Question

Explain the structure of organized sector of money market in India

Answer 1

Money market is a market for lending and borrowing of short term funds. The money market is India is dichotomous by nature. It comprises of both, the organised sector and the unorganised sector.

The organised sector includes the following:

1. Reserve Bank of India (RBI): Reserve Bank of India (RBI) is the central bank of India. It is at the apex of banking system in the country. It is entrusted with the responsibility of regulating money market. RBI was set up on the recommendations of Hilton Young Commission. The RBI Act of 1934 provides the statutory basis of the functions of bank. On 1st April, 1935, RBI commenced its operations as a private shareholders’ bank. It was nationalized on 1st January 1949. RBI is the most important constituent of the money market.

2. Commercial Banks: Commercial banks act as intermediaries in the country’s financial system by bringing the savers and investors together. They are profit seeking financial institutions. Accepting of deposits and granting loans & advances are the primary functions of commercial banks. Commercial banks play an important role in mobilizing savings and allocating them to various economic sectors. It includes both scheduled commercial banks and nonscheduled commercial banks.

3. Co-operative Banks: With the enactment of Co-operative Credit Societies Act of 1904, these banks came into existence. Co-operative banks complement the efforts of commercial banks in meeting the credit needs of local population, especially small and medium income groups.

The cooperative banks in India have three tier structure as follows:

1. Primary Cooperative Credit Societies (Primary level)
2. District Central Co-Operative Banks (District level)
3. State Co-Operative Banks (State level/ Apex bank).

4. Development Financial Institutions( DFIs): DFIs are agencies that provide medium and long-term financial assistance to aid the development of industry, agriculture and other key sectors. Industrial Finance Corporation of India (IFCI) was the first DFI to be established in 1948. Gradually, DFIs have diversified their operations. They have set up subsidiaries to provide wide range of new products and services such as commercial banking, consumer finance, broking, venture capital finance, infrastructural financing, e-commerce etc. Thus, DFIs are in the process of converting themselves into universal banks. RBI has issued guidelines for them to become commercial banks. E.g.: Industrial Credit and Investment Corporation of India (ICICI) has become a universal bank by reverse merger with its subsidiary ICICI Bank.

5. Discount And Finance House of India (DFHI): DFHI was set up in 1988 as a money market institution on the recommendations of the Vaghul Committee. It imparts liquidity to the money market instruments. DFHI is jointly owned by the RBI, public sector banks and financial institutions. Apart from the above, organised sector also comprises of investment institutions and regulated financial intermediaries.