Page 253 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 20: Indian Financial System: Money Market and Monetary Policy

Composition of the Indian Financial System Notes
The Indian financial system which refers to the borrowing and lending of funds or to the demand for
and supply of funds, consists of two parts, viz., the Indian Money market and the Indian Capital market.
The Indian money market is the market in which short-term funds are borrowed and lent. The capital
market in India, on the other hand, is the market for medium-term and long term funds.
Usually, we classify the Indian money market into organised sector and the unorganised sector. The
organised sector of the money market consists of commercial banks in India, which includes private
sector and public sector banks and also foreign banks. The unorganised sector consists of indigenous
bankers including the non-banking financial companies (NBFCs). Besides these two, there are many
sub-markets in the Indian money market, as we shall see later.
The Composition of the Indian Banking System
The organised banking system in India can be broadly divided into three categories, viz., the central
bank of the country known as the Reserve Bank of India, the commercial banks and the co-operative
banks. Another and more common classification of banks in India is between scheduled and non-
scheduled banks. The Reserve Bank of India is the supreme monetary and banking authority in the
country and has the responsibility to control the banking system in the country. It keeps the cash
reserves of all scheduled banks and hence is known as the “Reserve Bank”.
Scheduled and Non-Scheduled Banks
Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks and non-
scheduled banks. The scheduled banks are those which are entered in the Second Schedule of RBI
Act, 1934. Such banks are those which have a paid-up capital and reserves of an aggregate value of
not less than ` 5 lakhs and which satisfy RBI that their affairs are carried out in the interests of their
depositors. All commercial banks—Indian and foreign, regional rural banks and State co-operative
banks—are scheduled banks. Non-scheduled banks are those which have not been included in the
Chart 1 : Scheduled Banking Structure in India
Reserve Bank of India
[Central Bank and supreme monetary of the country]

Scheduled Banks

Scheduled Commercial Banks Scheduled Co-operative Banks

Public Private Foreign Regional Scheduled Scheduled
Sector Sector Banks in Rural Urban State
Banks (27) Banks (25) India (39) Banks (357) Cooperative Cooperative
Banks (53) Banks (31)

State Bank of Old New
Nationalised India & its Private Private
Banks (19)
Associates (8) Banks (17) Banks (8)
[As March 31, 2007]

Second Schedule of RBI Act, 1934. At present, there are only three non-scheduled banks in the country.
Scheduled banks are divided into commercial banks and cooperative banks. Commercial banks are
based on profit, while cooperative banks are based on cooperative principle.

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