Unit - 1

Introduction to Indian
Banking System.
Definition of Bank:
A Bank is a financial organization which
accept deposit and withdrawal on demand
and also lend money to individual and
business organisation.
History of Banking in India:
In the early part of 20th century , an account of Swadeshi
movement a number of Jointed Stock Banks were established by
Indian’s
1. Bank of India [BOI]
2. Bank of Baroda [BOB]
3. Central Bank of India [CBI]
First Bank in India was Bank of Hindustan was established
in 1770 and liquidated in 1829-32.
Presidency Banks:
• These banks were funded by the presidency
government at that time. There are three presidency banks .
They are
1. Bank of Bengal- Established in 1806.
2. Bank of Bombay - Established in 1840.
3. Bank of Madras - Established in 1843.
• The Bank of Calcutta was renamed as Bank of Bengal ,
which was established on 2nd June 1806
• The General Bank of India established in 1786 and failed in 1791. The
Longest Bank and Oldest Bank still is existence.

• RBI is the Central Bank of India . RBI was established on April

1,1935 under RBI Act , 1934.

• In 1921, 3 presidency Banks were merged and imperial Bank was

created . During the period of 1900-1925 many Banks failed and the
Government appointed in 1929 , a Central Bank Enquiry Committee
to trace the reason for the failure of the Bank.
• The Banking Regulation Act , 1949 gave wider powers to RBI to
Act as Regulator for Banks in India.

• In 1955, SBI begin the successor to the imperial Bank of India under
the State Bank of India Act , 1955.

• In 1959, SBI Act was passed to enable to take over State Associated
Banks as SBI subsidiaries.

• In July 19, 1969 The Government of India (GOI) nationalized 14

major Commercial Banks having deposits of 15crores or more.
•
• In 1975, RRBs ( Regional Rural Banks ) were established under
RRBs Act, which was preceded by RRB ordinance in 1975.

• In 1980, 6 more Commercial Banks were nationalized with

deposits of Rs200 crores or more.
 Structure of Indian Banking System
RBI (Reserve Bank of India) Apex body

Scheduled Banks Non - Scheduled Banks Development Banks

IFCI
Commercial Cooperative
IDBI
Banks Banks
SIDBI
Urban Cooperative Banks EXIM
Public Sector Banks Rural Cooperative Banks
Private Sector Banks NABARD
State Central Cooperative Banks
Foreign Banks District Central Cooperative Banks
RRBs ( Regional Primary Agricultural Societies
Rural Banks )
Reserve Bank of India ( RBI ) :
• The Reserve Bank of India was established on April 1, 1935 in
accordance with the provisions of the Reserve Bank of India Act,
1934.

• The Central Office of the Reserve Bank was initially established in

Calcutta but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated.

• Though originally privately owned, since nationalisation in 1949, the

Reserve Bank is fully owned by the Government of India.
• The Reserve Bank's affairs are governed by a central board of
directors. The board is appointed by the Government of India in
keeping with the Reserve Bank of India Act.
• Appointed/nominated for a period of four years
Constitution.
Official Directors:
• Full-time: Governor and not more than four Deputy Governors.
Non-Official Directors:
• Nominated by Government: ten Directors from various
fields and two government Official.
• Others: four Directors - one each from four local boards
Key functions of RBI are:
Banker’s bank,
The custodian of foreign reserve.
Controller of credit and to manage printing and
Supply of currency notes in the country.
• Reserve Bank of India (RBI) is the central bank of the country. RBI is a
statutory body. It is responsible for the printing of currency notes and
managing the supply of money in the Indian economy.
• Initially, the ownership of almost all the share capital was in the hands of non-
government shareholders. So in order to prevent the centralisation of the
shares in few hands, the RBI was nationalised on January 1, 1949.
 Preamble:
The Preamble of the Reserve Bank of India describes the basic
functions of the Reserve Bank as:

“To regulate the issue of Bank notes and keeping of reserves with a view
to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage; to have a
modern monetary policy framework to meet the challenge of an
increasingly complex economy, to maintain price stability while keeping
in mind the objective of growth."
Functions of RBI:
• Formulates, implements and monitors the monetary policy.
• Prescribes broad parameters of banking operations within which
the country's banking and
• Financial system functions.
• Manages the Foreign Exchange Management Act, 1999.
 Issues and exchanges or destroys currency and coins
not fit for circulation.
Eg: On Nov 2016, the Government of India
announced the demonstration of all Rs500 and
Rs1,000 bank notes of the Mahatma Gandhi Series.
In 1946, the currency note of Rs 1,000 and
Rs10,000 were removed from circulation .Both the
notes were reintroduced in 1954 with an additional
introduction of Rs5,000 currency.
 • Banker to the Government: performs
merchant banking function for the central and
the state governments; also acts as their banker.
• Banker to banks: maintains banking
accounts of all scheduled banks.
Objectives of RBI:
∆ To manage the monetary and credit system of
the country.
∆ To stabilizes internal and external value of
rupee.
∆ For balanced and systematic development of
banking in the country.
∆ For the development of organized money
market in the country.
∆ For proper arrangement of agriculture
finance. For proper arrangement of industrial finance.
 ∆ For proper management of public debts.
∆ To establish monetary relations with
other countries of the world and international financial
institutions.
∆ For centralization of cash reserves of
commercial banks.
∆ To maintain balance between the
demand and supply of currency.
Regional office:
 Subsidiary of RBI:
✓ A subsidiary company is an organization that is
owned or controlled by any other company. Following are the Fully
Owned subsidiaries of RBI:
● Deposit Insurance and Credit Guarantee Corporation of India
(DICGC)
● Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
● Reserve Bank Information Technology Private Limited (ReBIT)
● Indian Financial Technology and Allied Services (IFTAS)
RBI
ORGANISATION
STRUCTURE :
Functions of RBI (Reserve Bank of India) | Finance &
Management
♦ The central bank of India, RBI is also regarded as
a bank of banks owing to the functions of RBI. It was
established on April 1, 1935, under the Reserve Bank of India
Act, 1934. In the beginning, the headquarters of RBI was
established in Calcutta. However, soon after, in 1937, it was
permanently shifted to Mumbai.
♦ As of October 2021, the Governor of the Reserve
Bank of India is Mr Shaktikanta Das. He is the 25th RBI
Governor and all the RBI functions are supervised by him.
Interesting Facts About Reserve Bank of India (RBI)

♦The first Governor of RBI was Osborne Smith.

♦The first Indian governor of RBI was C D Deshmukh.
♦Originally, the Reserve Bank of India was privately
owned; and was established as a private bank with two
extra functions: the regulation and control of all banks in
India, and to be the banker to the then government.
♦Since its nationalization in 1949, RBI has been
wholly owned by the Government of India and thus, some
new roles were added to the list of functions of RBI!
Main Function of RBI:
1. Issue of Notes:
The Reserve Bank has a monopoly for printing the
currency notes in the country. It has the sole right to issue currency
notes of various denominations except one rupee note (which is
issued by the Ministry of Finance).
The Reserve Bank acts as the only source of legal tender
money because the one rupee note issued by Ministry of Finance is
also circulated through it.
The Reserve Bank has adopted the Minimum Reserve
System for issuing/printing the currency notes. Since 1957, it maintains
gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs.
115 cr. should be in gold and remaining in the foreign currencies.
2. Banker to the Government:
The second important function of the Reserve Bank is to act as
the Banker, Agent and Adviser to the Government of India and states.
It performs all the banking functions of the State and Central
Government and it also tenders useful advice to the government on
matters related to economic and monetary policy.
It also manages the public debt of the government.
3. Banker’s Bank:
The Reserve Bank performs the same functions for the
other commercial banks as the other banks ordinarily perform for
their customers.
RBI lends money to all the commercial banks of the
country.
4. Controller of the Credit:
The RBI undertakes the responsibility of controlling credit
created by commercial banks.
RBI uses two methods to control the extra flow of money in
the economy.
These methods are quantitative and qualitative techniques
to control and regulate the credit flow in the country.
5. Custodian of Foreign Reserves:
For the purpose of keeping the foreign exchange rates stable,
the Reserve Bank buys and sells foreign currencies and also
protects the country's foreign exchange funds.
RBI sells the foreign currency in the foreign exchange
market when its supply decreases in the economy and vice-versa.
6. Other Functions:
The Reserve Bank performs a number of other
developmental works.
These works include the function of clearinghouse
arranging credit for agriculture (which has been transferred to
NABARD) collecting and publishing the economic data, buying and
selling of Government securities (gilt edge, treasury bills etc)and
trade bills, giving loans to the Government buying and selling of
valuable commodities etc.
It also acts as the representative of the Government
in the International Monetary Fund (I.M.F.) and represents the
membership of India.
 Monetary policy:
It is a process by which monetary authority of a country
controls supply of money often targetting the purpose of promoting
economic growth and stability.
Main Targets:
•Stabilizing Prices
•Low Unemployment
Monetary authority of a country controls
1. The Supply of money.
2. Availablity of money.
3. Cost of money.
4. Rate of interest.
To attain a set of objectives oriented towards the growth and stability of
the economy.
Objectives of Monetary policy:
1. To ensure the economic stability at the full Employment or
potential level of output.
2. To achieve price stability by controlling inflation and
deflation.
3. To promote and encourage economic growth in the
economic.
4. To maintain a balance of payment in equilibrium states.
5. To maintain exchange rate stability.
6. To bring neutrality of money ( supply of money should be
constant)
7. Equal distribution of Income.
Scheduled Banks:
1. The Banks which are listed in second schedule of
RBI Act, 1934.
2. Minimum capital is Rs5 lakhs.
3. RBI should be satisfied with the conduction of
Bank operation in a manner not Deprinental to
the Interest of the Depositors.
4. It is a cooperative societies.
5. Can Borrow from RBI for normal requirements.
6. Require to maintain cash deserves with RBI.
Non - Scheduled Banks:

1. The Banks which is not listed in second

schedule of RBI Act, 1934.
2. Minimum capital as per respective Banks.
3. No such conditions.
4. Can Borrow from RBI only in abnormal
conditions.
5. No need to maintain cash deserve with RBI.
 Difference between scheduled bank and Non-Scheduled Banks
Basis Scheduled Banks Non-Scheduled Banks
Scheduled banks is a Non-scheduled banks are the
Meaning banking corporation whose banks which do not comply
minimum paid up capital is with the rules specified by the
Rs. 5 lakhs and does not Reserve Bank of India, or say
harm the interest of the the banks which do not come
depositors. under the category of
scheduled banks.

Second Listed in the second Not-listed in the second

Schedule schedule. schedule.
Basis SCHEDULED BANKS NON-SCHEDULED BANKS

Cash Reserve Ratio Maintained with RBI. Maintained with

themselves.

Borrowing Scheduled banks are allowed to Non-Scheduled banks are

borrow money from RBI for not allowed to borrow
regular banking purposes. money from RBI for
regular banking purposes.

Returns To be submitted periodically. No such provision of

submitting periodic
returns.

Members of It can become a member of It cannot become

clearing house clearing house. member of clearing
house.
Commercial Banks:
A commercial bank is a financial intermediary.
It's central objective is commercial that is, profit
making .
It takes money from a surplus unit by paying a low rate
of interest and lends the same fund to a Deficit unit at a higher
rate of interest and thus makes profit.
It is said to be a dealer in credit.
It may be organized privately or by the Government.
The two primary functions of such a bank are Deposit
function and Loan function, Deposits may be of three types:
Demand or current, Savings and Fixed or Time deposit.
Commercial Banks :
• The funds thus obtained from various classes of people are
pooled together and lend to users of capital.
• Banks do not lend the entire sum of deposit. But a portion is kept
in the form of cash. This is called Cash Reserve Ratio(CRR) in order to
meet the unforeseen demand of some depositors.
• In its loans and advances, banks maintain a diversified portfolio
in order to seek a balance between liquidity and profitability.
• Banks perform some other functions that enhance their yield.
They keep valuables in their custody, collect chequable amounts, the
purchase and sell of shares, debenture, they act as agents of their
customers. Besides they act as trustee and executors of wills, pay bills
of customers.
• Modern commercial banks perform a variety of
functions and provide a number of services to their
customers.
• They are regarded as departmental-store banks
because they provide a wide variety of services To
their customers.
1. Acceptance of deposits :
People who have surplus
funds with them would like to
deposit these with commercial
banks. Banks accept mainly three
types of deposits:
2. Advancing of Loans :
The second primary function of the
commercial banks is to extend loans and
advances. Lending is the most profitable business
of a bank. Banks charge interest from the
borrowers which are more than the interest they
pay to their depositors. Banks these days extend
loans and Advances to their customers in the
following ways:
● Facilitation of payments through cheques :
Banks have provided a very convenient
system of Payment in the form of cheques, The cheque is
the principal method of payment in business in recent
times. It is convenient, cheap and safe means of making
payments.
● Transfer of funds:
Banks help in the remittance or transfer of
funds from one place to another through The use of
various credit instruments like cheques, drafts, mail
transfers and telegraphic transfers.
● Agency Functions:
Banks provide various agency functions for their
customers. The banks charge Commission or service charge
for such functions. The main agency functions are:
1. Collection & payment of credit and other instruments e.g.
cheques,BOE. hundies.
2. Purchase and sale of stock exchange securities.
3. Administration of wills and trusteeship .
4. Remittance of funds— remit funds on behalf of clients
through cheques, drafts, main transfers etc
Representation and correspondence Bullion trading.
(i) The commercial banks collect cheques, drafts,
bills of exchange, hundies and other financial
Instruments for their customers.
(ii) They make and collect various types of
payments on behalf of their customers, such as
insurance premia, pensions, dividends, Interest,
etc,
(iii) The commercial banks act as agents for the
customers in the sale and purchase of securities.
They provide investment services to the companies by
acting as underwriters and bankers for new Issues of
securities to the public.
(iv) They render agency services of various types, such
as obtaining foreign currency for customers And sale of
foreign exchange on their behalf, sale of national
savings certificates and units of U. Tel.
(v) The commercial banks act as trustees and
executors. For instance, they keep the wills of their
Customers and execute them after their death.
Miscellaneous Services : Commercial banks provide various
miscellaneous services, such as provision of locker facilities for safe
custody of jewellery and other valuables, issue of travellers cheques,
gift cheques, provision of tax assistance and investment advice, etc.
7. Credit Creation — A very important and unique function of the
commercial banks is that they have the power of credit creation. In the
process of acceptance of deposit and granting of loans, commercial
banks are able to create credit. This means that they are able to grant
more loans than the amount of initial or primary deposits made by the
customers. This function is discussed below in detail.
• In short, commercial banks perform a large variety of functions in the
modern economics.
• Is the minimum fraction of the total deposits of
customers which commercial banks have to hold
as reserves either in cash or as deposits with the
central bank.
• Fixed by the Central Bank as a tool in monetary
policy in influencing the volume of credit.
i) CRR
1. All Banks have to maintain a minimum CRR of Net Demand
and Time Liabilities(Total deposits) with RBI , as cash.
2. It can be retained in the RBI currency chest.
3. Earlier ceiling limits of 3 to 20% has been removed and RBI
has no ceiling in prescribing this limit
4. This is as per section 42(1) of the RBI Act, 1934.
{Amended through RBI (Amendment) Act, 2006}
5. Scheduled Banks are required to maintain a certain
percentage of NDTL in cash form with a special account with RBI.
6. For securing monetary stability in the country.
7. No floor & No ceiling rate.
• Refers minimum portion of deposits that the
commercial banks are required to maintain in
the form of liquid asset such as gold or govt.
Approved securities (bonds, shares).
• Fixed central bank of a country in order to
control the expansion of bank credit.
ii) SLR
1. All Banks have to maintain a portion of their total
deposits with RBI either as cash or gold or approved
securities.
2. This is as per section 24 of the Banking Regulation Act,
1949. {This was amended through the Banking Regulation
(Amendment) Act, 2007}
3. No floor rate, but the ceiling is 40%.
4. To be maintained in cash, gold & approved securities.
5. To hold a certain percentage of NDTL in the above
forms as prescribed from time to time.
• Comprises of both CRR and SLR.
While the aim of CRR is immediate
liquidity needs, the objective of SLR is
two fold : to provide profitability with
liquidity.
Commercial Banks
can be classified
into four types.
They are
Public Sector Banks:
1. Banking companies which are nationalized in 1969
and 1970 ( Acquisition and Transfer of Undertaking )
Act , 1970.
2. Also nationalized Banking Companies in 1980 as per
Banking Act , 1980.
3. Companies Act , 1956 is applicable to Public Sector
Banks (PSU- Public Sector Units) .
4. Share should not excited or follow below 51% (NPS-
Non-Performing Assets).
There are 12 public sector banks :
There are a total of 12 nationalised banks in the
country namely below:

Bank of Maharashtra Indian Bank

Bank of Baroda Punjab & Sind Bank
Bank of India Punjab National Bank
Canara Bank State Bank of India
Central Bank of India Union Bank of India
Indian Overseas Bank UCO Bank
 These are owned and controlled by the
Government.
Public Sector Commercial Banking in India
started with setting up of State Bank of India started
with setting up of State Bank of India in 1955.
On 1st April 2017, SBI merged with 5 of its
associated banks and 1 other bank.
RRBs are also Scheduled Bank governed RRBs
Act, 1976.
Public Sector Banks:
Public Sector Banks are those banks in
which majority stake (i.e., more than 50% of the
shares) is held by the government of the country.
The words such as “The” or “Ltd” will not be found
in their names because the ownership of these
banks are with the government and the liability is
unlimited in nature.
Private Sector Banks:
Private Sector Banks are those banks which are
owned by group of private shareholders. They elect board
of directors which manages the affairs of the banks.
These include banks in which major stake or
equity is held by private shareholders. All the banking
rules and regulations laid down by the RBI will be
applicable on private sector banks as well.
Capital of 24% should be there under FII
(Foreign Institutional Investors)
There are 22 Private Sector Banks .

Axis Bank IndusInd Bank

Bandhan Bank Jammu and Kashmir Bank
City Union Bank Karnataka Bank
Dhanlaxmi Bank Kotak Mahindra Bank
DCB Bank Karur Vysya Bank
Federal Bank Lakshmi Vilas Bank
HDFC Bank Nainital Bank
ICICI Bank RBL Bank
IDFC Bank South Indian Bank
IDBI Bank Tamilnad Mercantile Bank
YES Bank
Foreign Banks:

Foreign Banks are defined as banks from a

foreign country working in India through branches.
RBI provided rules and guidelines for a
foreign Banks to establish and operate in India.
There are 46 Foreign Banks in India.
Regional Rural Banks:
1. Regional Rural Banks are public sector institutions , regionally
based , rural oriented and engaged in Commercial Banking.
2. They are oriented towards meeting the needs of Weaker Sections
of the Rural People consisting of small and marginal farmers,
agricultural labourers, artisans and small enterprenures .
3. RRBs Act , 1976 they governed by RRBs Act,1976.
4. First RRBs set up in 1975 under ordinates as per rule.
5. Shareholding will be 50% Central Bank , 35% Sponsor Bank and
managed by Sponsor bank . Regulated by RBI and NAWARD.
Artisan: An artisan is a skilled craft worker who makes or creates
material objects Partly or entirely by hand.
Objectives of RRBs:
1. Bringing the credit gaps in rural areas.
2. To develop measures which could restricts
outflow of rural deposits to urban areas.
3. To reduce regional imbalances and increase
rural employment generation activities.
4. Granting of loans and advances to regional
farmers agricultural labourers, artisans etc,..
● Sponsors ship of RRBs:
1. Each RRBs is sponsored by the public sector banks it
is a duty of a sponsors bank to aid and assist the RBI
sponsored by.
2. Sponsor Bank helps RRBs by
● Subscribing to the share capital.
● Training personnel of RRB.
● Providing managerial and financial assistance to
RRBs.
3.Captial essential for RRBs is 5 crores where share is
50:35:15.
Function of RRBs:
1. Granting of loans and advances with the farmers,
agricultural labourers , artisans in the rural areas.
2. Granting of loans and advances to small and
marginal farmers, cooperative societies,
agricultural societies , cooperative farming
societies and other agricultural operation and
process.
3. Accepting Deposits.
FUNCTIONS OF REGIONAL RURAL BANKS:
To provide cheap and liberal credit facilities to small and marginal farmers,
agricultural
labourers, artisans, small entrepreneurs and other weaker sections.
To save the rural poor from the money lenders.
To act as a catalyst element and thereby accelerate the economic growth in the
particular
region.
To cultivate the banking habits among the rural people and mobilize savings for the
economic
development of rural areas.
To increase employment opportunity by encouraging trade and commerce in rural
areas.
To encourage entrepreneurship in rural areas.
To cater to the needs of the backward areas which are not covered by the Government.
There are 56 foreign Banks in India:
LIST OF REGIONAL RURAL BANKS IN INDIA
Andhra Pradesh
Andhra Pragathi Grameena Bank
Andhra Pradesh Grameena Vikas Bank
Chaitanya Godavari Grameena Bank
Saptagiri Grameena Bank
Assam
Assam Gramin Vikash Bank
Langpi Dehangi Rural Bank
Arunachal Pradesh Rural Bank
Bihar
Uttar Bihar Gramin Bank
Madhya Bihar Gramin Bank
Bihar Gramin Bank
Chhattisgarh
Chhattisgarh Rajya Gramin Bank
Gujarat
Dena Gujarat Gramin Bank
Baroda Gujarat Gramin Bank
Saurashtra Gramin Bank
Haryana
Sarva Haryana Gramin Bank
Himachal Pradesh
Himachal Pradesh Gramin Bank
Jharkhand
Jharkhand Gramin Bank
Vananchal Gramin Bank
Jammu & Kashmir
Jammu And Kashmir Grameen Bank
Ellaquai Dehati Bank
Karnataka
Kaveri Grameena Bank
Karnataka Vikas Grameena Bank
Pragathi Krishna Gramin Bank
Kerala
Kerala Gramin Bank

Madhya Pradesh
Narmada Jhabua Gramin Bank
Central Madhya Pradesh Gramin
Bank
Madhyanchal Gramin Bank
Maharashtra
Maharashtra Gramin Bank
Vidarbha Kokan Gramin Bank
Manipur
Manipur Rural Bank
Meghalaya
Meghalaya Rural Bank
Mizoram
Mizoram Rural Bank
Nagaland
Nagaland Rural Bank
Odisha
Odisha Gramya Bank
Utkal Grameen Bank
Punjab
Punjab Gramin Bank
Malwa Gramin Bank
Sutlej Gramin Bank
Puducherry
Puduvai Bharathiar Grama Bank
Rajasthan
Baroda Rajasthan Kshetriya Gramin Bank
Marudhara Rajasthan Gramin Bank
Tamil Nadu
Pandyan Grama Bank
Pallavan Grama Bank
Telangana
Telangana Grameena Bank
Tripur
Tripura Gramin Bank
Uttar Pradesh
Sarva UP Gramin Bank
Prathama Bank
Allahabad UP Gramin Bank
Baroda UP Gramin Bank
Gramin Bank Of Aryavrat
Kashi Gomti Samyukt Gramin Bank
Purvanchal Bank
Uttarakhand
Uttarakhand Gramin Bank
ROLE OF REGIONAL RURAL BANKS IN ECONOMIC GROWTH OF OUR COUNTRY:
1. Promoting Savings.
2. Mobilizing savings.
3. Allocating savings among alternative uses and users.
4. Promotion of trade, production.
5. Regional Rural banks are playing important role in financial and
economic growth.
6. Trade development.
7. Agricultural development.
8. Industrial development.
9. Capital formation.
10. Transportation.
11. Safekeeping of valuables.
12. Better saving rates.
13. Construction.
14. Government Loans.
15. High Employment rates
 Difference between RRBs and Commercial Banks
Basis RRBs
Purpose Main reason for essentiance of
RRBs is to develop rural and
backward areas and to provide
Banking facility to rural population.
Scope Limited to agricultural finance ,
small sector loans , anticrafts
and others.
Commercial Banks
To make profit out
of their operations.
Not only for agricultural
finance but also housing
loan, car loan, gold loan ,
Letter of credit not only
for small companies but
also for big companies.
Basis RRBs Commercial Banks
Area of Presenting rural and semi urban All over the country.
areas ( Rural,semi urban and urban)
operations

Focus Accepting Deposits and Granting Appart from lending and

of loans to rural people.
borrowing they provide services
like stock broking , insurance,
asset management, merchant
banking, benchur capital
financing exchange and others.

State Holding Central government, state Public and central

governments and Commercial government etc..
Banks.
Co-operative Bank:
1. A Co-operative bank is a financial entity which belongs
to its members, who are at the same time the owners
and the customers of their bank.
2. Co-operative banks in India are registered under the
States Cooperative Societies Act. The Co-operative
banks are also regulated by the Reserve Bank of India
(RBI) and governed by the
•Banking Regulations Act 1949
•Banking Laws (Co-operative Societies) Act,
1955.
Features of Co-operative Bank:
1.Customer Owned Entities:
Co-operative bank members are both
customer and owner of the bank.
2.Democratic Member Control:
Co-operative banks are owned and controlled
by the members, who democratically elect a board of
directors. Members usually have equal voting rights,
according to the cooperative principle of “one person,
one vote”.
4.Profit Allocation:
A significant part of the yearly profit,
benefits or surplus is usually allocated to
constitute reserves and a part of this profit can
also be distributed to the co-operative members,
with legal and statutory limitations.
5.Financial Inclusion:
They have played a significant role in the
financial inclusion of unbanked rural masses.
Advantage of Cooperative Banking:
1.Cooperative Banking provides effective alternative to the traditional
defective credit system of the village money lender.
2.It provides cheap credit to masses in rural areas.
3.Cooperative Banks have discouraged unproductive borrowing personal
consumption and have established the culture of productive borrowing.
4.Cooperative credit movement has encouraged saving and investment,
instead of hoarding money the rural people tend to deposit their savings in
the cooperative or other banking institutions.
5.Cooperative societies have also greatly helped in the introduction of
better agricultural methods. Cooperative credit is available for purchasing
improved seeds, chemical fertilizers, modern implements, etc
6.Cooperatives Banks offers higher interest rate on deposits.
Problems with Cooperative Banking in India:
1•Organisational and financial limitations of the primary
credit societies considerably reduce their ability to
provide adequate credit to the rural population.
•Needs of tenants and small farmers are not fully met.
Primary credit societies are financially weak and are
unable to meet the production-oriented credit needs .
•Overdues are increasing alarmingly at all levels.
•Primary credit societies have not been able to provide
adequate and timely credit to the borrowing farmers.
2.The cooperatives have resource constraints as their owned funds
hardly make a sizeable portfolio of the working capital. Raising
working capital has been a major hurdle in their effective
functioning.
3.A serious problem of the cooperative credit is the overdue loans of
the cooperative banks which have been continuously increasing
over the years.
•Large amounts of overdues restrict the recycling of the funds and
adversely affect the lending and borrowing capacity of the
cooperative.
4.Most of the benefits from the cooperatives have been covered by
the big land owners because of their strong socio-economic
position.
5.Cooperative Banks are losing their lustre due to expansion of
Scheduled Commercial Bank and adoption of technology. They are also
facing stiff competition from payment banks and small-finance banks.
Long-term credit extended by them is declining.
6.Regional Disparities: The cooperatives in northeast states and in
states like West Bengal, Bihar, Odisha are not as well developed as the
ones in Maharashtra and Gujarat. There is a lot of friction due to
competition between different states, this friction affects the working of
cooperatives.
7.Political Interference: Politicians use them to increase their vote bank
and usually get their representatives elected over the board of director
in order to gain undue advantages.
Dual Regulation of Urban Cooperative Bank:
Urban Co-operative Banks are regulated and supervised by State Registrars of
Co-operative Societies (RCS) in case of single-State co-operative banks and
Central Registrar of Co-operative Societies (CRCS) in case of multi-State co-
operative banks and by the RBI.
The RCS exercises powers under the respective Co-operative Societies Act of
the States with regard to incorporation, registration, management,
amalgamation, reconstruction or liquidation and in case of UCBs that have
multi-State presence, are exercised by the CRCS.

The banking related functions such as issue of license to start new

banks/branches, matters relating to interest rates, loan policies,
investments and prudential exposure norms are regulated and supervised
by the Reserve Bank under the provisions of the Banking Regulation Act,
Case of Punjab and Maharashtra Cooperative (PMC)
Bank:
Restrictions imposed by RBI on withdrawals of money from PMC bank
highlighted the strong case of malfunctioning in dual regulatory system in
urban cooperative banking system.
In above PMC case, there are three major problems- financial
irregularities, failure of internal control and system, and underreporting of
exposures.
PMC Bank has extended 73% of its assets to HDIL which created a panicky
situation for depositors.
Since, PMC has deposits from other smaller cooperatives banks, the
financial irregularities which includes governance and transparency
issues will likely to have multi-dimensional impact.
Countering Dual Regulation Problem:
A high powered committee chaired by former Deputy Governor
of RBI, R. Gandhi has recommended the merging and converting
some of the cooperatives banks to small finance banks and the
same has been implemented by RBI in form of scheme for
voluntary transition of urban cooperative banks into small
finance banks.
Setting up of an independent regulator for Urban Cooperative
Banks.
H Malegam committee recommended a board of management
of eligible and proper persons as opposed to elected Directors.
Rural cooperative Bank:
The rural co-operative credit system in India is primarily mandated to ensure flow of credit to the
agriculture sector. It comprises short-term and long-term co-operative credit structures. The short-
term co-operative credit structure operates with a three-tier system - Primary Agricultural Credit
Societies (PACS) at the village level, Central Cooperative Banks (CCBs) at the district level and State
Cooperative Banks (StCBs) at the State level. PACS are outside the purview of the Banking Regulation
Act, 1949 and hence not regulated by the Reserve Bank of India. StCBs/DCCBs are registered under
the provisions of State Cooperative Societies Act of the State concerned and are regulated by the
Reserve Bank. Powers have been delegated to National Bank for Agricultural and Rural Development
(NABARD) under Sec 35 (6) of the Banking Regulation Act (As Applicable to Cooperative Societies) to
conduct inspection of State and Central Cooperative Banks.

Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the
financial needs of customers in urban and semi-urban areas. UCBs are primarily registered as
cooperative societies under the provisions of either the State Cooperative Societies Act of the State
concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank
extends beyond the boundaries of one state. The sector is heterogeneous in character with uneven
geographic spread of the banks. While many of them are unit banks without any branch network,
some of them are large in size and operate in more than one state.