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Banking Theory and Practice

Notes consumers, who have become more discerning and demanding, compelling banks to offer a
broader range of products through diverse distribution channels. The traditional face of banks
as mere financial intermediaries has since altered and risk management has emerged as their
defining attribute. The Indian financial system is identified with two set of institutions viz.
regulators and intermediaries. Regulatory Institutions are statutory bodies assigned with the
job of monitoring and controlling different segments of the Indian Financial System (IFS). These
institutions are given adequate powers through the vehicle of their respective Acts to enable
them to supervise the segments assigned to them.
It is the job of the regulator to ensure that the players in the segment work within recognized
business parameters maintain sufficient level of disclosure and transparency of operations and
do not act against the national interests. At present, there are two regulators directly connected
to Indian financial system. They are Reserve Bank of India and Security and Exchange Board of
India. Intermediary financial institutions include banking and non banking financial institutions.
The banking financial institutions participate in the economy’s payments mechanism, i.e., they
provide transaction services, their deposit liabilities constitute a major part of the national
money supply, and they can, as a whole, create deposits or credit, which is money. Banks, subject
to legal reserve requirements, can advance credit by creating claims against themselves. Other
financial institutions can lend only out of resources put at their disposal by the savers.

Did u know? Financial institutions are the primary source of long term lending for large
projects.
Conventionally, they raised their resources in the form of bonds subscribed by RBI, Public
Sector Enterprises, Banks and others. With the drying up of concessional long-term operations
funds from the Reserve Bank in the early 1990s, financial institutions have increasingly raised
resources at the short end of the deposit market.

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Caution The Banking Segment in India functions under the regulation of Reserve Bank of
India.
This segment broadly consists of commercial banks and cooperative banks. Non-banking
Financial Institutions carry out financing activities but their resources are not directly obtained
from the savers as debt. Instead, these Institutions mobilize the public savings for rendering
other financial services including investment. All such institutions are financial intermediaries
and when they lend, they are known as Non-banking Financial Intermediaries (NBFIs) or
investment institutions.

Example: Unit Trust of India, Life Insurance Corporation (LIC) and General Insurance
Corporation (GIC).
Apart from these NBFIs, another part of Indian financial system consists of a large number of
privately owned, decentralized, and relatively small-sized financial intermediaries. Most work
in different, miniscule niches and make the market more broad-based and competitive. While
some of them restrict themselves to fund-based business, many others provide financial services
of various types. The entities of the former type are termed as “Non-bank Financial Companies
(NBFCs)”. The latter type is called “Non-bank Financial Services Companies (NBFSCs)”.
The commercial banking structure in India consists of two major set of players scheduled
commercial banks and unscheduled banks. The scheduled commercial banks constitute those
banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.
RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide

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