Top Financial Terms You Must Know! Banks, NBFCs, The RBI (Series 3)

Finance is a vast subject which has several branches. The modern business world is changing rapidly and moving forward towards a direction of advancement in terms of its functioning. One has to be familiar with the terminology associated with the finance world.

Table of Contents

This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.

What Are Commercial Banks?

Banking is a fundamental branch of commerce and banking institutions are essential for the economy which facilitate trade. Banks take up an important space and position in the modern business. No country can make commercial and industrial progress without a well organised and well structured banking system.
Banks provide with the facility for deposit, encourage the habit of savings, mobilize idle funds and channelise them into productive uses.
Banks also provide facilities for safe custody, investment of money and transfer. They provide short term and long term Finance to business entities.
A bank may be defined as a company which collects money from the public in the form of deposits and lends the same to borrower in the form of credit. It is an institution that provides facilities for safe keeping, lending and transfer of money.
Accepting deposits is the main and primary function of a commercial bank. It accepts deposit from the public for the purpose of making further loans and advances.

As per the Banking Regulations Act, 1949, “banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.

Banks are also described as dealers in money and credit as they accept deposits and lend the same. The mechanism is as such when a bank accepts deposit it purchases the money at a certain prevailing rate of interest, however, when it lends the same it sells money at a higher rate of interest the difference between the two is the profit made by the bank.

“An organisation whose principle operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.” R.P. Kent

Types of Banks:

Central Bank: The central bank acts as the apex financial institution. Serves as a leader of the banking system and the money market. It exercises supervision and control over all other banks in the country, acts as a banker’s Bank. The Reserve Bank of India is the central bank of our country. The RBI frames the country’s monetary policy and occupies a central position in the banking system.
Commercial Banks: Commercial banks accept deposits from the general public and lends the same in the form of loans and advances for the purpose of generating profits. There are several commercial banks in a country. It is a banker to the general public.
Industrial Banks: These banks grand finance to industries for a medium term or long term periods, also known as development banks or Development and Financial Institutions. The examples which come under the industrial banking sector.
Merchant Banks: Various merchant banking functions like underwriting of securities, dealing with securities like issuing of securities, broking for companies.
Exchange Banks: As the name suggests, these banks provide foreign currency and other related facilities to importers and exporters. They provided services for collecting and supply information about foreign customers remittance of funds from one country to another. The Export Import Bank of India (EXIM) is an example of exchange banks.
Agriculture Banks: These banks provide credit to farmers against the security of land hence, they are also known as Land Development Banks. The National Bank for Agricultural and Rural Development (NABARD) is an example of agricultural banks.
Indigenous Banks: The money lenders in villages and small towns come under this category. These lenders generally charge high rates of interest.
Cooperative Banks: They accept deposits and grant loans to their members at concessional rate of interest. The primary aim is not to maximize the profit but to provide the facilities to its members.

What are NBFCs?

NBFC stands for Non Banking Financial Companies. Non banking financial companies (NBFCs) are institutions that facilitate financial services like a bank but don’t hold a banking license and are not regulated.
NBFCs cannot accept traditional demand deposits from the public, such as checks or savings accounts.
An NBFC is also known an NBFI, a Non-Banking Financial Institution.
A non banking financial company is not a bank but is a company which is registered under the Indian Companies Act, 1956. NBFCs are known for their approval of loans and advances but they cannot accept deposits from the public like a normal commercial bank.
NBFCs performs various functions like accepting deposits, forwarding loans and advances, leasing, hire-purchase.

Features of NBFCs:

NBFC cannot accept demand deposits from the general public like a normal commercial bank.
NBFCs do not form a part of the banking payment and settlement systems hence, cannot issue cheques to their customers.
Deposit insurance facility provided by the Deposit and Credit Guarantee Corporation is only available to bank customers. This facility of insurance proves to be very important in case of bankruptcy. However NBFCs do not provide such facility.
Cannot offer interest rates higher than the ceiling rate as prescribed by the RBI.
Should acquire minimum investment grade credit rating.
Allowed to accept and revenue term deposits for a minimum period of 12 months to maximum period of 60 months, but cannot accept demand deposits.
NBFCs are registered and governed under the Companies Act, 1956.
NBFCs mobilize the savings of the nation and further channelise it to better avenues.
This era is of technology, NBFCs are no exception to it. It has resulted in a significant growth of technology in the country.
NBFCs is play an integral part in promoting and all inclusive group by providing for different financial needs of business enterprises which is not a part of regular mainstream banking.
NBFCs create the trend when it comes to creating unique efficient and innovative financial products and services. The by-product of this process is the creation of a huge amount of employment opportunities.
Helps in the development of financial markets as they finance buying of various securities. The power to raise capital leads to increase in the capital stock of the company.

RBI- The Reserve Bank Of India:

The RBI stands for ‘The Reserve Bank of India’.
The Reserve Bank of India comes under the organised sector. RBI is the Central Bank of India and the apex financial institution. Every country in the world has a central bank.
The RBI acts as a regulator and supervisor of the entire financial system prevalent across the nation.
The RBI was established on April 1, 1935 in Kolkata.
The Reserve Bank of India was set up on the basis of the recommendations of the Hilton young commission. The RBI act of 1934 provides the statutory basis of the functions of the bank. RBI commenced its operations on 1st April, 1935 as a private shareholders’ Bank.
RBI was nationalised on first January 1949.

Dr. M. H. de Kock: “Central bank is one which constitutes the apex of the monetary and banking structure of the country.”

Prof. W. A. Shaw: “Central bank is a bank which controls credit.”

Functions of the Reserve Bank of India:

Issuing Currency Notes: The RBI possesses the sole right to issue currency notes of all denominations except one rupee note and coins. One rupee notes are printed by the Government of India and signed by the Finance Secretary. Similarly, all the coins are printed by the Government of India and signed by none, which are further circulated by RBI to the commercial banks. The currency is injected in the market through RBI.
Banker to the Government: The RBI is a banker and advisor to the government. It transacts the businesses and makes the relevant payments on behalf of government. It acts as an advisor to the government on a wide range of economic activities.
Lender of the Last Resort: The RBI acts as a banker’s bank and exercises statutory control over the commercial banks. All the scheduled banks are under a strict obligation to maintain a certain amount of cash reserves with the Reserve Bank of India in proportion to their demand and liabilities. The RBI gives financial assistance to banks in the form of discounting of bills, loans and advances against approved securities. It provides liquidity to banks experiencing financial constraints.
Online Platform: E-Kuber is the Core Banking Solution of Reserve Bank of India. It has the the provision of a single current account for each bank across the nation, with decentralised access to this account from anywhere-anytime using portal based services. This platform is used to regulate the commercial banks across the country.
Custodian of Foreign Exchange Reserves: Reserve Bank of India Act as a custodian of the country’s foreign exchange reserves. It has two maintain the rate of exchange of the currency (Rs) and ensure its stability.
Credit control: The RBI is responsible to regulate the money supply prevalent within the economy. As the apex banking institution of the country the RBI has the power to influence the volume of credit created by the banking system.
Data Collection: The RBI collects and utilises statistical information related to the banking sector and other financial sectors to analyse and take various integral decisions relating to the financial plan of the economy.
Financial Involvement: RBI has provisions to open no frill accounts by providing access to banking facilities at zero balance or nominal rates. The no frill accounts are such that, which are opened and maintained without the requirement of any minimum balance.
Development Activities: The Reserve Bank of India, from time to time, undertakes various development activities like priority sector lending (PSL) and disbursement of agricultural loans.The foreign banks and commercial banks are under an obligation by RBI to approve a certain predefined percentage of loans to the priority sector.
Supervision: The RBI supervisors various financial transactions taking place under the Payment And Settlement System Act, 2007.
Support: RBI has established the Reserve Bank Innovation Hub (RBIH) in Bengaluru which primarily focuses on strengthening and promoting the access to financial services for the low income population of the nation.

Sources of Income of the RBI:

By rendering various financial services.
Supervises and regulates the working of the entire financial machinery.
Keeps a check on the inflation rates prevalent, and the borrowing of the country.
Interest income by investment in bonds, government securities and by lending to commercial banks.