Schemes of Banking

DevelopmentLead Bank

Deposit insurance scheme

Mutual fund

Modernization of banking industry

Characteristics of non banking financial companies

A. LEAD BANKS• The National Credit Council was set up in Dec. 1967 to determine the priorities of

bank credit among various sectors of the economy. The NCC appointed a study group on the organizational framework for the implementation of social objectives in Oct. 68 under the Chairmanship of Prof. D R Gadgil. The study group found that the Commercial Banks had penetrated only 5000 villages as of June 67 and out of the institutional credit to agriculture, at 39%, the share was negligible at 1%, the balance being met by the co-operatives. The Banking needs of the rural areas in general and backward in particular were not taken care of by the Commercial Banks. Besides, the credit needs of Agriculture, SSI and allied activities remained neglected. Therefore, the group recommended the adoption of an area approach for bridging the spatial and structural credit gaps. Later, All India Rural Credit Review Committee 1969 endorsed the view that CBs should increasingly come forward to finance activities in rural areas.

Objectives of Lead Bank Scheme1. Eradication of unemployment and under employment 2. Appreciable rise in the standard of living for the poorest of the poor 3. Provision of some of the basic needs of the people who belong to poor

sections of the society4. To conduct surveys in the allotted districts for the potentials of the

development of banking5. To set up the branches in a phased manner6. To study local problems7. To provide assistance to other primary lending agencies8. To recruit an train banking staff for counselling the small borrowers and

farmers in the priority sectors and the follow up and inspection of the end use of bank credit

Benefits of Lead bank scheme1. Whole country is served by a well-organized system of commercial

and cooperative banking.2. Branch expansion, supervision and guidance have become much

more effective.3. A dynamic relationship is evolved among the commercial banks,

cooperative banks, financial institutions and government agencies.4. A close integration of banking business with other activities has

emerged.5. Major obstacle to the development of the district have been

identified and appropriate agencies are motivated by the lead banks to take remedial measures.

Implementation of the Scheme• Lead Bank as Consortium: Leader Under the Scheme, each district had been

assigned to different banks (public and private) to act as a consortium leader to coordinate the efforts of banks in the district particularly in matters like branch expansion and credit planning. The Lead Bank was to act as a consortium leader for coordinating the efforts of all credit institutions in each of the allotted districts for expansion of branch banking facilities and for meeting the credit needs of the rural economy.• Allotment of districts: All the districts in the country excepting the metropolitan

cities of Mumbai, Kolkata, Chennai and Union Territories of Chandigarh, Delhi and Goa were allotted among public sector banks and a few private sector banks. Later on, the Union Territories of Goa, Daman and Diu as also the rural areas of the Union Territories of Delhi and Chandigarh have been brought within the purview of LBS.

• District Consultative: Committees (DCCs) the next important development in the history of LBS was the constitution of DCCs in all the districts, in the early seventies to facilitate co-ordination of activities of all the Banks and the financial institutions on the one hand and Government departments on the other. The DCCs were constituted in the lead districts during 1971– 73. • District Credit Plan (DCP): The second and most important phase of the LBS was

formulation of DCPs and their implementation. Although certain structural credit gaps were identified earlier, positive measures were introduced only after nationalization of the banks. Certain sectors which were hitherto neglected were given a priority status and banks were asked to provide credit to these sectors in a more concerted way.• Village adoption scheme (VAS): Under this, bank adopted some villages in their

command area for intensive lending. The area approach was not so much aimed at development of a chosen area as for avoiding the pitfalls of scattered and unsupervised lending. In the initial stages of VAS, RBI has encouraged banks to adopt villages as well as to avoid scattered lending.

Points for Critical Examination (Weaknesses)1. There is a strong need to revamp and revitalize the Lead Bank Scheme so as to make it an effective

instrument for bringing about meaningful co-ordination among banks operating in a district. 2. This can bring about greater participation among banks and financial institutions in achieving full

financial inclusion. 3. The Operation problems are the major hurdles of the Lead bank Scheme. Obviously, financial

inclusion calls for united action on the part of all banks and financial institutions operating in a district.

4. An approach on the lines of area approach can be adopted and in each area or location a particular bank can be given responsibility for achieving meaningful financial inclusion.

5. Full computerization and data management in all banks must be in order and the banks involved should be able to periodically prepare and review reports, yearly draft plans, and financial inclusion plans, from time to time.

6. There is a need for revamping the District-level Consultative Committees (DLCC) and it should be a result oriented rather than a titular organization.

7. Lead bank Scheme should be an effective instrument in bringing about full and active involvement of all member banks in all efforts and schemes.

B. Deposit Insurance CorporationOrigin of Deposit Insurance Scheme:• The underdeveloped nature of the banking sector in India had been the

cause of bank failures and wiped out the savings of the depositors.• The loss born by the depositors were deterrent to the growth of banking

habit.• The idea of bank deposit created a question in the minds of the people

and they lost the confidence in bank investment or banking system.• In 1950 the Rural Banking Enquiry Committee considered the question of

deposit insurance.• In 1953, the committee for finance for private sector submitted a draft

scheme for setting up deposit insurance corporation.

• In 1960, two banks in India (Laxmi bank ltd. and Palai central bank ltd.) failed to fulfill the demand of their customers for the payments of their deposits.• The Government of India and RBI then realized the importance of

setting up a Deposit Insurance Corporation.• The Deposit Insurance Corporation bill was introduced in August

1961, and the Deposit Insurance Corporation Act 1961 was enacted.• After that the Deposit Insurance Corporation was established on 1st

January 1962 as a fully owned subsidiary of the RBI.

• Objectives:1. To give protection to depositors, particularly the small depositors, from the

risk of loss of their deposits in the event of bank failure.2. To create confidence in the minds of depositors.3. To enhance the banking habit among the people.4. To impart stability to the banking system and give more importance to the

process of deposit mobilization.

• Capital:• The corporation has an initial capital of Rs. 1 cr. Which was fully subscribed by

RBI. Consequent upon the extension of insurance scheme to the co-operative banks, the activities of the corporation expanded greatly. So the capital was increased to Rs. 2 cr. on 31st Dec. 1975 and the entire amount was contributed by RBI.

• Resources:I. General fund: The entire share capital has been invested in Central

Government Securities and it is held in General Fund. The interest earned from these investments is used for meeting the establishment and other expenses of the corporation. The general fund at the end of march 2004 was Rs. 91.52 crs.

II. Deposit Insurance Fund: The insurance premium received from fund is kept in this fund and the amount is invested in Central Government Securities. The payment of clams of depositors are met from this fund. The interest earned on investment and insurance premium are the two sources of income fro the fund. The Deposit Insurance fund at the end of March 2004 was Rs. 7079.09 crs.

• Management:• The chairman of the corporation is the governor of the RBI.• The corporation is managed by BOD consisting of 5 members including

Chairman. The other 4 members are;i. A deputy governor of RBI or any other officer of RBI.ii. An officer of central government.iii. Two non-official directors, nominated by central government. (having special

knowledge of commerce, industry and finance)

• Deposit Insurance:• The deposit insurance scheme covers all the scheduled banks, co-

operative banks and regional rural banks. These banks are registered as insured banks. The no. of banks insured as on march 2009 were 2307. (80 commercial banks, 87 RRBs 4 local urban banks and 2137 co-operative banks)

• Rate of Insurance Premium:• The insured banks are required to pay the premium on the assemble

deposits. The rate of premium was initially fixed at 5 paisa per annum for every Rs. 100. the Act permits premium up to 15 paisa per Rs. 100 per annum. The premium is collected quarterly from the insured banks. From june 1971 – june 1993 it was 4 paisa. And from 2004-05 it has been required to 8 paisa and from 2005-06, it is increased to 10 paisa per Rs. 100.• Insurance Cover: Starting from 1962 Deposit insurance scheme has

been providing cover to the depositors and the limit has chaged over a period of time.• 1962 - 1500 Rs., 1968 – 5000 Rs., 1970 – 10000 Rs., 1976 – 20000 Rs., 1980 –

30000 Rs., and at present (from 1993-94) the limit of insurance cover to the depositors is 100000 Rs.

• Payment of Claims: The corporation's liability in respect of insured deposit will arise in event of liquidation, reconstruction or amalgamation of a bank. When a bank liquidates the corporation pays to every depositor to the amount due under insurance scheme directly or through the liquidator.• Protected Deposits: The amount of assembled deposits at the end of

June 1989 was 1,40,746 crs. and the insured deposit was Rs. 90,192 crs. (72.2%). The number of fully protected accounts was 3059 lac which is 97.4% of the total deposit accounts in all the protected banks.• The total amount of calims paid under the scheme since 2004 is 1044.32 crs.• It is high time to raise the limit of insurance cover from 1 lac to 3 to 5 lac to

infuse confidence in minds of the depositors.

C. Mutual Funds• These days you are hearing more and more about mutual funds as a

means of investment. If you are like most people, you probably have most of your money in a bank savings account and your biggest investment may be your home. Apart from that, investing is probably something you simply do not have the time or knowledge to get involved in. You are not the only one. This is why investing through mutual funds has become such a popular way of investing.• What is a Mutual Fund?• A mutual fund is a pool of money from numerous investors who wish

to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want.

• Professional Management: Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those.• Fund Ownership: As an investor, you own shares of the mutual fund,

not the individual securities. Mutual funds permit you to invest small amounts of money, however much you would like, but even so, you can benefit from being involved in a large pool of cash invested by other people. All shareholders share in the fund' s gains and losses on an equal basis, proportionately to the amount they've invested.• Mutual Funds are Diversified: By investing in mutual funds, you could

diversify your portfolio across a large number of securities so as to minimize risk. By spreading your money over numerous securities, which is what a mutual fund does, you need not worry about the fluctuation of the individual securities in the fund's portfolio.

Mutual Fund Objectives• There are many different types of mutual funds, each with its own set of goals. The investment

objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio.

• For example, an objective of a growth stock fund might be: This fund invests primarily in the equity markets with the objective of providing long-term capital appreciation towards meeting your long-term financial needs such as retirement or a child' s education.

• Aggressive growth means that you will be buying into stocks which have a chance for dramatic growth and may gain value rapidly. This type of investing carries a high element of risk with it since stocks with dramatic price appreciation potential often lose value quickly during downturns in the economy. It is a great option for investors who do not need their money within the next five years, but have a more long-term perspective. Do not choose this option when you are looking to conserve capital but rather when you can afford to potentially lose the value of your investment.

• A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income whilst still keeping ahead of inflation. They are able to achieve multiple objectives which may be exactly what you are looking for. Equities provide the growth potential, while the exposure to fixed income securities provide stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate potential for current income and growth. You need to be able to assume some risk to be comfortable with this type of fund objective.

• That brings us to income funds. These funds will generally invest in a number of fixed-income securities. This will provide you with regular income. Retired investors could benefit from this type of fund because they would receive regular dividends. The fund manager will choose to buy debentures, company fixed deposits etc. in order to provide you with a steady income. Even though this is a stable option, it does not go without some risk. As interest-rates go up or down, the prices of income fund shares, particularly bonds, will move in the opposite direction. This makes income funds interest rate sensitive. Some conservative bond funds may not even be able to maintain your investments' buying power due to inflation.

• As with aggressive growth, growth seeks to achieve high returns; however, the portfolios will consist of a mixture of large-, medium- and small-sized companies. The fund portfolio chooses to invest in stable, well established, blue-chip companies together with a small portion in small and new businesses. The fund manager will pick, growth stocks which will use their profits grow, rather than to pay out dividends. It is a medium - long-term commitment, however, looking at past figures, sticking to growth funds for the long-term will almost always benefit you. They will be relatively volatile over the years so you need to be able to assume some risk and be patient.• The most cautious investor should opt for the money market mutual fund which aims

at maintaining capital preservation. The word preservation already indicates that gains will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits. These funds will pose very little risk but will also not protect your initial investments' buying power. Inflation will eat up the buying power over the years when your money is not keeping up with inflation rates. They are, however, highly liquid so you would always be able to alter your investment strategy.

Role of Mutual Funds in the Indian Economy1. Mutual funds are acting as a stabilizer in financial system and bringing efficiency in Resource

allocation.2. Mutual funds have opened new vistas for the investors and imparted much needed liquidity

to the system.3. It has emerged as a critical institutional linkage among various financial sectors such as

savings, capital market and capital sector.4. They provide much needed impetus to the money market and stock market.5. They also provide direct and indirect support to the corporate sector.6. The gap between demand and supply of financial resources of the private sector (being a

deficit sector in India) is met by funds raised trough loans and advances in issuance of securities.

7. Mutual funds have also widened the private placement market for corporate securities.8. All mutual funds in India (except UTI) are governed by SEBI (Mutual funds) Regulation, 1993.

Advantages of Mutual Funds• Professional management: Qualified professionals manage your money, but

they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.• Diversification: The truism, "don't put all your eggs in one basket" really

applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

• Affordability: As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.• Tax benefits: Investments held by investors for a period of 12 months or

more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.• Liquidity: With open-end funds, you can redeem all or part of your

investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardized, making it quick and efficient so that you can get your cash in hand as soon as possible.

• Transparency: The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unit holder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.• Regulations: All mutual funds are required to register with SEBI (Securities Exchange

Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.• Rupee-cost averaging: With rupee-cost averaging, you invest a specific rupee amount

at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.• More choice: Mutual funds offer a variety of schemes that will suit your needs over a

lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Disadvantages of Mutual Funds:• High Expense Ratios and Sales Charges: If you're not paying attention to mutual fund expense

ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they will be considered on the higher cost end. Be weary of 12b-1 advertising fees and sales charges in general. There are several good fund companies out there that have no sales charges. Fees reduce overall investment returns.

• Management Abuses: churning, turnover and window dressing may happen if your manager is abusing his or her authority. This includes unnecessary trading, excessive replacement and selling the losers prior to quarter-end to fix the books.

• Tax Inefficiency: Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual funds. Due to the turnover, redemptions, gains and losses in security holdings throughout the year, investors typically receive distributions from the fund that are an uncontrollable tax event.

• Poor Trade Execution: If you place your mutual fund trade anytime before the cut-off time for same-day NAV, you'll receive the same closing price NAV for your buy or sell on the mutual fund. For investors looking for faster execution times, maybe because of short investment horizons, day trading, or timing the market, mutual funds provide a weak execution strategy.

D. Modernization of Banking Industry:

• The committee on technological issues in the banking industry, under the Chairmanship of W.S. Saraf submitted its report in December 1944. In that report the recommendations for changes in Payment System, Cheque Clearing, Security Settlement Technology and training were made.• In 1996, Shere Committee made a suggestion of Electronic Fund Transfer

(EFT) system.• The RBI called upon all nationalized banks to prepare themselves for the

introduction of EFT system.• Today many of the services are provided with the use of Electronic

Devices. These facilities can be enumerated as follows:

1. Credit Cards: The card holder gets credit limits on per day basis, upto which limit he/she can avail credit and make purchase of goods and services. The credit limit is set on the basis of worth of the card holder.

2. Debit Cards: here the amount of the transaction will be debited from the Bank account of Card holder as soon as the transaction is notified to the issuer (bank). If the balance is insufficient to cover the debit, the difference becomes payable immediately or else the service fee is levied.

3. MICR Cheque: MICR is the abbreviation from the word ‘Magnetic Ink Character Recognition’. For speeding up the cheque clearing process, RBI has introduced MICR technology. Error are minimized and the transfer of funds through cheques are made faster and easy. The manual work of the staff has reduced.

4. ATM: ATM is the abbreviation of “Automated Teller Machine”. It allows the customers with ATM card to withdraw cash at their convenience from the nearest ATM. This facility is available to the customers 24*7, so that the withdrawal can be made available to the customers.

5. Tele Banking: Tele banking service is based on the voice processing facility available with the bank computers. The customers can call bank anytime and can inquire balance or transactions record and to transfer funds between accounts. Some banks are also having telephone answering system which enroute the customer’s call directly to the concerned department of the bank.

6. Home Banking: Home banking facility provides facility to the customers to collect banking information right at home or office. With adoption of electronic system and with the connectivity between the computers of a bank and a customer by means of telecommunications and modems, it has become possible for a customer to interact with the bank round the clock without coming to the bank personally.

7. Interlinked Branch Banking: banks have tried to link up their branches via an internet connection as the part of modernization activities of banking services. The bank uses VSAT (via satellite) system for providing banking services to the customers. Since all the branches of a bank are interlinked on an internet, each can get the information speedily of any other sister branch. Hence customer of any branch can transact his account dealings from any branch of the bank.

8. On-line Banking: Advantages:• The operating cost per unit services is lower for banks.• It offers convenience to customers as they are not required to go to the bank’s

premises.• There are very less incidents of errors.• The customers can obtain funds at any time from ATM machines.• The credit cards and debit cards enables the customers to obtain discounts from

retail outlets.• The customers can easily transfer the funds from one place to another place

electronically. Disadvantages:• It takes time to set up and get used to an online accounts.• Some banks only offer online banking in a limited area.• Some services that traditional banks offer are difficult or impossible for online

banks to offer, such as traveler’s cheques ad cashier’s cheques.

9. Social Banking: It describes the provision of baking and financial services that consequently pursue, as their main objective, a positive contribution to the potential of all human beings, today and in the future.The focus is on satisfying existing needs in the real economy and the society whilst simultaneously taking into account their social, cultural, ecological and economical sustainability.In social banking emphasis is given on;• Human rights and solidarity,• Equal treatment of genders,• Organizational structures based on participation,• Ownership structure preventing dependency of dominant individual interest,• Promotion of giving as a central ingredient t renewal and development• Rejection of the profit maximization principle and of speculative activities,• Self protection as an intermediary service provider to depositors and borrowers,• Transparency in all business conduct.

10. Computerization of Banking Field: the internal set up of banks have now been computerized. On each and every counter you will find a computer. All these computers are also interlinked too. The computers are also used in foreign exchange dealings of the banks. In foreign exchange cell, computers keep the following records:• Position of currency• Position of foreign exchange• Particulars of forward dealings• Maturity gap• Country wise position of foreign exchange, etc.

11. Electronic Fund Transfer (EFT): Different modes are made available for transferring the fund online under EFT. These are NEFT, RTGS and IMPS. These modes can be availed by any customer having access to his/her online banking. By just adding the beneficiary’s account details, we can transfer funds to that accounts anytime.

12. Elecronic Clearing Service (ECS): this scheme facilitates faster credit of interest and dividends to investor’s accounts directly by the companies and thus avoids delays and frauds.

Non Banking Financial Companies• Non banking financial companies or loan companies have emerged as important players

of the Indian Financial System. They have undergone quantitative changes through financial specialization . The role of these institutions as effective financial intermediaries has been well recognized as they have inherent ability to make quicker decisions, assume greater risks and customize their services and charges more according to the needs of their clients.• Definition:• A non banking financial company can be classified into two types:A. Miscellaneous non banking companyB. Residuary non banking company

A. Miscellaneous non banking company: A Company carrying on all or any type of following business is said to be Miscellaneous non banking company.

• Business (a) – managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company enters in to an agreement with a specific number of subscribers that everyone of them shall subscribe a certain sum in installments over a definite period and that everyone of such subscribers shall in his turn, as determined by lot or by auction or by tender or in such manner as may be provided for in the agreement by entitled to the price amount.• Business (b) – conducting any other form of chit which is different from the type of

business (a)• Business (c) – undertaking or carrying on or engaging in or executing any other

business referred to in business (a) and business (b).

• Residuary non banking company: A company which receives any deposit under any scheme or arrangement, by whatever name called, in one lump sum or in installments by the way of contribution or subscription or by sale of units or certificates or instruments or in any other manner is said to be residuary non banking company.

• Objectives of NBFCs:1. To provide necessary capital to new industrial units.2. To enhance the use of modern technology and development of promotions in

agriculture, industry, health and energy.3. To lend money for importing technology and technical appliances in the industry.4. To lend money for enhancing technological development in the country.5. To provide loans and services to NRI for investing in businesses and industries

based on modern technology for earning more profits.• Characteristics of Non banking Financial Companies:

1. Helpful in the economic development of the country2. Collection of surplus amount and scattered savings3. Diverting the savings to Investment Purpose4. Bringing Stability in the capital market5. Their main motto is of earning profits6. Reducing the risks of the creditors7. Helping to the state and local governments.

• Types of Non banking Financial compaies:1. Hire purchase companies: the principal business is hire purchase transactions or

financing of hire purchase transactions.2. Leasing Companies: the principal business is leasing of equipments or financing of

such activities.3. Investment Companies: which carry the business of acquisition of securities.4. Housing Finance Companies: Finance acquisition or construction of houses or

development of land for housing purposes.• Role of Non banking financial Institutions:

1. Role of intermediaries between the creditors and the debtors for mobilizing savings into investments for economic advantage.

2. They play the role of money merchants.3. They help industry people by lending them cash credit and in purchasing shares

and bonds by providing financial help.4. They exchange various assets into financial form immediately.5. They also provide necessary financial help to central government, state

government and local bodies.

• Limitations of Non banking Financial Comapnes:1. There is no control of RBI on most of the non banking financial companies. Their

functions are framed according to their own interests and their set of rules. Due to this economic development can not be achieved as per the social justice and equality.

2. The non banking financial companies do not provide loans on the whole overall production process. NBFCs do not lend for all the departments of the business units.

3. Priority lending is not given to the important sections. The distribution of money by these non banking financial companies is not scientific but it is given as per their own whims.

4. These companies have not proved collaborative I establishing equilibrium at the regional level. These companies have concentrated themselves to provide financial lending only to the developed industrial areas and hence the industries in other new regions have been left out by them for lending purpose. It has created a wide gap between the developed and underdeveloped regions.

5. These companies have not given prior attention to industrial entrepreneurship. They have diverted their flow of money towards the big industrial units and also have given the priority to the very big technical units and hence the new talented entrepreneurship is not given due weightage for development of the unit. So it is expected that due weightage should be given to small business entrepreneurs too.

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