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BANKING SYSTEM AND ITS REGULATIONS

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					UNIT-2      BANKING SYSTEM AND ITS REGULATIONS

1Q. Explain the different types of banking systems?
Ans.          A bank is an institution which deals with money and credit. It
accepts the deposits from public and makes the funds available to those who
need them. A modern bank performs a variety of functions and they purview is
different from each other. Depending upon their functions, size etc.. we can
classify the banking system into the following categories :

1.   Unit banking system
2.   Branch banking system
3.   Group banking system
4.   Chain banking system
5.   Deposit banking system
6.   Investment banking system
7.   Correspondent banking system
8.   Mixed banking system

Different countries adopt different types of banking system depending upon their
economic structure.

1. UNIT BANKING SYSTEM:
              Under this type of banking system an individual bank operates
through an single office. The size and area of operation is much smaller than in
other types of banking system. It was originated and grew in USA. The main
reason for the development of unit banking system in America is the fear of
emergence of monopoly in banking business.

2. BRANCH BANKING SYSTEM:
              In this type of banking system a big bank as a single owner ship
operates through a network of branches spread all over the country. This type of
banking system was initially developed in England. Later on it become popular in
other countries like Canada, India and Australia etc.


 3. GROUP BANKING SYSTEM:
               This banking system refers to the system of banking in which two
or more banks are directly controlled by a corporation or an association or a
business trust. The holding company may or may not be a banking company. In
this system each bank maintains its separate identity. Its business is managed by
the holding company. This type of banking system was popular in USA.
4. CHAIN BANKING SYSTEM:
                It is another form of group of banking. It refers to the system in
which two or more banks are brought under common control by a device other
than the holiday company. They have common management and policies. The
management may consist of group of persons through stock ownership or
otherwise.
5. DEPOSIT BANKING SYSTEM:
                Commercial banks are the best examples for deposit banking.
Deposit bank will have to maintain liquidity i.e. enough cash reserve to meet
withdrawals. Deposits bank are those banks which accept deposits of short term
and loans will also be for short term periods. The business in this type of banking
system is less risky. The loans provided by deposit bank are in the form of
overdraft, cash credit and discounting bills of exchange.
6. INVESTMENT BANKING SYSTEM:
                These banks are those financial institutions which provide long
term finance to business. They invest in capital market i.e. stocks & shares of
different companies. These banks act as intermediaries between savers and
investors. These investment bankers are classified into various categories such
as underwriters and retailers. An investment banker performs highly useful
services to the co-operative bodies by supplying long term capitals. They also
provide services to small investors. They mobilize the investment through shares,
stocks and mutual funds.
7.CORRESPONDENT BANKING SYSTEM:
                It is another important type of banking system. A correspondent
bank is one which connects the two banks under unit banking system. The best
examples of correspondent bank in India is RBI or central bank.

8. MIXED BANKING SYSTEM:
                If the banks provide both short term and long term loans to the
industries it is called as mixed banking system. German banks are the best
examples of this type of banking system. These banks accept both short term
and long term deposits. Therefore they are able to provide both short and long
term loans required by the industry. The banks were facilitated to invest the
surplus funds for the industrial development of the country in this type of banking
system.


2Q. EXPLAIN THE ADVANTAGES AND DIS-ADVANTAGES OF UNIT
BANKING SYSTEM?
ANS.            Under unit banking system an individual bank operates through a
single office. The size and area of an operation of a unit bank is smaller as
compared to that of a branch banking system. Its advantages are as follows:

ADVANTAGES:

1. LOCAL DEVELOPMENT:
               Unit banking system is a localized banking. The bank has
specialized knowledge of the local problem and serve the requirements of the
local people, because the fund of the locality are utilized for local development.
2. PROMOTES REGIONAL BALANCES:
               In this banking system there is no transfer of resources from back
word areas to the big industrial and commercial centers. It has to make
investments in those areas only where ever it exists. Thus, promotes regional
balances.

3. EASY IN MANAGEMENT:
               The management and supervision of a unit bank is much easier
and more effective due to its smaller size.

4. INITIATIVE IN BANKING BUSINESS:
                Unit banks have full knowledge and greater involvement in the
local problems. They are in a position to take initiative to tackle the local problem
through financial help.

5. PERSONAL CONTACT WITH THE CUSTOMERS:
               Unit banking system brings a small scale independent bank
which can maintain personal contact with the customers for efficient banking.

DIS-ADVANTAGES:

1. NO DISTRIBUTION OF RISK:
                 The banks under unit banking system are highly localized
without any branches. So, there us no possibility of diverting the risk.
 2. LACK OF SPECIALISATION:
                 Another disadvantages of unit banking system is lack of
specialization. Because of their small size unit banks are not able to introduce
division of labors and specialization. Further these banks cannot appoint or
employee highly trained & specialized staff.

3. LOCAL PRESSURE:
                 Unit banks are local in nature. Therefore pressure and
interference generally disturb their normal functions.

4. INABILITY TO FACE CRISIS:
                   Limited resources of the unit bank restrict their ability to face
the financial prices. These banks will not have any ability to withdraw in sudden
crises or rush of withdrawals.

5. DISPARITY IN INTEREST RATE:
                  Under unit banking system easy and cheap remittance of funds
and deposits doesn‟t exists. Every bank maintains its own rate of interest.
Therefore interest rate varies considerable from place to place or bank to bank.
3Q.ADVANTAGES          AND     DIS    ADVANTAGES          OF    BRANCH       BANKING
SYSTEM?

ANS;The branch system means each commercial bank will be a very large
institution. The bank will have a number of branches spreads all over the country
and even outside the country. Thus, we can say that branch banking system
which carries on business through a number of branch offices.

ADVANTAGES:

The advantages of branch banking system are as follows:

1. ECONOMIES OF LARGE SCALE OPERATION:
                 Under branch banking system the bank with a number of
branches posses‟ huge financial resources and enjoy the benefits of large scale
operations. In this type of banking system highly trained & experienced staff is
appointed which increases the efficiency of the management.

2. SPREADING OF RISK:
                  Another advantage of branch banking system is lesser risk and
greater capacity to meet risks. Since there is a wide geographical spreading and
diversification of risk is possible in this system. Further the possibilities of failures
are very less.

3. ECONOMY IN CASH RESERVE:
               Under this system a particular branch can operate without
keeping large amount of ideal resources. The funds can be easily transferred
from one branch to another.


4. CHEAP REMITTTANCE FACILATY:
                  In this type of banking system as branches are spread all over
the country. So it is easier and cheaper to transfer the funds.


5. UNIFORM RATE OF INTEREST:
                   Under branch banking system mobility of capital increases as a
result of equality in the rate of interests. The funds can be transferred from the
excess branches to the shortage branches. Consequently uniformity in the rate of
interest prevails in the whole area.
DIS-ADVANTAGES:
                The following are the important disadvantages of branch
banking system.

1. PROBLEM OF MANAGEMENT:
                 Under branch banking system a number of difficulties regarding
management and supervision and control may arise. Banks get concentrated at
the head office. The branch manager has to seek permission from the head
office on each and every matter. This results in unnecessary delay in banking
business.

2. LACK OF INITIATIVE:
                   In this type of banking system the branch manager generally
lacks of initiatives on all the matters. He cannot take independent decisions on
every matter. He has to wait for the clearance signal from head office.

3. REGIONAL IMBALANCES:
                Under this system the financial resources collected in the rural
areas and back word regions are transferred to big industrial sectors. This
encourages regional imbalance in the country.

4. MONOPOLISTIC TENDENCIES:
                 Branch banking encourages monopolistic tendencies in the
banking system of a country. It may lead to the concentration of resources in few
hands. A few banks may dominate the whole banking system in the country.

5. INEFFICIENT BRANCHES:
                 In this type of banking system weak and unprofitable branches
continue to operate under the protection of large and profitable branches
4Q. EXPLAIN THE OVERVIEW OF INDIAN BANKING SYSTEM?


ANS.              An overview of Indian banking system

                       Structure of Indian Banking System

                Organized sector                                 unorganized sector

Capital market intermediary’s   Money market intermediaries           Money lender


Development banks    LIC Agriculture finance NBFS                     Indigenous
                     GIC institution                                   Banker

                                      Leasing Companies

                                      Hire Purchases Companies         Pawn Broker

                                      Investment Companies




RBI    Commercial Bank      Co-operative Bank    Post office saving Bank Government
                                                                          Treasury
                                                                            Bank
5Q. EXPLAIN THE BANKING SECTOR REFORMS?

ANS : The govt. of India appointed 9 members committee under the
chairmanship of Mr. M. Narshimam to evaluate the banking sector and make
necessary recommendations to strengthen it. The committee submitted its report
on 17th dec.1991. The recommendations of committee are as follows:-
   o Reduction in CRR (cash reserve ratio)
   o Reduction in SLR ( statutory liquidity ratio)
   o De-regulation of interest rates
   o Debt recovery tribunals
   o Restructuring Indian banking sector
   o Removal of licensing policy
   o Equal opportunity to foreign

PRUDENTIAL NORMS:
                    In April 1992 RBI issued quick lines on prudential norms.
According to these norms assets should be classified into performing and non-
performing assets and consider the interest or installment on recovery basis and
not on accrual basis.
                     The committee also recommended for proper asset
classification for proper income recognition which provides for the stability and
strengthening the banking system. This classification is as follows:

NON PERFORMING ASSETS:
                   An asset becomes non-performing asset when it ceases or
stops generating income to the bank. In other words NPA can be defined as
credit facility in which the installment of principle “past due for 90days”. It is
treated as past due when it has not been paid for 30days from the due date.
          For the identification of NPA’s the following norms were
implemented:
    o Installment over due for a period of more than 90days is respect to term
       loan and overdraft.
    o The account remains out of order for the period more than 90days in case
       of cash credit.
    o A bill remains over due for a period more than 90days in case of
       discounting bill.

OUT OF ORDER STATUS:
             An account will be treated as out of order status if the outstanding
balance exceeds the sanctioned drawing limit.
CLASSIFICATION OF ASSETS:
           Assets can be classified into the following categories

1. STANDERD ASSETS:
                 The assets which are regular in all the respects are called as
standard assets. They bring income to the banks
2. SUB-STANDARD ASSETS:
                 An asset which is NPA for a period up to 12 months is known as
sub-standard assets.

3. DOUBT FULL ASSETS:
              An asset which is NPA for more that “12 months”.

4. LOSS-ASSETS:
                  It is a credit facility where the loss has been identified by the
auditors or RBI inspectors.

INCOME RECOGNITION NORMS:
                The policy of income recognition is based on record of
recovery.
   1. The income on the NPA is not recognized on annual basis but on recovery
      basis. Therefore it should be considered when it is actually received.
   2. The income on the term deposits should be taken into income account on
      the due date only.
   3. Fees, commission earned by the banks should be recognized on accrual.

   CAPITAL ADEQUACY NORMS:
                  It is basically a measure of bank capital. It is expressed as a
   percentage of banks, risk weighted, credit exposure. The ratio protects the
   depositor‟s interest. It promotes the stability and efficiency of the banking
   system. It is known as the ratio of capital funds in relation to deposits.


Features of capital adequacy norms:
                  Its features are categorized into tiers.

Tire 1:-
         It consists of:
   o   Paid up capital
   o   Statuary reserve
   o   Disclosed fee reserves
   o   Equity investment in subsidiaries
   o   Losses in current period ad those brought forward from previous years.
Tire 2:-
        It consists of:
  o Revaluation reserve
  o Subordinated debt.
  o Surplus provision/loss
        the capital adequacy is calculated by the following formula:
                            Weighted risk asset *100
Capital adequacy =           capital fund


The Narshimam committee recommended for the adoption of Basel norm on
capital adequacy for banks which was accepted by RBI and implemented in
1992.


6Q. EXPLAIN THE INNOVATIONS OF BANKING SECTOR?

ANS: In 1990‟s Indian banking sector saw a great emphasis on the replacement
of technology with the new innovations. Banks began to use these new
technologies to provide better and quick services to the customers at a great
speed. Some of the innovations techniques introduced in Indian banking sector in
post reform era are as follows:

    o   Automated teller machine (ATM)
    o   Electronic transfer of funds (ETF)
    o   Tele-banking
    o   Home banking
    o   Internet banking &
    o   Demate facility

1. AUTOMATED TELLER MACHINE:
               An ATM is a computerized Tele-communication device which
    provides the customers the access to financial transactions in public places
    without human intervention. It enables the customers to perform several
    banking operations such as withdrawals of cash, request of mini-statement
    etc.
2. ELECTRONIC TRANSFER OF FUNDS:
               This is an electronic debit or credit of customers account. Bank
customers can buy goods and services without carrying cash by using credit or
debit cards. These cards are issued to the customers by the bankers. This
system works on a pin (personal identification number). The customer swipes the
card by using the card reader device to make the transactions. The development
of electronic banking and internet banking helped the customers to utilize their
services.
3. TELE-BANKING:
                It is increasingly used in these days. It is a delivery channel for
marketing, banking services. A customer can do non-cash business related
banking over the phone any where and at any time. Automatic voice recorders
are used for rendering tele-banking services.

4. OFF SHORE BANKING: Off shiore banking is financial intermediation
offered to the non-residents to avail banking services with minimum tax burdens
and fewer legislations. These banks accept all kinds of deposits and pay interest
on deposits and provide online transfer of funds . However offshore banking is
not much popular among Indians banks.
       RBI issued guidelines in 2003 facilitating Indian banks to establish
offshore banking units in special economic zones. These are virtual foreign
branches of Indian banks located in India.

5.MOBILE BANKING:
                 It is another important service provided by the banks recently.
The customers can utilize it with the help of a cell phone. The bank will install
particular software and provide a password to enable a customer to utilize this
service.
6. HOME BANKING:
                   It is another important innovation took place in Indian banking
sector. The customers can perform a no. of transactions from their home or
office. They can check the balance and transfer the funds with the help of a
telephone. But it is not that popularly utilized in our country.

7. INTERNET BANKING:
                   It is the recent trend in the Indian banking sector. It is the result
of development took place in information technology. Internet banking means any
user or customer with personal computer and browser can get connected to his
banks website and perform any service possible through electronic delivery
channel. There is no human operator present in the remote location to respond.
All the services listed in the menu of bank website will be available.

8. DEMAT BANKING:
                 It is nothing but de-materialization. This is a recent entrant in the
Indian banking sector. The customer who wants to invest in stock market or in
share and stock needs to maintain this account with the commercial banks. The
customer needs to pay certain annual charges to the banks for maintaining this
type of accounts.

   9. CREDIT CARDS: Commercial banks introduced credit card facility in
      early 1980‟s. It is a plastic magnetic card . It is a document of card
      holder‟s credit worthiness on the one hand and minimizes the use of hard
      cash in day to day transactions. It is a convenient medium of exchange
      which enables its holders to buy goods and services without using money.
      It also helps its holder to buy when he wants and to pay when he can.
      These cards are issued to people having a certain minimum income. The
      card issuing banks pay to the seller as soon as the goods are sold but
      collects from the buyer after 30-45 days. For this bank bets commission
      between 2.5 to 5%.

7Q. EXPLAIN REGIONAL RURAL BANKS?
(PROBLEMS AND MEASURES)

ANS. With the view to fill up institutional credit gap in the rural areas govt. of
India under multi-agency approach set up RRB‟s in 1975. The main objective of
the RRB is to increase the local evolvement of the banks. In order to meet credit
requirements of weaker sections and marginal formers.

PROBLEMS OF RRB’S:

1. NO FREEDOM TO MAKE COMMERCIAL IMPROVEMENT:
                The policy of RRB‟S are starting in nature provides no freedom
    for any commercial improvements. RRB‟S manager had virtually no authority
    to make any strategic decision regarding its operation.

2. POOR GOVERNANCE:
                 The board of RRB‟S did not monitor their performance and had
no interest in the affairs of the bank. Further multiple ownership of RRB‟S little
prospectus for profit and diluted their accountability

3. MOUNTAIN LOAN LOSSES:
                 Despite the impressive coverage of RRB‟S, it suffered from poor
financial help, especially because of increasing loan losses and poor recovery.



4. ACTING AGAINST ITS OBJECTIVES:
                Many RRB‟S are actually showing improvement in their
performances by moving away from their objectives to serve the poor. They are
investing to rich clients. As a result, rural poor are still depending upon the
unorganized money lenders.

5. CONSUMPTION CREDIT IGNORED:
              RRB‟S are permitted to lend only for productive purpose. The
consumption credit is not allowed by RRB‟S. As a result the rural people have to
depend upon local money lender for such loans.
Suggestions by NABARD FOR RRB’S:

   o Participation of local people in the equity share capital should be allowed.
   o The activities of RRB‟s, PAC‟s and commercial banks must be
     complimentary and not competitive.
   o RRB‟s may also provide market guidance and consultancy services for the
     villagers.
   o RRB‟s should provide a wide range of services which could help a lot in
     developing banking habits among rural people.


8Q.CRITICALLY EXAMIN THE INDEGENOUS BANK FUNCTIONS?


ANS.                Indigenous banker constitutes the ancient banking system of
India. They have been carrying on their age old banking operation in different
parts of the country. They are called by different names in different areas. Such
as madras, shettys and marvadies, benal- seths and banniyas.




FUNCTIONS OF INDEGENIOUS BANKING:

1. ACCEPTING DEPOSITS:
                The indigenous bankers accept deposits from the public in two
    types.
    a) Deposit which are repayable on demand.
    b) Deposit which are repayable after a certain fixed period

2. ADVANCING LOANS:
                  Indigenous bankers advances loans to its customers against the
securities of land, gold etc..

 3. NON-BANKING FUNCTIONS:
                 The indigenous bankers carry on non banking functions with
banking activities. Simultaneously such as banking and non banking

4. BANKING IN HUNDIES:
                The indigenous bankers deal in hundies, they write sell and buy
    hundies and there by meet the financial requirement of the traders.
DEFECTS OF INDIGENOUS BANKERS:

   1. MIX BANKING & NON BANKING BUSINESS:
             These bankers generally combine banking and non banking
   business which is against the principles of sound banking.

   2. UNPRODUCTICE LOANS:
               The indigenous do not pay the attention to the purpose of loan
   and they also grand loans for unproductive purpose.

   3. DEFECTIVE LENDING:
                These bankers do not follow proper banking principles by
   granting loans. They provide loans against insufficient securities and they
   also do not distinguish between the short term and long term loans.

   4. HIGHER RATE OF INTEREST:
                These banker usually charge higher rate of interest for their
   loans. It adversely effects the inducement to invest.

    5. EXPLOITATION OF CUSTOMERS:
                 These bankers are involved in all types of malpractices and
   exploitation.



   6. REFORMS:
                The following are the important reforms for indigenous
   bankers.
      o They should be directly linked with RBI.
      o They should separate their banking and non banking business.
      o They should stop exploitation of their customers and other
         malpractices.

FEATURE OF INDEGINEOUS BANKERS:

                   The commercial banks set up their branches in rural and semi
urban areas with new technology. It was thought that these developments were
lead to sunset for indigenous bankers. But these bankers where prepared to take
the risk that could not be undertaken by the commercial banks. Further these
bankers invest without any security. Therefore the customer who does have any
thing to offer as a security has to seek indigenous bankers for the credit.
Because of these reasons the indigenous bankers are surviving yet and will have
a promising future.
9Q. EXPLAIN THE STRUCTURE OF CO-OPERATIVE CREDIT SOCIETIES?

ANS. Co-operative banking is established on the bases of mutual co-operative
like other commercial banks. Co-operative banks are counted by collecting funds
accepting deposits etc. The history of Indian co-operative banking started with
the passing of co-operative society‟s act 1904. This act was re-organized in
1912.




                       Structure of Co-operative Credit Society



Agricultural                                                      Non-Agricultural



State Co-operative Central Co-operative Primary Agricultural
Bank {SCB}           Bank {CCB}          Co-operative credit
                                         Societies {PACS}


SCB OR STATE CO-OPERATIVE BANK:
              It is the apex institution in the three tier structure of cooperative
credit society. It is operating at the state level. Every state has a state co-
operative bank. It occupies a unique position in the co-operative credit structure.

CAPITAL:
               SCB obtains capital from its own funds from RBI, its deposits and
borrowings.

FUNCTIONS OF SCB:
  o It provides a link between RBI and other co-operative societies.
  o RBI provides credit to other co-operative societies through SCB.
  o It controls supervisors and regulates the function of central co-operative
    banks.
CENTRAL CO-OPERATIVE BANKS (CCB):

                 CCB‟S are in the middle of the three-tier credit cooperative
structure. CCB‟S are of two types:

   1) Co-operative banking union whose membership is open only to co-
      operative societies.
   2) Member ship is open for both co-operative societies and individuals.

                 The main functions of CCB‟S are to provide credit assistance to
   the primary agricultural societies (PACS). This CCB will also give loan to the
   individuals for agricultural purpose against the security of immovable
   properties.

   PRIMARY AGRICULTURAL CO-OPERATIVE CREDIT SOCIETIES (PACS):

                 It forms the base in the three tier co-operative credit structure. It
   is village level institutions which directly deal with the rural people. It
   encourages savings among the rural population. It also accepts deposits and
   gives loans to the needy borrowers. It serves as the link between rural people
   and higher agencies such as CCB, SCB and RBI.

                 A “PACS” may be started with two or more persons of the same
   village. The member ship fee is nominal. So that even the poorest agriculturist
   can also become the member.


   CAPITAL OF PACS:
                The working capital of PACS comes from the deposits and
   borrowings. Further it gets the credit assistance by CCB

   LAND DEVELOPMENT BANK (LDB):

                  LDB‟S are constituted for meeting the long term financial
   requirements of the formers. These banks provide long term loans to the
   farmers for the purchase and improvement of the land. LDB was started for
   the first time in Chennai. These banks mortgage the land & give loans up to
   50% of the mortgage.
10Q. EXPLAIN THE ROLE AND PROBLEMS OF CO-OPERATIVE CREDIT
SOCIETIES?
ANS.
       ROLE OF CO-OPERATIVE CREDIT SOCIETIES:



      The role of co-operative credit societies can be discussed with the help
of following points:


1. ALTERNATIVE CREDIT SOURCES:
                The main objective of co-operative credit banking is to provide
an effective alternative to traditional defective credit system of money lenders.
These banks protect the village people from the clutches of rural money
lenders.
2. CHEAP RURAL CREDIT:
                The banks provide cheap credit to the rural people. It means
they charge low rate of interest as compared to that of money lenders.

3. PRODUCTIVE BORROWINGS:
             An important benefit of the co-operative credit system is to
bring a change in the nature of loans. These banks discourage unproductive
loans and encourage productive loans.

4. ENCOURAGE SAVINGS AND INVESTMENTS:
                These banks develop the habit of savings among the
agriculturists and thereby encourage savings and investments among rural
people.

5. IMPROVEMENT IN FARMING METHODS:
               These credit societies have greatly helped in introducing better
agricultural methods. By providing cheap credit facilities to the formers.

WEAKNESS OF CO-OPERATIVE CREDIT SOCIETIES:

1. PROBLEM OF OVER DUE:
              One of the important problems of these societies is problem of
overdue loans. It has been increasing continuously. In the year 1991 & 1992
overdue at CCB level was 41% and 39% at (PACS) village level.


2. REGIONAL DISPARITIES:
               There has been a large regional disparity in the distribution of
co-operative credit society. As a result there occurs regional disparity in the
country.
   3. BENEFIT TO THE BIG LAND OWNERS:
                    Most of the benefits from the societies have been enjoyed by
   the big land owners. The farmers of small holdings received a very less % of
   credit assistance.


11Q. EXPLAIN MICRO FINANCE?


ANS.                In India anti-poverty programs were implemented to assist the
poor and unprivileged sector of the society. Micro finance was launched by USA
for the 1st time. It got further popularity when prof. Mohammed Younus, the
founder of gramin bank of Bangladesh. Awarded noble prize for peace. The
concept of micro finance was initiated in India by NABARD & SIDBI in early
1990‟s.


Definition of micro finance:

        Micro finance refers to small savings, credit and insurance services
extended to socially and economically disadvantaged segments of the society. It
can also be defined as “provision of thrift” credit and other financial services and
products of very small amounts to the poor in rural areas, semi-urban or urban
areas for enabling them to raise their income levels and improve their standard of
leavings. In India at present a large part of micro finance activity is confined to
credit only. Majority uses of micro-finance services in our country are women.

Features of micro-finance:

     Indian micro finance sector has been making rapid progress. Some of its
features are as follows:

   o Among financial institutions banks have the highest share in linkage with
     SHG followed by RRB‟s and co-operatives
   o The no. of poor families benefited through SHG is increased from 24.3
     million as on 31st march 2005 to 32.9 million 31st march 2006.
   o Southern region of India obtains better linkages and secured highest
     loans.
   o Among the states Andhra Pradesh occupied 1 st place in terms of link age
     and credit disperse-ment.
   o SHG bank linkage model is popular and have wide geographical
     coverage. It started “NABARD” as a pilot project.
VARIOUS MODELS OF MICRO FINANCE:

   1. SHG-BANK MODEL:
                   SHG is a small voluntary association of the poor people.
Preferably from same socio- economic background. They come together for
solving their common problems through mutual help. It promotes small savings
among the members. This common fund is maintained in name of SHG. This
model can be further classified into three groups.

   a) SHG BANK LINKAGE MODEL-1:
                   Banks them self take up the work of forming the SHG‟s.
   Their savings bank accounts and providing them bank loans.

   b) SHG BANK LINKAGE MODEL-2:
                   In this model SHG‟s are formed by NGO‟S but directly
   financed by banks.

   c) SHG BANK LINKAGE MODEL-3:

                 In this model SHG‟S are financed by banks through NGO‟S and
other intermediaries.




12Q. EXPLAIN THE ROLE OF NABARD?

ANS. 27 years ago on July 12, 1982 by an act of parliament NABARD came into
existence. Its basic objective is providing focused and undivided attention to the
development of rural areas which was a crucial necessity for economic progress.
NABARD has 28 regional offices at the state capital, a sub office at port Blair and
376 districts development offices.

                  NABARD refinances through commercial banks, cooperative
banks and regional rural banks. In other words „NABARD‟ is involved in indirect
finance. It promotes loans for minor irrigation, animal husbandry, fisheries,
handy-crafts etc.


 INNOVATIONS BY NABARD:
                   NABARD has efficiently brought a number of innovations in
rural credit domain they are:

 1. PROMOTION OF SELF HELP GROUP:
                       It is a homogeneous group of poor framed to overcome their
   financial difficulties. It was introduced in 1992 in 500 cities. Under this scheme
   3.3 corers of Indian hose holds were covered during 2005-2006.

 2. FARMERS CLUB:
                  It was introduced with a view to bring about co-operative and
   mutual help among farmers.

 3. RURAL INFRA-STRUCTURE DEVELOPMENT FUNDS:
                  This project helped in development of rural areas. Till the end
   of 2005-2006 NABARD sanctioned RS.51283 crores loans under this RIDF. It
   has a separate window for villages whose population is less than 500.

 4. WATER SHED DEVELOPMENT:
                     It was established in the year 1999-2000 with an initial
   capital of Rs. 200 crores. Now it is covering 124 districts and 14 states.

 5. ATTRACTING YOUTH TO NON-FARM SECTOR:
                     In this regard NABARD introduced several schemes for
   rural artisans crafts-men and women to help self employment association.
   NABARD arranges exhibitions to increase the marketing of their products.

 6. RURAL ENTREPRENEUR SHIP DEVELOPMENT:
                    It is a programme supported by NABARD to motivate and
   train educated unemployed rural youth. So far more than 2 lacks individuals
   have been trained under this program.


   CONCLUSION:
                      In these 27 years of its journey NABARD has been making
   silent in roads in the fields of rural life. It also made its reputation in the battle
   against poverty. Its role in agricultural sector is significant one.




13Q. Explain SIDBI ?

       Small Industries Development Bank of India was established as wholly
owned subsidiary of industrial development bank of India . Under the small
industries development if India Act, 1989, it is the principal institution for
promotion, financing and development of industries in the small scale sector. It
also co-ordinates the functions of institutions engaged in similar activities. For
the purpose SIDBI has taken over the responsibilities of administering and
National equity fund from IDBI.

CAPITAL:
       SIDBI started its operations from April 1990 with an initial authorized
capital of Rs.250 Crores, which Rs.100,000 Crores. It also took over the
outstanding portfolio of IDBI relating to small scale sector held under small
Industries Development Fund as on March 31, 1990 worth over Rs. 4000 Crores.

OBJECTIVES:

        In the setting up of SIDBI the main purpose of the government was to
ensure larger flow of assistance to the small scale units. To meet this objective,
the immediate thrust of the SIDBI was on the following measures:

       1. Initiating steps for technological upgradation and and modernization of
       existing units;
       2. Expanding the channels for marketing the products of the small scale
       sector;
       3 .Promotion of employment-oriented industries, especially in semi-urban
       areas
       4 .To create more employment opportunities and thereby checking
       migration of population to urban areas.

FUNCTIONS:

       SIDBI provides assistance to the SSI sector in the country through the
existing banking and other financial institutions, such as SFC, SIDC, Commercial
Banks, Co-operative banks and RRB‟s etc., The major functions of SIDBI are
given below:

1. It refinances loans and advances provided by the existing lending institutions
to the Small Scale Units.

2. It discounts bills arising from sale of machinery to and manufactured by SSI
units.

3. It extends seeds Capital/Soft loan assistance under National Equity Fund,
Mahila Udyam Nidhi and Mahila Vikas and Seeds Capital Schemes.
4. It extends financial support to state small industries corporations for providing
scarce raw materials to and marketing the products of the small scale units.

5. It provides services like factoring, leasing, etc to small units.
6. It extends financial support to state small industries corporations for providing
scarce raw materials for marketing.

7. It extends financial support to State small industries corporations for providing
leasing, hire purchases and marketing support to industrial units and small scale
sector.

8. Another programme is providing financial assistance to integrated
infrastructure development centres scheme of the union ministry of small
industries.

9. It has been operating single window scheme to cover units in identified areas.

10. It also provides refinance under Automatic Refinance Scheme.

11. It also set up venture capital fund to assist entrepreneurs.


Q14. Explain State Finance Corporation.

Ans. The Industrial Finance Corporation provides financial assistance to large
public limited companies and cooperative societies and does not cover the small
and medium seized industries. In order to meet the varied financial needs of
small and medium sized industries, the Government of India passed the State
Finance Corporations Act in 1951 which empower state Government to establish
such corporation in their states. The first state finance corporation was set up in
Punjab in 1953. At present, there are 18 SFCs operating in the country.

FUNCTIONS:
Various functiond smd types of financial assistance to be provided by the SFCs
are given below:

                    The SFCs have been established to provide long term
                     finance to small scale and medium- sized industrial concerns
                     organized as public or private companies, corporations,
                     partnership or proprietary concerns.
                    The SFCs extend loans & advances to the industrial
                     concerns repayable within a period of 20 years.
                    The SFCs gurantee loans raised by the industrial concerns
                     in the market or from scheduled or co-operative banks and
                     repayable within 20 days.
                    The SFCs subscribe to the debenture of the industrial
                     concerns repayable within a period of 20 years.
                    The SFCs guarantee loans raised by the industrial concerns
                     from schedule or co-operative banks & repayable within 20
                     years.
                    The SFCs underwrite the issue of stocks, shares, bonds &
                     debenture by industrial concerns.
                    The SFCs guarantee the deferred payments for the
                     purchase of plant, machinery etc., within the country.
                    The SFCs are probihited from subscribing directly to the
                     shares or stock of any company having limited liability,
                     except for underwriting purposes, and granting any loan or
                     advance on the security of own shares.
                    The SFCs can act as agent of the central or state
                     government or some industrial financing institution for
                     sanctioning & disbursing loans to small industries.




CAPITAL:
     The capital resources of the SFCs include:
                Share capital & reserves
                Bonds & Debentures
                Borrowing from the Reserve Bank, the state Govts,
                Finance from industrial Development Bank of India, and
                   Deposits.

Features:


       The SFCs were set up with the objective of providing financial assistance
to small as well as medium industrial concerns. Though there has been a
notable rise in the overall financial assistance, the performance in individual
corporation differed largely due to the attitudes & motivation of the local
entrepreneurs in different states
       .
Prior to 1966, the SFCs showed preference for medium industries. But, now
there has been a marked shift in their lending policies in favour of the small units.
In 1985-86, the share of small units in the total loans sanctioned was 82%.
In order to encourage self employment, the SFCs have formulated schemes of
assistance to technician entrepreneurs.


Major beneficiaries of the financial assistance of the SFCs have been the food
processing , service sector, chemicals textiles, etc.,
A special features of the lending operations of SFCs has been the provision of
finance to industrial concerns of backward areas. In 1985-86 the share of
backward areas in the total assistance sanctioned by the SFCs was 53%.
The SFCs provide concessional assistance to the industrial units located in
backward areas in terms of soft loans at concessional rates, lower margins,
reduced service charges etc.,

CRITICISM:

        The actual performance of the SFCs has been criticized mainly because
of the following defects & inadequancies:
     The financial resources of the SFCs are inadequate. Moreover they face
        the difficulty of finding funds.
     The SFCs have not been able to provided adequate financial assistance
        to meet the requirements of small & medium industries.
     The SFCs charge very high interest rates on all the loans other than the
        soft loans. Moreover, the terms & conditions of assistance are also
        hard.There is also a shortage of technical personnel for judging the
        soundness of the proposed schemes of the borrowing units.
     The SFCs lack self-sufficient organizational set up along with adequate
        specialized & trained staff for ensuring their efficient functioning.
     Many difficulties are faced by the SFCs while extending financial
        assistance to the small industrial units.
     The SFCs also face the serious problems of increasing magnitude of
        overdues.        The main reasons for overdues are delays in the
        implementation of projects & industrial sickness.

SHORT NOTES:

PRIORITY SECTOR LENDING:

       Introducing priority sector lendings is the most successful and adventures
decision of Government of India. India is an agricultural country. Inspite of its
economic significance it is completely neglected by the commercial banks.
These commercial banks are providing the credit assistance exclusively to the
corporate sector.     Thus, after the introduction of economic planning the
Government of India launched so many programmes for priority sector lending.
Priority sector is a sector for which priority is given in offering financial services
by the banks.    Under this programme loans are given to the weaker sections,
small and marginal farmers, to small and cottage industries, professionals and
self employed people in rural areas.

				
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