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A bank is a financial institution that accepts deposits and channels those

deposits into lending activities. Banks primarily provide financial services to
customers while enriching investors. Government restrictions on financial
activities by banks vary over time and location. Banks are important players
in financial markets and offer services such as investment funds and loans.
In some countries such as Germany, banks have historically owned major
stakes in industrial corporations while in other countries such as the United
States banks are prohibited from owning non-financial companies.


The name bank derives from the Italian word banco "desk/bench", used
during the Renaissance by Jewish Florentine bankers, who used to make
their transactions above a desk covered by a green tablecloth.[2] However,
there are traces of banking activity even in ancient times, which indicates
that the word 'bank' might not necessarily come from the word 'banco'.
In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards
called macella on a long bench called a bancu, from which the
words banco and bank are derived.

In the earlier societies functions of a bank were done by the corresponding

institutions dealing with loans and advances. Britishers brought into India
the modern concept of banking by the start of Bank of England in 1694. In
1708, the bank of England was given the monopoly for the issue of currency
notes by an Act. In nineteenth century various banks started operations,
which primarily were receiving money on deposits, lending money,
transferring money from one place to another and bill discounting.

Banking in India has a very old origin. It started in the Vedic period where
literature shows the giving of loans to others on interest. The interest rates
ranged from two to five percent per month. The payment of debt was made
pious obligation on the heir of the dead person.

Modern banking in India began with the rise of power of the British. To
raise the resources for the attaining the power the East India Company on 2nd
June 1806 promoted the Bank of Calcutta. In the mean while two other
banks Bank of Bombay and Bank of Madras were started on 15th April 1840
and 1st July, 1843 respectively. In 1862 the right to issue the notes was taken
away from the presidency banks. The government also withdrew the
nominee directors from these banks. The bank of Bombay collapsed in 1867
and was put under the voluntary liquidation in 1868 and was finally wound
up in 1872. The bank was however able to meet the liability of public in full.
A new bank called new Bank of Bombay was started in 1867.

On 27th January 1921 all the three presidency banks were merged together to
form the Imperial Bank by passing the Imperial Bank of India Act, 1920.
The bank did not have the right to issue the notes but had the permission to
manage the clearing house and hold Government balances. In 1934, Reserve
Bank of India came into being which was made the Central Bank and had
power to issue the notes and was also the banker to the Government. The
Imperial Bank was given right to act as the agent of the Reserve Bank of
India and represent the bank where it had no braches.

In 1955 by passing the State Bank of India 1955, the Imperial Bank was
taken over and assets were vested in a new bank, the State Bank of India.

Bank Nationalization:
After the independence the major historical event in banking sector was the
nationalization of 14 major banks on 19th July 1969. The nationalization was
deemed as a major step in achieving the socialistic pattern of society. In
1980 six more banks were nationalized taking the total nationalized banks to


Commercial Specialized Institutional Non Banking

Banks banks banks Financial Institutions

Land Mortgage IFCI

SBI and Rural Credit SFCs
Nationalised Industrial Dev. IRBI
banks (20) Associate Housing Finance NABARD
Banks EXIM Bank HDFC

Private Sector
Private Sectors
Banks Foreign Banks

Old private New private

sector banks sector banks

The composition of the board of directors of a scheduled commercial bank

shall consist of whole time chairman. Section 10A of the Banking
Regulation Act, 1949 provides that not less than fifty-one per cent, of the
total number of members of the Board of directors of a banking company
shall consist of persons, who shall have special knowledge or practical
experience in respect of one or more of the matters including accountancy,
agriculture and rural economy, banking, co-operation, economics, finance,
law, small-scale industry, or any other matter the special knowledge of, and
practical experience in, which would, in the opinion of the Reserve Bank, be
useful to the banking company. Out of the aforesaid number of directors, not
less than two shall be persons having special knowledge or practical
experience in respect of agriculture and rural economy, co-operation or
small-scale industry.

Besides the above the board of the scheduled bank shall consist of the
directors representing workmen and officer employees. The Reserve Bank of
India and the Central Government also has right to appoint their nominees
into the board of the banks.


Banks are extremely useful and indispensable in the modern community.

The banks create the purchasing power in the form of bank notes, cheques
bills, drafts etc, transfers funds bring borrows and lenders together,
encourage the habit of saving among people.
The banks have played substantial role in the growth of Indian economy.
From the meager start in 1860 the banks have come to long way. At present
in India there are 19 nationalized banks, State bank of India and its seven
Associate banks, 21 old private sector banks and 8 new private sector banks.
Besides them there are more than 30 foreign banks either operating
themselves or having their branches in India.
State bank of India and its associates

Name of bank Year of incorporation No. of Offices

State Bank of Bikaner 833
& Jaipur
State Bank of 1941 943
State Bank of India 1955*. 9161

State Bank of Indore 1960 456

State Bank of Mysore 1913 639
State Bank of Patiala 1917 754
State Bank of 1902 429
State Bank of 1945 681

Nationalized Banks
Year of incorporation No. of Offices
Name of bank
Allahabad Bank 1865 2027
Andhra Bank 1923 1159
Bank of Baroda 1908 2772
Bank of India 1906 2668
Bank of Maharashtra 1935 1330
Canara Bank 1906 2627
Central Bank of India 1911 3239
Corporation Bank 1906 799
Dena Bank 1938 1072
Indian Bank 1907 1417
Indian Overseas Bank 1937 1583
Oriental Bank of Commerce 1943 1166
Punjab & Sind Bank 1908 787
Punjab National Bank 1895 4117
Syndicate Bank 1925 1905
UCO Bank 1943 1801
Union Bank of India 1919 2140
United Bank of India 1950 1343
Vijaya Bank 1931 966

Old private Sector Banks

Name of bank Year of incorporation No. of Offices
Bank of Rajasthan 1943 388
Bharat Overseas Bank 1973 91
Catholic Syrian Bank 1920 314
City Union Bank 1904 137
Development Credit Bank 1995** 88
Dhanalakshmi Bank 1927 180
Federal Bank 1931 471
Ganesh Bank of Kurundwad -- 31
ING Vysya Bank 1930 381
Jammu & Kashmir Bank 1938 439
Karnataka Bank 1924 398
Karur Vysya Bank 1926 249
Lakshmi Vilas Bank 1926 239
Lord Krishna Bank 1940 118
Nainital Bank 1922 69
Ratnakar Bank 1943 75
Sangli Bank 1948 192
SBI Comm. & Intl. Bank 1993 3
South Indian Bank 1929 438
Tamilnad Mercantile Bank 1921 183
United Western Bank 1936 237
** Converted to a private sector commercial bank on 31st May, 1995.
Started as a Credit Society set up by the followers of His Highness the Aga
Khan in the 1930s and later converted into Co-operative Bank.

New Private Sector banks

Name of bank Year of incorporation No. of Offices
Bank of Punjab* 1995 120
Centurion Bank 1994 77
HDFC Bank 1994 446
ICICI Bank 1994 519
IDBI Bank Ltd. 1994 157
IndusInd Bank 1995 127
Kotak Mahindra Bank 1985 54
UTI Bank 1994 249
Yes Bank 2003 3
* Now merged with Centurion Bank

Foreign Banks
No. of Offices
Name of bank
ABM Amro 19
Abu Dhabi Commercial Bank 2
American Express Bank 8
Antwerp Diamond Bank 1
Arab Bangladesh Bank 1
Bank International Indonesia 1
Bank of America 5
Bank of Bahrain & Kuwait 2
Bank of Ceylon 1
Bank of Nova Scotia 5
Bank of Tokyo Mitsubishi 3
Barclays Bank 1
BNP Paribas 9
Calyon Bank 4
Chinatrust Commercial Bank 1
Cho Hung Bank 1
Citibank 35
DBS Bank 1
Deutsche Bank 5
Hongkong & Shanghai Banking Corpn. 39
JP Morgan Chase Bank 1
Krung Thai Bank 1
Mashreq Bank 2
Mizuho Corporate Bank 1
Oman International Bank 2
Societe Generale 2
Sonali Bank 1
Standard Chartered Bank 85
State Bank of Mauritius 3
UFJ Bank 1
(Source: A profile on banks 2004-05, RBI))
Future is bright:
The Information Technology (IT) is becoming an important component of
the banking sector. The customers have become more demanding and they
need value added services from the banks. The foreign banks have raised the
expectations of the customers causing the bank to invest strongly on IT. The
Indian banks have started to meet the expectations of the people by opening
both onsite and offsite ATMs. Banks have also started telebanking,
anytime/anywhere banking, mobile banking and Internet banking to give the
facilities to the customers. Banks have also following the RBI sponsored
technology programmes like mail messaging, Electronic fund transfers
(EFT), Structured Financial Messaging System (SFMS), (Real Time Gross
Settlement (RTGS), Centralized Fund Management System (CFMS) and
Negotiated Dealing System / Public Debt Office (NDS/PDO).

Banks have been given more teeth to tackle the Non performing assets by
passing the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. Under this Act, the banks can
take over the assets of the defaulters either by themselves or with the help of
Court. The power is in addition to the power to recover through the Debt
Recovery Tribunal. The Asset Reconstruction Companies have been formed
which also take over the distress assets from the banks.

The Indian banking sector is an important constituent of the Indian financial

system. The banking sector plays a vital role through promoting business in
urban as well as in rural areas in recent years. Without a sound and effective
banking system, India can not be considered as a healthy economy.
For the past three decades India's banking system has several outstanding
achievements to its credit. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to
the remote corners of the country. This is one of the main reasons of India's
growth process. ‘With total deposits of over Rs. 22 lakh crores in 2007-08,
the Indian commercial banking sector is one of the largest in the world. Over
the decades, the Indian banking sector has grown steadily in size, measured
in terms of total deposits, at a fairly uniform average annual growth rate of
about 22%.


1. Financial sector reform was undertaken early in the reform-cycle

in India

2. The financial sector was not driven by any crisis and the reforms
have not been an outcome of multilateral aid.

3. The design and detail of the reform were evolved by domestic

expertise, though international experience is always kept in view.

4. The Government preferred that public sector banks manage the

over-hang problems of the past rather than cleanup the balance
sheets with support of the Government.
5. It was felt that there is enough room for growth and healthy
competition for public and private sector banks as well as foreign
and domestic banks.



Banking is an ancient business in India. Initially, the growth of Indian banks

was very slow and also experienced periodic failures between 1913 and
1948. To streamline the functioning and activities of commercial banks, the
Government of India came up with The Banking Companies Act, 1949
which was later changed to Banking Regulation Act, 1949 as per amending
Act of 1965 (Act No. 23 of 1965).
During those days, public had lesser confidence in the banks. As an
aftermath deposit mobilization was slow. Government took major steps in
Indian banking sector reform after independence. On 19th July 1969, major
process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. Fourteen major commercial banks
were nationalized.
Second phase of nationalization of Indian banking sector reform was carried
out in 1980 with seven more banks having deposits over 200 crore. This step
brought 80 percent of the banking segment in India under Government
ownership. After the nationalization, the branches of the public sector bank
in India rose to approximately 800 percent and deposits and advances took a
huge jump by 11,000 percent. Thus, the Indian banking system became
predominantly government owned by the early 1990s.
Banking sector in pre reform period was facing very poor performance due
to excessive loans in comparison to total deposits having a ratio more than
50 percent consisting of about 90 percent of all commercial banking and
continuous escalation in non-performing assets (NPAs) in the portfolio of
banks also posed a significant threat to the very stability of the financial


In 1991, the country was caught into a deep crisis. The government at this
juncture decided to introduce comprehensive economic reforms. The
banking sector reforms were part of this package. The main objective of
banking sector reforms was to promote a diversified, efficient and
competitive financial system with the ultimate goal of improving the
allocative efficiency of resources through operational flexibility, improved
financial viability and institutional strengthening. Many of the regulatory
and supervisory norms were initiated first for the commercial banks and
were later extended to other types of financial intermediaries. While nudging
the Indian banking system to better health through the introduction of
international best practices in prudential regulation and supervision early in
the reform process, the main idea was to increase competition in the system
gradually. The reforms have focused on removing financial repression
through reductions in statutory preemptions, while stepping up prudential
regulations at the same time. Furthermore, interest rates on both deposits and
lending of banks had been progressively deregulated.
In August 1991, the Government appointed a committee under the
chairmanship of M. Narasimham, which worked for the liberalization of
banking practices. The aim of this Committee was to bring about
‘operational flexibility’ and ‘functional autonomy’ so as to enhance
efficiency, productivity and profitability of banks.

The Committee submitted its report in November, 1991 and recommended -

1. ‘Reduction in CRR to 8.5 percent and SLR to 25 percent over a period of
about five years.
2. Deregulation of interest rates structure and decreasing the emphasis laid
on directed credit and phasing out the concessional rates of interest to
priority sector.
3. To raise fresh capital through public issue by the profit making banks.
4. Transparency in Balance sheets
5. Establishment of Special Tribunals to speed up the process of debts
6. Establishment of an Assets Reconstruction Fund with special power of
7. Bank restructuring through evolving a system of a broad pattern
consisting of 3 or 4 large banks including SBI, 8-10 national Banks
engaged in ‘Universal’ Banking with a network of branches, local banks
confined to a specific region and RRBs confined to the rural areas
engaged in financing of agriculture and allied activities.
8. Abolishment of branch licensing and leaving the matter of opening and
closing of branches to the commercial judgment of individual banks
9. Progressive reduction in pre-emptive reserves.
10.Introduction of prudential norms to ensure capital adequacy norms,
proper income recognition, more stringent recognition of NPAs,
classification of assets based on their quality and provisioning against
bad and doubtful debts by constituting the special debt recovery tribunals
11.Introduction of greater competition by entry of private sector banks and
foreign banks and permitting them to access capital market
12.Partial deviation from directed lending
13.Strengthening the supervisory mechanism by creating a separate Board
for Banking and Financial supervision
14.Up gradation of technology through the introduction of computerized
system in banks.
15.Freedom to appoint chief executive and officers of the banks and changes
in the constitutions of the board
16.Bringing NBFC’S under the ambit of regulatory framework.

The Government also appointed another committee on banking sector

reforms under the Chairmanship of M. Narasimham which submitted its
report in April 1998. The committee focused on bringing about structural
changes so as to strengthen the foundations of the banking system to make it
more stable. The major recommendations of Narasimham Committee II
1. ‘In case of capital adequacy, strengthening the banking system through
an increase in the minimum capital adequacy ratio (CRAR) from 8
percent to 10 percent by 2002, 100 percent of fixed income portfolio
marked-to-market by 2001 (up from 70 percent), 5 percent market risk
weight for fixed income securities and open foreign exchange positions
limits (no market risks weights previously) and 100 percent commercial
risks weight to Government-Guaranteed advances (previously treated as
risk free)
2. To bring down net NPAs below 5 percent by 2000 and to 3 percent by

Reducing the minimum stipulated holding of the Government or RBI in the

equity of nationalized banks or SBI to 33 percent
1. Merging financially strong institutions and giving a revival
package to the weak banks
2. Strengthening the operation of rural financial institutions in terms
of appraisal, supervision and follow-up, loan recovery strategies
and development of bank-client relationships in view of higher
NPAs in public sector banks due to directed lending.
3. Amendment to RBI Act and Banking Regulation Act’4

The Government focused on competition enhancing measures by way of

granting operational autonomy to public sector banks, reduction of public
ownership in public sector banks by allowing them to raise capital from
equity market up to 49 percent of paid-up capital; setting of transparent
norms for entry of Indian private sector, foreign and joint-venture banks and
insurance companies, giving permission for foreign investment in the
financial sector in the form of foreign direct investment (FDI) as well as
portfolio investment, giving permission to banks to diversify product
portfolio and business activities, to prepare aroadmap for presence of foreign
banks and guidelines for mergers and amalgamation of private sector banks,
public sector banks and NBFCs, and providing guidelines on ownership and
governance in private sector banks.
Government focused through reform process on enhancing the role of
market forces by making sharp reduction in pre-emption through reserve
requirement, market determined pricing for government securities,
disbanding of administered interest rates with a few exceptions and
enhanced transparency and disclosure norms to facilitate market
discipline;introduction of pure inter-bank call money market, auction-based
repos-reverse repos for short-term liquidity management, facilitation of
improved payments and settlement mechanism, and requirement
ofsignificant advancement in dematerialization and markets for securitized
assets are being developed.
A provision was made for introduction and phased implementation of
international best practices and norms on risk-weighted capital adequacy
requirement, accounting, income recognition, provisioning and exposure,
taking suitable measures to strengthen risk management through recognition
of different components of risk, assignment of risk-weights to various asset
classes, norms on connected lending, risk concentration, application of
marked-to-market principle for investment portfolio and limits on
deployment of fund in sensitive activities, and'Know Your Customer' and
'Anti Money Laundering' guidelines, roadmap for Basel II, introduction of
capital charge for market risk, higher graded.


As the Indian banking system had become predominantly government
owned by the early 1990s, banking sector reforms essentially took a two
pronged approach. First, the level of competition was gradually increased
within the banking system while simultaneously introducing international
best practices in prudential regulation and supervision tailored to Indian
requirements. In particular, special emphasis was placed on building up the
risk management capabilities of Indian banks while measures were initiated
to ensure flexibility, operational autonomy and competition in the banking
sector. Second, active steps were taken to improve the institutional
arrangements including the legal framework and technological system. The
supervisory system was revamped in view of the crucial role of supervision
in the creation of an efficient banking system. . ‘Measures to improve the
health of the banking system had included (i) restoration of public sector
banks' net worth through recapitalization where needed; (ii) streamlining of
the supervision process with combination of on-site and off-site surveillance
along with external auditing; (iii) introduction of risk based supervision; (iv)
introduction of the process of structured and discretionary intervention for
problem banks through a prompt corrective action (PCA) mechanism; (v)
institutionalization of a mechanism facilitating greater coordination for
regulation and supervision of financial conglomerates; (vi) strengthening
creditor rights (still in process); and (vii) increased emphasis on corporate
During the 90’s quite a few new private sector banks made their appearance,
predominantly floated by public sector or quasi-public sector financial
institutions. Several foreign banks also made their entry into the Indian
banking scenario while the existing foreign banks expanded their operations.
Meanwhile, the performance of public sector banks continued to be saddled
with operational and lending inefficiencies. ‘The Verma Committee in 2000
identified Indian Bank, UCO Bank and United Bank of India as the weakest
of the twenty-seven public sector banks, in terms of NPAs and accumulated
losses. In March 2002, the gross NPAs of scheduled commercial banks
amounted to Rs. 71,000 crores out of which Rs. 57,000 crores or roughly 80
percent came from the public sector banks.
Financial liberalization has, however, had a predictable effect in the
distribution of scheduled commercial banking in India. Between 1969 and
1991 for instance, the share of the rural branches increased from about 22
percent to over 58 percent. The number of rural bank branches actually
declined from the 1991 figure of over 35,000 branches by about 3000
branches. Between 1969 and 1991 the share of urban and metro branches fell
from over 37 percent to less than 23 percent. In the years since it has crawled
back up to over 31 percent.


These reform measures have had major impact on the overall efficiency and
stability of the banking system in India. The present capital adequacy of
Indian banks is comparable to those at international level. There has been a
marked improvement in the asset quality with the percentage of gross non-
performing assets (NPAs) to gross advances for the banking system reduced
from 14.4 per cent in 1998 to 7.2 per cent in 2004. The reform measures
have also resulted in an improvement in the profitability of banks. The
Return on Assets (RoA) of the banks rose from 0.4 per cent in the year
1991-92 to 1.2 per cent in 2003-04. Considering that, globally, the RoA has
been in the range 0.9 to 1.5 per cent for 2004, Indian banks are well placed.
The banking sector reforms also emphasized the need to review the
manpower resources and rationalize the requirements by drawing a realistic
plan so as to reduce the operating cost and improve the profitability. During
the last five years, the business per employee for public sector banks more
than doubled to around Rs.25 million in 2004.
Since the process of liberalization and reform of the financial sector were
introduced in 1991, banking sector has undergone major transformation. The
underlying objectives of the reform were to make the banking system more
competitive, productive and profitable. Indian banks especially the public
sector banks and the old private sector banks are lagging far behind their
competitors in terms of both productivity and profitability so the public
sector banks and old private sector banks need to go for the major
transformation program for increase their productivity and profitability.
No doubt, the banking sector has been successful in improving the health
and efficiency of banking sector in India but they have failed in achieving
growth with equity. Privatization and globalization have also introduced
excessive competition (domestic as well as foreign) before Indian public
sector banks which has created an unstable banking environment.
After studying banking reform process it can be suggested that the public
sector banks must create strategic alliance with the rural regional banks to
open up rural branches and increased use of technology for improved
products and services for the same. ‘Banks must reinvent themselves so that
they can make a viable market out of the middle and low corporates.’9
Government should be strong enough to ensure accountability of
professionally managed firms causing the sub prime crisis in well known
financial institutions. Branch and ATM licensing should be abolished in
order to reduce competition. Prevailing conditions in current scenario are not
opportunistic in terms of fee income. ‘Although liberalization of financial
services and competition has improved customer services but experience
shows that customers' interests are not always accorded priority.’10 The
banks need to focus at ensuring greater financial stability to tackle lots of
challenges successfully to keep growing and strengthen the Indian banking

4. “Report on Trend and Progress of Banking in India” by RBI .




Mrs. Supreet Kaur Prabhjot Kaur
Roll No.5525
MBA Finance
10th sem