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Role of Banking/ Banks in Resource Mobilization

Role of Banking

Financial intermediaries, often referred to as FI, play a crucial role in facilitating resource mobilization. Among the most significant FI are banks, insurance companies, and capital markets. Banks, as a prime source of resource mobilization, accept deposits from the public and extend credit, providing a sense of certainty and assurance to depositors by guaranteeing repayment along with pre-agreed interest.

  • When individuals have surplus money, they can choose to invest in stock markets or deposit it in banks. Opting for banks ensures a high level of certainty and assurance due to the guaranteed repayment, while stock exchanges do not provide such assurances.
  • Specialized financial institutions, like banks, focus on financing specific economic and social activities. These may include supporting small and cottage industries, insurance companies, commercial mortgage lenders, and specialty equipment financing organizations.
  • In India, government undertakings such as the Export-Import Bank of India, Board for Industrial and Financial Reconstruction, Small Industries Development Bank of India, and National Housing Bank serve this purpose by offering financial and technical assistance to Indian industries.
  • In the initial stages of economic development, banks play a crucial role in resource mobilization, particularly in risk-averse economies like India. New firms in developing economies often turn to banks for loans, as they find it challenging to raise significant capital through capital markets.
  • As the Indian economy expands, capital markets are strengthening year by year. Despite this, the banking industry remains a vital backbone of the Indian economy. Effective resource mobilization aims to channelize resources towards the most productive sectors and avenues, ultimately benefiting the least advantaged people.

Commercial banks encompass both scheduled and non-scheduled commercial banks, which fall under the regulatory framework of the Banking Regulation Act, 1949, and are subject to oversight by Other Scheduled Banks.

Scheduled Commercial Banks are those specifically listed in the second schedule of the RBI Act of 1934. To qualify, these banks must have a paid-up capital and funds collection amounting to at least Rs. 5 Lakh. Additionally, they are required to refrain from engaging in any activities that could harm the interests of depositors. The banks in this category are broadly classified into:

  1. State Bank of India and its Associates
  2. Other Nationalized Banks
  3. Foreign Banks: These banks can either establish branches in India or opt for the formation of wholly owned subsidiaries (WOS), where the parent company holds 100% of the shares.
  4. Established in 1975, RRBs promote rural economic growth, complementing the Cooperative Credit Structure. Sponsored by a commercial bank, they facilitate rural credit expansion.

Indicators used to measure Resource Efficiency

  • Resource efficiency = GDP/Domestic Material Consumption.
  • It also calculated as, RE = GDP/Material flow indicator (MFA).

    Other Scheduled Commercial Banks (Private Banks)

    • Pre-1990s, banks like ING Vysya, Jammu & Kashmir Bank stayed private. 1993 Banking Law amendment allowed new licenses post LPG reforms.
    • Prominent banks such as HDFC, ICICI, AXIS Bank, Kotak Mahindra intensified competition. IDFC and Bandhan received ‘in-principle’ approval, expanding the banking sector.

    Non Scheduled Banks

    • Some banks aren’t listed in the second schedule of the RBI Act 1934.
    • These banks have to maintain a certain amount of cash as per statutory requirements. The interesting part is that they don’t have to park this cash with the RBI; they can keep it with themselves.
    • Even though these banks can’t borrow from the RBI for regular banking activities, they can reach out to the RBI in special situations when they need financial assistance.

        Cooperative Banks

        • Cooperative banks are special financial institutions where the members are not just customers but also the owners of the bank.
        • Members join voluntarily to fulfill common economic, social, and cultural needs through a jointly-owned and democratically-controlled enterprise.
        • In the 1960s, these banks played a crucial role, constituting about 80% of institutional credit.
        • However, with the nationalization of banks, they faced tough competition from commercial banks, leading to a substantial decrease in their market share.
        • Depending on their structure and functions, one can categorize cooperative banks as either scheduled or non-scheduled.
        • Post-nationalization, cooperative banks encountered challenges as commercial banks gained prominence.
        • This competition resulted in a significant decline in the market share of cooperative banks.
        • A credit union is a specific type of cooperative bank where members own and democratically control the institution.
        • The primary goal of a credit union is to promote thrift and offer competitive credit rates, along with providing various other financial services to its members.

        Non-Banking Finance Companies (NBFCs)

        • Non-Banking Financial Companies (NBFCs) play a vital role in the financial system, engaging in activities such as lending, investment in shares and securities, hire purchase, chit funds, insurance, and money collection. These companies are categorized based on their line of activity.
        • Initially, regulators focused on NBFCs for deposit-taking, setting limits, and regulating interest rates. NBFCs cannot open current accounts or issue cheque books.
        • Merchant banks, specializing in international finance, business loans, and underwriting, contribute significantly to the financial landscape. Unlike traditional banks, they don’t offer regular services to the general public but focus on international trade, making them experts in dealing with multinational corporations.
        • Essential for resource mobilization, international trade financing firms facilitate collaboration among importers, exporters, banks, insurers, and service providers.
        • Innovation funding, exemplified by entities like the India Innovation Fund, a SEBI-registered venture capital fund, plays a pivotal role in supporting early-stage Indian firms focused on innovation in areas such as Information and Communication Technologies and Life Sciences.

              Read Also: Role of Fiscal Policy in Resource Mobilization

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