Functions and Credit Control

Prof. Hanumant Yadav

HNLU

Prof. H. Yadav

Prof. H. Yadav

Indian Financial System consists of financial

markets, financial intermediation and financial
instruments.
In other words a Indian Financial System is a
composition of various institutions, markets,
regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
A financial system or financial sector functions as
an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit.

Prof. H. Yadav

A Financial Market can be defined as the

market in which financial assets are created or
transferred.
Money Market- The money market is a
wholesale debt market for low-risk,
highly-liquid, short-term instrument.
Capital markets are financial market for the
buying and selling of long-term debt or equity
backed securities.

Prof. H. Yadav

Capital markets channel the wealth of savers to those

who can put it to long-term productive use, such as
companies or governments making long-term
investments.
Based on the nature of capital, there are two types
of capital markets : (i) Debt market (ii) Equity markets.
Loan Capital is provided by the financial
institutions.
Equity capital is raised by Opening issues or Primary issues of
shares or stock. Companies are required to be listed in
the Stock Exchange before raising equity capital
by Issuing shares for subscription.
Prof. H. Yadav

There are 3 components of Indian Capital Market :

1) Financial Institutions :

a) All India Financial Instituitons : IFCI, IDBI, ICICI,

SIDBI, EXIM Bank, NABARD,
b) Investment Institutions : UTI, LIC, GIC.
c) State level Financial Institutions : State Finance
Corporations, State Industries Development
Corporations,
2) Banking Industry
3). Security Market : Debt and Security Market

Prof. H. Yadav

Subscribed shares are traded in the stock market

known as secondary market.
The traded value of equities in the secondary market
depict of capitalization .
There are 22 stock exchanges in India.
Bombay Stock Exchange is largest stock market
in India followed by National Stock Exchange,.

Prof. H. Yadav

After Independence capital market has shown a

remarkable progress.
The first organized stock exchange was
established in India at Bombay in 1887.
When the Securities Contracts (Regulation) Act
1956 was passed, only 7 Stock exchanges Viz.
Mumbai, Ahmedabad, Kolkata, Chennai, Delhi, Hyderabad
and Indore, received recognition.
By end of March 2011, the number of stock
exchanges increased to 22.

Prof. H. Yadav

1.

2.
3.
4.
5.
6.

7.
8.

Mobilisation Of Savings And Acceleration Of

Capital Formation
Raising Long - Term Capital
Promotion Of Industrial Growth
Ready And Continuous Market
Technical Assistance
Reliable Guide To Performance of Corporate
sector
Proper Channelisation Of Funds
Development Of Backward Areas

Prof. H. Yadav

Prof. H. Yadav

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1) Growth Of Development Banks And Financial

Institutions : IFCI, IDBI, ICICI, IRCI,
2) Setting Up Of The Securities Exchange Board
of India (SEBI) in 1988
3) Credit Rating Agencies :
Credit rating agencies provide guidance to investors / creditors
for determining the credit risk. The Credit Rating
Information Services of India Limited (CRISIL) was
set up in 1988 and Investment Information and
Credit Rating Agency of India Ltd. (ICRA) was set
up in 1991.

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4) Growth Of Mutual Funds :

5) Increasing

Awareness

( News papers & TV

Channels)
6) Growing Public Confidence
7) Legislative Measures :8) Growth Of Underwriting Business
9) Growth Of Multinationals (MNCs)
10)Growth Of Entrepreneurs
11)Growth Of Merchant Banking ( Grindlays
Bank 1967, Citi Bank 1970) Management
of capital issues
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SECURITIES AND EXCHANGE BOARD OF INDIA

(SEBI) was established as a non-statutory board in
1988 and in January 1992 it was made a Statutory
body.
The main objectives of SEBI are
1) To protect the interest of investors.
2) To bring professionalism in the working of
intermediaries in capital markets (brokers, mutual
funds, stock exchanges, demat depositories etc.).
3) To create a good financial climate, so that
companies can raise long term funds through issue
of securities (shares and debentures
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In 2002, SEBI is further empowered to do the following:-

1. To file complaints in courts and to notify its

regulations without prior approval of
government.
2. To regulate issue of capital and transfer of
securities.
3. To impose monetary penalties on various
intermediaries and other participants for a
specified range of violations.
4. To issue direction to and to call for documents
from all intermediaries

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Banking denotes banking transactions i.e.

accepting deposits, lending money, credit
and other transactions.
From public point of view banking means
transacting with a bank by depositing and
withdrawing money, and borrowing loan
and utilizing services of a bank.
Transacting with a bank is banking.
Functions of the commercial banks is
banking.
Banking is what bank does.

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According to Banking Companies Act 1949,

A Bank is an institution whose

business is the accepting, for the purpose

of lending or investment, of deposits of
money from the public, repayable on
demand or otherwise, and withdrawable
by cheque, draft or otherwise.

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Modern banking history is usually traced back

to sixteenth century with the establishment of
London Royal Exchange in 1565.
At that time moneychangers were already called
bankers, though the term bank" usually referred
to their offices, and did not carry the meaning it
does today.
There was also a hierarchical order among
professionals; at the top were the bankers who
did business with heads of state, next were the
city exchanges, and at the bottom were the pawn
shops or Lombards.

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Banking in India originated in the last decades of

the 18th century.
The first banks were The General Bank of India
which started in 1786, and the Bank of
Hindustan, both of which are now defunct.
The oldest bank in existence in India is the State
Bank of India, which originated in the Bank of
Calcutta in June 1806, which became the Bank
of Bengal in 1809.
This was one of the three presidency banks.

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The East India Company established Bank of

Bengal (1809), Bank of Bombay (1840) and
Bank of Madras (1843) as independent units
and called it Presidency Banks.
. For many years the Presidency banks acted as
quasi-central banks, as did their successors.
These three banks were amalgamated in 1920
and Imperial Bank of India was established
which started as private shareholders banks,
mostly Europeans shareholders.

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In 1865 Allahabad Bank was established

and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with
headquarters at Lahore.
Between 1906 and 1913, Bank of India,
Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of
Mysore were set up.
Reserve Bank of India came in 1935.
After Independence the Imperial Bank of
India has become State Bank of India.

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The growth of banking till 1948 was very

slow and banks also experienced periodic
failures also.
There were approximately 1100 banks,
mostly small.
To streamline the functioning and activities
of commercial banks, the Government of
India came up with The Banking Companies
Act, 1949 which was later changed to
Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965).

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Reserve Bank of India is vested with

extensive powers for the supervision of
banking in India as the Central Banking
Authority.

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Government took major steps in this Indian

Banking Sector Reform after independence.
In 1955, it nationalised Imperial Bank of India
with extensive banking facilities on a large
scale specially in rural and semi-urban areas.
It formed State Bank of india to act as the
principal agent of RBI and to handle banking
transactions of the Union and State
Governments all over the country.

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Seven banks forming subsidiary of State

Bank of India were nationalised in 1960.
on 19th July, 1969, 14 major commercial
banks in the country were nationalised.
Second phase of nationalisation Indian
Banking Sector Reform was carried out in
1980 with seven more banks. This step
brought 80% of the banking segment in
India under Government ownership.

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The following are the steps taken by the

Government of India to Regulate Banking
Institutions in the Country:
1949 : Enactment of Banking Regulation Act.
1955 : Nationalisation of State Bank of India.
1959 : Nationalisation of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with
deposits over 200 crore.

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The country is flooded with foreign banks

and their ATM stations.
Efforts are being put to give a satisfactory
service to customers.
Phone banking and net banking is
introduced.
The entire system became more convenient
and swift.
Time is given more importance than money.

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 Commercial

banks provide Composite

loans
( Long-term & short-term
loans) to SSI units
( both
manufacturing and service units)
The number of commercial banks is
298 with 69,600 branches.
The number of Regional Rural Banks is
196 sponsored by nationalised
commercial banks.
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The Central Bank creates credit by

advancing loans to Government and banks.
As a matter of fact entire banking system
creates credit. Credit creation depends on
the number and quantity of its deposits.
Method of Credit Creation :
1-Granting of loans,
2-Overdraft facilities,
3- Discounting of bills,
4- Purchase of government bonds and
securities.

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Credit Control means controlling the

lending policy of commercial banks by the
Central Bank.
Central Bank adopts quantitative and
qualitative methods to control credit
Quantitative methods aim at controlling
the cost and quantity of credit,
Qualitative method aim at controlling the
use and direction of credit.

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1. Stabilization

of Internal Price level

2. Stabilization of Rate of Foreign Exchange
3. Protection of outflow of gold
4. Control of Business Cycles
5. Meeting of Business Needs
6. Growth of Economy with stability

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Methods of Credit Control

1.

General or Qualitative Credit

Control

General or Quantitative methods aim

at controlling the cost and quantity
of credit,
I - Bank Rate or Discount Rate policy
Bank rate is discount rate of bills
and government securities held by
the commercial banks. Credit is
controlled by lowering and
increasing the bank rate.
The market lending rates of
commercial bank changes with
change in bank rate.
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II Open Market Operations

Selling and purchasing of securities and
bonds of Govt. and financial Institutions.
Central bank
sells the securities to check the
expansion of credit and inflationary trend
and purchases to check recessionary
trend.
III - Variable Reserve Ratio:
Banks are required to maintain Statutory
Liquidity Ratio (SLR) with them and
maintain a minimum amount or
percentage of fixed deposits (Reserve
Ratio) with RBI.
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2.

Qualitative or Selective Credit Control

a) Regulation of Margin Requirement
b) Regulation of Consumer Credit
c) Rationing of Credit
d) Direct Action
e) Moral persuasion
f) Publicity

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1.
2.
3.
4.
5.
6.

Creation and Expansion of Financial

Institutions
Proper Adjustment between Demand and
Supply of Money
A suitable Interest Rate Policy
Debt management
Credit Control
Solving the Balance of Payment problems

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COMMERCIAL

BANKS

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According to Banking Companies Act

1949,
A commercial Bank is an
institution whose business is the
accepting, for the purpose of lending or
investment, of deposits of money from the
public, repayable on demand or otherwise,
and withdrawable by cheque, draft or
otherwise.
Banking has been defined as functions of
banking.
Banking is what bank does.

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1.
2.

3.

Accepting deposits : Bank offer different types

of schemes to attract deposits.
Credit Creation : Commercial bank create credit
by lending more money than they have with
them as cash deposit.
Advancing loans and Making investments :
Money at call : the loan can be called at very
short notice.
Over-draft : Permitting to overdraw from current
account up to an agreed limit.
Bill discounting
Cash Credits
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4. Agency Services : Commercial banks act

as agent of the customers. They provide
following agency services :
Remittance of funds
Collections and payment of dividends,
bills, cheques, etc.
Sale and purchase of securities
Representation and correspondence
Trusteeship : Bank act as attorneys,
executors and trustee of customers.

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5. General Utility services to customers:

Letter of credit facilities

Locker facilities
Referee facilities
Travellers cheques and bank drafts
Underwriting of shares and bonds
Collection of statistical information

6.

Social functions:

Serving of backward areas, weaker sections of

society, promotion of entrepreneurship,
controlling of speculation activities,

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Branch banking is a decetralised banking

system in which each commercial bank is
very large institution having a large
number of branches all over the country.
This system is very popular in the UK,
India, Canada, Australia, South Africa, etc,
UNIT Banking : Under this system each
town has its own bank which carries its
operations from a single office. This
system originated in the USA.
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Paid up Capital : Initial capital by issuing

shares
Reserve Fund : It is that portion of the
profits of a bank which is not distributed
among its share holders as dividends.
Deposits : Deposits from customers
Borrowings : Borrowing from Central Bank

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1.
2.
3.
4.
5.
6.

Cash Reserves : necessary for liquidity

Dead stock : Fixed assets
Call loans : Short notice loans
Discounting of bills
Loans and Advances to cusotmers
Investments in securities

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Share Capital of the Bank

Reserve Fund
Deposits : Time, Demand and Savings
Borrowing from other banks
Acceptance, endorsements on account of
customers
Bank premises

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1. Cash in Hand and with Central banks

2.
Money at call with short notice
3.
Bills discounted including treasury bills
4.
Investments in securities.
5.
Advances against mortgaged assets
6.
Liabilities of customers for acceptances,
endorsements, etc.

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The Reserve Bank of India (RBI) was set up

in 1935 (by the RBI Act) as a private bank
with two extra functions regulation and
control of their banks in India and being the
banker of the Government.
After nationalization in 1949, RBI emerged
as the central banking body of India.
Reserve bank is banker and advisor of the
Government.
It has monopoly of Note Issue.

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Traditional Functions :
1. Monopoly of Note Issue : In terms of Section 22
of the Reserve Bank of India Act, the RBI has been
given the statutory function of note issue on a
monopoly basis.
Banker to the Government : The RBI acts as
banker to the Government under Section 20 of RBI
Act. Section 21 provides that Government should
entrust its money remittance, exchange and
banking transactions in India to RBI.
Under Section 21A RBI has to conduct similar
transactions for State Governments also.

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Prof. H. Yadav

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Indian Financial System consists of financial

markets, financial intermediation and financial
instruments.
In other words a Indian Financial System is a
composition of various institutions, markets,
regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
A financial system or financial sector functions as
an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit.
A Financial Market can be defined as the market in
which financial assets are created or transferred.
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A Financial Market can be defined as the market in

which financial assets are created or transferred.
Money Market- The money market is a wholesale
debt market for low-risk, highly-liquid, short-term
instrument.
Capital Market

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Prof. H. Yadav

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Prof. H. Yadav

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Portfolio management is arranging assets

and liabilities in its quest for liquidity,
solvency and income.
LIQUIDITY : Liquidity is the capacity of bank
to produce cash in demand.
SOLVENCY : Solvency is the capacity of
keeping the realisable value of its assets
equal to the value of liabilities over the
long run.
PROFITABILITY : Commercial banks are
profit maximising firms, hence after
meeting the needs of liquidity and
solvency, they must try to maxiise their
income by minimising their variable costs.
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