Banking Acts and Development Financial Institutions | MODULE C: INDIAN FINANCIAL ARCHITECTURE
Banking Regulation Act, 1949 and RBI Act, 1934
Background of Enactment
The need for a central banking authority and regulation of banking operations arose during the early 20th century due to financial instability and banking crises. This led to the enactment of the Reserve Bank of India Act in 1934 and later the Banking Regulation Act in 1949.
PART I: Reserve Bank of India Act, 1934
Chapters I to V Overview
- Chapter I: Preliminary – definitions and commencement
- Chapter II: Establishment and incorporation of RBI
- Chapter III: Central Banking functions like issuing currency, maintaining reserves
- Chapter IV: Business of the Bank – powers to deal with the Government and banks
- Chapter V: RBI's relationship with the Government
Schedules to the RBI Act, 1934
The Second Schedule lists scheduled banks. A bank needs to satisfy certain criteria to be included, such as minimum paid-up capital and reserves of Rs. 5 lakhs.
PART II: Banking Regulation Act, 1949
Structure and Sections
- Section 1 to 56: Covers licensing, regulation of management, operations, audits, amalgamation, etc.
- Applies to: All commercial banks in India, both public and private sector
Development Financial Institutions (DFIs)
Evolution in India
Post-Independence, India lacked long-term finance sources. DFIs emerged to fill this gap by providing medium and long-term financing to industries and key sectors.
Gaps in the Post-Independence Financial System
- Lack of capital market development
- Inadequate long-term credit institutions
- Dependence on foreign institutions for infrastructure development
Objectives of DFIs
- Provide medium and long-term finance
- Promote industrial growth
- Support economic development in backward areas
Classification of DFIs
- Sectoral: Industry, agriculture, export
- Ownership: Government-owned, private, joint
- Function-based: Promotional, developmental, financial
Role in the Indian Economy
DFIs helped in industrialization, employment generation, infrastructure development, and promotion of entrepreneurship.
Changing Role of DFIs
Many DFIs converted to universal banks due to economic reforms and overlapping roles with commercial banks.
Key DFIs in India
- IFCI: Industrial Finance Corporation of India, set up in 1948 for long-term industrial finance
- ICICI: Industrial Credit and Investment Corporation of India, established in 1955
- IDBI: Industrial Development Bank of India, started in 1964, now a universal bank
- SIDBI: Small Industries Development Bank of India, focuses on MSMEs
- EXIM Bank: Export-Import Bank of India, supports international trade
- NABARD: National Bank for Agriculture and Rural Development, supports rural development
- NHB: National Housing Bank, promotes housing finance
- NaBFID: National Bank for Financing Infrastructure and Development, for infra development
Example: Simple Calculation
Suppose a DFI gives a loan of Rs. 10,00,000 at an interest rate of 8% for 5 years. The interest earned =
= Principal × Rate × Time = 10,00,000 × 8/100 × 5 = Rs. 4,00,000.
Total amount repaid = Rs. 14,00,000
Chapter List
- Indian Financial System – An Overview
- Indian Banking Structure
- Banking Regulation Act, 1949 and RBI Act, 1934
- Development Financial Institutions
- Micro Finance Institutions
- Non-Banking Financial Companies
- Insurance Companies
- Indian Financial System - Regulators & their roles
- Reforms & Developments in the Banking sector
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