The process, also known as capital formation.



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The rupee is convertible to the currencies of other countries.

The RBI keeps a minimum backing of Rs. 200 crore against issuance of coins and currency notes out of which there should be gold worth Rs. 115 crore and balance in rupee securities.

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The issue of currency into circulation and its withdrawal from circulation i.e. expansion and contraction respectively takes place through the Banking Department of the RBI.

Though one rupee notes and coins and small coins are issued by the Central Government, this distribution to the public is the sole responsibility of the RBI. According to the provision of the law the RBI can print and issue currency notes of different denominations from two rupee note to ten thousand rupee notes. India’s financial system includes a host of institutions and the mechanisms which affects the generation of savings by the community. The Indian financial system performs a crucial role in economic development of India through saving investment process, also known as capital formation. The Indian financial system which refers to the borrowing and lending of funds consists of two parts viz: Indian money market (organized and unorganized sector) and the Indian capital market. The organized banking in India can be divided into three categories viz the Central Bank of the Country as the Reserve Bank of India, the Commercial Banks and Cooperative Banks.

The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system. It keeps the reserve of all Commercial Banks and hence is known as the Reserve Bank. Commercial Banks mobilizes savings in urban areas and make them available to large and small industrial and trading units mainly for working capital requirements. After 1969 commercial banks are broadly classified into nationalised or public sector banks and private sector banks. The State Bank of India (SBI) and its associate banks are the public sector banks. The Regional Rural Banks came into existence since 1976 with the specific objective of providing credit and deposit facilities particularly to small and marginal farmers, agricultural labourer’s artisans and small entrepreneurs. Primary co-operative credit societies or banks were originally set up in villages to promote thrift and savings of the farmers and to meet their credit needs for cultivation. To support them, central or district cooperative banks were established.

The funds of the RBI meant for agricultural sector actually pass through the state co-operative bank and central co-operative banks. After independence the Indian banking system has recorded rapid growth. This was due to economic planning, increase in money supply, growth of banking sector, control and guidance by the RBI and nationalisation of banks in July 1969.

In 1950-51, there were 430 commercial banks but the member banks declined rapidly due to RBIs policy or merger of small banks with big banks as a measure of strengthening the banking system. 14 major Indian scheduled commercial banks each having aggregate deposits of not less than Rs. 50 crore were taken over by the Government of India in 1969. On April 15, 1980 six more commercial banks whose total deposits exceeded by Rs. 200 crore were nationalised.

Thus the State Bank of India, 7 associate banks of SBI, 19 nationalised banks i.e. 27 commercial banks together constitute public sector commercial banks.

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