FINANCIAL SYSTEM

FUNCTIONS OF FINANCIAL SYSETEM

• It act as a interlink between saver and investor by mobilizing the saving of scattered savers in more effective manner.
•  It provides a payment mechanism for the exchange of goods and services.
• It provides a mechanism for the transfer of resources across geographical boundaries.

COMPONENTS

1. Financial Institutions
2. Financial Markets
3. Financial Instruments
4. Financial services

FINANCIAL INSTITUTIONS

Financial institutions can be classified into two types i.e. Banking Institutions and Non-Banking Institutions

1).  BANKING INSTITUTIONS – Banking Industry is controlled by the Central Bank of India i.e. RBI. RBI is the apex body which supervises, regulates and develops the monetary system of country. It can be further classified into following :

A). Organised institutions – It includes workers employed by government, state owned enterprise and private sector enterprises.It includes:

Commercial banks-   It is a type of institution that provides services such as accepting deposits, making business loans and offering basic investment product. Commercial banks are of two types :

Scheduled banks-  The banks which are included in Second Schedule of Reserve Bank of India Act 1934 are schedule banks.RBI includes only those banks under this schedule which fulfill the criteria laid down under section 42(6)(a) of RBI Act 1934. Every schedule bank enjoys two principle facilities:

• It becomes eligible for debts/loans at the bank rate from RBI.
• It automatically acquires the membership of clearing houses.

At present there are 22 Public Sector banks, private and foreign banks and 19 nationalized banks.

In 1969, nationalization of 14 banks was done.

In 1980, nationalization of 6 banks was done.

Later on in 1993 New Bank of India merged with Punjab National Bank. Thus at present there are 19 Nationalized banks in India.

In year 2014 Bandhan Bank and IDFC get licensed by RBI in this category.

Non-Scheduled banks-  The banks which are not included in Second Schedule of Reserve Bank of India Act 1934 are non-scheduled banks.

Co-operative banks-  Co-operative banks are co-operative organizations which are governed by co-operative societies act 1904.

Co-operative banks have three tier structures:

Urban co-operative banks-  These banks are registered and governed by state under the respective co-operative act of that state.

District co-operative banks-  These banks work at district level.

State co-operative banks- These banks work at state level.

Regional rural banks-  Regional Rural Banks are local level banking organizations operating in different states of India. RRBs were established in 1975 on the recommendations of Narsimham Committee. It is followed by Regional Rural Banks Act 1976. RRBs are regulated by NABARD (National Bank for Agriculture and Rural Development) act 1981.

• This bank provides credit to small farmers, small enterprises in rural areas.
• Basically it focused on rural areas.

All states in India have RRB except Goa and Sikkim.

Foreign banks –  A foreign branch bank is type of that is obliged to follow the regulations of both the home and host countries.

B). Unorganised sector- It consists of all unincorporated private enterprises owned by individuals and households engaged in sale of goods and services. It comprises of following:

Indigenous bankers- Indigenous Bankers are the individuals and partnership firms performing banking functions. They are local bankers. They can be distinguished as professional money lenders whose primary business is not banking but money lending.

Money lenders-  A money lender is a person or a group who typically offers personal loans at a high rate of interest.

2). NON- BANKING INSTITUTIONS -If the financial institutes have all the same functions but does not allow depositors to issue cheque and withdraw their money from deposits then it is Non Banking Institutions. It is further classified into:

A). Organised sector -It includes workers employed by government, state owned enterprise and private sector enterprises. It includes:

Development finance institutions - It is an alternative financial institution which includes microfinance institutions, community development financial institution and revolving loan funds. It includes:

IDBI (Industrial Development Bank of India) - It is established in 1964 by an Act of Indian industry.

IFCI (Indian Finance Corporation of India Ltd.) – It was the first development finance institution of India established by Indian government after independence. In 1993 it was reconstituted as a company to apart higher degree of operational flexibility. It is allowed to access to capital market directly.

EXIM (Export and Import Bank of India) - It is established in 1982 under Export Import Bank of India Act 1981. It acts as a key player in promotion of cross border trade and investment.

NABARD (National Bank for Agriculture and Rural Development)- NABARD was established in 1982 to implement National Bank for Agriculture and Rural Development Act 1981.

Investment institutions -  It includes the institutions which mobilize savings of public at large through various schemes and invest these into corporate and government securities. It include:

LIC (Life Insurance Corporation) - The Life Insurance Industry in the country was nationalized by the government of India in 1956 and a fully government owned company, the Life Insurance Corporation of India setup.

GIC (General Insurance Corporation)-In 1971, the government of India nationalized the private sector companies playing in general insurance segment and the government company the General Insurance Corporation was formed in 1972.

UTI (Unit Trust of India) – It was created by the UTI act passed by the parliament of India on 1963.

B). Unorganised sectors- It includes number of NBFCs providing financial services such as

Asset Finance Companies- Its principle business is to finance physical assets.

Investment Companies- It involves in the business of acquisition of securities.

Sample questions:

Q1. Apex  body which supervises, regulates and develops the monetary system of India

a). RBI (Reserve Bank of India)

b). NABARD

c). Government of India

d). None of above

Q2. How many Nationalized banks are there in India

a). 19

b). 18

c). 20

d). 17

Q3. In which year RBI get nationalized

a). 1980

b). 1935

c). 1969

d). 1949

Q4. In 1993, New Bank of India merged with which bank

a). Punjab and sind Bank

b). State Bank of India

c). Canara Bank

d). Punjab National Bank

Q5. Which of the following statement is true about the schedule banks

It includes bank which fulfill the conditions mentioned under sec42(6)(a) of RBI Act 1934

It becomes eligible for debt/loans at the bank rate from RBI

It automatically acquires the membership of clearing house.

a). only a

b). a and c

c). all of above

d). none of above

Q6. In year 2014 which bank get license by RBI under the category of scheduled banks

Bandan Bank

IDFC

Indian Bank

a). Only a

b). Only b

c). a and b

d). none of these

Q7. Co-operative banks are governed by

a). RBI

b). Government of India

c). Co-operative  Societies  Act 1904

d). Co-operative  Societies  Act 1940

Q8. RRBs ( Regional Rural Banks ) are regulated by

a). NABARD

b). RBI

c). Banking Regulation Act1949

d). Government of India

Q9. Full form of NABARD

a). National Bank for Agriculture and Rural Development

b). New Agricultural Bank for Rural Development

c). Nationalized Bank for Agricultural and Rural Development

d). None of above

Q10. Following of which state do not have RRBs

Goa

Rajasthan

Sikkim

Orissa

a). Only a

b). a and b

c). a and c

d). only c

Q11. IDBI established in which year

a). 1945

b). 1949

c). 1964

d). 1960

Q12. Full form of IFCI

a). Indian Finance Corporation of India

b). Industrial Finance Corporation of India

c). Industrial Finance Company of India

d). Indian Finance Company of India

Q13. EXIM bank was established in which year

a). 1982

b). 1981

c). 1980

d). 1983

Q14. NABARD was established in which year

a). 1982

b). 1981

c). 1980

d). 1983

Q15. Which of the following are the Investment Institutes of India

LIC

GIC

UTI

a). Only a

b). Only b

c). Only c

d). All of above

Q16. Which of the following is the Development Finance Institution of India

IFCI

EXIM

IDBI

NABARD

a). Only a

b). a and b

c). All of above

d). None of above

Q17. What is the full form of UTI

a). United Trust of India

b). Unit Trust of India

c). Unified Trust of India

d). None of above

Q18. Which of the following is not  a public sector bank

a). Bank of Maharashtra

b). Dena Bank

c). Indian Bank

d). Bandan Bank

Q19. What does I stand for in IDBI

a). Industrial

b). Infrastructure

c). Indian

d). India

Q20. Which of the following is not a nationalized bank

a). State Bank of India

b). Bank of India

c). Corporation Bank

d). Canara Bank

Answers:

1). (a) RBI (Reserve Bank of India) is the apex body which supervises, regulates and develops the monetary system of India.

2). (a) There are 19 nationalized banks in India.

3). (b) RBI get nationalized in 1935

4). (d) In 1993, New Bank of India is merged with Punjab National Bank

5). All of the above options

6). (III) Bandan Bank and IDFC are the bank which get license by RBI under the category scheduled banks

7). (c) Co-operative  Banks are governed by Co-operative Societies Act 1904

8). (a) RRBs (Regional Rural Banks ) are regulated by NABARD

9). (a) National Bank for Agriculture and Rural Development(NABARD)

10). (III) Goa and Sikkim do not have RRBs

11). (c) IDBI was established in 1964

12). (b) Industrial Finance Corporation of  India(IFCI)

13). (a) EXIM was established in 1982

14). (a) NABARD was established in 1982

15). (IV) LIC, GIC and UTI  are the investment institutions of India

16). (IV) IFCI, EXIM, IDBI and NABARD are the development institutions of India

17). (b) Unit Trust of India (UTI)

18). (d) Bandan Bank is not a public sector bank

19). (a)IDBI- Industrial Development Bank of India

20). (a) State Bank of India is a public sector bank but not nationalized as it was established by the government