A bill of exchange represents a promise to pay a fixed amount of money at a specific
point of time in future. It can also be encashed earlier through discounting process
of a commercial bank. Alternatively, a bill of exchange is a document
acknowledging an amount of money owed in consideration of goods received.
It is a paper asset signed by the debtor and the creditor for a fixed amount payable
on a fixed date. It works like this.
Suppose, A buys goods from B, he may not pay B immediately but instead give B a
bill of exchange stating the amount of money owed and the time when A will settle
the debt. Suppose, B wants the money immediately, he will present the bill of
exchange (Hundi) to the bank for discounting.
The bank will deduct the commission and pay to B the present value of the bill.
When the bill matures after specified period, the bank will get payment from A.
 Overdraft facility:
An overdraft is an advance given by allowing a customer keeping current account to
overdraw his current account up to an agreed limit.
It is a facility to a depositor for overdrawing the amount than the balance amount in
his account.
In other words, depositors of current account make arrangement with the banks that
in case a cheque has been drawn by them which are not covered by the deposit, then
the bank should grant overdraft and honour the cheque.
The security for overdraft is generally financial assets like shares, debentures, life
insurance policies of the account holder, etc.

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2. Performing general utility services:

The banks provide many general utility services, some of which are as under:
(i) Traveler’s cheques:
The banks issue traveler’s cheques and gift cheques.
(ii) Locker facility:
The customers can keep their ornaments and important documents in lockers for safe
custody.
(iii) Underwriting securities:
Underwriting securities issued by government, public or private bodies.
(iv) Foreign exchange:
Purchase and sale of foreign exchange (currency).

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Exim Bank:
Once our economy opened up post liberalization and globalization, the import and
export industry became a huge sector in our economy. Even today India is one of the
largest exporters of agricultural goods. So to provide financial support to importers
and exporters the government set up the EXIM Bank.
Export import bank of India is the premier export finance institution in India,
established in 1982 under the Export-Import Bank of India Act 1981. Exim Bank
of India has been both a catalyst and a key player in the promotion of cross border
trade and investment.
The Export and Import Bank of India, popularly known as the EXIM Bank was set
up in 1982. It is the principal financial institution in India for foreign and
international trade. It was previously a branch of the IDBI, but as the foreign trade
sector grew, it was made into an independent body.
The main function of the Export and Import Bank of India is to provide financial and
other assistance to importers and exporters of the country. And it oversees and
coordinates the working of other institutions that work in the import-export sector.
The ultimate aim is to promote foreign trade activities in the country.
Established in: September 1981
Headquarters: Bombay, Maharashtra
Authorized Capital: INR 10,000 crore
Managing Director: David Rasquinha
Objectives:
- To ensure and integrated and coordinated approach in solving the allied problems
encountered by exporters in India.
- To pay specific attention to the exports of capital goods.
- Export projection.
- To facilitate and encourage joint ventures and export of technical services and
international and merchant banking.
- To extend buyers’ credit and lines of credit.

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- To tap domestic and foreign markets for resources for undertaking development
and financial activities in the export sector.

Importance of the EXIM Bank:

Other than providing financial assistance, the Export and Import Bank of India bank
is always looking for ways to promote the foreign trade sector in India. In the early
1990s, EXIM introduced a program in India known as the Clusters of Excellence.

The aim was to improve the quality standards of our imports and exports. It also has
a tie-up with the European Bank for Reconstruction and Development. It has agreed
to co-finance programs with them in eastern Europe.

In order to promote exports EXIM bank also has schemes such as production
equipment finance program, export marketing finance, vendor development finance,
etc.

Functions of EXIM bank:

- Finances import and export of goods and services from India

- It also finances the import and export of goods and services from countries other
than India.
- It finances the import or export of machines and machinery on lease or hires
purchase basis as well.
- Provides refinancing services to banks and other financial institutes for their
financing of foreign trade
- EXIM bank will also provide financial assistance to businesses joining a joint
venture in a foreign country.
- The bank also provides technical and other assistance to importers and exporters.
Depending n the country of origin there are a lot of processes and procedures

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involved in the import-export of goods. The EXIM bank will provide guidance
and assistance in administrative matters as well.
- Undertakes functions of a merchant bank for the importer or exporter in
transactions of foreign trade.
- Will also underwrite shares/debentures/stocks/bonds of companies engaged in
foreign trade.
- Will offer short-term loans or lines of credit to foreign banks and governments.
- EXIM bank can also provide business advisory services and expert knowledge to
Indian exporters in respect of multi-funded projects in foreign countries
- Planning, promoting and developing exports and imports.
- Providing technical, administrative and managerial assistance for promotion
management and expansion of export.
- Undertaking market and investment surveys and techno-economic studies related
to development of exports of goods and services.
- Financing of exports and imports of goods and services, not only of India but also
of the third world countries.
- Financing of exports and imports of machinery and equipment on lease basis.
- Financing of joint ventures in foreign countries.
- Providing loans to Indian parties to enable them to contribute to the share capital
of joint ventures in foreign countries.
- To undertake limited merchant banking functions such as underwriting of stocks,
shares, bonds or debentures of Indian companies engaged in export or import.
To provide technical, administrative and financial assistance to parties in
connection with export and import.

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Co-operative Banks:
A co-operative bank is a small-sized, financial entity, where its members are the
owners and customers of the Bank. They are regulated by the Reserve Bank of India
(RBI) and are registered under the States Cooperative Societies Act.
Co-operative banks are an important component of the Indian banking system. It is
originated with the enactment of the Co-operative Credit Societies Act of 1904.
These banks are classified as Urban Co-operative Banks and Rural Co-operative
Credit Institutions.
Definition Of Co-operative Banks
A co-operative bank is known as to be one of the financial entity which belongs to
their members and at the same time they are its owners and also are the customers
of the bank.
1. Urban Co-operative Banks:
The urban areas are served by the urban co-operative banks. These banks are
registered under Co-operative Societies Act of the respective State Governments.
These banks operate in urban areas and accept deposits from the public and also
advance loans to them. Supervised by the RBI and managed by the State
governments.
The RBI is the regulatory and supervisory authority of these banks for their banking
related operations. The RBI extends refinance to these banks at Bank Rate against
their advances to tiny and cottage industrial units.
These banks are required to channelise 60% of total loans and advances towards
priority sectors. There are urban co-operative credit societies working in the urban
areas to supply credit at low rate of interest to the semi-urban weaker sections of
society.
These are the societies registered under Co-operative Societies Act. They play an
important role in providing credit in urban areas.
2. Rural Co-operative Credit Institutions:
The rural areas are largely served by the rural co-operative credit institutions. There
is a three tire structure consisting of:
a) The State Co-operative Banks at the apex level exist at the state level.

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b) The District Co-operative banks at the intermediate level existing at District level.
c) The Primary Co-operative credit societies at the grassroots level.
The State Co-operative Banks and the District Central Co-operative Banks provide
financial support to Primary Co-operative Credit Societies. The funds of the Reserve
Bank are provided to agricultural sector through the State Co-operative Banks and
the Central Co-operative Banks.
Objective of Co-operative Banks
Cooperative banks are financial institutions that are owned and operated by their
members, who are typically individuals, businesses, or other organizations within a
particular community or industry. The main objectives of cooperative banks are to
provide financial services to their members, promote their economic development,
and support the overall growth of the community they serve. In this blog, we will
discuss these objectives in more detail.
It helps those people who have been less resources or whoever not financially strong.
It also promotes a habit of thrift, savings and mutual help. The main focus of co-
operative banks is to come up with a low cost financially on the basis of the principal
of mutual help.
The objective of cooperative banks
1. Providing financial services to members:
The primary objective of cooperative banks is to provide financial services to their
members. These services can include deposit accounts, loans mortgages, and other
financial products. By providing these services, cooperative banks help their
members achieve their financial goals and improve their financial stability.
2. Promoting economic development:
Another important objective of cooperative banks is to promote economic
development within the communities they serve. This can be achieved by providing
loans and other financial services to local businesses, which helps to create jobs and
stimulate economic growth. Cooperative banks can also support local farmers and
agricultural businesses, which are important contributors to the local economy.
3. Supporting community growth:

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Cooperative banks also aim to support the overall growth of the community they
serve. This can include investing in community development projects, such as
building affordable housing or supporting local charities and non-profit
organizations. By keeping these projects, cooperative banks can help to create a
stronger and more vibrant community.
4. Ensuring member participation and control:
A key feature of cooperative banks is that they are owned and operated by their
members. This means that members have a say in how the bank is run and its profits
are distributed. This objective ensures that cooperative banks remain accountable to
their members and can provide financial services that meet their needs.
Functions Performed by the Co-operative Banks
Co-operative banks work and function only on one simple rule “One member one
vote”. It is more democratic than the commercial banks, co-operative banks perform
all the basic functions that a commercial bank performs. Co-operative banks have a
federal structure.
Co-operative banks act as an agent to its customers, it accepts cheques and draft from
their customers, lends money to other co-operative societies and banks at
comparatively less interest rate.
Following are the functions performed by the co-operative banks:
1. Primary Urban Co-operative Bank (PUCBs)
This type of Co-operative banks provide their services to mainly urban areas of
India, they mainly provide advances in shares and debentures to the small
businessmen and also provide these small businessmen loans with extension in credit
facilities.
2. District Central Co-operative Bank (DCCBs)-
These type of banks provide their services to the district or local area. They make
and implements the policies at a district level and also provide credit facilities to the
PACs and PUBCs.
3. Primary Agriculture Credit Society (PACs)-

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PACs are a type of Co-operative bank which provides loans to its customers with
less complexity, they also motivate their customers to learn to save their money
through deposits. It also provides the benefits and development of the large society.
4. State Co-operative Banks (SCBs)-
SCBs are governed by NABARD and acts as supervisor to the DCCBCs.
5. Land Development Banks (LDBs)-
These banks help in fulfilling the needs and requirements of the agricultural sector
and provide credit in local areas and also perform all the general and basic functions
of a bank. This type of bank motivates and helps in the increase in agricultural
production in our country.
History of Co-operative Banks
The introduction of Co-operative Banks in India dates back to the early 20th century,
which was a time of distress for the Indian society.
A timeline as to how the co-operative banking emerged in India has been given
below:
 The Cooperative Credit Societies Act, 1904, was the first step taken for the co-
operative society, which got accelerated with the introduction of the Cooperative
Societies Act of 1912.
 In post-independent India, Central Committee for Cooperative Training (1953)
was set up by RBI for establishing co-operative training centers.
 To solve the issue of the financial crisis in the rural areas, Rural Credit Survey
Committee was set up 1954.
 This co-operative movement spread through the banking sector as well and by
1950s, Co-operative Banks had started extending their reach to the public in both
rural and urban areas.

Advantages of Co-operative Banks

The Co-operative banks have acted as a boon to various sectors of Indian society
and also played an important role in the development of the economy.
Given below are a few advantages of the Co-operative Banks in India:

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 These banks have provided aid to the rural population by granting loans and
credits with interest rates, lower in comparison to that asked by local money
lenders.
 They have their reach at every corner of the country and have managed to
maintain a personal rapport with the customer.
 Since the bank is owned and governed by the members themselves, they do not
seek huge profits and believe in mutual help.
 The interest rate on deposits is high and on loans is low.
 They promote productive borrowing, in order to reduce the risk of loss.
 Co-operative Banks have helped the farmers by providing them agricultural
credits to buy basic products like fertilizer, seeds, etc.
Disadvantages of Co-operative Banks
Discussed below are a few disadvantages of the Co-operative Banks in India:
 To lend money, they need investors which are tough to find.
 Over the years, the number of NPAs and overdues have been increasing.
 Since the lack of investors and money, few of them have not been delivering the
credits and money to the rural population.
 Rather than small industrialists, the benefits from Co-operative Banks have been
enjoyed by rich landowners.
 The Co-operative Banks across the country are not equally developed. A few
states have more functioning and beneficial units, while some states have faced
loss.
 Political interference has also been observed in these banks.
 With new types of banks opening up, the Co-operative Banks are facing the risk
of losing their customers.

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What Is the Reserve Bank of India (RBI)?

The Reserve Bank of India (RBI) is the central bank of India. It was established as
a shareholders' bank on April 1, 1935. The RBI retained this character for a little less
than fourteen year. On January 1, 1949 it was nationalized and since then it has
remained wholly c state owned.
The Reserve Bank of India (RBI) is the central bank of India, which began operations
on Apr. 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India
uses monetary policy to create financial stability in India, and it is charged with
regulating the country’s currency and credit systems.
- The Reserve Bank of India (RBI) is the central bank of India,
- The RBI was originally set up as a private entity in 1935, but it was nationalized
in 1949.
- The main purpose of the RBI is to conduct consolidated supervision of the
financial sector in India, which is made up of commercial banks, financial
institutions, and non-banking finance firms.
Headquartered in Mumbai, the Reserve Bank of India (RBI) serves the financial
market in various ways. For example, the bank sets the overnight interbank lending
rate, known as Mumbai Interbank Offer Rate (MIBOR) and this acts as a benchmark
for interest rate–related financial instruments in India.
The Reserve Bank of India (RBI) origins can be traced to 1926, when the Hilton-
Young Commission, known as Royal Commission on Indian Currency and Finance,
urged to create a central bank for India to separate the control of currency and credit
from the Government and to extend the banking facilities throughout the nation.
Hence, it was the Reserve Bank of India Act of 1934 that led to the establishment of
the Reserve Bank and set in motion various actions that led to the start of operations
in 1935. Since then, RBI's functions and role have gone through numerous changes
as the nature of the Indian financial sectors and economy changed.
Initiating as a private shareholders’ bank, it was in 1949 the RBI was nationalized,
and then it assumed the responsibility to meet the aspirations of a newly independent
nation and its people. RBI's nationalization strived to achieve coordination between
the policies of the government and those of the central bank.
RBI is entirely operated and owned by the Government of India, and the Preamble
of RBI, describes the basic objectives of the Reserve Bank which are as follows:

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- To regulate the issue of Banknotes

- Securing monetary stability in India
- To operate the currency and credit system of India to its advantage
Summing up, the RBI's main objective is to conduct consolidated supervision of
India's financial sector, which consists of financial institutions, commercial banks,
and non-banking finance firms. The various initiatives that RBI has adopted include
introducing off-site surveillance of banks, restructuring bank inspections, and
financial institutions, along with strengthening the role of auditors.
The RBI implements, formulates, and monitors India’s monetary policy. The goal
of the bank’s management is to maintain price stability and ensure credit is reaching
the productive economic sectors. Along with these tasks, the RBI even manages
foreign exchange under the Foreign Exchange Management Act of 1999. This act
permits the RBI to facilitate external trade and payments to boost the health and
development of India's foreign exchange market.
The RBI functions as a supervisor and regulator of the overall financial system. Due
to this, it brings more confidence in the public toward the national financial system
as it protects interest rates, and provides positive banking alternatives to the public
at large. Finally, the RBI also acts as the issuer of the national currency, which means
the currency is issued or destroyed depending on its fit for current circulation. This
provides the Indian public with the supply of currency in the form of dependable
notes and coins.
During the last few decades and in today’s time, we have noticed the growing
integration of the national economy and financial system with the Globalizing world.
Although rising global integration does benefit India as it enables the nation to
expand the scope and scale of growth of its economy, at the same time, it also
exposes India to global shocks. Therefore, maintaining financial stability has
become a vital mandate for RBI. In turn, this has arisen the requirement for effective
coordination and consultation with other regulators within India and abroad.
Understanding the Reserve Bank of India (RBI)
Located in Mumbai, the RBI serves the financial market in many ways. The bank
sets the overnight interbank lending rate. The Mumbai Interbank Offer Rate
(MIBOR) serves as a benchmark for interest rate–related financial instruments in
India.

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The main purpose of the RBI is to conduct consolidated supervision of the financial
sector in India, which is made up of commercial banks, financial institutions, and
non-banking finance firms. Initiatives adopted by the RBI include restructuring bank
inspections, introducing off-site surveillance of banks and financial institutions, and
strengthening the role of auditors.
First and foremost, the RBI formulates, implements, and monitors India’s monetary
policy. The bank’s management objective is to maintain price stability and ensure
that credit is flowing to productive economic sectors. The RBI also manages all
foreign exchange under the Foreign Exchange Management Act of 1999. This act
allows the RBI to facilitate external trade and payments to promote the development
and health of the foreign exchange market in India.
The RBI acts as a regulator and supervisor of the overall financial system. This
injects public confidence into the national financial system, protects interest rates,
and provides positive banking alternatives to the public. Finally, the RBI acts as the
issuer of national currency. For India, this means that currency is either issued or
destroyed depending on its fit for current circulation. This provides the Indian public
with a supply of currency in the form of dependable notes and coins, a lingering
issue in India.
The Reserve Bank of India (RBI) is the nation's central bank and is also known as
the banker’s bank. It began its operations on April 1, 1935, under the Reserve Bank
of India Act. RBI was established to ensure monetary stability by enforcing
monetary policies to create financial stability in India. Its functions include
regulating India's currency and credit systems, monetary management, government
debt management, foreign exchange and reserves management, financial regulation
and supervision, and it also acts as a banker to the banks and the Government. Right
from the start, RBI has played an active role in developing various sectors, especially
the rural and agriculture sectors. Over the years, these functions have evolved in duo
with global and national developments.

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The Organization Structure of the Reserve Bank of India (RBI)

Central Board of Director

Governor

Deputy Governor

Executive Director

Principal Chief General Manager

Chief General Manager

General Manager

Deputy General Manager

Assistant General Manager

Manager

Assistant Manager

Support Staff

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The Central Board of Directors retains the topmost position in the Reserve Bank’s
organizational structure. Under the provisions of the Reserve Bank of India Act,
1934, the Central Board of Directors gets appointed by the Government, and it has
the primary authority and responsibility for the oversight of the Reserve Bank.
It also delegates some vital functions to the Local Boards and various
committees. The Reserve Bank’s chief executive is the Governor, who directs and
supervises the affairs and business of the RBI. The management team includes the
Deputy Governors and Executive Directors.
Furthermore, the Central Government appoints fourteen Directors on the Central
Board, which consists of one Director each from the four Local Boards. The other
ten Directors represent various sectors of the economy, such as industry, trade,
agriculture, and professions.
Do note that all these appointments are made for a period of four years. The
Government even nominates one Government official as a Director to represent the
Government, and he/she is usually the Finance Secretary to the Government of India
and remains on the Board ‘during the pleasure of the Central Government’.
Moreover, the Reserve Bank Governor and a max of four Deputy Governors are ex
officio Directors on the Central Board as well.
The Reserve Bank of India (RBI) Policies
Repo Rate:
Repo or repurchase rate acts as the benchmark interest rate at which the RBI lends
funds to all other banks for a short term. As the repo rate increases, borrowing
from RBI tends to become more expensive; hence, customers or the public bears
the outcome of high-interest rates.
Reverse Repo Rate (RRR):
The Reverse Repo Rate refers to the short-term borrowing rate at which RBI
borrows funds from other banks. The RBI uses this method to decrease inflation
whenever there is an excess of money in the banking system.
Cash Reserve Ratio (CRR):
Cash Reserve Ratio refers to the particular share of a bank’s total deposit, which is
compulsory and it has to be maintained with the RBI in the form of liquid cash.

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Statutory Liquidity Ratio (SLR):

Leaving aside the cash reserve ratio, banks are also required to maintain liquid
assets in the form of gold and approved securities. If the SLR gets higher it
disables the banks to grant more loans.
Objectives of Reserve Bank of India:
- The Reserve Bank of India was established with the main motto of regulating
all the banks in India. The objective was to keep in check the reserves as well as
the issue of bank notes.

- So, it was done to secure the monetary stability and thereby to operate the credit
system and currency of the country to its own advantage.

- Prior to the RBI, the government of India and the Imperial Bank of India were
unable to control the Indian financial system by keeping it in check.

- Therefore, a committee led by the Hilton and young commission in 1935,

shifted the entire financial system to the RBI.

- So, the primary target for RBI was to control and regulate the various financial
policies and help in the development of the banking facilities throughout India.

- The primary objective for the RBI would be to regulate the various banking
functions for India in the money market. Thus, they focus mainly on issuing
new notes.

- The RBI was established with the aim of being a banker’s bank and also the
bank for the government. Its task was to promote the economic growth of the
country through various frameworks and economic policies of the government.

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Functions of the Reserve Bank of India (RBI):

The RBI performs two types of functions:
A. Traditional functions.
B. Developmental and promotional functions.
The traditional functions are more or less the same which a central bank normally
performs in both developed and less developed economies. In contrast, the
developmental and promotional functions of a central bank prating in less developed
countries are determined by the unique requirements of the economy in general and
financial markets in particular. In India, the inadequacy of agricultural finance and
lack of specialized institutions of long-term industrial finance have mainly
determined the developmental and Promotional functions the RBI.
A. Traditional functions:
The RBI was established on the model of the Bank of England. It was, therefore,
entrusted with the task of performing all those functions which the Bank of England
had been performing. These functions, which are usually known as traditional
functions of a central bank are:
1. To Issue Currency Notes
2. To Act as A Banker to The Government
3. To Act as A Banker's Bank
4. To Control and Supervise Banks
5. To Manage and Control The Foreign Exchange
6. To Control Credit

1. Issue of Currency Note:

The RBI is the sole authority for issuing currency notes in India. We know that
currency constitutes a significant part of the money supply in India. In 1989-90
around 57% of the money supply (considered in the narrow sense, that is, M) was in
the form of currency. The issue of currency notes, therefore, becomes one of the
principal functions of the RBI. All currency notes issued by the RBI are legal tender
in India.
The Reserve Bank of India Act permits the issue of currency notes in rupees in the
denominations of two, five, ten; twenty, fifty, one hundred, five hundred, one

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thousand, five thousand and ten thousand or such other denominations not exceeding
rupees ten thousand as the Central Government may specify. At present notes in
denominations of rupees one thousand, five thousand and ten thousand are not
issued. One hundred rupee notes are most important as they account for around half
the total value of currency notes.
2. Bank to the Government:
The RBI is a banker to both Central and State governments. As a banker it renders a
variety of banking services to the government, including acceptance of money
deposit, withdrawal of funds by cheques, and collection of payments to Government
and transfer of funds. The RBI is under statutory obligation to render banker's
services to the Central Government.
The State Governments, however, obtain these services from the RBI by virtue of
agreements entered with it. The public debt management which is now done by the
IPBI was earlier the responsibility of the Government. Since the RBI operates in gilt
-edged market, it has intimate knowledge of it.
The RBI can thus provide useful advice to the government on the amounts, terms,
conditions and timing of new bonds issue. In India, the Treasury Bills now constitute
a significant proportion of the public debt of the Central ' Government. The Treasury
Bills issued by the RBI as the agent of the government.
Apart from handling the public debt, the RBI also makes short -term advances to the
government. These short-term advances are provided to overcome temporary
difficulties of the government arising from shortfalls in their revenue.
Finally, the RBI acts as an adviser to the government. The RBI, with its experts
specializing in various areas, is in a position to advise the government not only on
banking and financial matters, but also on issues pertaining to overall economic
planning. The importance of this function has increased due to the need for
integration between the monetary and fiscal policies.
3. Bankers' Bank:
Like other central banks, the RBI does not deal with the public or business firms, it
is only a bankers' bank. The commercial and cooperative banks avail the financial
assistance from the RBI in the form of rediscounting of bills as-well as loans and
advances against approved securities, for periods not exceeding ninety days. The
RBI has been entrusted with the task of channelizing banking development on sound

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lines. Therefore, while giving advances to banks it has to discriminate between banks
on the bases of their financial positions, lending policies and the securities offered.
The RBI is within its powers to deny financial assistance to any bank wanting to
borrow from it without assigning any reason.
4. Control and Supervision of Banks:
Under the Reserve Bank of India An, 1934 and the Banking Regulation Act, 1949
the RBI has been given extensive powers to control Commercial banks. The
Regulatory functions of the relating to commercial banks cover their Licensing,
branch expansion, liquidity of their assets, management and methods of working
amalgamation, reconstruction and liquidation.
For the purpose of control, the RBI conducts inspection 0f the banks and calls for
returns and information from them. In case the operations of any bank are bound
unsatisfactory, the RBI may recommend remedial measures to improve the
functioning of that bank.
In order to ensure &at commercial banks me organized and operated on sound
financial lines, The Banking Regulation Act has determined the minimum
requirements of paid-up capital and reserves, transfer to reserve fund, and
maintenance of cash reserve and other liquid assets.
However, the most important supervisory function of the RBI is the inspection of
banks. It safeguards the interests of the depositors and helps in developing banking
system in conformity with the banking laws and regulations.
5. Foreign exchange management and Control:
Foreign exchange management and Control involves three main functions:
i. Maintaining the external value of the currency
ii. Management of external cervices of the country
iii. Exchange control
The RBI, being the central bank of the country, is required to perform all these
functions. Presently the exchange value of the rupee is determined with reference to
the daily exchange rate movements of a selected number of currencies of the
countries which are India's major trading partners. The selection of the currency
units 'and the weights ta be assigned to them has been left to the discretion of the
RBI.

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As a custodian of foreign exchange services, the RBI manages the investment and
utilization of these reserves. The exchange control is presently governed by the
Foreign Exchange Regulation Act, 1973. The Act is administered by the RBI in
accordance with the general policy laid down by the Central Government in
consultation with the former.
6. Credit Control:
Regulation of credit in accordance with the needs of the economy is perhaps the
most significant function of a central bank. M.H. De Kock, a leading authority on
central banking has observed, “credit control is the function which embraces the
most important questions of central banking policy and one through which
practically all other functions are united and made to serve a common purpose."
De Koclc's observations are no doubt relevant in the Indian context. In this country
the objective of economic policy is growth with price stability. The monetary policy
relying primarily on credit control also aims at realising this objective. Thus the
control of credit function of the RBI assumes unique importance. In order to regulate
the supply of credit, the RBI used bath quantitative and qualitative techniques.
B. Developmental and promotional functions:
The functions of the Reserve Bank of India are multi-dimensional. The bank
performs a number of developmental and promotional functions. Apart from credit
regulation, the Reserve Bank effectively channelizes credit, especially to priority
sectors, such as agriculture, exports, transport operations, and small scale industries.
In the pre-Independence days the RBI did not perform any developmental functions.
But after the country got Independence the RBI has begun performing a number of
developmental and promotional functions. Broadly these may be classified under
four heads.
First, it has largely institutionalized agricultural credit. With this in view, it first hied
to integrate indigenous bankers with the organized money market. Having failed in
this attempt, it not only encouraged development of cooperative credit in rural areas
but also exercised its licensing power in such a manner that commercial banks have
now reached rural areas in a big way.
Secondly, in order to channelize the savings of depositors particularly the small
savers, it played an active role in the establishment of the Unit Trust of India (UTI).
The UTJ presently offers the best investment opportunity to both persons and

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institutions lacking in investment expertise. It ensues steady income, liquidity, low

risk and expert management to its investors. Thirdly, by helping in setting up the
National Bank for Agriculture and Rural Development (NABARD), the RBI has
filled the gap in agricultural finance.
The NABARD is the apex organization in agricultural finance. Half of its share
capital has been provided by the RBI.
Finally, the RBI has contributed greatly to the setting up of a number of development
banks in India. In fact, the Industrial Development Bank as India (IDBI) was
originally established as a subsidiary of the RBI. However, in 1976 it become an
autonomous institution.
1. Regulating the Volume of Currency:
The RBI is performing the regulatory role in issuing and controlling the entire
volume of currency in the country through its Issue Department. While regulating
the volume of currency the RBI is giving priority on the demand for currency and
the stability of the economy equally.
2. Regulating Credit:
The RBI is also performing the role to control the credit money created by the
commercial banks through its qualitative and quantitative methods of credit control
and thereby maintains a balance in the money supply of the country.
3. Control over Commercial Banks:
Another regulatory role performed by the RBI is to have control over the functioning
of the commercial banks. It also enforces certain prudential norms and rational
banking principles to be followed by the commercial banks.
4. Determining the Monetary and Credit Policy:
The RBI has been formulating the monetary and credit policy of the country every
year and thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio
(CRR), bank rate, interest rate, credit to priority sectors etc.
5. Mobilizing Savings:
The RBI is playing a vital promotional role to mobilize savings through its member
commercial banks and other financial institutions. RBI is also guiding the
commercial banks to extend their banking network in the unbanked rural and semi-

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urban areas and also to develop banking habits among the people. All these have led
to the attainment of greater degree of monetization of the economy and has been able
to reduce the activities of indigenous bankers and private money-lenders.
6. Institutional Credit to Agriculture:
The RBI has been trying to increase the flow of institutional credit to agriculture
from the very beginning. Keeping this objective in mind, the RBI set up ARDC in
1963 for meeting the long term credit requirement of rural areas. Later on in July
1982, the RBI set up NABARD and merged ARDC with it to look after its
agricultural credit functions.
7. Specialized Financial Institutions:
The RBI has also been playing an important promotional role for setting specialized
financial institutions for meeting the long term credit needs of large and small scale
industries and other sectors. Accordingly, the RBI has promoted the development of
various financial institutions like, WCI, 1DBI, ICICI, SIDBI, SFCs, Exim Bank etc.
which are making a significant contribution to industry and trade of the country.
8. Security to Depositors:
In order to remove the major hindrance to the deposit mobilization arising out of
frequent bank failures, the RBI took major initiative to set up the Deposit Insurance
Corporation of India in 1962. The most important objective of this corporation is to
provide security to the depositors against such failures.
9. Advisory Functions:
The RBI is also providing advisory functions to both the Central and State
Governments on both financial matters and also on general economic problems.
10.Policy Support:
The RBI is also providing active policy support to the government through its
investigation research on serious economic problems and issues of the country and
thereby helps the Government to formulate its economic policies in a most rational
manner. Thus, it is observed that the RBI has been playing a dynamic role in the
economic development process of the country through its regulatory and
promotional framework.

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NABARD:
National Bank for Agriculture and Rural Development or NABARD is the main
regulatory body in the country’s rural banking system and is considered as the peak
development finance institution which is established and owned by the government
of India. This bank aims to provide and regulate credit to the rural areas, which will
be a first step towards enhancing the rural development in the country.
NABARD has been given many responsibilities related to the formulation of
policies, planning, and operations in agriculture and financial development.
NABARD carries these responsibilities efficiently and works towards promoting
and developing man industries in the rural areas like the agriculture industry, cottage
industries, other small scale industries, and rural crafts in an effort to create better
infrastructure and better employment opportunities for the people living in these
regions.
The Government of India established this bank considering all the guidelines of the
National Bank for Agriculture and Development Act of 1981. To put it in simple
terms, you can say that the National Bank for Agriculture and Rural Development
or NABARD is the main and specific bank of the country for agriculture and rural
development.
National Bank for Agriculture and Rural Development (NABARD):
NABARD is an apex regulatory body for overall regulation of regional rural
banks and apex cooperative banks in India. It is under the jurisdiction of Ministry of
Finance, Government of India. The bank has been entrusted with matters concerning
policy, planning, and operations in the field of credit for agriculture and other
economic activities in rural areas in India. NABARD is active in developing and
implementing financial inclusion.
NABARD was established on the recommendations of B. Sivaramman Committee
(by Act 61, 1981 of Parliament) on 12 July 1982 to implement the National Bank
for Agriculture and Rural Development Act 1981.
It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit
Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and
Development Corporation (ARDC).
It is one of the premier agencies providing Rs.14080 crore (100% share). The
authorized share capital is Rs.30,000 crore.

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International associates of NABARD include World Bank-affiliated organizations

and global developmental agencies working in the field of agriculture and rural
development. These organizations help NABARD by advising and giving monetary
aid for the upliftment of the people in the rural areas and optimizing the agricultural
process.
Role of NABARD:
Being the main regulatory body for agriculture and rural development, the National
Bank for agriculture and rural development or NABARD has many important roles
to play. These roles are as follows:
- The National Bank for Agriculture and Rural Development or NABARD
provides investment and production credit for various developmental activities
and projects taking place in rural areas, which will help enhance rural
development and facilitate rural prosperity. As this bank is the center or the main
financing agency for all such developmental projects, the responsibility falls on
the bank to ensure that the projects receive the proper financing and promotion.

- The responsibility of coordinating all the financing activities in the rural areas
with all institutions involved in the developmental projects falls on the
NABARD. It has to stay in touch with all major institutions, including the Indian
government, Reserve Bank of India or RBI, state governments, or any other
major institutions that may be a part of the ongoing agriculture or rural
development activities.

- NABARD takes action towards monitoring, formulating strategies for the

rehabilitation schemes, restructuring credit institutions and training personnel,
etc., through making an improvement in the credit delivery system’s absorptive
capacity and building a strong institution with an aim to achieve the same.

- The National Bank refinances all the financial institutions that finance the rural
development projects for Agriculture and Rural Development or NABARD as it
is the specific bank for looking after all agriculture and rural developments in the
country.

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- After the bank has refinanced a developmental project or activity taking place in
the rural region, the responsibility of monitoring and evaluating the project or
activity also falls on the NABARD.

- NABARD keeps all the client institutions in check and provides training facilities
to all the institutions that are working towards rural upliftment or want to work
for rural development in the future.

- Along with all the above roles, the National Bank for Agriculture and Rural
Development also keeps the portfolio of the Natural Resource Management
Programmes.

- NABARD also helps Self-Help Groups or SHGs through its SHG bank linkage
programme that will boost the activities of SHGs in the rural areas and will be a
helpful step in the rural development.

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Objectives of NABARD
The main objectives of National Bank for Agriculture and Rural Development has
been provided below:
Promotion of Agriculture and Rural Development:
NABARD aims to accelerate agricultural production and rural development by
providing financial support, promoting institutional development, and implementing
various development schemes.
Facilitating Credit for Agriculture:
It plays a crucial role in channeling credit to the agriculture sector. It refinances
commercial banks, regional rural banks, and other financial institutions to provide
loans for agricultural and rural development activities.
Institutional Development:
It focuses on strengthening and developing rural financial institutions to improve
their efficiency and outreach. It provides assistance for capacity building, training,
and technology adoption to enhance the functioning of cooperative banks, regional
rural banks, and microfinance institutions.
Promoting Rural Infrastructure Development:
NABARD Bank supports the development of rural infrastructure by providing
financial assistance for irrigation projects, rural roads, rural markets, and other
agricultural infrastructure facilities. It aims to improve connectivity and access to
markets for farmers and rural communities.
Promoting Sustainable Agriculture:
It encourages the adoption of sustainable agricultural practices and technologies to
enhance productivity, conserve natural resources, and promote climate resilience. It
supports projects related to organic farming, watershed management, renewable
energy, and agricultural research and development.
Rural Innovation:
National Bank for Agriculture and Rural Development promotes innovation and
entrepreneurship in rural areas. It provides funding and support for rural startups,
agri-businesses, and rural artisans to encourage economic diversification and
employment generation.

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Financial Inclusion:
It actively works towards promoting financial inclusion in rural areas. It supports
initiatives to provide banking services, credit, and insurance products to underserved
sections of the rural population, including small farmers, rural women, and
marginalized communities.
Other basic objects of NABARD are as follows:
- NABARD provides refinance assistance for agriculture, promoting rural
development activities. It also provides all necessary finance and assistance to small
scale industries.
- NABARD in coordination with the State Governments, provides agriculture.
- It improves small and minor irrigation by way of promoting agricultural activities.
- It undertakes R&D in agriculture, rural industries.
- NABARD promotes various organizations involved in agricultural production by
contributing to their capital.
Thus, the objects of NABARD can be brought under four major heads:
1. Credit function.
2. Financial Function
3. Supervisory Function
4. Development function.
Functions of NABARD
Now that we have seen what NABARD stands for and the roles that it has to perform,
let us go through the functions performed by the bank. In an effort to keep up with
its roles, the National Bank for Agriculture and Rural Development undergoes four
central functions. These four central functions performed by the NABARD are—
credit functions, financial functions, supervisory functions, and development
functions. To understand all these four functions performed by the NABARD, let’s
go through all of them one by one.
1. Credit functions:
Credit functions as the main provider of credit facilities in rural areas, the National
Bank for Agriculture and Rural Development or NABARD performs the credit

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functions. Under these functions, the bank provides, regulates, and monitors the
credit flow in the rural parts of the nation.
2. Financial functions:
Financial functions NABARD has many client banks and institutions that help and
assist in the developmental activities in rural areas. By performing the financial
functions, the National Bank for Agriculture and Rural Development or NABARD
provides loans to these client banks and institutions like handicraft industries, food
parks, processing units, artisans and many more.
3. Supervisory functions:
Supervisory functions as already discussed above, NABARD is the apex institution
that looks after agriculture and rural development. This is why the responsibility of
monitoring and regulating all the development activities and projects fall on this
institution. Given this role, the NABARD performs supervisory functions in which
it has to keep a check on all the client banks, institutions, credits and non-credits
societies that are a part of the developmental tasks taking place in the rural areas.
4. Development Functions:
Development Functions As you must be pretty much aware by now that the primary
role of the National Bank for Agriculture and Rural Development or NABARD is to
focus on developing sustainable agriculture and promote rural development, the
bank performs development functions in an effort to stay true to this role. Under
developmental functions, the NABARD helps rural banks prepare action plans for
the developmental activities.
Some other basic functions of NABARD
 NABARD provides refinancing facilities to Commercial banks, State co-
operative banks, Central Co-operative banks, Regional rural banks and Land
Development banks.

 It provides refinancing to agriculture, small scale industries and other village and
cottage industries by lending to commercial banks.

 It promotes rural industries, small scale and cottage industries including tiny
sectors by providing loans to commercial and co-operative banks.

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 Special assistance is given by the bank for the promotion of small scale, cottage
and village industries under service area approach.

 The bills of commercial and co-operative banks are discounted to enable them to
finance for agricultural operations.

 The bank provides funds to State governments for undertaking developmental

and promotional activities in rural areas. In order to promote rural development
and to help the weaker sections, the bank refinances especially regional rural
banks which are set up in backward areas in most of the States.

 Towards long-term loan, the bank is providing loans to institutions involved in

long-term agricultural loan against guarantee of State government.

 The bank is also financing research and development of agricultural and rural
industries.

 The bank implements the policy of the Central Government and the RBI with
regard to agricultural credit.

 Provides finance for promoting non-form activities and employment in non-farm

sectors for the purpose of reducing rural unemployment.

 It strengthens the co-operative structure in the States by providing loans to both

State co-operative banks and also to Land Development Banks.

 It promotes minor irrigation projects by financing State Government’s sponsored

irrigation projects.

 The bank is undertaking inspection work of Co-operative banks and Regional

rural banks.

 The bank has opened branches at all District headquarters by which it co-
ordinates the District development Programmes along with the district officials.

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 The bank also helps in the annual credit plan of the commercial banks and co-
ordinates the activities of commercial and co-operative banks at the district level.

 During natural calamities, such as droughts, crop failure and floods, the bank
helps by refinancing commercial and cooperative banks so that the farmers tide
over their difficult period.

The National Bank for Agriculture or Rural Development or NABARD performs all
the above roles and functions efficiently and has a great impact on the agricultural
progress and rural development in the country.
Thus, the bank is providing short-term, medium term and long-term loans for
agriculture and rural development
Ever since the setting up of NABARD, there has been a considerable increase in the
distribution of agricultural credit both by commercial and co-operative banks.
NABARD has also strengthened up the working of Regional rural banks.
Thus, we find that the role of RBI in agricultural finance has been not only taken
over by NABARD but it has been discharging it to the at most satisfaction of all the
parties concerned.

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State Bank of India:

The State Bank of India is the biggest commercial bank and holds a special position
in the modern commercial banking system in India. It came into existence on July 1,
1955 after the nationalization of Imperial Bank of India. The Imperial Bank of India
was established in 1921 by amalgamating the three Presidency Banks of Madras,
Bombay and Bengal.
Until the establishment of the Reserve Bank of India in 1935, the Imperial Bank of
India, in addition to its normal commercial banking functions had been performing
certain central banking functions. It used to act as the banker to the government, as
banker’s bank and as the clearing house.
After the establishment of the Reserve Bank of India, the Imperial Bank of India left
its central banking functions, but continued to serve as the agent of the Reserve Bank
in the areas where the latter did not have its branches. In 1955, on the
recommendations of the Rural Credit Survey Committee, the Imperial Bank of India
was nationalized and renamed as the State Bank of India through the State Bank of
India Act 1955.
Organization of State Bank of India:
The organization of the State Bank of India can be discussed under the following
heads:
1. Capital:
The state Bank of India has an authorized capital of Rs. 20 crore which has been
divided into 20 lakh shares of Rs. 100 each. The issued capital of the State Bank is
Rs. 5.6 crore. The shares of the State Bank are held by the Reserve Bank, insurance
companies and the general public. At the end of March 2001, the paid-up capital and
the reserves of the State Bank were Rs. 13461 crore.
2. Management:
The management of the State Bank of India is under the control of a Central Board
of Directors consisting of 20 members.
The break-up of the Central Board is as given below:
a) A Chairman and a Vice-Chairman are to be appointed by the Central Government
in consultation with Reserve Bank.

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b) Two Managing Directors are to be appointed by the Central Board with the
approval of the Central Government.

c) Six directors are to be elected by the private shareholders.

d) Eight directors are to be nominated by the Central Government in consultation

with the Reserve Bank to represent territorial and economic interests. Not less
than two of them should have special knowledge in the working of cooperative
institutions and of the rural economy.

e) One director is to be nominated by the Central Government.

f) One director is to be nominated by the Reserve Bank.

3. Subsidiary Banks:
Through the State Bank of India (Subsidiary Banks) Act, 1959, major state-
associated banks were converted into subsidiary banks of State Bank of India.
At present, there are seven subsidiary banks of the State Bank of India:
(a) The State Bank of Bikaner and Jaipur;
(b) The State Bank of Hyderabad;
(c) The State Bank of Mysore;
(d) The State Bank of Patiala;
(e) The State Bank of Saurashtra;
(f) The State Bank of Travancore; and
(g) The State Bank of Indore.
The State Bank of India holds not less than 55 per cent of the issued capital of each
subsidiary bank.

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Objectives of State Bank of India:

The State Bank of India has been established to operate on the normal commercial
principles, with the only difference that, unlike other commercial banks in the
country, it takes into consideration and responds in a progressively liberal manner
the financial requirements of cooperative institutions and small scale industries,
particularly in the rural areas of the country.
The main objectives of the State Bank are:
- To act in accordance with the broad economic policies of the government

- To encourage and mobilize savings by opening branches in rural and semi-urban

areas and to promote rural credit

- To establish government partnership in the provision of cooperative credit

- To extend financial help for the establishment of licensed warehouses and

cooperative marketing societies

- To provide financial help to the small scale and cottage industries

- To provide remittance facilities to the banking institutions.

The State Bank of India acts as an agent of the Reserve Bank in all those places
where the latter does not have its branches.

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Functions of State Bank of India:

As an agent of the Reserve Bank, the State Bank performs the following functions:
- It acts as the government’s bank, i.e., it collects money and makes payments on
behalf of the government and manages public debt.

- It acts as the bankers’ bank. It receives deposits from and gives loans to
commercial banks. It also acts as the clearing house for the commercial banks,
rediscounts the bills of exchange of the commercial banks and provides
remittance facilities to the commercial banks.
Ordinary Banking Functions:
The State Bank of India performs all kinds of commercial banking functions:
a) It receives deposits from the public.

b) It gives loans and advances against eligible securities including goods, bills of
exchange, promissory notes, fully paid shares of companies, immovable property
or documents of title, debentures, etc.

c) It invests its surplus funds in government securities, railway securities and

securities of corporations and treasury bills.
Other Functions:
The State Bank of India also performs the following other functions:
a) It buys and sells gold and silver.

b) It acts as agent of cooperative banks.

c) It underwrites issues of stocks, shares, debentures, and other securities in which

it is authorized to invest funds.

d) It administers, singly or jointly, estates for any purpose as executor, trustee or

otherwise.

e) It draws bills of exchange and grants letters of credit payable out of India.

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f) It buys bills of exchange payable out of India with the approval of the Reserve
Bank; it subscribes buys, acquires, holds and sells shares in the capital of banking
companies.

Prohibited Functions:
The State Bank of India has been prohibited from doing certain businesses by
the State Bank of India Act:
a) The State Bank cannot grant loans against stocks and shares for a period more
than six months.

b) It can purchase no immovable property other than its own offices.

c) It can neither rediscount nor offer loans against the security of exchange bills
whose maturity period exceeds six months.

d) It cannot rediscount bills which do not carry at least two good signatures.

e) It can neither discount bills nor grant credit to individuals or firms above the
sanctioned limit.
State Bank and Rural Credit:
The State Bank had made remarkable progress in the field of rural credit. Since its
establishment, it has been making tremendous efforts to develop rural credit by
extending credit facilities to cooperative institutions and agriculturists.
Important measures undertaken by the State Bank to promote rural credit are as
follows:
1. Expansion of Rural Branches:
The branch expansion of the State Bank has been largely rural – oriented. Out of the
total 12486 branches of the State Bank Group at the end of March 1990, 5811 (i.e.,
44.8%) were located in the rural areas with population less than 10,000; 3483 (i.e.,
27.9%) were in semi-urban areas with population 10,000 to less than 1 lakh; and
3192 (i.e., 25.6%) in the urban areas and metropolitan cities.

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2. Agricultural Finance:
The State Bank has been extending financial help to agriculture. In 1969, the total
agricultural advances by the State Bank were Rs. 92 crore, which increased to Rs.
14982 crore in March 2001.
The State Bank of India has identified and is expanding its involvement in the
following critical areas in agricultural lending:
a) The Bank has contributed to the spread of minor irrigation schemes;

b) To increase productivity at the farm level, the Bank provides production finance
directly to the farmers.

c) To develop dryland farming, the Bank- (a) grants loans for agricultural
development in dryland areas, and (b) prepares and finances dryland farming
projects in compact areas on the watershed basis.

d) The bank finances the farmers to install drip irrigation schemes in Karnataka,
Tamil Nadu and Maharashtra.

e) The Bank provides assistance to farmers to take up cultivation on waste lands

under social forestry schemes for raising nurseries and planting of trees for fuel,
fodder, etc.

f) The Bank provides financial help for modernising agricultural practices and
raising farm productivity through the use of tractors and other agricultural
implements.

3. Village Adoption Scheme:

The State Bank has undertaken a village adoption scheme. Under this scheme, a
village is selected for development by meeting its complete financial requirements,
including the requirements of the farmers, artisans and others.
The total number of villages adopted by the State Bank (other than those covered by
the agricultural development banks) in 1987 was 54207. The total amount of credit
and the number of farmers financed under this scheme stood at Rs. 1559 crore and
26.4 lakh respectively in March 1989.
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4. Integrated Rural Development Programme:

Integrated rural development scheme aims at all round and integrated development
(i.e., economic, social, cultural, etc.) of the rural areas. The total loans disbursed by
the State Bank upto the end of March 1999 under this programme amounted to Rs.
3212 crore spread over 69 lakh beneficiaries.
5. Regional Rural Banks:
Regional rural banks have been started with a view to provide credit to the small and
marginal farmers and other weaker sections of the society. The State Bank is
providing financial assistance to these banks. Upto the end of March 2001 the State
Bank had sponsored 30 regional rural banks, covering 85 districts in the country.
6. Agricultural Development Branches:
An important feature in the field of agricultural financing by the State Bank is the
expansion of special agricultural development branches. These branches aim at
financing all – round development of agriculture and function in close cooperation
with Agricultural Refinance Development Corporation (ARDC), now called
National Bank for Agriculture and Rural Development (NABARD). Upto March
1999, the Bank has contributed Rs. 1681 crore to NABARD.
7. Remittance Facilities:
The State Bank provides liberalised remittance facilities to the institutions operating
in the rural areas like state and central cooperative banks, land development banks,
etc. With the implementation of the branch expansion programmes, the State Bank
is now in a position to extend these liberalised remittance facilities more effectively
to the rural and semi-urban areas.
8. Short-Term Credit to Cooperative Banks:
The State Bank has been providing short-term credit facilities to the state and central
cooperative banks against government securities at a rate half per cent below the
usual rate charged by it.
9. Assistance to Land Development Banks:
The State Bank also gives financial assistance to the land development banks which
provide long-term credit to agriculture:

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a) The State Bank subscribes to the debentures issued by the land development
banks.

b) The State Bank grants advances on the security of such debentures. This
improves the marketability and popularity of these debentures in the money
market.

c) The State Bank provides loans and advances to cooperative central land
development banks.

10.Finance for Marketing and Processing Societies:

The State Bank gives direct financial help to marketing and processing cooperative
societies in the areas where the central cooperative banks are not in a position to
assist them. The marketing societies can get advance by pledging their produce at
favorable prices. Processing cooperative societies such as cooperative sugar mills,
cotton ginning and pressing societies, etc. are also provided similar credit facilities
by the State Bank of India.
11.Warehousing Finance:
Warehousing aims at scientific storage of the products and is essential for the
development of agricultural marketing. The State Bank has been actively associated
with the warehousing development scheme and provides advances against
warehousing receipts.
It has also been making efforts to improve its procedures and terms with a view to
promote and popularize the warehousing scheme. Moreover, the State Bank has
permitted its officers to serve on the advisory committees for warehouses.

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