Commercial Banks-2

1. INDIAN ECONOMY COMMERCIAL BANKS AND RURAL CREDIT IN INDIA DONE BY_ M. SOHANA REDDY {B.A (3rd YEAR), EPP} St. FRANCIS COLLEGE (DEGREE & PG), BEGUMPET, TELANGANA, INDIA.

2. SYNOPSIS • DIFFERENCES BETWEEN RURAL CREDIT AND COMMERCIAL BANKS • IMPORTANCE OF COMMERCIAL BANKS • ADVANTAGES AND DISADVANTAGES • CHALLENGES • CRITICISMS • CONCLUSION • INTRODUCTION • RURAL CREDIT • MEANING • EVOLUTION • TYPES AND SOURCES • COMMERCIAL BANKS • MEANING • EVOLUTION • TYPES OF COMMERCIAL BANKS • ROLE AND FUNCTIONS • HOW COMMERCIAL BANKS ARE PERFORMED THROUGH RURAL CREDIT

3. RURAL CREDIT Rural Credit refers to financial assistance provided to people in rural areas to support their agricultural and economic activities. They are facilitated through various channels - Rural Banks, Cooperative Societies, microfinance Institutions, Govt. sponsored Programs like Kisan Credit Card Scheme. Commercial Banks in India are financial institutions that offer a wide range of banking services to individuals, businesses, and government entities. These banks play a crucial role in the country's financial system and economy. Ex - SBI, PUNJAB NATIONAL BANKS, AXIS BANK, BANK OF BARODA etc.

4. Government/Reserve Bank of India (RBI) has taken several measures to increase institutional credit flow and bringing more and more farmers including small and marginal farmers within the fold of institutional credit. • As per RBI directions, Domestic Scheduled Commercial Banks are required to lend 18% of the Adjusted Net Bank Credit (ANBC) or Credit Equivalent to Off-Balance Sheet Exposure (CEOBE), whichever is higher, towards agriculture. • 21.7 lakh crore has been disbursed for the financial year 2023 against a target of 18.7lakh crore successfully.

5. EVOLUTION - RURAL CREDIT PRE - INDEPENDENCE ERA • During the pre-independence period, the rural credit system in India was dominated by informal lenders such as moneylenders and zamindars. • These lenders charged very high interest rates and often exploited the poor farmers. POST - INDEPENDENCE ERA • Establishment of Cooperative Credit Societies: • Cooperative credit societies were established in villages to provide farmers with access to credit at affordable interest rates. • Presently, around 8 lakh cooperative credit societies • EXAMPLES OF FEW COOPERATIVE CREDIT SOCIETIES • Amul Dairy Cooperative Society • Indian Farmers Fertilizer Cooperative Limited (IFFCO) • Kerala State Cooperative Bank

6. 2.Nationalization of commercial banks • Nationalized in 1969 • Mandated to open branches in rural areas and provide credit to farmers. • 1969, 14 major Commercial banks were nationalized. • At present, 34 Commercial banks - 12 Public Sector, 21 Private Sector Banks. 3. Establishment of Regional Rural Banks (RRBs) • Established in 1975 (Recommendations of Narasimham Committee) • Provides credit to Small and Marginal Farmers in Rural Areas • March 2016 - 56 RRB’s with 45 recommendations of sustainable RRB’s. • At present, 43 RRB’s sponsored by Govt. of India. 4. Establishment of the National Bank for Agriculture and Rural Development (NABARD) • Established in July, 1982 as an Apex bank for the rural credit system. • Provides refinance to cooperative banks, RRBs, and other financial institutions that lend to farmers.

7. RECENT DEVELOPMENTS • Growth of MicroFinance Institutions (MFIs) • MFIs have emerged as a major source of credit for the poor and marginalized, including farmers. • MFIs provide small loans to borrowers at affordable interest rates. • Direct Benefit Transfer (DBT) • The government has introduced DBT for a number of subsidies, including agricultural subsidies. • This has helped to reduce corruption and ensure that subsidies reach the intended beneficiaries. • Use of Technology • Technology is being increasingly used to deliver rural credit services. • For example, farmers can now apply for loans online and receive payments through their mobile phones.

9. TYPES - RURAL CREDIT • Short-Term Loans/Credit • Quick loans for small needs • Less than a Year • Medium-term Loans/Credit • Suitable for small businesses with a clear repayment plan. • Between 2 to 5 years • Long-term Loans/Credit • Like buying land, heavy machinery, or making permanent improvements • 5 - 20 years

10. COMMERCIAL BANKS EVOLUTION

11. PRE - INDEPENDENCE (1947) - PHASE 1 • More than 600 banks in India. • The establishment of the Indian banking system can be traced back to the establishment of banks like the Bank of Hindustan in Calcutta (1770). • Several early banks - the General Bank of India (1786), the Oudh Commercial Bank (1881), the first commercial bank in India, struggled and eventually failed. • Successful banks - Allahabad Bank (1865), Punjab National Bank (1894), Bank of India (1906), Bank of Baroda (1908), and Central Bank of India (1911). • The merger of the Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) in 1921 resulted in the formation of the Imperial Bank of India, later renamed the State Bank of India in 1955. • During this era, most banks were relatively small and prone to failures, leading to low public confidence and sluggish deposit mobilization.As a result, people continued to rely on the unorganized sector, including moneylenders and indigenous bankers.

12. 2nd PHASE (1947 - 1991) • Broadly the main characteristic feature of this phase is the Nationalization of the bank. • Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized. • On the recommendation of the Narasimham Committee, RRBs were formed on Oct 2, 1975 APRIL 1980 19 JULY 1969

13. THIRD PHASE (1991 ONWARDS) • In 1991, the Narasimham committee gave its recommendation i.e. to allow the entry of private sector players into the banking system.Following this, RBI gave licenses to 10 private entities, out of which few survived the market demands, which areICICI, HDFC, Axis Bank, IndusInd Bank, DCB. • In 1998, the Narasimham committee again recommended the entry of more private players. As a result, RBI gave a license to the following newbies: Kotak Mahindra Bank (2001), Yes Bank (2004). • In 2015, IDFC Bank and Bandhan Bank emerged. • For further financial inclusion, RBI proposed to set up 2 new kinds of banks i.e. Payment Banks and Small Banks. • In 2015, RBI gave in-principle licenses to 11 entities to launch Payments Bank and granted approval to the 10 applicants to set up Small Finance Banks.

14. ACCORDING TO 2016, TOP 10HIGHESTCOMMERCIALBANKSSTATES IN INDIA

15. TYPES OF COMMERCIAL BANKS

16. ROLE AND FUNCTIONS OF COMMERCIAL BANKS PAYMENT SERVICES • Commercial banks offer various payment services such as issuing checks, debit cards, and facilitating electronic funds transfers. • They play a crucial role in the payment system. SAFEKEEPING AND CUSTODY • Banks offer safe deposit boxes and custody services to safeguard valuable items and financial assets. ACCEPTING DEPOSITS • Safe place for individuals/ businesses to deposit their money. • Includes savings accounts, checking accounts, and fixed deposits.

17. CENTRAL BANKING FUNCTIONS • In some countries, commercial banks also act as agents for the central bank, helping implement monetary policy, such as controlling the money supply. FINANCIAL ADVISORY • They offer financial advice and services such as wealth management, retirement planning, and investment advisory. ELECTRONIC BANKING • Many banks provide online and mobile banking services, making it convenient for customers to manage their finances and make transactions.

19. HOW ARE COMMERCIAL BANKS PERFORMING THROUGH RURAL CREDIT? RURAL INFRASTRUCTURE FINANCING AGRICULTURAL LOANS GOVT. SCHEMES RISK MITIGATION CROP LOANS SELF HELP GROUPS

20. DIFFERENCES BETWEEN COMMERCIAL BANKS AND RURAL CREDIT RURAL COOPERATIVE CREDIT BANKS

21. IMPORTANCE OF COMMERCIAL BANKS ACCESS TO FINANCE Ensures people in rural areas have access to money for farming and small businesses. AGRICULTURAL DEV. Helps farmers buy what they need, improving agriculture and food supply. RURAL DEV. Funds projects like schools and healthcare, making rural areas better. INVESTMENT IN INFRASTRUCTURE Commercial banks invest in important projects like roads and bridges that help a country develop. FINANCIAL INCLUSION Give banking services to those who don't have access, helping them save and build wealth. ECONOMIC GROWTH Commercial banks lend money to businesses, creating jobs and boosting the economy.

22. ADVANTAGES OF COMMERCIAL BANKS PRIVACY PROTECTION - Commercial banks prioritize customer privacy, ensuring that personal information and financial details are kept confidential and not shared with others. COST EFFICIENT - Commercial banks are a cost-effective source of funding since they do not involve expenses like prospectus issuance or underwriting fees, and their services typically come with transparent and no hidden charges. FLEXIBILITY - Borrowers find commercial banks to be flexible sources of funds, as they can easily access money when needed and adjust borrowing amounts according to their requirements. Repayment options are also accommodating. SIMPLIFIED PROCEDURES - Borrowing from commercial banks involves fewer formalities and paperwork, eliminating the need for underwriters or prospectus issuance, streamlining the borrowing process for a hassle-free experience.

23. DISADVANTAGES OF COMMERCIAL BANKS COMPLEX VERIFICATION - Commercial banks must conduct thorough investigations into a borrower's background and financial situation to ensure responsible lending, which can make the borrowing process intricate and rigorous. SHORT - TERM FOCUS - Loans from commercial banks typically have short repayment periods, making it challenging to renew or extend the borrowing, often requiring borrowers to take out fresh loans SECURITY REQUIREMENT - Commercial banks generally require borrowers to provide collateral or personal guarantees to secure loans, and the loan amount may be lower than the value of the security, posing a disadvantage to borrowers. STRICT TERM CONDITIONS - Commercial banks may impose stringent terms and conditions on borrowers, sometimes making it difficult for them to meet the requirements and potentially causing them to seek alternative funding sources with more favorable terms.

24. CHALLENGES - COMMERCIAL BANKS REGULATORY COMPLIANCE Banks must adhere to strict regulations and reporting requirements, which can be complex and subject to change. CYBER SECURITY Protecting customer data from cyberattacks is a constant concern, as cyber threats continue to evolve. COMPETITION Banks compete not only with each other but also with fintech companies and other non-traditional financial institutions. CUSTOMER EXPECTATION Customers increasingly expect seamless digital banking experiences, putting pressure on banks to invest in technology. MARKET RISK Banks must navigate financial market volatility, which can impact their investments and trading activities. TECHNOLOGICAL ADVANCEMENT Keeping up with rapid technological changes is vital, both for security and competitiveness.

25. CRITICISMS TO COMMERCIAL BANKS After nationalization, banks rapidly increased lending to rural areas, but this expansion and diversification caused problems in the system. Commercial banks found it time-consuming and costly to approve and oversee numerous small loans in rural branches. Opening many branches in rural areas with limited business opportunities increased the banks' operating costs, affecting their profitability negatively. The recovery position of the Commercial Banks is bad.

26. CONCLUSION Commercial banks play a pivotal role in finance sector.They incline towards funding and lending large amount of loan to marginal farmers, which relieves them from the debt trap. Yearly setting higher targets,these banks are proving to be an authentic source of finance to all marginal sectors at large. Hence,they hold greater recognition in uplifting the economy of the country at faster pace.