The Indian Financial Structure

"Banking industry is consolidating and diversifying". The mergers in banks are not like the mergers that take place in companies. In case of companies the two parties decide among themselves whether to go for the merger or not. But in case of Banks it is the RBI that governs which banks should go ahead with the merger. In case of US the government initially there were 1600 banks at the start of the 19th century but now there are more than 13 banks. In India the situations is not like that and there are a large number of banks, the sole reason has been that in India sentiments of hte locals play a huge in rule in decision making on the choice of the bank. People of mysore would prefer to put there money in Bank of Mysore and not Bank of Travancore. Though both belong to State bank but if they are merged then the money might move out to a third bank.

Diversification is in terms of services offered by the bank. Earlier banks used to be places simply for parking your money and borrowing money but over time this outlook is changing and banks are getting into different business lines like underwriting, M&A advisory and trading scrips.

Difference between banks and Non Banking Financial Institutions ?
Both are same apart from the fact that NBFC's are not allowed to issue negotiable instruments like bill of exchange (Cheque's) and promisory notes (notes, cash that we normally have with us)

What are scheduled banks and Non-scheduled banks?
Scheduled banks are those which are mentioned in the schedule II of the Reserve Bank of India(RBI) Act, 1934 [http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/54435.pdf] (Page 54 first two bullets). Scheduled banks must meet two requirements

• Paid up capial must be greater than 5 lakh


• RBI should feel that the banks should not run away with the capital

For a list of the scheduled banks in India refer to the link below
http://finance.indiamart.com/investment_in_india/scheduled_commercial_banks.html

Non-scheduled banks are only 4 in India namely




How are banks in India incorporated ?
Banks in india can be incorporated by three laws
SBI act
Banking regulation act
COmpanies act 1934

SOme of the banks like Kotak Mahindra are incorporated as companies the reason being that getting a license to operate as a bank under the banking regulation act is quite difficult.

TRENDS
During the 19th century there was a credit repression which was being faced by the industry. You could not give the credit freely based on the credentials of the person. The person to whom you would lend was being regulated by the RBI. RBI would make statements like "you would this year lend only to equipment manufacturers". But this has changed now and the banks are free to lend to anyone they deem credit worthy.

Eg.2 Till the 1990's the education loan interest rate was being guided by the RBI. so there was parity in the interest rates given by banks. But as the market got re-regulated RBI now only specifies the upper cap and banks are free to charge what they wish to.

To put in short till the 1990's we were in a regulated financial service market but now it has been re-regulated(do what-ever you feel but up-to a limit not beyond) and deregulated (do whatever you feel like).

The banking sturucture
1st tier
2nd tier
3rd tier