602: FINANCIAL INSTITUTIONS AND MARKETS

TY BBA SEM VI
2022-23

2. THE BANKING AND NON-BANKING FINANCIAL INSTITUTIONS

Sr.No Content Page No.
1. Reserve Bank of India 2
2 Banking Structure in India 2
2.1 Scheduled Banks 3
2.2 Commercial Banks 4
2.2.1. Functions of Commercial Banks
A Primary Functions
a. Accepting Deposits 4
b. Providing Loans & Advances 5
c. Credit Creation 5
B Secondary Functions
a. Agency Services 5
b. General Utility Services 6
2.2.2. Classification of Commercial Banks
a. Public Sector Banks 7
b. Private Sector Banks 7
c. Foreign Banks 7
d. Regional Rural Banks 7
e. Small Finance Banks 8
f. Payment Banks 9
2.3 Cooperative Banks
2.3 Features/Characteristics 9
2.3 Structure of Cooperative Banks 10
a. Primary Credit Society
b. District Central Cooperative Bank
c. State Cooperative Bank
2.3 Functions of Cooperative Banks 11
2.4 Difference between Public Sector and Private Sector Banks 11
2.5 Difference between Commercial and Cooperative Banks 12
3 Non-Banking Financial Institutions
a. Meaning 12
b. Types 13
c. Services 13
d. Advantages of NBFCs’ over Banks 14
e. Difference between Banks and NBFCs’ 15
4 Insurance Companies – Role of IRDA
a. Establishment 15
b. Objectives 16
c. Powers/Functions 16
d. Role 17
e. Features and Benefits 17
5 Merchant Banking – Meaning & its services
a. Definition 17
b. Merchant Banking in India 18
c. Scope for Merchant Banking in India 18
d. Services of Merchant Bankers 19
6 Small Savings; Meaning & Instruments 22
1. Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is India’s central banking institution, which controls the
monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934 and in
1949 it was nationalized. The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the
Governor sits and where policies are formulated. Sir CD Deshmukh was the first Governor of
RBI. The RBI has four Zonal offices at Chennai, Delhi, Kolkata, Mumbai and 20 regional
offices mostly located in the state capitals and 11 sub-offices. Reserve Bank of India Act,
1934 is the legislative act under which the Reserve Bank of India was formed. This act along
with the Companies Act, which was amended in 1936, were meant to provide a framework
for the supervision of banking firms in India. The Preamble of the Reserve Bank of India
describes the basic functions of the Reserve Bank as: “to regulate the issue of Bank notes
and keeping of reserves with a view to securing monetary stability in India and generally to
operate the currency and credit system of the country to its advantage”. RBI is managed by
Central Board of Directors. It is the main committee of the Central Bank. The Board consists
of a Governor, and not more than four Deputy Governors, four Directors to represent the
four regional boards, two from the Ministry of Finance and 10 other directors from various
fields which accounts to 21 members in total.

2. Banking Structure in India

The current Banking Structure in India has evolved over several decades, is complex, and has
been fulfilling the economy's credit and banking needs. In today's Banking Structure in India,
there are several layers to cater to the distinct and varied needs of different customers and
borrowers. The Banking Structure in India played a critical role in mobilizing deposits and
encouraging economic development. The performance and strength of the banking
structure improved noticeably after the financial sector reforms (1991).
Reserve Bank of India (RBI) is Central Bank of India also known as Apex Bank of India which
was established on 1st Jan 1935. RBI is the supreme bank or we can say the head of all
banks which is responsible for regulating and monitoring each type of banks in India. The
Reserve Bank is also responsible for implementing monetary policy, issuing currency notes,
formulating various guidelines to control inflation, deflation etc. The following structure
displays the entire banking system in India.
Banking Structure in India

2.1. Scheduled Banks

Scheduled Banks are those banks which are listed in 2nd schedule of RBI Act 1934. In other
words, the banks which follow the guidelines of the 2nd schedule of RBI Act 1934 fall under
the category of Scheduled Banks. Scheduled banks can take loans from RBI at Repo rate or
bank rate. They must, however, meet certain requirements, such as maintaining an average
daily CRR (Cash Reserve Ratio) balance with the central bank at the rates set by it. The RBI
allows Scheduled Banks to raise debts and loans at bank rates. Some major criteria to be
followed by scheduled banks are as follows.
 Banks must open 25% of its branches in rural areas.
 A total of Rs. 5 lakh in paid-up capital and reserves are needed
 At least 40% of loan must be distributed to priority sectors like SC/ST, PH, Housing,
Education etc.
The benefits enjoyed by scheduled banks are often denied to non-scheduled banks. These
banks have certain privileges and benefits, such as:
1) The ability to obtain a refinancing facility from the central bank.
2) Access to currency storage facilities.
3) Membership in the clearinghouse is automatic
The scheduled banks can be further classified as follows.
1. Commercial Banks
2. Co-operative Banks

2.2. Commercial Banks:

These banks are governed by the Indian Banking Regulation Act of 1949, and according to it,
banking is the accepting of money from the public for lending and investment. The
Commercial Banks are those financial institutions which accept deposit and provide services
like loans, credit, opening bank accounts, locker facilities, foreign exchange and other digital
services like mobile banking, Internet Banking, NEFT, RTGS etc. These banks are basically
profit-making and consumer-oriented institutions. In other words, these banks deal with the
financial requirements of the general public.
The commercial banks are the financial institutions which are authorised to receive deposits
from public, industries and commerce as well as cater short, medium and long term
requirements of individuals, entrepreneurs and corporate in form of different types of
loans/ advances. In addition, commercial banks also provide various other banking services
like internet banking, debit card, credit card, money transfer, foreign exchange, bill
discounting, letter of credit etc.

2.2.1. Functions of Commercial Banks

(A) Primary Functions

a. Accepting Deposits – Commercial banks accept deposits from their customers in the form
of saving, fixed, current and recurring deposits.
Savings Deposits – Savings deposits allow a customer to credit funds towards their accounts
for up to a certain limit. These deposits are preferred by individuals with a fixed income,
utilized to create savings over time. Withdrawals can be made either by signing a
withdrawal form or by issuing a cheque or by using an ATM card. Normally banks put some
restriction on the number of withdrawal from this account. Interest is allowed on the
balance of deposit in the account. The rate of interest on savings bank account varies from
bank to bank and also changes from time to time. A minimum balance has to be maintained
in the account as prescribed by the bank.
Fixed Deposits – This type of deposit account allows the deposit to be made of an amount
for a specified period. This period of deposit may range from 15 days to three years or more
during which no withdrawal is allowed. However, on request, the depositor can encash the
amount before its maturity. In that case, banks give lower interest than what was agreed
upon. The interest on a fixed deposit account can be withdrawn at certain intervals of time.
At the end of the period, the deposit may be withdrawn or renewed for a further period.
Banks also grant a loan on the security of the fixed deposit receipt.
Current Deposits – Big businessmen, companies, and institutions such as schools, colleges,
and hospitals have to make payment through their bank accounts. Since there are
restrictions on the number of withdrawals from a savings bank account, that type of account
is not suitable for them. They need to have an account from which withdrawal can be made
any number of times. Banks open a current account for them. Like a savings bank account,
this account also requires a certain minimum amount of deposit while opening the account.
On this deposit, the bank does not pay any interest on the balances. Rather the account
holder pays a certain amount each year as an operational charge.
These accounts also have what we call the overdraft facility. For the convenience of the
accountholders banks also allow withdrawal of amounts in excess of the balance of the
deposit. This facility is known as an overdraft facility.

Recurring Deposits- Recurring Deposit account or RD account is a form of account wherein

the account holder needs to deposit a fixed amount every month until it reaches the fixed
maturity date. Any individual or an Institution can open a recurring deposit account either
separately or jointly. Periodic or monthly instalments that need to be added can be as low
as Rs.50/- or may vary from bank to bank The interest rate varies depending upon the bank
you choose to open an account with Premature withdrawal of the amount is permitted,
provided a sum of amount is deducted as penalty.

b. Providing Loans and advances – One of the main functions of commercial banks is
providing credit to organizations and individuals, and profit from the earned interest.
Usually, banks retain a small reserve for their expenses while offering the remaining amount
to customers as various types of short and long-term credits.

Cash Credit – Commercial Banks and their Functions include extending advances to
individuals and organizations against bonds, inventories, and other types of securities. This
facility, commonly known as cash credit, provides a more substantial sum when compared
to other forms of credit.
Short-Term Credits – Short-term loans are usually pledged without any security, offering a
smaller loan amount and repayment tenor. These are also referred to as personal loans.

c. Credit Creation – A unique function of commercial banks is credit creation. Instead of

offering liquid cash, banks create a line of credit and transfer the loan to a business or
commercial body all at once.

(B) Secondary Functions

The following can be considered as the secondary functions of commercial banks –
a. Agency services: Commercial banks provide the facility of agency services to our
customers these are follow:

(i) Collection & Payment of Cheques:

Commercial banks collect and make payment of cheques on the behalf of their customers.
(ii) Collection of Interest and dividends:
Commercial Banks collect dividend and interest on securities on behalf of their customers.
For this purpose, the customer pre-informs the issuer of the security to pay interest or
dividend in his account of the bank.
(iii) Purchase & Sale of Security:
If the customer directs his bank to purchase and sale securities on his behalf, the bank will
do this by charging a nominal commission.
(iv) Execution of Standing Instructions:
Bank also executes instructions of his customers by charging nominal charges. For instance,
if a person has to pay Rs. 600 to the insurance company and Rs. 200 as rent every month
then Bank will make monthly payments on the written order of the customer.
(v) Trustee:
Bank also acts as a trustee on behalf of the customer. In this capacity, the bank takes care of
the affairs of its client.
(vi) Transfer of Fund:
Bank also performs the function of transferring fund from one place to another by charging
a nominal commission.
(vii) Agent:
Banks also act as an agent or representative of customer at home and abroad. These
services usually include –
 Acting as an administrator, trustee, or executor of a customer-owned estate.
 Assisting customers with tax returns, tax refunds, and other similar tasks.
 Serving as a platform to pay premiums, bills etc.
 Offering a platform for electronic transaction of funds, processing of cheques, drafts,
bills, etc.

b. General Utility Services: Other than the agency functions, the banks also provide other
facilities to the public. Some of these are mentioned below:
I. Providing locker Facilities – Commercial banks provide locker facilities to customers who
want to store valuables and jewellery safely. Locker facilities eliminate the impending risk of
theft or loss, which prevail when kept at home.
II. Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to
individuals and organizations that export or import goods from overseas. However, only
certain banks which have the license to deal in foreign exchange are eligible for such
transactions.
III. Exchange of Securities – Another function of commercial banks is to trade in bonds and
securities. Customers can purchase or sell the units from the financial institution itself,
which offers more convenience than alternate approaches.
IV. Discounting Bills of Exchange –Bill discounting is considered a profitable investment for
banks. Bills create a steady flow of funds, while not becoming a risky venture during
payment as it is considered as a negotiable instrument. These also do not involve the
financial institution in any litigation.
2.2.2. Classification of Commercial Banks

The Commercial Banks can be classified as below.

a. Public Sector Banks (PSBs)
Those banks in which more than 50% stake is held by Government of India is defined as
Public Sector Banks and the shares of these banks are listed on the stock exchange too. SBI
was the first bank in India that was nationalised in 1955. After SBI, 14 banks were
nationalised in 1969 and the remaining 7 banks were nationalized in 1980. These were the
banks that were relatively bigger in size.
List of Public Sector Banks in India
 Bank of Baroda  Indian Overseas Bank
 Bank of India  Punjab & Sind Bank
 Bank of Maharashtra  Punjab National Bank
 Canara Bank  State Bank of India
 Central Bank of India  UCO Bank
 Indian Bank  Union Bank of India

b. Private Sector Banks:

Private Sector banks are those banks where major stakes (51%) is of private entities. In
these banks, most of the equity is owned by private bodies, corporations, institutions or
individuals rather than government. These banks are managed and controlled by private
promoters. The shares of private sector banks are also listed in the stock exchange.
List of a few Private Sector Banks in India
 Axis Bank Ltd.  IDFC FIRST Bank Limited
 HDFC Bank Ltd  Kotak Mahindra Bank Ltd
 ICICI Bank Ltd.  YES Bank Ltd
c. Foreign Banks:
The banks which are incorporated or have their headquarters in a foreign country and open
their branches in India as per RBI Act 1934 is known as foreign banks. There are total foreign
44 banks operating their business in India. Some examples of the foreign bank are:
 Citi Bank  Deutsche Bank
 HSBC Bank  DBS Bank Ltd.
 Standard Chartered Bank  United Overseas Bank Ltd
 Australia and New Zealand Banking Group  J.P. Morgan Chase Bank
Ltd.
d. Regional Rural Banks (RRBs)
These banks are generally operating at the regional area to facilitate backward people in
society. The purpose of RRBs to offer the banking services at the doorstep of rural masses
especially in remote areas. These banks provide services like deposits, withdrawals, short
term credit to the small farmers, labours, small entrepreneurs to increase their productivity.
RRBs refer to Regional Rural Banks which were created in 1975. They were created with the
idea of developing something which is a combination of rural characteristics and the
professionalism of commercial banks. Government of India chose to establish these RRBs
keeping in mind the need of specialised institutions for rural lending. The shareholding in
RRBs is fixed as:
 GOI – 50%
 Sponsor Bank – 35%
 State Government – 15%

The sponsor bank is supposed to provide all management support that is needed to run the
bank. Most of the nationalised commercial banks have been promoting some RRBs by
sponsoring them. RRBs do full-fledged banking but have to lend 75% to the priority sector
compared to 40% priority sector lending done by other commercial banks including the
nationalised banks. In Gujarat, RRBs are Baroda Gujarat Gramin Bank and Saurashtra Gramin
Bank.
Regional Rural Banks are regulated by RBI and supervised by National Bank for Agriculture
and Rural Development (NABARD) in India.

Functions of the RRBs in India

 Accepting deposits from members in current or savings accounts. They can also be made
in fixed or recurring deposits. Extending loans to the small and marginal farmers,
craftsmen and artisans, medium and small scale enterprises, housing, local traders,
renewable energy, etc. that need development and financial assistance.
 Disbursing wages is an important RRB function under the Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Gram Sadak
Yojana (PMGSY). It also disburses pensions under the poverty alleviation schemes.
 Providing agency services and general utility services to the customers, Assisting in
foreign exchange, money wire transfer, bill payments, etc
 Utility services like the ATM, issuance of debit cards, locker facilities, UPI, etc

The following banks have also been emerged as a part of commercial banks due to reforms
in banking sectors.
 Small Finance Banks
 Payment Banks

e. Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small farmers, and
the unorganized sector. They shall primarily undertake basic banking activities of acceptance
of deposits and lending to non-served and underserved sections of the society by providing
them loans and financial assistance. These banks are governed by the central bank of the
country. Given below is the list of the Small Finance Banks in our country.
 Au Small Finance Bank Ltd.  Suryoday Small Finance Bank Ltd.
 Capital Small Finance Bank Ltd  Ujjivan Small Finance Bank Ltd.
 Fincare Small Finance Bank Ltd.  Utkarsh Small Finance Bank Ltd.

f. 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. The objective of the committee was to
propose measures for achieving financial inclusion and increased access to financial
services. Given below is a list of the few payments bank in our country:
 Airtel Payments Bank Ltd
 India Post Payments Bank Ltd
 FINO Payments Bank Ltd
 Paytm Payments Bank Ltd
2.3. Co-operative Banks
Cooperative Banks are the small-sized banks having the ability to operate in rural or urban
or semi-urban for the purpose of mutual help and cooperation, operating on the basis of ‘no
profit no loss’. 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 Banking Regulations
Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. The cooperative banks
function on No profit No loss basis, which means their main objective, as discussed above,
are to help backward segment of the society like agriculturists, labours, small vendors, self-
employed. The cooperative banks accept deposits from its members and fulfill short term
needs of those where the banking services are still unavailable or those who are unable to
get regular banking services.
2.3.1.Features/Characteristics of Cooperative Banks:
o Small in size: Cooperative Banks are the small-sized banks having the ability to operate in
rural or urban or semi-urban for the purpose of mutual help and cooperation.
o Registration: Co-operative banks are registered under the cooperative society Act. The
registration process in co-operative banks is quite easy and less time consuming as
compared to other banks.
o More focus on rural areas: Co-operative banks provide credit services to agriculturalists
and weaker sections of the society at comparatively lower rates.
o Customer Owned Entities: Members are both customer and owner of the bank.
o 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”.
o 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.
o Financial Inclusion: They have played a significant role in the financial inclusion of
unbanked rural masses.
2.3.2.Structure of Co-operative Banks
The short-term co-operative credit structure operates with a three-tier system.
 Primary Credit Society (working at Rural level)
 Central Cooperative Bank (working at District level)
 State Cooperative Bank (working at State level)

a. Primary Credit Society:

The Primary Cooperative banks operate at the village/town level in which every member
belongs to the same village or town or nearby. The area finance by these credit societies are
individuals, personal finance, small scale business, home finance etc. Primary credit societies
consist of minimum of 10 members, one secretary and working committee which ensures its
proper functionality. Anyone who wants to become its member can pay a nominal fee and
become a member of the PCS. These banks generate funds primarily from its members
where the people with surplus money become the lender and earn some interest on the
contributed amount, whereas people who need money pay interest. The Primary
cooperative banks are at many places known as urban Cooperative Banks (UCBs) they are
registered as cooperative societies. They are registered under the State Cooperative
Societies Act or Multi-State Cooperative Act, 2002. The overall supervision of UCBs is done
by the registrar of Co-operative Societies (RCS). The Reserve Bank carries out all inspections
and Surveillance of Primary Co-operative banks.

b. Central Credit Society:

The Central co-operative banks work at the district level. It is also called District Co-
operative Central Bank. The main purpose of the establishment of DCCB is to provide
banking to the rural people for the agricultural sector. The Central Co-operative bank usually
raises its capital from its funds, deposits, and borrowings. The deposits come from
cooperative societies, local bodies, and individuals. Whereas the borrowings are from Banks
like RBI and Apex banks These credit societies operate at the district level and responsible
for monitoring, auditing the primary credit societies and proper utilisation of surplus funds.
In other words, we can say Central Credit society is the head office of primary Credit
societies. There may be any number of primary credit societies in a district and each PCSs
report and invest their surplus funds in CCs. CCs works as a mediator between State
Cooperative Banks and Primary Credit Societies. They help to regulate, inspect and operate
PCs under the guidelines passed from State Cooperative Banks.
c. State Cooperative Banks:
State Cooperative Bank is the supreme institution (Apex Institution) for the Cooperative
Credit Societies operating under RBI Banking Regulation Act 1949 at the state level. Thus
State Cooperative Banks follows the guidelines of RBI and eligible to take advance from RBI
at repo rate. This bank also raises funds from the State Government and the surplus fund
from the Central Cooperative Society.

2.3.3. Functions of Cooperative Banks:

Cooperative banks play a key role in banking especially in developing countries like India.
The main functions of cooperative banks are:
1. The Cooperative Banks play a crucial role in short term rural financing. for e.g.
agricultural, cattle, street vendors, shopkeepers etc.
2. Cooperative banks establish a link between RBI and beneficiaries by a proper hierarchy of
cooperative banking. In simple words, the money borrowed from cooperative society travels
from state cooperative banks to central cooperative society to primary credit societies to
individuals and state cooperative society take a loan from RBI.
3. The Cooperative Banks protect its members form money lenders and agents who charge a
high rate of interest and commission from borrowers.
4. Cooperative banks provide credit facilities to the farmers at a lower level of interest
because their objective is not to make a profit but provide service to its members.
5. It provides cheap credit to masses in rural areas.
6. Cooperative Banks have discouraged unproductive borrowing personal consumption and
have established the culture of productive borrowing.
7. Cooperative credit movement has encouraged saving and investment, instead of hoarding
money the rural people tend to deposit their savings in the cooperative banks.
8. 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

2.4. Difference between public sector bank and private sector bank

2.5. Difference between Commercial and Cooperative Bank:

The following comparison table contains every aspect based on which commercial banks
and cooperative banks can be distinguished quickly.

Bases COMMERCIAL BANKS COOPERATIVE BANKS

Incorporation Banking Regulation Act, 1949 Cooperative Society Act,
1965
Main Objective Earn Profits Provide Banking Services
Types of Entity Private and Public Private
Rate of Interest Low High
Scope of Operation Larger Scale Limited Scale
Voting Rights No Yes
Reserve Policy Strictly maintains CRR and Comparatively less strict
SLR
Governing Body Reserve Bank of India RBI and NABARD of
Cooperative Society
Non Performing Asset High Low
Merchant Banking Service Yes No
Mutual Fund Yes No
Bill Discounting & Letter of Yes No
Credit
Foreign Exchange Services Yes No

3. Non- Banking Financial Institutions/Companies

The finance sector in India is revolutionizing. The Non-Banking Financial Companies (NBFCs)
have rapidly emerged as an important segment as an alternative lender to provide finance.
NBFCs have recognized as an important financial intermediary particularly for the small-
scale and retail sectors with the growing importance assigned to financial inclusion.
NBFC is a heterogeneous group of financial institutions. They offer facilities like equipment
lease finance, hire purchase finance, personal loans, vehicle financing, working capital loans,
housing loans, loans against shares and investment, etc.

a. Meaning of Non-Banking Financial Companies (NBFCs)

NBFC is a Company registered under Companies Act 1956/2013, engaged in the financing
activities.
Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/
debentures/ securities issued by Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase, insurance business, chit business but does
not include any institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
A non-banking institution which is a company and has principal business of receiving
deposits under any scheme or arrangement in one lump sum or in instalments by way of
contributions or in any other manner, is also a non-banking financial company (Residuary
non-banking company).

b.Types of Non-Banking Financial Companies

NBFCs varying types play a key role in meeting the credit demand unmet by traditional
banks. NBFCs are broadly divided into three categories namely:
a. NBFCs accepting deposits from banks (NBFC-D)
b. NBFCs not accepting/holding public deposits (NBFC-ND)
c. Core Investment Companies (CIC)

Further, they are classified into various categories namely:

a. Asset Finance Company (AFC)
b. Investment Company (IC)
c. Loan Company (LC)
d. Infrastructure Finance Company (IFC)
e. Micro Finance Institution (MFI)

Besides the above categories, the fastest-growing segment of the non-bank lending sector
peer-to-peer lending has also recognized as NBFC by the RBI. The growth of P2P lending has
been facilitated by the power of social networking, which brings like-minded people from all
over the world together.

c.Services provided by the NBFCs

NBFCs offer a range of product and services which includes loans and advances, credit
facilities, saving and investment plans, acquisition of shares, stock, bonds hire-purchase,
insurance business or chit business and money transfer service.
It also includes private education funding, retirement planning, underwriting stocks and
shares, trading in money markets, TFCs (Term Finance Certificate) and other obligations.
Apart from this, NBFCs also provide wealth management services such as handling portfolios
of stocks and shares and discounting services.

NBFCs are typically into the funding of:

 Construction equipment
 Commercial vehicles and cars
 Gold loans
 Microfinance
 Consumer durables and two-wheelers
 Loan against shares, etc.
List of major products offered by NBFCs in India:
 Funding for commercial vehicles
 Funding for infrastructure assets
 Retail financing
 Loan against shares
 Funding for plant and machinery
 Project finance
 Unsecured personal loans
 Trade finance
 Venture finance

Small and Medium Enterprises Financing:

 Financing of specialized equipment
 Operating leases of cars, etc.

Types of the instrument generally executed:

 Loans
 Hire purchase
 Financial lease
 Operating Lease

d.Advantages of NBFC over Banks

NBFC’s provide all types of financial services similar to banks with two major differences –
they do not hold a banking license and they cannot accept monetary deposit from individual
customers. NBFC’s are recognized as complementary to the banking sector as a result of the
implementation of innovative marketing strategies, the introduction of tailor-made
products, customer-oriented services, attractive rates of return on deposits and simplified
procedures, etc.
In the past few years, the increased competition from banks in the retail finance segment
has led to excess diversification by NBFCs from their core business activities. The NBFCs has
introduced various innovative products such as IPO financing, three-wheeler financing,
vehicles financing, small personal loans, finance for tires & fuel, asset management, mutual
fund distribution, and insurance advisory, etc.
Moreover, NBFCs are aspiring to emerge as a one-stop-shop for all financial services.
In recent years, NBFCs have begun to create niches for themselves which are often
neglected by banks. These mainly include providing finance to non-salaried individuals,
traders, transporters, stockbrokers, etc.
NBFCs have also offered into riskier segments such as unsecured loans, purchase finance for
used commercial vehicles, capital market lending, etc. NBFC’s customer profile is
concentrated on the self-employed segment.

e.Difference between Banks and NBFCs

 Features Banks NBFCs
1. Regulated By RBI-Banking Act Companies Act and the
direction of RBI
2. The process of Loan Moderately Stringent Easier and faster
sanction
3. Product Offering all types of loans Majorly property loans

4. Interest Rate Benchmark Base rate + Margin Retail Prime Lending

Rate(RPLR)-Spread
5. Overdraft Facility Available Not Available
6. Passing interest rate benefit No much room more existing High chance for existing and
to existing borrowers borrowers new borrowers to get
benefited from discounts and
offers
7. Pre-payment convenience Available at banks for all Usually prefers cheque
through NEFT customers payments to process
Electronic Clearing
Service(ECS)
8. Interest Rates Rate of interest will be Depends on the property and
comparatively lower applicant and most of the
times will be higher than
banks

4. IRDA

The insurance companies in India are supervised by IRDAI - Insurance Regulatory

Development Authority of India. IRDAI regulates the Indian insurance industry to protect the
interests of the policyholders and work for the orderly growth of the industry.
The Insurance Regulatory Development Authority of India (IRDAI) is a regulatory body
created with the aim of protecting the policyholder’s interest. It also regulates and sees to
the development of the insurance industry.
Insurance Regulatory and Development Authority of India, commonly known as, IRDA, is the
supreme authority that authorizes the insurance business in India. It was established by the
Insurance Regulatory and Development Authority of India Act, 1999 after the declaration
made by the former President of India, Pranab Mukherjee, on Insurance Laws (Amendment)
Ordinance of 2014.
a.Establishment of IRDA
The Insurance Regulatory and Development Authority of India was established on the
recommendations made by the Malhotra Committee in its report. This committee was
headed by Mr. R.N. Malhotra (retired Governor of the Reserve Bank of India). It was finally
set up at New Delhi on April 2000, but later on, it was shifted to Hyderabad, Telangana in
2001. The main recommendation made by this committee was to allow the entrance of
private sector companies and foreign promoters and independent regulatory authority for
the Insurance sector in India.

b.Objectives of IRDA
 To carry forward the interests of the policyholders.
  To uphold the development of the Insurance industry.
 To ensure speedy resolution of claims.
 To prevent frauds and malpractices.
 To ensure fair conduct on the part of the financial market and transparency when
dealing with insurance.

c.Powers of IRDA / IRDA Functions

As per Section 14 of the Insurance Regulatory and Development of Authority Act, 1999 the
Authority has to ensure the regulation, development and promotion of the insurance
business and reinsurance business. Following are the other powers, duties and functions of
the Authority:
 To avail the applicant a certificate of registration, renewal, modification, withdrawal,
suspension or cancellation of such registration.
 To protect the interests of the policy holders in cases related to assigning and
nomination of policy holders, understanding of insurance claims, insurable interests,
surrendering of the value of the policy and other terms and conditions of the insurance
contract.
 To specify the necessary qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents.
 Explaining the required code of conduct to the surveyors and loss assessors.
 To ensure that the proficiency and efficiency of the conduct of the business of insurance.
 To encourage and regulate the relationship between the professional organisations and
the insurance and reinsurance businesses.
 To levy charge to carry out the purpose of the Act.
 To call for the information, undertaking an inspection of, conducting enquiries and
investigations including the audit of insurers, intermediaries, insurance intermediaries
and other organisations connected with the insurance business.
 To control and regulate the rates, benefits, terms and conditions which are offered to
the insurer in respect of general insurance business that is not controlled and regulated
by the Tariff Advisory Committee under Section 64U of the Insurance Act of 1938 (4 of
1938).
 To specify the manner in which the books are to be maintained and the way in which the
statement of accounts shall be rendered by insurers and other insurance companies.
 To maintain the investment funds by the insurance companies.
 To regulate the maintenance of margin solvency.
 Deciding the disputes between the insurers and the intermediaries of insurance
intermediaries.
 Administering the functioning of the Tariff Advisory Committee.
 To set down the percentage premium income of the insurer of finance schemes for
promoting and regulating the professional organisations.
 To protect the interests of the policyholders in cases related to assigning and
nomination of policyholders.
 To set out the percentage of life insurance business and general insurance business to
be taken forward by the insurer in the rural or social sector.
 Exercising other powers as may be prescribed.

d.Role of IRDA
The role of IRDA includes:
 To ensure interests and fair treatment to the insurance policy holders.
 To ensure the development of the insurance industry or sector and to impart benefits to
people and long-term funds to increase the growth of the economy.
 To promote and apply high standards of integrity, fair dealing, the ability of all those
companies that it administers.
 To ensure clarity and accuracy while contracting with the insurance policyholders. The
Authority has to ensure that true information has been rendered regarding products and
services. Also, to make policyholders aware of the different plans and policies those are
being implemented by the Insurance sector.
 To provide speedy trials in case of disputes and to prevent fraud or any other
misconduct.
 To initiate new standards where they are needed or where there is lack of such
standards.
 To promote self-regulation in daily activities with the necessary regulations

e.Features & Benefits of IRDA:

Following are the salient features of the apex body, the Insurance Regulatory and
Development Authority of India:
 Acts as a regulator for the insurance industry.
 Protects the policyholder’s interests.
 Rules and regulations are framed by the apex body under Section 114A of the Insurance
Act, 1938.
 It is entrusted under the Insurance Act to grant the certificate of registration to new
insurance companies to operate in India.
 Oversees the insurance industry’s activities to ensure sustained development of insurers
and policyholders.

5. Merchant Banking

Definition
There is no universal definition for merchant banking. It assumes diverse functions in
different countries. So merchant banking may be defined as, 'an institution which covers a
wide range of activities such as management of customer services, portfolio management,
credit syndication, acceptance credit, counselling, insurance etc.

The Notification of the Ministry of Finance defines a merchant banker as, "any person who is
engaged in the business of issue management either by making arrangements regarding
selling, buying or subscribing to the securities as manager, consultant, adviser or rendering
corporate advisory service in relation to such issue management ".
The difference between merchant banks and commercial banks is summarized below:
Commercial banks basically deal in debt and debt related finance and their activities are
appropriately arrayed around credit proposals, credit appraisal and loan sanctions. On the
other hand, the area of activity of merchant bankers is 'equity and equity related finance'.
They deal with mainly funds raised through money market and capital market.

Merchant Banking in India

In India prior to the enactment of Indian Companies Act, 1956 managing agents acted as
issue houses for securities, evaluated project reports, planned capital structure and to some
extent provided venture capital for new firms. Few share broking firms also functioned as
merchant bankers.
The need for specialized merchant banking service was felt in India with the rapid growth in
the number and size of the issues made in the primary market. The merchant banking
services were started by foreign banks, namely the National Grindlays Bank in 1967 and the
City Bank in 1970. The Banking Commission in its report in 1972 recommended the setting
up of merchant banking institutions by commercial banks and financial institutions. This
marked the beginning of specialized merchant banking in India. To begin with, merchant
banking services were offered along with other traditional banking services. In the mid -
eighties, the Banking Regulations Act was amended permitting commercial banks to offer a
wide range of financial services through the subsidiary rule. The State Bank of India was the
first Indian Bank to set up Merchant Banking Division in 1972. Later ICICI set up its Merchant
Banking Division followed by Bank of India, Bank of Baroda, Canara Bank, Punjab National
Bank and UCO Bank. The merchant banking gained prominence during 1983 - 84 due to new
issue boom.

Scope for Merchant Banking in India

In the present day capital market scenario, the merchant banks play the role of an
encouraging and supporting force to the entrepreneurs, corporate sectors and the
investors. There is vast scope for merchant bankers to enlarge their operations both in
domestic and international market.

1. Growth of New Issues Market -

The growth of new issue market is unprecedented since 1990 amount of annual average of
capital issues by non - government public companies was only about 90 crores in the 70s,
the same rose to over Rs. 1,000 crores in the 80s' and further to Rs. 12,700 crores in the first
four years of 1990 's. This figure could be well beyond Rs. 40,000 crores by the end of 1994 -
95. The number of capital issues has also increased from 363 in 1990 - 91 to 900 in 1993 -
94. The trend is expected to continue in future.

2. Entry of Foreign Investors

An outstanding development in the history of Indian capital market was its opening up in
1992 by allowing foreign institutional investors to invest in primary and secondary market
and also permitting Indian companies to directly tap foreign capital through euro issues.
Within two years to March 1994, the total inflow of foreign capital through these routes
reached to about $ 5 billion. It is estimated that this figure may go up to $ 35 - 40 billion by
the turn of this century.

3. Changing Policy of Financial Institutions

With the changing emphasis in the lending policies of financial institutions from security
orientation to project orientation, corporate enterprises would require the expert services
of merchant bankers from project appraisal, financial management etc. The policy of
decentralization and encouragement of small and medium industries will further increase
the demand for technical and financial services which can be provided by merchant bankers.

4. Development of Debt Market

The concept of debt market has set to work through National Stock Exchange and the Over
the Counter Exchange of India. Experts feel that of the estimated capital issues of Rs. 40,000
crores in 1994 - 95, a good portion may be raised through debt instruments. The
development of debt market will offer tremendous opportunity to Merchant Bankers.

5. Innovations in Financial Instruments

The Indian capital market has witnessed innovations in the introduction of financial
instruments such as non - convertible debentures with detachable warrants, cumulative
convertible preference shares, zero coupon bonds, deep discount bonds, triple option
bonds, secured premium notes, floating rate bonds, auction rated debentures etc. This has
further extended the role of Merchant Bankers as market makers for these instruments.

6. Corporate Restructuring
As a result of liberalization and globalisation the competition in the corporate sector is
becoming intense. To survive in the competition, companies are reviewing their strategies,
structure and functioning. This had led to corporate restructuring including mergers,
acquisitions, splits, disinvestments and financial restructuring. This offers good opportunity
to Merchant Bankers to extend the area of their operations.

7. Disinvestment
The government raised Rs. 2000 crores through disinvestment of equity shares of selected
public sector undertakings in 1993 - 94. The government proposes to shift the present
method of periodic sale of public sector shares to round the year off loading of shares
directly on the stock exchange from the year 1995 - 96. The government will sell the shares
of identified public sector at any time during the year when they get a good price above
minimum stipulated level. This is likely to provide good business to Merchant Bankers in
future.

Services of Merchant Banks

The financial institutions in India could not meet the demand for long term funds required
by the ever expanding industry and trade. Corporate sector enterprises, therefore, meet
their requirements ach issue of shares and debentures in the capital market. To raise money
from capital market, promoters bank upon merchant bankers manage the whole show by
rendering multifarious services. The merchant bankers also advise the investors of the
incentives available in the form of tax reliefs and other statutory obligations.

The services of merchant bankers are described in detail in the following section:

(i) Corporate Counselling

Corporate counselling covers the entire field of merchant banking activities viz. project
counselling, capital restructuring, project management, public issue management, loan
syndication, working capital, fixed deposit, lease financing, acceptance credit etc. The scope
of corporate counselling is limited to giving suggestions and opinions to the client and help
taking actions to solve their problems. It is provided to a corporate unit with a view to
ensure better performance, maintain steady growth and create better image among
investors

(ii) Project Counselling

Project counselling includes preparation of project reports, deciding upon the financing
pattern to finance the cost of the project and appraising project report with the financial
institutions or banks.
Project reports are prepared to obtain government approval, get financial assistance from
institutions and plan for the public issue.
The financing mix is to be decided keeping in view the rules, regulations and norms
prescribed by the government or followed by financial institutions. The projects are
appraised, as to the location, technical, commercial and financial viability of the project.
Project counselling

ii) Loan Syndication

Loan syndication refers to assistance rendered by merchant banks to get mainly term loans
for projects. Such loans may be obtained from a single development finance institution or a
syndicate or consortium. Merchant Bankers help corporate clients to raise syndicated loans
from commercial banks. Merchant Banks help clients approach financial institutions for
term loans. The decision as to which financial institution should be approached depends on
industry, location of the unit and size of project cost.
The Merchant Bankers, first, make an appraisal of the project to satisfy that it is viable. The
next step is designing capital structure, determining the promoter's contribution and
arriving at a figure of approximate amount of term loan to be raised. The Merchant Banker
has to ensure that the project adheres to the guidelines for financing industrial projects.
After verifications that the project would be eligible for term loan, a preliminary meeting is
fixed with financial institution. If the financial institution agrees to consider the proposal,
the application is filled in and submitted along with other documents. The Merchant
Bankers involvement enables the company to state that it has exercised due diligence in the
exercise of obligations under various regulations.
(iv) Issue Management
Management of issue involves marketing of corporate securities viz., equity shares,
preference shares and debentures or bonds by offering them to public. Merchant banks act
as intermediary whose main job is to transfer capital from those who own it to those who
need it. The issue function may be broadly dividend into pre – issue management and post
issue management. In both the stages, legal requirements have to be complied with and
several activities connected with the issue have to be co - ordinated.
The pre - issue management is divided into:
(i) Issue through prospectus, offer for sale and private placement.
(ii) Marketing and underwriting. (iii) Pricing of Issues,

(v) Underwriting of Public Issue

Underwriting is a guarantee given by the underwriter that in the event of under subscription
the amount underwritten, would be subscribed by him. It is an insurance to the company
which proposes to make public offer against risk of under subscription. The issues packed by
well-known underwriters generally receive a high premium from the public. This enables the
issuing company to sell securities quickly.

(vi) Managers, Consultants or Advisers to the Issue

The managers to the issue assist in the drafting of prospectus, application forms and
completion of formalities under the Companies Act, appointment of Registrar for dealing
with share applications and transfer and listing of shares of the company on the stock
exchange.
Companies are free to appoint one or more agencies as managers to the issue. SEBI
guidelines insist that all issues should be managed by at least one authorized merchant
banker. Ordinarily, not more than two merchant bankers should be associated as lead
managers, advisers and consultants to a public issue. In issues of over Rs. 100 crores, upto a
maximum of four merchant bankers could be associated as managers.

(vii) Portfolio Management

Portfolio refers to investment in different kinds of securities such as shares, debentures or
bonds issued by different companies and securities issued by the government. It is not
merely a collection of unrelated assets but a carefully blended asset combination within a
unified framework. Portfolio management refers to maintaining proper combination of
securities in a manner that they give maximum return with minimum risk.
6. Small Savings Instruments

Small savings instruments are managed by the central government to encourage citizens to
save regularly, irrespective of their age. They not only provide returns that are usually
higher than bank fixed deposits. They also come with a sovereign guarantee and tax
benefits.

 Small savings instruments help the citizens to achieve their financial goals over a
particular time period.
 The small savings instruments include
 Public Provident Fund Account (PPF)
 Sukanya Samriddhi Scheme
 Senior Citizen Savings Scheme
 Post Office Savings Account
 5-Year Post Office Recurring Deposit Account (RD)
 National Savings Certificates (NSC)

They are the major source of household savings in India. The small savings schemes
basket can be classified under three categories. They are
 Postal deposits: Post Office Savings Account(SB), National Savings Recurring
Deposit Account(RD), National Savings Time Deposit Account(TD) etc.
 Savings certificates: National Savings Certificates, Kisan Vikas Patra (KVP) etc.
 Social security schemes: Public Provident Fund (PPF), Senior Citizens Savings
Scheme (SCSS) etc.
Interest rates are reviewed every quarter by the Government for these schemes.

Latest Interest Rates

The government has decided to maintain the status quo on interest rates of small savings
instruments for the April-June quarter. The interest rates are given below. Figures in % p.a.

Small savings instruments 2022-23 Quarter 1 2022-23 Quarter 4

Public Provident Fund Account (PPF) 7.1 7.1
Senior Citizens Savings Scheme (SCSS) 7.4 8.0
National Savings Certificate (NSC) 6.8 7.0
Post Office Monthly Income Scheme(MIS) 6.6 7.1
Post Office Time Deposits 5.5-6.7 6.6-7.0
Post Office 5-year time deposit 6.7 7.0
5-year recurring deposit 5.8 5.8
Sukanya Samriddhi Yojana 7.6 7.6
Savings Deposits 4.0 4.0
Some Important Small Savings Schemes

Post Office Savings  It is like a savings account with a bank.

Account  Only one account can be opened by an individual as a single
account
 Minimum deposit amount: – Rs. 500
 Minimum withdrawal amount: – Rs. 50
 Maximum deposit: – No maximum limit
Kisan Vikas Patra  It can be purchased from any post office.
(KVP)  The minimum deposit is Rs. 1000 and in multiple of Rs. 100, no
maximum limit.
 The deposit shall mature on the maturity period prescribed by the
Ministry of Finance from time to time as applicable on the date of
deposit.
 Certificates are easily transferable
Senior Citizen’s  An individual above 60 years of age can open an account.
Savings Scheme  Retired Civilian Employees above 55 years of age and below 60
years of age, subject to the condition that investment is made
within 1 month of receipt of retirement benefits.
 The maximum limit of investment allowed per individual
(combined balances in all accounts) is Rs. 15 lakhs. The minimum
deposit shall be Rs. 1000.
Public Provident  PPF is a long-term investment for a period of 15 years.
Fund (PPF)  Minimum deposit Rs. 500 and the maximum deposit is Rs. 1.50
lakh in a financial year.
National Savings  The NSC has a maturity period of 5 years.
Certificate (NSC)  The minimum deposit is Rs. 1000 and in multiple of Rs. 100. There
is no maximum limit.
Sukanya Samriddhi  It is introduced for the benefit of the girl child.
Scheme  The minimum deposit is Rs. 250 and the maximum deposit can be
made up to Rs. 1.50 lakh in a financial year.
 The investment will mature after the completion of 21 years from
the date of opening the account, or upon the marriage of the girl
child after attaining the age of 18.
 The account will also have to be closed if the girl child becomes
an NRI or loses her Indian citizenship.
These are time-tested and safe modes of investment. They don’t offer quick returns, but are
safer when compared to market linked schemes.