FMI - Unit 3, Part 2

Unit 3
Financial Markets and Institutions
BANKS IN INDIA
Different types of Banks in India reflect that India is a mixed economy. Banks are the financial
institutions that play a crucial role in the functioning of the Indian economy and are licensed
to receive cash deposits and provide loans. So, banks can be defined as financial institutions
which perform deposit and lending functions. These various types of banks in India help
in economic growth and development, maintain financial stability and support existing and
new business. The Reserve Bank of India (RBI) is the Indian central bank that controls and
regulates Banking in India. The bank takes deposit at a much lower rate from the public called
deposit rate and lends money at a much higher rate called lending rate.
Banks can be classified into various types. Given below are the bank types in India: -
1. Central Bank
2. Commercial Banks
3. Cooperative Banks
4. Local Area Banks (LAB)
5. Specialised Banks
6. Small Finance Banks
7. Payments Bank
Scheduled Banks and Non-Scheduled Banks
Scheduled banks are covered under the 2nd Schedule of RBI Act 1934, and they need to have
a paid-up capital of Rs. 5 lakh or more. They adhere to the rules and regulations laid down by
the RBI. The RBI includes only those banks which satisfy the conditions mentioned in article
42(6)(a) of the Reserve Bank of India Act, 1934, into the scheduled bank category. One such
condition is that the banks should have a paid-up capital and reserve of Rs. 5 lakhs and above.
The banks should also demonstrate to the RBI that its operations do not jeopardize the interest
of depositors. These banks are eligible for low-interest loans from the RBI and membership in
the clearing house. They maintain Cash Reserve Ratio (CRR) with the central bank.
The banks that are not listed under the second schedule of the Reserve Bank of India Act of
1934 are Non-Scheduled banks in India. These banks do not follow the banking norms laid
by the central bank. Like the scheduled banks, the Non-Scheduled banks also maintain Cash
Reserve Ratio, not with RBI, but with themselves. They retain less than 5 lakh rupees as their
reserved capital. These banks in India are deemed incapable of protecting the depositor’s
interests. Thus, they are quite risky to do business with. They are incapable of facilitating
interbank financial transactions and clearance of cheques. Non-Scheduled Banks are not
authorized for financial assistance from the Reserve Bank of India, except during emergencies.
Unlike scheduled banks, they are not eligible for clearinghouse membership. According to the
RBI report, the country has 11 non-scheduled state cooperative banks and 1478 non-scheduled
urban cooperative banks.
Commercial Banks
Commercial banks are the financial institutions in the country that deal with activities such
as granting loans, accepting deposits, and offering other basic financial services to business
organisations. As the name suggests, the main functions of commercial banks are to earn
profits by providing loans and making interest out of them.
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• Commercial Banks in India are regulated under the Banking Regulation Act of
1949.
• They allow three types of deposits – Current account deposits, fixed deposits, and
savings account deposits.
• Commercial banks carry out a major proportion of the business of the scheduled
banks. The two primary characteristics of a commercial bank are lending and
borrowing. The bank receives the deposits and gives money to various projects to
earn interest (profit). The rate of interest that a bank offers to the depositors is
known as the borrowing rate, while the rate at which a bank lends money is known
as the lending rate.
• These banks do not charge concessional interest rates unless instructed by the RBI.
• Public deposits are the main source of funds for these banks
Main features of commercial banks are as follows:

(i) It deals with money, it accepts deposits and advances loans.
(ii) It also deals with credit, it has the power to create credit.
(iii) It is a commercial institution, whose aim is to earn profit.
(iv) It is a unique financial institution that creates demand.
(v) It deals with the general public.
Functions of Banks
The primary functions of commercial banks include accepting deposits and credit cash and
providing loans and advances to entrepreneurs and business organizations. Apart from this, it
provides overdraft facilities, locker facilities, purchase and sale of bonds and securities, and
issuing financial instruments such as cheques, promissory notes, and bills of exchange. These
are considered secondary functions of commercial banks. Given below the functions of the
banks in India:
• Primary functions:
o Acceptance withdrawals and deposits from the public
o Lending facility - loans
• Secondary functions:
o Transfer of funds
o Issue of drafts
o Provide customers with locker facilities
o Dealing with foreign exchange
o Internet banking and mobile banking
o Credit cards and debit cards
o ATM facility
o Bill payments
o Offer schemes like PPF
o Services like mutual funds, leasing, open de-mat accounts etc.
Types of Commercial banks
There are four types of Commercial banks in India are further classified into four types,
1. Public sector banks

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2. Private sector banks

3. Foreign banks
4. Regional Rural Banks (RRB)
Public Sector Banks:
o Public sector banks in India are the banks in which the Government of India holds the
majority of the stake i.e., more than 50% ownership.
o Post Independence, several privately owned banks in the country were nationalized and
made public sector banks. These banks cover about 72.9% of the total banking business
in the country.
o Since these banks are held under government ownership, the depositors believe that
money is more secure in the hands of public sector banks. Thus, they have a very large
customer base compared to other banks in the country.
o To restructure and redefine the country's banking structure, the Government of India
2020 merged 10 public sector banks into 4. In 2017, the State Bank of India was merged
with its associates and the Bharatiya Mahila Bank; in 2019, the Dena Bank and the
Vijaya Bank were merged with the Bank of Baroda.
o The oldest and most significant public sector bank in India is the State Bank of
India (SBI), which began its journey as the Bank of Calcutta in 1806.
o For example, Bank of Baroda, State Bank of India (SBI), Canara bank, Union Bank of
India.
Private Sector Banks:
o The banks where most of the stake is held by private individuals/ shareholders are called
private sector banks.
o Like the public sector banks, the private sector banks in India follow the rules and
regulations of the Reserve Bank of India. However, they can frame their independent
financial strategy for their customers.
o The total market share of private sector banks in the Indian banking system is 19.7%.
o The Union government initiated the privatization drive to strengthen the better-
performing banks rather than supporting the underperforming ones.
o HDFC Bank is India's largest private sector bank.
o Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and
Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.
Foreign Banks in India:
Foreign banks in India are international banks headquartered in a foreign country and
have branches operated in India. The key objective of foreign banks is to provide
financial services to multinational corporate clients. Such types of banks follow
dual banking regulations, i.e., the banking norms of both the home and the host country,
which makes it difficult to operate. These banks should meet the minimum capital
requirements of Rs.5 billion and have the capital adequacy ratio prescribed in the Basel
norms.
Only after the liberalization in the 1990s foreign banks entered India. There are a total
of 46 foreign banks in India as of now as per the RBI. The list includes American
Express Banking Corporation, Barclays Bank Plc, Bank of America, Bank of Bahrain
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& Kuwait BSC, Citibank N.A, Deutsche Bank, DBS Bank India Limited, Emirates
Bank NBD, HSBC Ltd, Industrial & Commercial Bank of China Ltd., Standard
Chartered Bank, and others.
Regional Rural Banks:
Regional Rural Banks (RRBs) were established based on recommendations made by

the Narasimham Committee on rural credit.
The function of the Regional Rural Bank is to develop the rural economy of India by
providing credit facilities for agriculture, trade, industries, and other productive
activities and thereby creating them. Initially, the Regional Rural Banks in India were
established by promulgating an ordinance on 26th September 1975. Then in 1976, the
Government of India passed the Regional Rural Bank Act of 1976, and within a year,
nearly 25 RRBs were established in various parts of the country. The main objective of
the RRBs is to provide credit and other banking facilities to the small, marginal farmers,
agricultural labourers, small artisans, etc., in rural areas to boost the rural economy.
The Regional Rural Banks are owned jointly by the Central government, respective
state governments, and the sponsor bank. The sponsor banks are the ones that mainly
provide managerial and financial assistance to the RRBs. Currently, 27 scheduled
commercial banks and one state cooperative bank are sponsor banks to various RRBs
in the country. The authorized capital for RRBs is Rs.5 crores, and they are contributed
in the ratio of 50:15:35 by the central government, respective state government, and the
sponsor bank, respectively.
As per the Regional Rural Bank Act of 1976, the following are the key objectives of
RRBs in India,
o To bridge the credit gaps that are prevalent in rural areas.

o To restrict the outflow of rural deposits to urban areas by developing appropriate
measures.
o To reduce the regional imbalances and increase employment generation
activities in rural areas.
These banks accept deposits, grant loans, and advances mainly to small and marginal
farmers and agricultural labourers. They are mostly confined to a few districts of the
state in which they are established.
At present, there are 56 Regional Rural Banks in India. The first regional rural bank in
India was Pratham Bank. It was sponsored by Syndicate Bank and had an authorised
capital of Rs. 5 crores. The largest bank is Kerala Gramin Bank.
Examples of RRBs are given below:
o Assam Gramin Vikash Bank

o Baroda UP Bank
o Dakshin Bihar Gramin Bank
o Karnataka Gramin Bank
o Manipur Rural Bank
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o Mizoram Rural Bank

o Punjab Gramin Bank
o Tamil Nadu Grama Bank
o Utkal Grameen Bank
o Uttarakhand Gramin Bank
Cooperative Banks
A Co-operative bank is a financial entity which belongs to its members, who are at the
same time the owners and the customers of their bank. Co-operative banks in India are
registered under the States Cooperative Societies Act. The Co-operative banks are also
regulated by the Reserve Bank of India (RBI) and governed by the
o Banking Regulations Act 1949
o Banking Laws (Co-operative Societies) Act, 1955.
Features of Cooperative Banks:
• Customer Owned Entities: Co-operative bank members are both customer and
owner of the bank.
• Democratic Member Control: Co-operative banks are owned and controlled by the
members, who democratically elect a board of directors. Members usually have
equal voting rights, according to the cooperative principle of “one person, one vote”.
• Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually
allocated to constitute reserves and a part of this profit can also be distributed to the
co-operative members, with legal and statutory limitations.
• Financial Inclusion: They have played a significant role in the financial inclusion of
unbanked rural masses.
• Cooperative banks can be scheduled or non-scheduled banks.
Types:
Urban Co-operative Banks
o Non-Scheduled UCBs
o Scheduled UCBs
Rural Co-operative Banks
o State Cooperative Banks
o District Central Cooperative Banks
o Primary Agricultural Credit Societies
Advantage of Cooperative Banking
▪ Cooperative Banking provides effective alternative to the traditional defective credit
system of the village money lender.
▪ It provides cheap credit to masses in rural areas.
▪ Cooperative credit movement has encouraged saving and investment, instead of
hoarding money the rural people tend to deposit their savings in the cooperative or
other banking institutions.
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▪ Cooperative societies have also greatly helped in the introduction of better

agricultural methods. Cooperative credit is available for purchasing improved seeds,
chemical fertilizers, modern implements, etc
▪ Cooperatives Banks offers higher interest rate on deposits.
Problems with Cooperative Banking in India
▪ Organisational and financial limitations of the primary credit societies considerably
reduce their ability to provide adequate credit to the rural population.
o Needs of tenants and small farmers are not fully met.
o Primary credit societies are financially weak and are unable to meet the
production-oriented credit needs
o Overdue are increasing alarmingly at all levels.
o Primary credit societies have not been able to provide adequate and timely
credit to the borrowing farmers.
▪ Most of the benefits from the cooperatives have been covered by the big land
owners because of their strong socio-economic position.
▪ Cooperative Banks are losing their lustre due to expansion of Scheduled
Commercial Bank and adoption of technology. They are also facing stiff
competition from payment banks and small-finance banks.
▪ Long-term credit extended by them is declining.
▪ Regional Disparities: The cooperatives in northeast states and in states like West
Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and
Gujarat. There is a lot of friction due to competition between different states, this
friction affects the working of cooperatives.
▪ Political Interference: Politicians use them to increase their vote bank and usually
get their representatives elected over the board of director in order to gain undue
advantages.
Local Area Banks (LAB)

Introduced in India in the year 1996, the Local Area Banks are non-scheduled banks in India.
LAB collects and utilizes rural savings and makes these savings available for investment in
needs. These banks aid in filling the current gaps in credit supply. It also improves the local
credit system (rural and semi-urban areas). Local area banks are referred to as small private
banks with low-cost structures that provide financial services limited by the area of operation.
These banks usually function in rural and semi-urban areas.
The main objective of the local area banks is to mobilise rural savings through local institutions.
They are also set up to give rise to new investment opportunities in the same local areas.
Functions of LAB:
• The Local Area Banks can do all normal banking business but their major function was
to finance agriculture and allied activities, small scale industries, agro-industries and
trading / non-farm activities in the rural and semi-urban areas.
• These banks had to give out 40% of total credit to priority sector, of which 10% is to
be given to weaker sections of the society.
There are 3 LABs - Coastal Local Area Bank Ltd, Krishna Bhima Samruddhi Local Area Bank
Ltd and Subhadra Local Area Bank Ltd. Capital Local Area Bank Ltd which was established
as LAB was converted in small finance bank in 2016.
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Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called specialized
banks. These include:
• Small Industries Development Bank of India (SIDBI) – Loan for a small-scale industry
or business can be taken from SIDBI. Financing small industries with modern
technology and equipment is done with the help of this bank
• EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be done
through this type of bank
• National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people
can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping develop
the country financially.
Small Finance Banks

Small Finance Banks in India are a specific segment of banking created by RBI, under the
guidance of the Government of India. They were introduced with the objective of
furthering financial inclusion by primarily extending basic banking services to unserved and
underserved sections including small and marginal farmers, small business units, micro and
small industries and unorganized entities. They are supposed to lend 75% to priority sector.
Small Finance Banks are operational under the regulation of the RBI in India, under the
purview of the apex bank’s Banking Ombudsman Scheme, 2006, as amended from time to
time. SFBs are registered as public limited companies under the Companies Act, 2013 and
governed by Banking Regulations Act, 1949; RBI Act, 1934 and other relevant Statutes and
Directives from time to time. It is a niche small finance bank in India with the objective of
providing financial inclusion to sections of society that have not been served by other banks.
The core customers of this bank are inclusive micro industries, unorganized sector entities,
marginal farmers, and more. Like any other commercial bank, it offers loans and accepts
deposits. Examples: Jana small finance bank, AU small finance bank etc.
Payments Banks
A payments bank is like any other bank, but operating on a smaller scale without involving any
credit risk. In simple words, it can carry out most banking operations but can’t advance loans
or issue credit cards. It can accept demand deposits (up to Rs 1 lakh), offer remittance services,
mobile payments/transfers/purchases and other banking services like ATM/debit cards, net
banking and third-party fund transfers. However, they do not accept NRI deposits. These banks
use channels such as ATMs, payment bank branches, Business Correspondents etc, for
transferring payments. Options for online banking, mobile banking etc. can be done through
payments banks.
In September 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket
Mor to study 'Comprehensive financial services for small businesses and low-income
households'. The objective of the committee was to propose measures for achieving financial
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inclusion and increased access to financial services. The committee submitted its report to RBI
in January 2014. One of the key suggestions of the committee was to introduce specialised
banks or ‘payments bank’ to cater to the lower income groups and small businesses so that by
January 1, 2016 each Indian resident can have a global bank account.
The main objective of payments bank is to widen the spread of payment and financial services
to small business, low-income households, migrant labour workforce in secured technology-
driven environment. With payments banks, RBI seeks to increase the penetration level of
financial services to the remote areas of the country. Financial inclusion is the chief objective
of payment banks in India.
Given below is a list of the few payments bank in our country:

• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
NATIONALISATION AND MERGERS AND ACQUISITIONS IN THE

BANKING SECTOR
NATIONALISATION OF BANKS
Nationalisation of banks is the process of converting a private stake into a public stake,
essentially increasing the government's share of the banking sector. The primary goal of this
move was to reduce the concentration of power and wealth in the hands of a few families
who owned and controlled these financial institutions.
With the nationalisation of the Imperial Bank in 1955, the central government entered the
banking business, taking a 60% stake and forming a new bank, SBI. The nationalisation of
banks broadened the scope of public sector banking, which had previously been limited to
the State Bank of India.
• At the time of India's independence, all of the country's major banks were privately
led, which was a source of concern because people in rural areas were still reliant on
money lenders for financial assistance.
• To address this issue, the then-Government decided to nationalise the banks. The
Banking Regulation Act of 1949 was used to nationalise these banks.
• The Reserve Bank of India, on the other hand, was nationalised in 1949.
• Following the formation of the State Bank of India in 1955, another 14 banks were
nationalised between 1969 and 1991. These were the banks with more than 50 crores
in national deposits.
• The 14 largest commercial banks were nationalised by then-Prime Minister Indira
Gandhi in 1969.
.
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• The banks that were nationalized included Allahabad Bank, Bank of Baroda, Bank of
India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian
Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank,
Union Bank and United Bank of India. Aside from the aforementioned 20 banks,
seven SBI subsidiaries were nationalised in 1959. Thereafter, in 1980, six more banks
that were nationalized included Punjab and Sind Bank, Vijaya Bank, Oriental Bank of
India, Corporate Bank, Andhra Bank, and New Bank of India.
• The government merged Punjab National Bank and New Bank of India in 1993. It
was the only merger between nationalised banks, which reduced the number of
nationalised banks from 20 to 19.
After independence, the Government of India (GOI) adopted planned economic

development for the country. Nationalisation was in accordance with the national policy of
adopting the socialistic pattern of society.
Nationalization came at the end of a troubled decade. India has suffered many economic as
well as political shocks.
• There were two wars (with China in 1962 and Pakistan in 1965) that put immense
pressure on public finances.
• Two successive years of drought had not only led to food shortages but also
compromised national security.
• Subsequently, a three-year plan holiday affected aggregate demand as public
investment was reduced.
• The decade of 1960-70s was the lost decade for India as the economic growth
barely outpaced population growth and average incomes stagnated.
• Industry’s share in credit disbursed by commercial banks almost doubled between
1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of
total credit. Agriculture needed a capital infusion, with the initiation of the Green
Revolution in India that aimed to make the country self-sufficient in food security.
Reasons for Nationalisation of Banks
1. To boost private sectors

2. To assist agricultural sector - Banks favoured big industries and businesses while
ignoring the rural sector. Nationalization was accompanied by a promise to support
the agricultural sector.
3. To grow India’s banking network - Nationalisation facilitated the establishment of
new branches, ensuring that banks were well-represented throughout the country.
4. To mobilize individual savings - Nationalizing the banks would give people more
access to banks and encourage them to save, bringing in more revenue to a cash-
strapped economy.
5. Economic & Political Factors - The two wars in 1962 and 1965 had wreaked havoc on
the economy. The nationalisation of Indian banks would boost the economy by
increasing deposits
What were the benefits of nationalization?
• After the nationalization of banks, the branches of the public sector bank India rose
to approximately 800% in deposits and advances took a huge jump by 11,000%.
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• Banking under government ownership gave the public implicit faith and
immense confidence about the sustainability of the banks.
• Banks were no longer confined to only metropolitan or cosmopolitan in India. In
fact, the Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons for India’s growth process, particularly in
the Green revolution. Purpose of nationalization is to promote rapid growth in
agriculture, small industries and export, to encourage new entrepreneurs and to
develop all backward areas.
Balance of payment crisis 1991 started an era of liberalization, privatization and globalisation.
However, the political control of bank lending continued even after the 1991 reforms which
today had culminated into the bad loan or Non Performing Assets crisis that has slowed down
India's growth trajectory.
Was the nationalization of banks a right move?

• Nationalization of banks led to an interest rate structure that was incredibly
complex. There were different rates of interest for different types of loans. The
Indian central bank eventually ended up managing hundreds of interest rates. This
defeated the purpose of nationalization, as due to complex structure loans never
reach the needy ones.
• Banking is a highly competitive enterprise which works on profits, nationalization
of banks has led to lesser competition between the public sector and private sectors
banks. This has created a bureaucratic attitude in the functioning of the banking
system. Lack of responsibility and initiative, red-tapism, inordinate delays are
common features of nationalized banks.
• Although liberal credit policy is necessary for providing financial support to the
weaker sections of the rural community, such a policy may prove harmful for the
stability of the banking system. The experience of the nationalized banks has shown
that these banks are now facing the problems of heavy overdue loans and
economically unviable branches.
RECENT DEVELOPMENTS IN COMMERCIAL BANKING
MERGER AND ACUISITION OF BANKS
With the rapidly advancing technology and an increase in competitions between corporations,
Mergers and Acquisitions (“M&A”) are the immediate choice and an effective strategy to
penetrate new markets. This approach is often employed by corporations with an aim to
extend their business into a new domain and prevail over their unviable state. Banks being the
underpinning foundation of our economy, are frequently encouraged to merge in order to
expand globally and create harmony, which in turn benefits the affluence of our country
through enhanced flow of monies. In the present day, the Indian banking industry is
considered to be growing swiftly and has altered itself into a dynamic industry. A new
dimension is accelerated in the sector through mergers and acquisitions and has enabled
banks to achieve a high ranking, tossing huge value to the shareholders.
Guidelines for merger/amalgamation of private sector banks

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On April 21, 2016, the Reserve Bank of India (“RBI“) issued master directions streamlining
the process of mergers of private sector banks (“Guidelines“). The proposed merger of two
banking companies or of a banking company with a non-banking financial company is
governed by these Guidelines. Additionally, these Guidelines would be applicable to public
sector banks, as appropriate.
According to the Guidelines, under the terms of Section 44A of the Banking Regulation Act
of 1949, RBI has the discretionary authority to authorize the voluntary merger of two banking
entities.
Reasons for M&As in banks
The following are the reasons for the mergers in banks:
1. Merger of weaker banks
The objective of combining weaker banks with stronger banks has been supported in order to
stabilize weak banks and diversify risk management. By joining forces with a more powerful
bank, the weaker ones can maintain its presence and avoid going out of business completely.
2. Synergies and Economies of scale
Due to the synergies created by the combined client bases of the two banks, the amalgamated
product will be more profitable and provide improved customer satisfaction. The merged
bank will have superior business portfolio, risk management plans, and market capitalization.
It also benefits from economies of scale and lower costs through better utilization of available
resources.
3. Financial liquidity and economies of scale
A merger increases liquidity, ensures direct access to cash resources, and assists in the
disposition of surplus and obsolete assets. It aids to pool the resources of the individual banks
and use them in an effective and efficient manner. After the merger, the banks will be better
equipped to fund massive projects that they previously wouldn't be able to do so on their
own, making the funding procedure for those projects swift and simple.
4. Technology advancement
With the advent of the internet, banks can now offer services with the touch of a screen,
allowing them to utilize the latest technologies. Through the merger, banks work together and
make use of cutting-edge technology to deliver better services and support the expansion of
the banking industry.
5. Skill & Talent
When two banks merge or are acquired by one another, staff and expertise are also
amalgamated, creating a larger talent pool that gives the merged entity an advantage over its
competitors.
History of mergers and acquisitions

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The Indian banking sector has witnessed a few mergers with the primary motive to ensure
growth, expand and diversify within the sector. For example, inter-alia, Punjab National Bank
acquired New Bank of India in 1993, Bank of Madura Ltd merged into ICICI Bank Ltd in
2001 and Bhartiya Mahila Bank merged into State Bank of India in 2017.
In August 2019, Government of India announced the -merger of 10 Public Sector Banks
(“PSBs”) to 4. In accordance with RBI's press release dated 28th March 2020, the said
mergers were to take effect from 1st April, 2020.
ANCHOR BANK BANKS MERGED

Punjab National Bank United Bank of India and Oriental Bank of Commerce
Indian Bank Allahabad Bank
Canara Bank Syndicate Bank
Union Bank of India Andhra Bank and Corporation Bank
Bank of Baroda Dena Bank and Vijaya Bank
-State Bank of Bikaner and Jaipur
-State Bank of Hyderabad
-State Bank of Mysore

State Bank of India
-State Bank of Patiala
-State Bank of Travancore
-Bharatiya Mahila Bank
1. Bank of Baroda was merged with Vijaya Bank and Dena Bank. The merger took
effect on 1 April 2019.
2. SBI's associate banks and Bharatiya Mahila Bank were merged with the State Bank of
India in 2017.
Impact of the mergers
The merger, which saw 27 public sector banks consolidated and reduced to 12, had a
principal objective to establish next generation banks and achieve a trillion-dollar economy in
the years to come. This merger undoubtedly has positive and synergistic effects on the
banking industry, which would have an impact on the effectiveness, workforce, and clients of
the banks.
The government's consolidation strategy aims to create larger banks that can compete with
both domestic and international financial institutions. Following the mergers, SBI currently
has a 22% market share among all banks, and PNB, the second-largest public-sector bank,
has a market share of roughly 8%.
With the merger of Punjab National Bank, United Bank of India, and Oriental Bank of
Commerce, the country's second-largest nationalized bank in terms of revenue and branch
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network will be created. The resulting synergy will yield a next-generation bank that is
competitive on a global scale.
Objectives of PSB Amalgamation
The Government of India announced the mergers with the following objectives:
1. Increase operational effectiveness to reduce financing costs

2. Establishment of banks with a significant national presence and global reach
3. Unlocking potential through mergers and the development of new banks
4. Repositioning PSBs in order to create a $5 trillion economy
5. Increased ability to take on more credit and risk
6. Improvement in delivery of services
RBI's Financial Stability Report
The combined PSBs' total assets account for almost 90% of all PSB assets. As a result, under
the same reasoning, the following data analysis of all PSBs can be treated equivalently for the
combined PSBs.
The following data is extracted from RBI's financial stability report published in January,
2021
1. All banks' credit growth (year over year), which had fallen to 5.7% by March 2020,
fell even lower to 5.0% by September 2020. Credit growth for PSBs accelerated from
3.0% in March 2020 to 4.6% in September 2020.
2. Precautionary savings fueled the other business component, or deposit growth, of all
banks, which grew at a robust 10.3% (y-o-y). One of the highest growth rates over the
past five years was 9.6% for PSBs.
3. In terms of earnings, PSBs' net interest income (NII) increased at a significantly faster
pace of 16.2% in September 2020 compared to March 2020 (13.0%).
4. In September 2020, Net Interest Margin (NIM) increased. However, the rise of other
operating income (OOI), which was 29.2% in March 2020, fell to 1.2%.
5. PSBs' earnings before taxes and provisions (EBPT) increased by 17.6%. Return on
assets (RoA) and return on equity (RoE) both increased significantly, with PSBs'
return to positive RoE after four years of sub-zero and near-zero levels being
particularly remarkable.
6. As a result, profit parameters for the combined PSBs in FY21 showed a markedly
hopeful growth.
Conclusion
In addition to providing a bank with additional capital to work with in terms of making loans
and investments, an acquisition or merger also aids in the growth of the bank's geographic
reach, allowing it to serve a bigger customer base.
Major M&A transactions have taken place in the Indian banking industry recently, and as a
result, a number of international players have emerged. Recent studies demonstrate that there
are reliable predictions of increases in the profitability of Indian banks in the near future.
However, a dramatic increase in the volume of these mergers and acquisitions has led to an
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unprecedented growth in market-level bank concentration, which could have an effect on the
competitiveness of the banking industry.
Mergers do appear to be a solution because the country's nonperforming assets (NPAs) and
bad loans have adversely affected its reputation abroad. However, the government should
constantly monitor anti-competitive mergers and abuses of power in the banking industry.
The Government currently needs to enact stringent legislations pertaining to mergers in both
PSBs and private banking organizations.
Instruments in Banking
The Negotiable instrument Act, 1881, defines a Negotiable Instrument as a promissory note,
Bill of Exchange or cheque. A Bill of Exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person or to the bearer of the instrument. Negotiable
instruments are legal documents that guarantee a monetary value and payment from one party
to another. These instruments can have their legal ownership transferred, exchanged, and sold.
The term negotiable can also describe a contract that is not fixed, meaning its terms can be
changed, depending on those involved.
Characteristics of Negotiable instruments:
1. Freely transferable
2. Unconditional
3. In writing
4. Payable to a specific person
5. Payable on demand
Types of Negotiable instruments:
Bills of Exchange
In transactions involving both services and goods, they are legally binding documents. These
bills direct one person to pay a certain amount to another person. The person who pays the bill
accepts the exchange bill, an official contract for payment. If issued through a bank, the bill of
exchange is typically referred to as a draft from a bank. If an individual or business issues the
bill, we call it a trade draft.
Cheque
A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand. In other words, an order to a bank to pay a stated sum from the
drawer’s account written on a specifically printed form. The maker of a cheque is called the
'drawer', and the person directed to pay is the 'drawee'. The person named in the instrument, to
whom or to whose order the money is, by the instrument directed, to be paid, is called the
'payee'. A cheque has to be presented for payment by the payee or holder to the acceptor, maker
or drawer.
A cheque is not cash, as it does not assume the finality of payment. The funds may not be
available with the drawer or the drawer may have withdrawn funds from his bank account in
the interim leading to the possibility of the cheque being dishonoured on presentation. In
addition, the banks levy a collection charge based on postal costs as well as the value of the
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cheque in case of outstation cheques. It takes time to realise the proceeds of a cheque payment,
especially if the cheque is an outstation one. For these reasons, the cheque is not always
acceptable in several business transactions particularly where the drawer and the payee are not
known to each other. In many commercial transactions, the sellers of goods and services prefer
to have a payment instrument where the sum of money payable to the payee is guaranteed. The
demand draft is one such instrument.
Demand Draft
The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank undertakes
to make payment in full when the instrument is presented by the payee for payment. The
demand draft is made payable on a specified branch of a bank at a specified centre. In order to
obtain payment, the beneficiary has to either present the instrument directly to the branch
concerned or have it collected by his / her bank through the clearing mechanism.
Promissory notes
Promissory notes are documents containing a written promise between parties – one party (the
payor) is promising to pay the other party (the payee) a specified amount of money at a certain
date in the future. Like other negotiable instruments, promissory notes contain all the relevant
information for the promise, such as the specified principal amount, interest rate, term length,
date of issuance, and signature of the payor. The promissory note primarily enables individuals
or corporations to obtain financing from a source other than a bank or financial institution.
Those who issue a promissory note become lenders.
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DEVELOPMENT FINANCIAL INSTITUTIONS

The Development Finance Institution (DFI) are organizations which are either owned by the
government or by charitable institutions to finance infrastructure projects that are of national
importance but may or may not meet commercial return standards. DFIs do not accept deposits
from people. They raise funds by borrowing funds from governments and by selling their bonds
to the general public. It also provides a guarantee to banks on behalf of companies and
subscriptions to shares, debentures, etc.
Categories of DFIs:
1. National Development Banks such as IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC.
2. Sector-specific financial institutions such as TFCI, EXIM Bank, NABARD, HDFC,

and NHB.
3. Investment Institutions such as LIC, GIC and UTI.
4. State-level institutions such as State Finance Corporations and SIDCs.
Types of Finances offered by DFIs are Medium (1-5 years) & Long term (>5 years).
The need for DFIs in India:
India needs DFIs for the below-mentioned reasons:
1. To boost economic growth.
2. To improve long term finances.
3. To provide credit enhancement for infrastructure and housing projects.
4. Infrastructure Building: Inadequate and inefficient infrastructure leads to high

transaction costs, which in turn stunts an economy’s growth potential. Debt flows
towards infrastructure projects would be improved.
5. International Precedent: Irrespective of the level of development, countries across the
world have set up development banks to finance key infrastructure and manufacturing
projects. For instance, the European Investment Bank (EIB) acts like a DFI for
Europe. Lack of Finance for Infrastructure: Although India has a long-term debt
market for the government securities and corporate bonds cut, it is still out of reach
of retail investors and unable to meet the large infrastructure financing needs.
6. Economic Crisis Triggered by Covid-19 Pandemic: The Covid-19 pandemic has
exacerbated inequality, the poverty gap, unemployment, and the economy’s slowing
down.
7. They also provide technical assistance like Project Report, Viability study, and
consultancy services.
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List of important Development Finance Institutions (DFIs):
1. IFCI: Industrial Finance Corporation of India was established in 1948. It is India's

first Development Finance Institution.
2. ICICI: Industrial Credit and Investment Corporation of India Limited

was established in the year 1955 by an initiative of the World Bank and was the first
DFI in the private sector. ICICI Limited established its subsidiary company ICICI Bank
Limited in 1944 and in 2002, ICICI Limited was merged into ICICI Bank Limited,
making it the first universal bank of India.
3. IDBI: Industrial Development Bank of India was set up in 1964 under RBI and was
granted autonomy in 1976. The bank is responsible for ensuring adequate flow of credit
to various sectors and was converted into a universal bank in 2003.
4. IRCI: Industrial Reconstruction Corporation of India was set up in 1971 to revive

weak units and provide financial & technical assistance.
5. SIDBI: Small Industries Development Bank of India was established in 1989 as a

subsidiary of IDBI and was granted autonomy in 1998.
6. EXIM Bank: Export-Import Bank was established in January 1982 to provide

technical assistance and loan to exports.
7. NABARD: National Bank for Agriculture and Rural Development was established
in July 1982 on the recommendation of the Shivraman Committee and functions as a
refinancing institution.
8. NHB: National Housing Bank was established in 1988 to finance housing projects.
After two important DFIs, namely, ICICI and IDBI were merged with their banking
units, many functions of DFIs are now performed by commercial banks and these are actively
performed by commercial banks that finance projects like DFIs. Thus, Commercial banks are
called universal banks which provide all kind of financial services under one roof.
EXIM BANK
Export-Import Bank of India is the premier export finance institution of the country that seeks
to build value by integrating foreign trade and investment with the economic rise of India. The
Bank has been guided by expertise at the Board level, by senior policy makers, expert bankers,
leading players in industry and international trade as well as professionals in exports, imports
or financing. With offices spread across India and in select locations of the world, the bank
aspires to boost the businesses of industries and SMEs.
Objectives:
“providing financial assistance to exporters and importers, and ... functioning as the
principal financial institution for coordinating the working of institutions engaged in
financing export and import of goods and services with a view to promoting the
country's international trade...”
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“... act on business principles with due regard to public interest.”

(Export-Import Bank of India Act, 1981)
Vision
Globalisation of Indian businesses and empowering growth of partner countries.
Mission
Facilitate Indian trade and investment, and support partner countries’ development priorities as
a financially, socially and environmentally responsible institution.
Exim Bank of India represents a rare case of an institution where the concept and need for such
an institution had been debated for a long period-more than two decades – before it was finally
set up in 1982. The two decades prior to the establishment of Exim Bank witnessed significant
changes in the industrial and the trade scenario. Indian exports during the fifties and the early
sixties consisted of primary commodities and traditional manufactures like jute and cotton
textiles. The dominant viewpoint was that in India’s case, expansion in domestic demand alone
could realistically serve as the engine for economic growth, since export expansion
opportunities were limited and there were fundamental constraints (like inadequate
infrastructure) to export growth. The ideology relating to the manufacturing sector was to
promote industrialization through import substitution. As a result, the export sector remained
neglected with a small share in India’s GDP.
Nevertheless, the process of industrial development in India promoted through the import
substitution strategy provided an impetus to the growth of a large and diversified industrial
base, particularly the engineering industry. A number of emerging industrial sub-sectors also
proved to be internationally competitive. The change in India’s export profile commenced
slowly in the sixties with a growing share of non-traditional manufactured goods and value-
added products.
During 1978-79, the Ministry of Finance convened meetings to discuss the proposal regarding
setting up of an Export-Import Bank. At these meetings, it was agreed that there was a
justification for a separate institution on the ground that it would be able to devote concentrated
attention to the needs of exporters and explore new methods for augmenting credit on
reasonable terms. It could also concern itself with investment finance required for export
production.
By 1980, engineering goods exports had grown to constitute 13 per cent of Indian exports.
Project exports were also buoyant. The growing demand of project exporters for an Exim Bank,
vigorous support from the Ministry of Commerce and increasing emphasis on export promotion
combined to push the government into taking a final view. On June 18, 1980, in his budget
speech in Parliament, the then Finance Minister, Shri R. Venkataraman, announced the
momentous decision to establish an Exim Bank.
Export-Import Bank of India was thus born after two decades of debate on the need for a
specialized export credit agency for India and the role of international trade in India’s economic
development.
The Export-Import Bank of India Act was passed in September 1981 and the Bank commenced
its operations in March 1982.
Today with our rich pedigree, we serve as a growth engine for Indian Businesses range of
products and services. This includes import of technology and export product development,
export production, export marketing, pre-shipment and post-shipment and overseas investment.
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In a rapidly shifting financial landscape, we are a catalyst and key player in the promotion of
cross border trade and investment.
The operations of the Bank are governed by a Board of Directors. The Board of Directors
consists of a chairman, a managing director, two deputy managing directors; one director each
nominated by the Reserve Bank of India; IDBI Bank Ltd. and ECGC Ltd.; and not more than
12 directors nominated by the Central Government of, whom 5 directors are Central
Government officials; not more than 3 directors are from commercial banks; and up to 4
directors are professionals with experience in export / import or financing.
Financial products:
1. Buyer’s credit - Buyer's Credit is our unique credit facility programme that motivates
Indian exporters to explore new geographies. Through this programme, the overseas
buyer can open a "letter of credit" in favour of the Indian exporter and can import goods
and services from India on deferred payment terms. While on the one hand, the exporter
enjoys reduced transaction costs and complexities of international trade transactions,
on the other hand, the Indian exporter gets to compete in the international market and
can continue to put his working capital to good use to scale up operations.
2. Corporate Banking – They offer a range of financing programmes to enhance the
export-competitiveness of Indian companies. The bank provides 360 degree support to
export-oriented units by catering to long-term loan requirements that help exporters
finance new projects, expand, modernize or purchase new equipment or carry out R&D;
and cater to their working capital and overseas investment requirements.
3. Lines of credit - Lines of Credit (LOC) enable Indian exporters to enter new
geographies or expand their business in existing export markets without any payment
risk from overseas importers.
4. Overseas investment finance –
Term loans to Indian companies for :
• Equity investment in their overseas Joint Venture (JV)/Wholly Owned
Subsidiaries (WOS)
• Onward lending to their overseas JV/WOS.
5. Project exports - It provides a steady stream of support to project activities in
engineering, procurement, construction (civil, mechanical, electrical or instrumental).
This includes the provision of specific equipment related to supplies, construction and
building materials, consultancy, technical know-how, technology transfer, design,
engineering (basic or detailed). It supports existing or new projects, plants or processes
that require additional assistance in processes such as international competitive bidding:
including multilaterally funded projects in India.
6. The Ubharte Sitaare Programme (USP) identifies Indian companies that are future
champions with good export potential. An identified company should have potential
advantages by way of technology, product or process. It can be supported even if it is
currently underperforming or may be unable to tap its latent potential to grow. The
Programme diagnoses such challenges and provides support through a mix of structured
support covering equity, debt and technical assistance.
Services provided by the bank:
1. Marketing advisory services
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Key roles of Marketing Advisory Services:

• To help Indian exporting firms in their globalisation efforts by proactively assisting
in locating overseas distributors/buyers/partners for their products/services
• To identify opportunities overseas for setting up plants or projects or for acquisition
of overseas companies
2. Research and analysis
At the helm of Exim Bank's Research & Analysis Group (RAG) is a team of experienced
economists and strategists who steer the group with in-depth insights on international
economics, trade and investment through qualitative and quantitative research techniques.
The Group skilfully monitors trends in global and domestic economies to analyse their
impact on Indian and other developing economies. Besides catering to the constituents
within the Bank, the Group also connects with the Government, RBI, exporters/importers,
trade & industry associations, external credit agencies, academic institutions and
researchers.
The Group envisages avenues to enhance India's international engagement and implements
the research under a broad classification of regional, sectoral and policy related studies;
which are then published as Occasional Papers, Working Papers, Books, etc.
The Group also undertakes country profiles to:
• assess the economic, political, currency and credit risks involved
• identify export opportunities in the country concerned
• provide short-to-medium term economic outlook of a country
• indicate the economic risk involved in doing business with country
3. Export Advisory services

The Export Advisory Services Group [EAS] offers a diverse range of information, advisory
and support services, which enable exporters to evaluate international risks, exploit export
opportunities and improve competitiveness. Value added information and support services
are provided to Indian projects exporters on the projects funded by multilateral agencies.
The Group undertakes customised research on behalf of interested companies in the areas
such as establishing market potential, defining marketing arrangements, and specifying
market distribution channels. Developing export market entry plans, facilitating
accomplishment of international quality certification and display of products in trade fairs
and exhibitions are other services provided.
NABARD
The importance of institutional credit in boosting rural economy has been clear to the
Government of India right from its early stages of planning. Therefore, the Reserve Bank of
India (RBI) at the instance of the Government of India, constituted a Committee to Review the
Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD)
to look into these very critical aspects. The Committee was formed on 30 March 1979, under
the Chairmanship of Shri B. Sivaraman, former Member of Planning Commission,
Government of India.
The Committee’s interim report, submitted on 28 November 1979, outlined the need for a new
organisational device for providing undivided attention, forceful direction and pointed focus to
credit related issues linked with rural development. Its recommendation was formation of a
unique development financial institution which would address these aspirations and creation
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of National Bank for Agriculture and Rural Development (NABARD) was approved by the
Parliament through Act 61 of 1981.
NABARD came into existence on 12 July 1982 by transferring the agricultural credit functions
of RBI and refinance functions of the then Agricultural Refinance and Development
Corporation (ARDC). It was dedicated to the service of the nation by the late Prime Minister
Smt. Indira Gandhi on 05 November 1982. Set up with an initial capital of Rs.100 crore, its’
paid up capital stood at Rs.17,080 crore as on 31 March 2022. Consequent to the revision in
the composition of share capital between Government of India and RBI, NABARD today is
fully owned by Government of India.
VISION
Development Bank of the Nation for Fostering Rural Prosperity
MISSION
Promote sustainable and equitable agriculture and rural development through participative
financial and non-financial interventions, innovations, technology and institutional
development for securing prosperity.
NABARD's affairs are governed by a Board of Directors. The Board of Directors are appointed
by the Government of India in consonance with NABARD Act.
“What we do?
Our initiatives are aimed at building an empowered and financially inclusive rural India
through specific goal oriented departments which can be categorized broadly into three
heads: Financial, Developmental and Supervision. Through these initiatives we touch
almost every aspect of rural economy. From providing refinance support to building
rural infrastructure; from preparing district level credit plans to guiding and motivating
the banking industry in achieving these targets; from supervising Cooperative Banks
and Regional Rural Banks (RRBs) to helping them develop sound banking practices
and onboarding them to the CBS platform; from designing new development schemes
to the implementation of GoI’s development schemes; from training handicraft artisans
to providing them a marketing platform for selling these articles.
Over the years our initiatives have touched millions of rural lives across the country.
Our milestone achievements have been India’s achievements as well. The SHG Bank
Linkage Project launched by NABARD in 1992 has blossomed into the world’s largest
micro finance project. Kisan Credit Card, designed by us has become source of comfort
for crores of farmers. We have financed one fifth of India’s total rural infrastructure.
We were pioneers in the field of watershed development as a tool for sustainable
climate proofing. It’s a long list indeed and we welcome you to understand us better.”
- NABARD official website.
NABARD by virtue of its Financial, Developmental and Supervisory role is touching almost
every aspect of rural economy, including providing refinance support, building rural
infrastructure, preparing district level credit plans, guiding and motivating the banking industry
in achieving credit targets, supervising Cooperative Banks and Regional Rural Banks, helping
banks to develop sound banking practices, enabling them to on-board to the CBS platform,
designing new projects for rural development, implementing GoI's development schemes,
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training handicraft artisans and providing them a marketing platform for selling their articles,
etc.
A) FINANCIAL FUNCTIONS
• Refinance
NABARD disbursed Rs.152136 crore and Rs.116136 crore for supporting ST and LT financing
by banks, respectively, during the year 2021-22 (This includes Special Liquidity Facility
Finance provided to banks).
NABARD provides by way of refinance, loans and advances repayable on demand or on the
expiry of fixed period not exceeding 12 months, to Cooperative Banks and Regional Rural
Banks for production, marketing and procurement activities. The basic objective of short-term
refinance provision is to supplement the resources of banks and to improve credit flow at the
ground level.
• Short Term Loans
Crop loans are extended to farmers for crop production by financial institutions, which support
in ensuring food security in the country. During the year 2021-22, NABARD has disbursed
Rs.55695 crore for Seasonal Agricultural Operations, Rs.67818 crore for Additional Seasonal
Agricultural Operations and Rs.28590 crore for other than seasonal agriculture operations to
Cooperative Banks and RRBs.
• Long Term Loans
NABARD's long-term refinance provides credit to financial institutions for a wide gamut of
activities encompassing farm and non-farm activities with tenor of 18 months to more than 5
years.
• Rural Infrastructure Development Fund (RIDF)
RIDF was set up with NABARD in 1995-96 by the Reserve Bank of India out of the shortfall
in lending to priority sector by scheduled commercial banks for supporting rural infrastructure
projects. NABARD disbursed Rs.33883 crore during 2021-22 under RIDF which contributes
substantially to the rural infrastructure funding in the country today.
• Long-Term Irrigation Fund
Long Term Irrigation Fund (LTIF) was announced in the Union Budget 2016–17 for fast
tracking completion of 99 identified Medium and Major Irrigation projects, as identified by
Ministry of Jal Shakti (nodal Ministry under the fund), GoI. The projects were spread across
18 States. Subsequently, 04 more projects, viz., Polavaram project in Andhra Pradesh, North
Koel project in Bihar & Jharkhand, Relining of Sirhind & Rajasthan Feeders and Shahpur
Kandi Dam in Punjab were included under LTIF.
• NABARD Infrastructure Development Assistance (NIDA)
NABARD Infrastructure Development Assistance (NIDA) offers flexible long-term loans to
well-managed public sector entities for financing rural infrastructure. Projects for agriculture
infrastructure, rural connectivity, renewable energy, power transmission, drinking water and
sanitation, and other social and commercial infrastructure are financed under NIDA. Inclusion
of public–private partnership (PPP) and non-PPP projects to be undertaken by registered
entities like corporates/companies, cooperatives, etc. has further broadened NIDA’s scope of
funding. Financing under NIDA offers scope for off-budget and on-budget borrowing to state
governments and aids in easing state budget constraints.
• Credit Facility to Federations (CFF)
Credit facility to Federations (CFF) provides short-term credit support to state government
entities like agricultural marketing federations, civil supply corporations, dairy cooperatives,
/milk unions or federations etc., for procurement, processing and marketing of agricultural
commodities, input supply, and value and supply chain management. Under this facility, credit
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support is made available for procurement of food grains, pulses and oilseeds and other
agricultural commodities like milk. The facility is also available for procurement and marketing
of agricultural inputs like seed and fertilizer. This facility is extended as short-term loan for a
period of twelve months and another product in the nature of a very short-term loan for three
months to meet the specific requirements of the agencies.
Sanctions under CFF were made to 12 agencies during 2021-22 with a credit limit sanction of
Rs. 36435.80 crore and disbursement of Rs. 46434.31 crore. The loan outstanding position as
on 31 March 2022 was 11.36% more than the position as on 31 March 2021.
B) SUPERVISORY FUNCTIONS
NABARD undertakes inspections of banks and other financial institutions under this function.
For the FY 2021-22, 322 statutory inspections and 9 voluntary inspections were scheduled with
reference to the financial position of banks/ other institutions as on March 31, 2021.
C) DEVELOPMENTAL FUNCTIONS
• Financial Inclusion
As on 31 March 2022, a cumulative amount of Rs.5013.91 crore was sanctioned and an amount
of Rs.2804.57 crore was disbursed towards various schemes implemented under FIF (Financial
Inclusion Fund) by generating demand for banking services and building payment/acceptance
infrastructure at the ground level. To bridge the gap between the demand and supply side of
FI, under differentiated strategy adopted to address the regional disparities and to bring about
inclusive and equitable financial inclusion across the country since 2019, grant assistance was
extended at an enhanced rate of 90% in 358 Special Focus Districts which includes aspirational
districts, LWE districts, Credit Deficient Districts, Lakshadweep, Andaman and Nicobar Island
and districts in Hilly states and NER.
• Microfinance Sector
NABARD had launched the Self Help Group-Bank Linkage Programme (SHG-BLP) in 1992.
The programme has empowered 118.93 lakh Self Help Groups (SHGs) and 14.2 crore rural
households in India as on 31 March 2022. Nearly 33.98 lakh SHGs availed credit support of
Rs.997.29 crore from various banks during 2020-21, at an average of Rs.2.93 lakh per SHG.
54.08 lakh JLGs were promoted and financed by banks during 2021-22.
• EShakti
Government of India launched “Digital India” mission to transform India into a digitally
empowered society and knowledge economy. Aligning with the initiatives of Government of
India, NABARD launched Project EShakti, a pilot project for digitization of SHG data in
March 2015 in two districts i.e. Ramgarh (Jharkhand) and Dhule (Maharashtra). The project
was expanded in phases to 281 districts. The project aims at digitization of SHG data for
enhancing banks’ ease of doing business with SHGs through a ‘one-click’ availability of the
financial and non-financial profiles of the Self Help Groups maintaining Saving Bank accounts
with banks. Now the project is running in 130 districts under Focused Approach.
As on 31 March 2022, data pertaining to 12.74 lakh SHGs involving 146 lakh members in more
than 1.73 lakh villages of 281 districts have been on-boarded in EShakti portal.
• Skill Development
In tune with GoI’s goal, NABARD has developed a structured approach for addressing the skill
gap in rural India through demand and outcome-based programmes through multiple
stakeholders in skill development ecosystem leading to wage/self-employment.
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• Marketing Initiatives
To support rural producers in the farm and off-farm sector to market their produce effectively,
NABARD has been extending support for setting up of Rural Haats, Rural Marts and
participation of artisans and craftsmen in national and regional level exhibitions and melas.
Rural Haats
Rural Haats have been vital to the lives of rural communities by providing them accessible
market place to buy and sell their farm and off-farm produce.
Rural Marts
Rural Marts help to promote entrepreneurship amongst producer communities and provide
market link for domestic products manufactured by rural community particularly women and
weaker sections. They help in generating income and employment at grassroot level.
Exhibitions/Melas
Exhibitions and Melas provide a direct marketing platform to the artisans with access to market
intelligence, customer preferences and bulk orders. Participation in these melas empowers the
artisans to face the challenges in doing business.
NATIONAL HOUSING BANK
The National Housing Bank (NHB) is the agency that is involved in the promotion of housing
finance institutions at both the regional and local levels. The secondary function of the NHB is
to provide financial and other assistance to such institutions. The National Housing Bank Act
(NHBA) of 1987 declared the NHB to be the prime banking agency for housing finance in
1988 July.
• The NHB was previously an integral part of the Reserve Bank of India (RBI) until the
Government of India purchased it in 2019 with the entire stake for INR 1,450 Crores.
This step by the union was taken as per the Narasimha-II Committee Report of 2001.
• NHB primarily raises the required funds from bonds, borrowings, debentures, etc.
• As per the Bank Regulations Act, the bonds of the NHB are accepted as security in the
commercial banks that can be used to meet the statutory liquidity.
• Moreover, the bonds can successfully seek external assistance from several
international organisations, including USAID and OECF Japan. Another major
component of the NHB is that it refinances Housing Finance Companies at varying
rates depending on the size of the loan.
Objectives of the National Housing Bank

The following are some of the primary objectives of the NHB:
1. To promote a feasible and cost-effective housing finance system for all segments of the
population and to integrate housing finance with the other mechanics of finances.
2. The most popular objective is to make house mortgages more affordable and bearable.
3. The NHB aims toward the development of a network of housing finance that will be
viable for people from almost all socioeconomic strata and scattered over a scattered
region.
4. NHB engages in increasing resources from various sectors and directs them towards
housing finances.
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5. To exercise the right of supervision as dictated by the NHBA of 1987 on the activities
of the housing finance institutions.
Functions of the National Housing Bank
• The primary function of NHB is to supervise and propel the housing companies in the
country following the Act.
• Moreover, the NHB is also responsible for registering Housing Finance Companies.
• The NHB raises funds on a large scale and refinances the housing finance companies
along with cooperative banks.
• These housing agencies further lend housing loans to individuals and housing
infrastructure companies.
• The NHB ensures that all the housing finance companies under the Act follow the
regulatory capital required as outlined in BASEL guidelines.
The NHB RESIDEX

NHB, in July 2007, created the NHB RESIDEX, which is the first official housing price index
in response to the Ministry of Finance, Government of India Directives. The Technical
Advisory Committee (TAC), comprising housing stakeholders, assists the NHB RESIDEX.
The NHB RESIDEX was previously evaluated in terms of the obtained market data, and later
it followed the valuation data obtained from various HFCs and other housing institutions. Since
2007, the NHB RESIDEX went through regular updates until 2015. In these years, the main
housing price index expanded over 26 cities present in the country. The NHB RESIDEX
witnessed the most recent development in April 2018.
The NHB can be referred to as a self-governing agency whose primary goal is to encourage
housing development. Promoting, fundraising, and surveilling the functions of various housing
finance institutions are its extended functions. The NHB has prominent ties with eminent
overseas housing organisations that directly influence the housing finance conditions of India.
IFCI
IFCI’s full form is Industrial Finance Corporation of India, founded as a Statutory Corporation
in 1948 to offer medium- and lengthy finance to industries. IFCI became a Public Limited
Company under the Companies Act of 1956 when the IFC Act was repealed in the year of1993.
IFCI is currently a government-owned corporation, with the Indian government owning 61.02
% of the company’s paid-up capital. IFCI is also a recognised Public Financial Institution under
Section 2(72) of the Companies Act in 2013 and is registered as a Systemically Important Non-
Deposit Taking Non-Banking Finance Company with the Reserve Bank of India (RBI).
Indian capital markets were somewhat underdeveloped at the time of independence in 1947.
The need for capital was fast increasing, yet capital sources were scarce. The commercial banks
that existed at the time were not well-positioned to meet long-term capital demands in any
substantial way. The Industrial Finance Corporation of India (IFCI) was created on July 1,
1948, by adopting the IFC Act 1948 in response to this backdrop and to bridge the demand-
supply gap for capital needs in the sector.
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The Indian Capital Markets and Financial System saw considerable changes after the Indian
economy was liberalised in 1991. The constitution of IFCI was converted from a statutory
corporation to a company under the Indian Companies Act, 1956, to facilitate raising funds
directly through capital markets. The company’s name was subsequently changed to ‘IFCI
Limited’ in October 1999.
Functions
• The IFCI bank’s main goal is to provide medium-fast loans and advances to industrial
and manufacturing enterprises
• Before making any loans, it considers several variables
• They research the significance of the industry in our country’s economy, the project’s
overall cost, and, eventually, the service performance and administration
• If the results of the above factors are satisfactory, the IFCI will approve the loan
• The IFCI bank can also invest in these companies’ debentures on the market
• The IFCI bank also backs up these industrial enterprises’ loans
• The Industrial Finance Corporation of India might choose to underwrite securities when
a company issues shares or debentures
• It also ensures deferred payments on loans taken out in foreign currency from foreign
banks
• The Allied Services and Merchant Banking Department is a separate division. They
handle issues including capital restructuring, loan syndication, mergers and acquisitions
• The Industrial Finance Corporation of India has promoted three subsidiaries to boost
industrial growth: IFCI Financial Services Ltd, IFCI Insurance and Services Ltd
• It is responsible for the operation and regulation of these three companies
SIDBI
Small Industries Development Bank of India (SIDBI) is an independent financial institution
aimed at aiding the growth and development of Micro, Small and Medium Enterprises
(MSMEs) which contribute significantly to the national economy in terms of production,
employment and exports.
• SIDBI was established with the mission of facilitating and strengthening the flow of
credit to Micro, Small and Medium Enterprises and for addressing the developmental
and financial gaps in the ecosystem of MSMEs.
• It is a statutory body set up under an act of the Indian Parliament in 1990.
Functions of SIDBI
• It aims at emerging as a single-window to meet the developmental and financial needs

of MSMEs in order to make them globally competitive, strong, vibrant and to protect
the institution as a customer-friendly financial body.
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• It also aims at enhancing the wealth of shareholders through the modern technology
platform.
• It is involved in the promotion and development of the MSME sector.
• It is the principal institution for the development, promotion and financing of the
MSME sector and for coordination of functions of the institutions engaged in similar
activities.
• SIDBI retained its position in the top 30 Development Banks of the World in the ranking
of The Banker, London.
• SIDBI also functions as a Nodal/Implementing Agency to various ministries of the
Government of India viz., Ministry of MSME, Ministry of Textiles, Ministry of
Commerce and Industry, Ministry of Food Processing and Industry, etc.
Financial Support of SIDBI to MSMEs

SIDBI provides financial support to MSMEs in the following ways:
1. Indirect financing by way of refinancing the banks, refinancing financial institutions

for onward lending to MSMEs.
2. Direct financing by way of service sector financing, receivable financing, risk capital
and sustainable financing, etc.
Apart from providing financial assistance, SIDBI focuses on the “credit plus approach” under
which it facilitates technology modernisation & upgradation, cluster development, enterprise
development, upgrading the skills and support marketing activities.
ROLE OF DFIS:
Specialized development financial institutions (DFIs), such as, Industrial Finance Corporation
of India (IFCI), Industrial Development Bank of India (IDBI), National Bank for Agriculture
and Rural Development (NABARD), National Housing Board (NHB) and Small Industry
Development Bank of India (SIDBI), with majority ownership of the RBI were launched to
meet the long-term financing needs of industry and agriculture in India for driving growth in
our economy post-independence. There have been three phases in the evolution of DFIs in
India. The first phase began with Independence and spreads to 1964 when the Industrial
Development Bank of India was set up. The second phase stretched from 1964 to the middle
of the 1990s when the role of the DFIs grew in importance, with the funding disbursed by them
amounting to 10.3 per cent of Gross Capital Formation in 1990-91 and 15.2 per cent in 1993-
94. In third phase after 1993-94, the prominence of development banking declined with the
decline being particularly severe after 2000-01, as liberalization resulted in the exit of some
firms from development banking and in a waning in the resources mobilised by other firms.
Declining role of DFIs post-liberalization:
In the second phase extending from the start of liberalization to the transformation of the ICICI
and IDBI into commercial banks (2002-2004), the share of DFIs fell from two-thirds to just 30
per cent. Indian Govt. soon understood that development banking was not in itself suitable to
deal with all its needs. This is because the financial system must not only back to growth by
directing investment to crucial investment projects, but it must render development broad-
based by delivering credit to sectors that may otherwise be ignored by the financial sector.
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Credit to support agricultural operations that are seasonal in delivery of produce and subject to
much volatility is vital. But providing credit in small volumes to isolated and often remotely
located borrowers’ surges transaction costs substantially. DFIs failed in providing cheaper
loans to small scale sector and rural farm sector. As DFIs were not having low-cost deposits in
form of current and saving accounts like commercial banks in India, they were not able to
provide low cost finance to priority sector for long term. Although access to state funding prior
to the reforms in 1991 meant that the development financial institutions were in a position to
raise resources at interest costs that were much lower than if they had relied on market sources.
This also allowed them to lend at rates that were rational from the point of view of industry
and the infrastructural sectors. That made them the first choice for finance for Indian business,
which did considerably benefit from the financial support provided by the government, in the
years before the 1990s. But Govt. after 1991 reforms reduced public funding in these DFIs
responsible for their decline in India. Therefore, there are a variety of ways in which the gap
created by the transformation of development finance was filled. There was a shift towards
bank credit and external commercial borrowing. There was improved reliance on internal
resources and there was a growing role for external commercial borrowing & private equity in
corporate financing.
Recent development in DFIs:
Finance Minister Nirmala Sithraman while presenting the Union Budget 2021-22 stated
that India will set up a new DFI called the National Bank for Financing Infrastructure and
Development. A bill for the creation of the Development Finance Institution (DFI) is listed for
the ongoing session of the Indian Parliament that describes DFI as a provider, enabler and
catalyst for infrastructure financing and as the principal financial institution and development
bank for building and sustaining a supportive ecosystem across the life-cycle of infrastructure
projects.
The DFI will be set up on a capital base of Rs. 20,000 crores and will have a lending target of
Rs. 5 lakh crore in three years. Debt financing through the infrastructure investment trust
(InvIT) and real estate investment trust (REIT) routes will be enabled through necessary
amendments in the rules.
In the year 2017, RBI specified that specialised banks could cater to the wholesale and long-
term financing needs of the growing economy and possibly fill the gap in long-term financing.
Thus, it would revive the concept of DFI, if the government wishes to keep societal, cultural,
regional, rural and environmental concerns intact.
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CASHLESS ECONOMY
The cashless economy is developed based on digital methods or programs towards the vision
of digital India. India has faced several challenges to make a cashless economy such as “cash
circulation”, “being costly to print”, “withdrawal of soiled currency in a timely manner”,
“difficult to carry”, and so on which reduces the growth of the cashless economy. The national
priority towards the transition of the monetary value is to empower digital means or a cashless
economy.
Overview of cashless economy

The cashless economy refers to the use of digital payment methods for transactions through the
processes of credit cards and net banking. 79% of Indians are responsible for making a cashless
economic society through UPI systems. In order to promote cashless transactions, Banking
cards, UPI, Mobile wallets, Internet Banking, Micro ATMs, etc. are mostly used across Indian
society. The government of India is aggressively trying to drive the Digital economy to recover
less cash flow that took place due to pandemic outbreaks.
Readiness of India for adopting a cashless economy
The argument on the readiness of India to adopt a cashless economy refers to the use of digital
payments methods for various aspects. The scope for improving the cashless economy has been
increased due to the Covid-19 as people are lacking to use physical banknotes for their daily
lives. The money circulation across Indian society has declined by 23.31% due to the pandemic
lockdown. This also includes that the overall printing volume of banknotes has been attenuated
by 13% due to the sudden outbreak of Covid-19. The rate of UPI transactions has been
improved up to 11% through private players such as Amazon pay, Google pay, PhonePe,
WhatsApp pay, etc. This is also associated with the fact that UPI does not provide any
restrictions for a minimum payment that helps for creating a cashless flow in Indian society.
The real-time payments within 24*7 are included with the “zero service cost” process that
makes it more beneficial for Indian society to adopt a cashless economy.
Importance of cashless economy in Indian Society for improving GDP growth
The cashless economy offers multiple discounts to the common people in the form of card
transactions. The use of digital cards from multiple aspects allows promoting GDP growth with
0.1% by incorporating the role of the cashless economy in Indian society. Online shopping gets
the easy use of digital purchase and payment options from debit and credit cards to net banking.
90% of transactions for digital purchases have a revolutionary move towards the cashless
economy from the use of physical banknotes. According to the RBI reports, all the bank
branches have increased “card swiping machines”, debit cards, and ATMs by 5% that
enhancing the annual growth of GDP across the Indian society. The growth of GDP rate can
be enhanced with digital payments through card transactions refers to the significance of a
cashless economy.
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Transformational measures taken by the Indian Government
Demonetization: On November 8, 2016, India went through demonetization by abolishing high-

value currency overnight– a move that gave an unanticipated fillip to a cashless Indian
economy. It nudged the cash-dependent Indians to go digital in unprecedented ways. PayTm for
example, saw a surge in overall traffic (700% increase), value of money added to PayTm accounts
(1000%) touching a record 5 million transactions a day. Fueled by the pandemic and the ensuing
lockdown, the overall bank notes printing volume has reduced by 13% and the money circulation
has declined by 23.3%1.
United Payment Interface (UPI): Being one of the largest contributors to cashless transactions, it
is a popular choice among Indians for its convenience, speed and access. With no fringe accounts,
no restrictions on minimum payment, and the advantage of a 24*7 real-time basis payments with
zero service costs, the rate in increase in UPI transactions has been spectacular. It clocked an all-
time high 3.2 billion transactions in July 2021 displaying a 10-11% jump in both value and volume
month-on-month2. In fact, it has become a catalyst for a dramatic rise in several private players
in India with several private players such as Google Pay, Amazon Pay, PayTm, PhonePe and even
Whatsapp Pay.
Direct Benefit Transfer: Thanks to the leakage-free DBT, the end beneficiaries across various
segments such as agriculture, fisheries etc., are able to receive direct benefits and subsidies of a
plethora of social welfare schemes such as MGNREGA, LPG subsidy, and more. This has enabled
the government to not just weed out fake beneficiaries and arrest pilferages, but also helped the
government save INR 1.78 lakh crores. This has been a significant contributor in the penetration
of digital banking penetration into rural India leveraging the JAM trinity (Jan Dhan yojana,
Aadhaar, Mobile Phone).
Financial Reforms: Before the introduction of GST, discreet tax systems with varied compliance
and timeline requirements were functional at regional as well as central levels. The
implementation of a nationwide one taxation system, GST, has bolstered a paperless, contactless
and cashless transaction ecosystem. It brings the entire trading community – transporter, recipient,
supplier – into one common portal, and empowers them with the e-way bill which has not just
eliminated the state-specific way bills, but also radically enhanced the movement of goods in a
seamless manner, turnaround times, country-wide logistics, convenience and tax compliance.
The robust foundations behind these notable measures
Pradhan Mantri Jan Dhan Yojana: Launched in 2014, it was one of the biggest financial inclusion
initiatives in the world, and hoped to provide banking services to 75 million households in the
country by January 26th, 2015. The government overachieved its target by bringing over 125
million households under a range of financial services such as bank accounts, need-based credit
accessibility, insurance and pension. A one of its kind national mission on financial inclusion, it
played a historical role in folding the under- and unbanked population into the formal financial
arena and closing the digital gap. Today we have over 425 million active Jan Dhan accounts. This
has been a transformational initiative to bring in the cashless environment in the country enabling
people to make payments using their mobile phones in offline (QR code) or online modes (UPI,
UD ID).
Bharat Net: This forms the backbone of an efficient cashless economy dream. Without a robust
network infrastructure, payments cannot happen seamlessly. Hailed as the world’s largest rural
broadband connectivity project, it aims to connect 2.5 lakh gram panchayats and 6 lakh villages
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through high-speed broadband services at affordable prices laid through 10 lakh kms of optical
fibre expansion.
India Post Payments bank: This has been another instrumental step in spearheading financial
inclusion and ensuring banking services are easily available at speed and convenience. Merely
two years from the launch of its operations, IPPB in October 2020, had acquired over 3.6 crore
customers, clocking over INR 38.5K crore financial transactions through its network of over 136k
branches, thus taking banking to the very last mile and transforming payment infrastructure at the
grassroot level. The payment bank license has also been extended to eight other big entities such
as Idea, PayTm, Reliance Jio etc.
RuPay Card: Devoid of acquisition or transaction cost as opposed to VISA or Mastercard, and
having international acceptance, RuPay has further catalysed digital payments in India. With the
introduction of RuPay contactless, a one-card for all payment systems, it is set to transform the
payment landscape across all use cases.
Finally, keeping in pace with the continuous innovation in the digital payment landscape, last
week the prime minister launched a cashless and contactless digital payment solution digital
rupee– it could be the first stage of introducing CBDC into the market. This is slated to be a
potential disrupter drastically reducing the dependency on currency circulation and digitizing cash
transactions.
Opportunities and Challenges
A paperless economy has its own merits and demerits. However, in the wake of this unprecedented
digitalization, the merits certainly trumps the challenges. First and foremost, the cost of money
printing, storage, and circulation will come down dramatically. Government spends
approximately INR 4.15 to print every INR 2000 bank note and INR 2.90 – 3.10 for every 500
rupee note. The savings with paperless currency will be enormous. The security and convenience
of transactions would be one of the greatest motivators of a cashless economy. With digital
transactions, e-KYC will be mandatory, thus ensuring seamless transactions traceability and
arresting tax evasions. Given the money is in the system, fraudulent transactions can be effectively
tracked and corrected. NPCI international operations is working along with many countries to
implement UPI equivalents. The ease of transactions beyond India would radically improve.
Furthermore, a blockchain infrastructure on top of this ecosystem will enhance international
remittances, cross-border transactions and more securely and transparently.
There are interesting dynamics at play for the future of a cashless economy in India. With an
advanced market infrastructure, banking technology infrastructure, and networking infrastructure,
India is significantly ahead of most developing countries. It is clear that the Digital India Program
has been the lynchpin to a truly cashless society, benefitting the government, businesses, and the
end consumers by bringing in convenience, speed, and transparency at a negligible cost. With a
continued innovation, a truly cashless economy is imminent and inevitable.
Question: Benefits and risks of digital payments.
What is the Velocity of Money?

The velocity of money is a measurement of the rate at which money is exchanged in an
economy. It is the number of times that money moves from one entity to another. The velocity
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of money also refers to how much a unit of currency is used in a given period of time. Simply
put, it's the rate at which consumers and businesses in an economy collectively spend money.
There are several factors that can affect the velocity of money in an economy. These include:
• Money supply: The velocity of money is inversely related to the supply of money.
When the supply of money is increased by the central bank, the pace of economic
transactions also increases. This can potentially lead to inflation.
• Consumer behaviour: Velocity is also affected by the behaviour of economic actors.
When consumers prioritize saving rather than spending, the pace of transactions slows
and the velocity of money declines. When consumers prioritize spending, the velocity
of money speeds up.
• Payment systems: The velocity of money is also affected by features of the monetary
system, such as the availability of credit or electronic banking. When there are few
barriers to transactions, the velocity of money tends to increase; when it is difficult to
spend money, it decreases.
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DIGITAL PAYMENT METHODS
The Digital India programme is a flagship programme of the Government of India with a vision
to transform India into a digitally empowered society and knowledge economy. “Faceless,
Paperless, Cashless” is one of professed role of Digital India.
As part of promoting cashless transactions and converting India into less-cash society, various
modes of digital payments are available. Few of them are given below.
i. Banking cards - The wide variety of cards available – including credit card, debit card
and prepaid – offers enormous flexibility, as well. These cards provide 2 factor
authentication for secure payments e.g secure PIN and OTP. RuPay, Visa, MasterCard
are some of the examples of card payment systems.
ii. UPI
iii. Mobile wallets
iv. Internet banking
v. Mobile banking
vi. Banks pre-paid cards
vii. Micro ATMs - Micro ATM meant to be a device that is used by a million Business
Correspondents (BC) to deliver basic banking services. The platform will enable
Business Correspondents (who could be a local kirana shop owner and will act as
‘micro-ATM’) to conduct instant transactions. Micro ATM is a mini version of an
ATM. Micro ATMs are like modified point of sales terminals this terminal can connect
to banking network via GPRS to perform banking transactions. This machine contains
card swipe facility. This initiative aims to bridge the gap between the need and
availability of cash requirement in the eco-system.
viii. AEPs – Aadhaar Enabled Payment System (AEPS) is a payment service that allows a
bank customer to use Aadhaar as his/her identity to access his/her Aadhaar enabled
bank account and perform basic banking transactions like balance enquiry, cash
withdrawal, remittances through a Business Correspondent.
SMART MONEY- Digital Wallets and UPI

DIGITAL WALLETS
A digital wallet (or electronic wallet) is a financial transaction application that runs on any
connected device. It securely stores your payment information and passwords in the cloud.
Digital wallets may be accessible from a computer; mobile wallets, which are a subset, are
primarily used on mobile devices. Digital wallets allow you to pay when you're shopping
using your device so that you don't need to carry your cards around. You enter and store your
credit card, debit card, or bank account information and can then use your device to pay for
purchases. Digital wallets use a mobile device's wireless capabilities like Bluetooth, WiFi, and
magnetic signals to transmit payment data securely from your device to a point of sale
designed to read the data and connect via these signals.
A mobile wallet is a way to carry cash in digital format. You can link your credit card or debit
card information in mobile device to mobile wallet application or you can transfer money
online to mobile wallet. Instead of using your physical plastic card to make purchases, you can
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pay with your smartphone, tablet, or smart watch. e.g. Paytm, Freecharge, Mobikwik, Oxigen,
mRuppee, Airtel Money, Jio Money, SBI Buddy, itz Cash, Citrus Pay, Vodafone M-Pesa, Axis
Bank Lime, ICICI Pockets, SpeedPay etc.
How to get it:

• Option to open min KYC or Full KYC wallet
• Option of Consumer vs. Merchant wallet

• Mobile Number
• An App to be downloaded in smart phone
What is required for Transaction:
• Smartphone or internet
• Use MPIN
• Self-service and/or Assisted mode
Services Offered:
• Balance Enquiry
• Passbook/ Transaction history

• Add money
• Accept Money
• Pay money
• Another wallet (mobile no.) with same provider
• Pay merchant
• Bar Code reader
• Manage Profile
• Notifications
Funds Transfer limit:
• For Users
• No KYC - Rs 20,000/ month (revised from Rs 10,000 to current till

30th Dec. 2016)
• Full KYC – Rs 1,00,000/- month
• For Merchants
• Self-Declared - Rs 50,000/ month
• With KYC – Rs 1,00,000/- month
Example: KYC in case of Paytm Wallet
Paytm Wallet is a key feature of the Paytm app, which is provided by Paytm Payments Bank
Limited (PPBL) and regulated by the Reserve Bank of India (RBI). To use Paytm Wallet, users
must complete a Know Your Customer (KYC) process. There are various types of KYC that
users can complete in order to activate and use Paytm Wallet.
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• Minimum KYC:
o Paytm users can complete minimum or “min” KYC to gain partial access to the
Paytm wallet.
o This type of KYC is valid for 24 months.
• Full or maximum KYC:
o Full KYC grants users access to all features of the Paytm wallet.
o Full KYC requires the user to provide additional personal information, such as their
PAN number and house number.
Restricted transactions with minimum KYC:
• Sending money to another Paytm user’s wallet.
• Sending money to a bank account.
• Wallet balance limited to Rs. 1,000,000.
• Cannot open a Paytm Payments Bank savings account.
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UNIFIED PAYMENTS INTERFACE (UPI)

Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single
mobile application (of any participating bank), merging several banking features, seamless
fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect
request which can be scheduled and paid as per requirement and convenience.
With the above context in mind, NPCI conducted a pilot launch with 21 member banks. The
pilot launch was on 11th April 2016 by Dr. Raghuram G Rajan, Governor, RBI at Mumbai.
Banks have started to upload their UPI enabled Apps on Google Play store from 25th August,
2016 onwards.
How is it unique?
• Immediate money transfer through mobile device round the clock 24*7 and 365 days.
• Single mobile application for accessing different bank accounts.
• Virtual address of the customer for Pull & Push provides for incremental security with
the customer not required to enter the details such as Card no, Account number; IFSC
etc.
• QR Code
• Best answer to Cash on Delivery hassle, running to an ATM or rendering exact amount.
• Merchant Payment with Single Application or In-App Payments.
• Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay) based
payments.
• Donations, Collections, Disbursements Scalable.
• Raising Complaint from Mobile App directly
The Unified Payments Interface (UPI) is a revolutionary, user-friendly, real time payment
solution that facilitates inter-bank transactions, and enables greater digital payments adoption
in the country. Developed and launched by the National Payments Corporation of India in 2016,
UPI is now one of the most preferred payment solutions in India, with over a billion
transactions every month. UPI’s core function is to support easy and secure money transfers
between bank accounts. It does this by adding multiple bank accounts into a single mobile
application, allowing for seamless fund transfers and merchant payments from one place. It
also enables ‘peer to peer’ and ‘peer to merchant’ collection requests, which can be scheduled
and paid as requested. Payments can be made using a UPI ID, UPI Number, Account number,
and an Indian Financial System Code (IFSC). Payment security is as per applicable RBI
guidelines using a 1-click 2-factor authentication where the second factor of authentication is
the UPI PIN. UPI is also available through the Unstructured Supplementary Services Data
(USSD) channel to enable UPI members to cater to users of feature phones.
UPI - Benefits to the Ecosystem participants

Universal benefits
• Mobile-first customisable design
Developed to embrace the smartphone boom in India and customers shifting to digital and
mobile-based solutions, the mobile phone has been defined as the primary device for payment
authorization. This transforms the acquiring infrastructure requirements to make them simple,
low-cost, and universal.
• Push and pull payments for innovative use-cases
Payments can be initiated by either the sender (payer) or the receiver (payee).
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For pay requests: the initiating customer ‘pushes’ funds to the intended beneficiary.
For collect requests: the customer ‘pulls’ funds from the intended sender using the UPI ID.
• User-friendly, single-click, two-factor authentication
UPI follows the one-click, two-factor authentication protocol.
When a transfer transaction is initiated using a smart phone, the device fingerprint (IMEI
number or other technical detail unique to the device) is passed as the first factor of
authentication.
The second factor is the UPI PIN number, which has to be physically keyed in by the user/
sender on their initiating device - usually a mobile phone.
• Easily identified across payment options
The UPI ID creates a common identifier for the customer to send or receive money from
anyone.
It provides the user with a single, unified interface for all payment transactions, across all UPI
linked accounts.
• Available on feature phones and voice-based payments
UPI functionality enables feature phone and voice-based payments. In essence, a user does not
need to have a smartphone and internet connectivity to make a UPI payment.
Banks:
• Single click Two Factor authentication
• Universal Application for transaction
• Leveraging existing infrastructure
• Safer, Secured and Innovative
• Enable seamless merchant transactions
Customers:
• Round the clock availability
• Single Application for accessing different bank accounts
• Use of Virtual ID is more secure,
• Raise Complaint from Mobile App directly
Merchants:
• Seamless fund collection from customers
• No risk of storing customer’s virtual address like in Cards
• Tap customers not having credit/debit cards
• Suitable for e-Com & m-Com transaction
• Resolves the COD collection problem
Source: Official websites.

5. Participants
Who are the participants in the UPI ecosystem?
NPCI
NPCI is the owner, network operator, service provider, and coordinator of the UPI
Network.
Banks
Banks and payment banks with an RBI-approved mobile banking license and IMPS
capability are eligible for UPI. Banks or PPIs should broadly perform the
functions/roles mentioned below:
Payer PSP - Member bank as a Payer PSP can onboard a customer into a UPI
app, allowing the customer to register for UPI services and provide options to
approve a financial transaction or non-financial request wherever necessary.
Payee PSP - A bank in the role of Payee PSP can onboard a customer/merchant
to receive money or raise a collect request. This is also known as a
beneficiary/resolving PSP.
Remitter Bank - All UPI users need to have a banking account with a UPI
enabled bank. While performing a transaction, the user’s bank account will be
debited. The remitting bank also holds the responsibility of authenticating the UPI
PIN set by the customer.
Beneficiary Bank - Any credit going to a UPI user will be credited to a

beneficiary’s bank account. The bank receiving the funds in UPI transactions will
be acting as a beneficiary bank.
Bank Account holders / Customers

Any customer who is on-boarded by a bank with a UPI enabled account and a UPI ID
can utilise the services.
Merchants
Participating merchants are those who are on-boarded by their banks to accept UPI
enabled payments from customers.
Corporates
UPI also provides the ability for large technology companies, 3rd party processors,
and aggregators to connect to banks and provide extensive services to end
consumers.
Roles and Responsibilities
NPCI
1) NPCI is the owner, network operator, service provider, and coordinator of the UPI
Network.
2) NPCI reserves the right to either operate and maintain the UPI network on its
own or provide or operate necessary services through third party service
providers.
3) NPCI will provide and maintain the network infrastructure relevant to the
operation of the UPI platform, maintain uptime, and ensure timely settlements to
banks.
4) NPCI may revise the UPI architecture and its procedural guidelines as and when
required.
5) NPCI has the right to call for documents relating to the architecture, operating
model, and other technology related aspects of the UPI solution which the
bank/PPI/PSP is planning to develop or has developed.
6) All certification stages will require sign-off from the concerned UPI team.
7) NPCI may notify PSP and TPAP of any problems encountered in the UPI
platform, that are attributable to the telecommunication network, as well as any
complaints received from customers from time to time.
8) NPCI issues circulars from time to time, to disclose major decisions, to relevant
stakeholders, which all banks/PPIs/ PSPs will have to adhere to.
6. Use Cases
How is the UPI service used?
Fulfilling a money request

Shom receives a notification on his phone. It is a message from a UPI ID asking him
if he wishes to send Rs. 5000. He recognises that the message is from his younger
brother, who is studying in another city. After calling his brother and checking with
him, Shom then uses his own UPI app to accept the fund request and authenticate
the transaction with his M-PIN. In a few seconds, he gets a successful transaction
notification SMS on his phone from his bank. His brother calls to thank him for the
instant fund transfer.
In-app payment within the same mobile of the customer.

Ashok’ is a student who uses a personal MyStar app video application to select, pay
for and watch a movie for, Rs. 25 on his Android enabled phone. He banks with
DiBank (the PSP in this case) and uses their UPI-enabled mobile application.
The MyStar application creates a UPI payment link with all the necessary parameters
populated. As DiBank PSP app is registered for UPI link, it starts the app and takes
Ashok straight to the pay screen with all the relevant values pre-populated. Ashok
verifies the information shown on the screen and clicks ‘pay’ to complete the
payment and enjoy the movie he selected.
DTH payment from home

‘Nadeem’ is a DTH subscriber who wishes to pay his on-demand subscription fee. He
selects the channel and clicks ‘Buy Now’. The DTH program shows the details along
with a QR code for UPI payment. Nadeem opens the UPI application on his mobile
and scans the QR code given on his TV screen, which takes him straight to the pay
screen with all values pre-populated from the QR code, which contains the standard
UPI link. Nadeem verifies the information on the pay screen and clicks ‘pay’ to
complete the payment. He gets a confirmation on his mobile and the TV channel is
automatically turned on for his viewing pleasure.
UPI Autopay
Reshma uses this capability to automatically pay her OTT content platform’s monthly
subscription fees of Rs. 500. She sets a UPI recurring mandate at ‘check out’ and
provides the one-time UPI PIN in her app. Subsequent fee payments will be auto-
deducted from the customer’s linked bank account.
Credit card bill payment

Vaishanvi is clearing up around the house when she finds last month’s credit card bill
that she had forgotten to pay. Today is the last day for payments, and she realises
that she needs to pay the amount before she is charged interest. She uses her
smartphone to open her UPI enabled app and clicks on the credit card payment
option. She enters her card details and it auto-populates the amount she needs to
pay. She is able to pay by using her secret M-PIN to authenticate the transaction.
Merchant payment using BHIM app

Saira wants to treat her best friend who is visiting her from the USA. Saira takes her
friend to a trendy cafe where they proceed to order coffee and snacks. At the time of
paying the bill, Saira realises that her credit card has passed its validity date. So she
smoothly takes out her smartphone, accesses her UPI enabled BHIM app, and uses
the scan to pay feature to pay the cafe bill.
Non-financial transaction - change UPI M-PIN

Ramakant wants to change his M-PIN for security purposes. He enters his old UPI
PIN and preferred new UPI PIN (the UPI PIN that he would like to set) and clicks on
Submit. After clicking on submit, Ramakant gets a notification of either a successful
change of his M-PIN or a failure. In the event of failure, he will need to submit the
request again.
7. Acts
Banking Regulations Act 1949

Payment and Settlement Systems Act, 2007 (PSS Act)
Section 43A of IT Act, 2000 and the IT Rules, 2011
Section 25 of the Payment and Settlement Systems Act, 2007 (PSS Act)

FMI - Unit 3, Part 2

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Unit 3

Financial Markets and Institutions

Main features of commercial banks are as follows:

Types of Commercial banks

1. Public sector banks

2. Private sector banks

Public Sector Banks:

Regional Rural Banks:

Regional Rural Banks (RRBs) were established based on recommendations made by

o To bridge the credit gaps that are prevalent in rural areas.

Examples of RRBs are given below:

o Assam Gramin Vikash Bank

o Mizoram Rural Bank

▪ Cooperative societies have also greatly helped in the introduction of better

Local Area Banks (LAB)

Small Finance Banks

Given below is a list of the few payments bank in our country:

NATIONALISATION AND MERGERS AND ACQUISITIONS IN THE

After independence, the Government of India (GOI) adopted planned economic

1. To boost private sectors

What were the benefits of nationalization?

Was the nationalization of banks a right move?

RECENT DEVELOPMENTS IN COMMERCIAL BANKING

MERGER AND ACUISITION OF BANKS

Guidelines for merger/amalgamation of private sector banks

Reasons for M&As in banks

The following are the reasons for the mergers in banks:

1. Merger of weaker banks

2. Synergies and Economies of scale

3. Financial liquidity and economies of scale

5. Skill & Talent

History of mergers and acquisitions

ANCHOR BANK BANKS MERGED

-State Bank of Mysore

-State Bank of Travancore

-Bharatiya Mahila Bank

Impact of the mergers

Objectives of PSB Amalgamation

1. Increase operational effectiveness to reduce financing costs

RBI's Financial Stability Report

DEVELOPMENT FINANCIAL INSTITUTIONS

2. Sector-specific financial institutions such as TFCI, EXIM Bank, NABARD, HDFC,

3. Investment Institutions such as LIC, GIC and UTI.

4. State-level institutions such as State Finance Corporations and SIDCs.

The need for DFIs in India:

India needs DFIs for the below-mentioned reasons:

1. To boost economic growth.

2. To improve long term finances.

3. To provide credit enhancement for infrastructure and housing projects.

4. Infrastructure Building: Inadequate and inefficient infrastructure leads to high

List of important Development Finance Institutions (DFIs):

1. IFCI: Industrial Finance Corporation of India was established in 1948. It is India's

2. ICICI: Industrial Credit and Investment Corporation of India Limited

4. IRCI: Industrial Reconstruction Corporation of India was set up in 1971 to revive

5. SIDBI: Small Industries Development Bank of India was established in 1989 as a

6. EXIM Bank: Export-Import Bank was established in January 1982 to provide

“... act on business principles with due regard to public interest.”

Globalisation of Indian businesses and empowering growth of partner countries.

Key roles of Marketing Advisory Services: