Unit 2: Financial institutions

Commercial banks

• Public sector banks: majority government-owned — SBI and 11 nationalised banks (after the 2019–20 mergers). Nationalisation in 1969 (14 banks) and 1980 (6 banks).
• Private sector banks: old (pre-1993) and new (HDFC Bank, ICICI Bank, Axis Bank, Kotak).
• Foreign banks: branches or wholly owned subsidiaries (Citibank's retail business sold to Axis in 2023; SBM, DBS India).
• Organisation: head office → zonal/regional offices → branches; board of directors; functional departments (credit, treasury, retail, risk, IT).

Regional Rural Banks (RRBs)

• Set up under the RRB Act, 1976 (Narasimham Working Group, 1975) to provide credit to small farmers, labourers and artisans in rural areas.
• Ownership: Central Government 50%, sponsor bank 35%, state government 15%.
• Amalgamated over time to improve viability (about 28 RRBs after the 2025 consolidation — "one state, one RRB").

Co-operative banks

• Urban co-operative banks (UCBs): serve urban and semi-urban areas; under dual control (RBI for banking functions, Registrar of Co-operative Societies for management) — strengthened by the Banking Regulation (Amendment) Act, 2020.
• Long-term credit: State/Primary Co-operative Agriculture and Rural Development Banks.
• Features: owned by members, one member one vote, service motive, cheaper credit.

New-generation banks

• Small Finance Banks (2015): small loans to unserved segments; 75% of ANBC to priority sector.
• Payments Banks (2015): deposits up to ₹2 lakh per customer, no lending — Airtel Payments Bank, India Post Payments Bank.

An NBFC is a company registered under the Companies Act engaged in lending, acquiring securities, leasing, hire purchase, insurance, chit business or collecting deposits, but not in agriculture, industrial or trading activity as principal business (RBI's 50–50 test: financial assets > 50% of total assets and financial income > 50% of gross income).

• Types: investment and credit companies (NBFC-ICC), infrastructure finance, microfinance (NBFC-MFI), housing finance companies, core investment companies, NBFC-factors, account aggregators, peer-to-peer lending platforms.
• Scale-based regulation (2021): base, middle, upper and top layers with increasing regulation (upper-layer NBFCs — e.g., Bajaj Finance, Tata Capital — face bank-like norms).
• Role: credit to MSMEs, vehicles, gold loans, microfinance, last-mile reach; concerns — liquidity crises (IL&FS 2018), asset–liability mismatches.

• Role: risk transfer, long-term savings, investment in government securities and infrastructure, social security.
• Structure: 26 life insurers (LIC + private), about 34 general/health/specialised insurers, reinsurers (GIC Re + foreign branches), regulated by IRDAI.
• Investments: life insurers must invest at least 50% of life funds in government and approved securities — a major source of long-term funds.

• Structure: sponsor → trust (trustees) → AMC → custodian and RTA; regulated by SEBI (Mutual Funds) Regulations, 1996; AMFI as the industry body.
• Role: small savers get diversification and professional management; channel household savings into equity and debt markets; SIP inflows of over ₹25,000 crore a month (2025) support market stability.
• Schemes: equity, debt, hybrid, solution-oriented, index funds and ETFs.

A depository holds securities in electronic (dematerialised) form and facilitates their transfer by book entry — Depositories Act, 1996.

• Benefits: no risk of theft, forgery or loss; no stamp duty on transfer of demat shares; faster settlement (T+1); easy pledging; automatic credit of bonus and splits; nomination.
• Dematerialisation: converting physical certificates into electronic holdings; rematerialisation is the reverse.