CHAPTER-2

BANKING INSTITUTIONS

1. COMMERCIAL BANKS: The term “commercial bank” refers to a financial institution

that accepts deposits, offers checking account services, makes various loans, and offers
basic financial products like certificates of deposit (CDs) and savings accounts to
individuals and small businesses.
FUNCTIONS OF A COMMERCIAL BANK:
A. PRIMARY FUNCTIONS: IT IS ALSO KNOWN AS ACID TEST FUNCTIONS
1. ACCEPTANCE OF DEPOSITS: Those who have excess of money over their
consumption needs keep it with their banks. To attract deposits from all the
sectors of the society, a bank provides different types of accounts. They can be:
a. Fixed deposit accounts: it is an account where money is deposited for a fixed
period of time. The deposited money cannot be withdrawn before the expiry
of the period. The rate of interest paid on this account is higher as compared to
other accounts. The longer the period of deposit, the higher is the rate of
interest.
b. Savings bank deposit: this type of a/c is provided to encourage savings of
households. Money on this a/cs can be deposited any number of times
however there are restriction on withdrawals.
c. Current account: money in this a/c can be deposited and withdrawn any
number of times but generally no interest is paid on this account because the
banker has to keep the cash ready all the times to meet the requirements of the
depositors
2. Provides loan and advances : Another critical function of this bank is to offer
loans and advances to the entrepreneurs and business people, and collect interest.
For every bank, it is the primary source of making profits. In this process, a bank
retains a small number of deposits as a reserve and offers (lends) the remaining
amount to the borrowers in demand loans, overdraft, cash credit, short-run loans,
and more such banks.
3. Investment of funds: Besides loans and advances, a bank also invest a part of its
funds in government and industrial securities. Banks purchase both government
 and industrial securities like govt promissory notes, govt. bills, shares, debentures
etc.
B. SECONDARY FUNCTIONS
1. AGENCY FUNCTIONS: THESE ARE PERFORMED BY THR BANKERS
FOR ITS OWN CUSTOMERS. THEY INCLUDE THE FOLLOWING:
a. Remittance of funds: Banks help their customers in transferring of funds
from one place to another.

b. Providing locker Facilities – Commercial banks provide locker facilities to

customers who want to store valuables safely. Locker facilities eliminate the
impending risk of theft or loss, which prevail when kept at home.

c. 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.
d. 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.

FINANCIAL INCLUSION

Financial Inclusion is described as the method of offering banking and financial solutions and
services to every individual in the society without any form of discrimination. It primarily aims
to include everybody in the society by giving them basic financial services without looking at a
person’s income or savings. Financial inclusion chiefly focuses on providing reliable financial
solutions to the economically underprivileged sections of the society without having any unfair
treatment. It intends to provide financial solutions without any signs of inequality. It is also
committed to being transparent while offering financial assistance without any hidden
transactions or costs.

Financial inclusion wants everybody in the society to be involved and participate in financial
management judiciously. There are many poor households in India that do not have any access to
financial services in the country. They are not aware of banks and their functions. Even if they
are aware of banks, many of the poor people do not have the access to get services from banks.

They may not meet minimum eligibility criteria laid by banks and hence, they will not be able to
secure a bank’s services. Banks have requirements such as minimum income, minimum credit
score, age criteria, and minimum years of work experience. A bank will provide a deposit or a
loan to an applicant only if he or she meets these criteria. Many of the poor people may be
unemployed without any previous employment record due to lack of education, lack of
resources, lack of money, etc.

These economically underprivileged people of the society may also not have proper documents
to provide to the banks for verification of identity or income. Every bank has certain mandatory
documents that need to be furnished during a loan application process or during a bank account
creation process. Many of these people do not have knowledge about the importance of these
documents. They also do not have access to apply for government-sanctioned documents.

Financial inclusion aims to eliminate these barriers and provide economically priced financial
services to the less fortunate sections of the society so that they can be financially independent
without depending on charity or other means of getting funds that are actually not sustainable.
Financial inclusion also intends to spread awareness about financial services and financial
management among people of the society. Moreover, it wants to develop formal and systematic
credit avenues for the poor people.

For several years, only the middle and high classes of the society procured formal types of credit.
Poor people were forced to rely on unorganised and informal forms of credit. Many of them were
uneducated and did not have basic knowledge about finance and hence, they got cheated by the
greedy and rich people of the society. Several poor people have been exploited for years in the
context of financial assistance.

Financial Inclusion Schemes in India

The Government of India has been introducing several exclusive schemes for the purpose of
financial inclusion. These schemes intend to provide social security to the less fortunate sections
of the society. After a lot of planning and research by several financial experts and policymakers,
 the government launched schemes keeping financial inclusion in mind. These schemes have been
launched over different years. Let us take a list of the financial inclusion schemes in the country:

 Pradhan Mantri Jan Dhan Yojana (PMJDY)

 Atal Pension Yojana (APY)
 Pradhan Mantri Vaya Vandana Yojana (PMVVY)
 Stand Up India Scheme
 Pradhan Mantri Mudra Yojana (PMMY)
 Pradhan Mantri Suraksha Bima Yojana (PMSBY)
 Sukanya Samriddhi Yojana
 Jeevan Suraksha Bandhan Yojana
 Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)
 Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives
 Varishtha Pension Bima Yojana (VPBY)

Objectives of Financial Inclusion

 Financial inclusion intends to help people secure financial services and products at economical
prices such as deposits, fund transfer services, loans, insurance, payment services, etc.
 It aims to establish proper financial institutions to cater to the needs of the poor people. These
institutions should have clear-cut regulations and should maintain high standards that are
existent in the financial industry.
 Financial inclusion aims to build and maintain financial sustainability so that the less fortunate
people have a certainty of funds which they struggle to have.
 Financial inclusion also intends to have numerous institutions that offer affordable financial
assistance so that there is sufficient competition so that clients have a lot of options to choose
from. There are traditional banking options in the market. However, the number of institutions
that offer inexpensive financial products and services is very minimal.
 Financial inclusion intends to increase awareness about the benefits of financial services
among the economically underprivileged sections of the society.
NON-BANKING FINANCiAL COMPANIES

The full form of NBFC is the Non-Banking Financial Companies. It relates to assets
institutions providing financial services without the need for a banking licence. Such entities are
registered under the Companies Act, 1956 and, as specified under Section 45-IA of the RBI Act,
1934, do operation as a non-banking financial institution. It particularly means the following:

 An NBFC is primarily involved in the business of loans, stocks, equity acquisition,

insurance business, government-issued bonds,

 An organization whose principal business is linked to agriculture, sale, purchase or

construction of immovable property, industrial production, sale and so on.
 The key difference among NBFC & the bank in which we can withdraw or deposit cash
in a bank when we require it, but NBFC does not allow withdrawals or deposit cash when
it is necessary.

Few examples of NBFC

 Housing finance firms regulated by the National Housing Bank (NHB).

 Stockbroking companies, merchant banking companies, SEBI controlled venture
capital finances
 DIFFERENCES BETWEEN NBFC AND BANK

BASIS NBFC BANK

Meaning An NBFC is a company that Bank is a government
provides banking services to authorized financial
people without holding a intermediary that aims at
bank license. providing banking services
to the general public.

Incorporated under Companies Act 1956 Banking Regulation Act,

1949
DEMAND DEPOSIT Not Accepted Accepted

Foreign Investment Allowed up to 100% Allowed up to 74% for

private sector banks
Payment and Settlement Not a part of system. Integral part of the system.
system
Maintenance of Reserve Not required Compulsory
Ratios
Deposit insurance facility Not available Available

Credit creation NBFC do not create credit. Banks create credit.

Transaction services Not provided by NBFC. Provided by banks.