BANKING SYSTEM IN INDIA

BY swetha banodhya subhashini

geetha

OBJECTIVES
To make an account of evolution of banking in India To know the different types of banks and their functions in India

What is bank
An organization ,usually a corporation which does most or all of the following. Receives demand deposits : An account from which deposited funds can be withdrawn at any time without any notice to the depository institution. and time deposits: A savings account held for a fixed-term with the understanding that the depositor can only withdraw by giving written notice. honors instruments drawn on them and pays interest on them ; makes loans and invests in securities ;

banking
In general terms, the business activity of accepting and safe guarding money owned by the individuals and entities and lending out this money in order to earn money.

The banking in India can be segregated into three distinct phases.

Phase 1:1786-1969 of Indian banking Phase II:1969-1991,from the time of nationalization of banks to prior to Indian banking sector reforms Phase III: new phase with the advent of Indian Financial & Banking Sector Reforms after 1991.

Phrase 1
1976-1969

Phase 1
The first Banks were the General Bank of India, which started in 1786 and Bank of Hindustain,which started in 1790. Both are now defunct. Next came Bengal Bank.

Phase 1
The East India company formed Bank of Bengal (1809), Bank of Bombay(1840), Bank of Madras(1843) as independent banks The three Banks are called as presidency Banks , and their were unified in 1921 and imperial Bank of India was formed.

 The imperical bank of India upon independence, became state Bank of India which is the oldest bank in existence today in India which was nationalised in the year 1954 through state bank of india act. The Allahabad Bank, established in 1865,The Punjab National Bank in 1895 in lahore are the oldest joint stock banks in existence today in india.

Foreign banks
Foreign banks too started to arrive,particularily in calcutta in 1860s. Calcutta was the most active trade port in India , mainly due to the trade of british empire and so became a banking center.

Between 1906-1913, inspired by swadesi movement many banks such as Bank of India , Central Bank of India, Bank of Baroda, Canara Bank , Indian Bank and Bank of Mysore were set up During this period the development of banks was sluggish and the presidency banks dominated in india having mostly european shareholders

Post independence
The government of India initiated measures to play an active role in the economic life of nation

 During first world war(1914-1918) through the second world war(1939-1945)& 2 years thereafter until the independence of India were challenging for India. The Indian economy gained indirect boost due to war related economic activities.

 The industrial policy resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of economy including banking & finance.

The Reserve Bank which is the Central Bank was created in 1935 by passing RBI Act 1934 by the recommendations of HILTONYOUNG COMMISSION. In 1949 ,the banking regulation act was enacted which empowered the RBI to regulate , control and inspect the banks in india

administers the government's monetary policy.

granting licenses for new bank branches.

The RBI is the sole authority for issuing currency It acts as a banker , agent and financial advisor to states . it is a custodian of member banks reserves and as well as controller of Credit through following terms SLR(24%) CRR(6%) BANK RATE(6%) REPO RATE(6.5%) REVERSED REPO RATE(5.5%) IT ACTS AS A LENER OF LAST REPORT

India celebrating the Rabindranath Tagore's 150th birth anniversary. On this celebration Reserve Bank of India launched the 150 Rupee coin in the memory of Nobel Winner Sir Rabindranath Tagore. Newly launched 150 Rupee coin is about 40 mm in diameter and It's weighs is about 35 grams. The coin of 150 Rupee contain Rabindranath Tagore image on one side and on another side it will contain the image of Ashok Stambha.

During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phrase II
1969-1991

Nationalization
On July 19 1969 under directions from the then prime minister mrs.indira gandhi 14 major commercial banks were nationalized. In 15th April 1980 6 more banks were nationalized. These banks played a vital role in both rural & urban economics & in making banking services accessible to the mass

The stated reason for nationalization was to give the government more control of credit delivery. Later on,in the year 1993,the government merged new bank of india with punjab national bank.it was the only merger between nationalized banks.

Nationalization
At present there are 26 nationalized banks which includes SBI and its associates The major reason for was to spread banking in rural areas. 92% of the banking segment in India under Government ownership in 1990.

The 26 nationalized banks

1. State Bank of India (SBI) 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 5. State Bank of Mysore 6. State Bank of Patiala 7. State Bank of Saurashtra 8. State Bank of Travancore 9. Bank of India 10. Canara Bank 11. Central Bank of India 12. Corporation bank 13. Indian Bank 14. Indian overseas bank

15. Syndicate Bank 16. UCO Bank 17. Allahabad Bank 18. Andhra Bank 19. Bank of Baroda 20. Bank of Maharashtra 21. Dena Bank 22. Oriental Bank of Commerce 23. Punjab & Sind Bank 24. Union Bank of India 25. United Bank of India 26. Vijaya Bank 27. IDBI Bank

Phrase III
From 1991

The Recommendations of Narasimham Committee

Emerging Problems post Nationalization

Effects1. Phenomenal increase in the geographical coverage of our banking and financial institutions. 2. Despite impressive quantitative achievement- low efficiency and productivity, bad portfolios performance, and eroded profitability. 3. Several public sector banks and financial institutions were incurring losses year after year.

Narasimham Committee

1991 -RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System.

Review- aspects relating to the Structure, Organization, Procedures and Functioning of the financial system.
Until recently, the lack of competitiveness vis--vis global standards, low technological level in operations, over staffing, high NPAs and low levels of motivation had shackled the performance of the banking industry.

Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector.
The Narasimham Committee laid the foundation for the reformation of the Indian banking sector.

Problem Areas

Higher rates of CRR(15%) and SLR(38.5%) Directed credit programmes Political and Administrative interference Subsidizing of credit Mounting expenditures of banks

The main recommendations of the Committee were: Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% Phasing out of directed credit programmes and redefinition of the priority sector Stipulation of minimum capital adequacy ratio of 8 per cent by March 1996. (Capital adequacy ratios ("CAR") are a measure of
the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.)

Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

Setting up of special tribunals to speed up the recovery process of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down

Committee On Banking Sector Reforms 1998

1998- Finance minister appointed Mr. Narasimham as chairman of one more committee. This committee was asked to review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it internationally competitive. The committee submitted its report to the government in April 1998. The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized

Major Recommendations of Narasimham Committee 1998

Need for stronger banking system Experiment with concept of narrow banking Small local banks Capital Adequacy Ratio Review and update banking laws.

Need for stronger banking system

The committee has made clear the need of a stronger banking system , which would involve large inflows and outflows of large capital and consequent complications for exchange rate management and domestic liquidity. So committee recommended the merger of strong banks which would have a multiplier effect on industry. But has rejected the merger of weak banks with strong banks as it may have a negative impact on the asset quality of the stronger bank. The committee has also supported that two or three large Indian banks be given international or global character.

Small Local Banks

The committee has suggested setting up of small, local banks which would be confined to states or clusters of districts in order to serve local trade, small industry, and agriculture. At the same time, these banks should have strong corresponding relationship with the larger and international bank.

Experiment with concept of narrow banking

Serious concern for rehabilitation of weak PSBs which have accumulated a high percentage of NPAs in some cases as high as 20% of the total assets.

Committee suggested the concept of narrow banking to rehabilitate weak banks. Narrow banking means that the weak banks place their funds only in the short term in risk-free assets- these banks try to match their demand deposits with safe liquid assets

Capital Adequacy Ratio

The committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve inherent strength of banks and to improve their risk absorption capacity.

Review and update banking laws.

Committee has suggested an urgent need to review and amend the provisions of RBI Act, Banks Nationalization Act, etc so as to bring them in line with the current needs of the banking industry.

Other recommendations

Other recommendations relate to the need for automation of PSBs; professionalizing and depoliticizing bank boards; review of recruitment procedures; training and remuneration policies; real autonomy etc

Post liberalisation
The banking industry was opened up for private participation and the entry of new private banks and foreign banks increased competition The objective of banking sector reforms was in line with the overall goals of the 1991 economic reforms of opening the economy, giving a greater role to markets in setting prices and allocating resources, and increasing the role of the private sector

Phase III - Liberalization

Constitution of Narasimham committee and its report on Banking reforms in 1991. It covered the areas of interest rate deregulation & directed credit rules, Statutory preemptions and entry deregulation for both domestic and foreign banks. Lowering of the CRR and SLR Interest rate liberalization Do away with Entry barriers. By March 2004, the new private sector banks and the foreign banks share shared almost 20% of total assets Prudential Norms act against NPAs

Types of banks
And their functions

Types of Banks Central Bank (RBI)

Commercial Banks Non Banking Finance Companies (NBFCs) Term Financial Institutions

Public Sector
E.g. SBI PNB BOB

Private Sector E.g. HDFC Bank UTI Bank ICICI Bank

Foreign

Co-operative Banks

Regional Rural Banks

State/Central E.g. Citibank ABN Amro HSBC

Private

Primary Credit Societies

State Finance Corpor ations (SFCs)

Indian Financial Institutio ns E.g. IFCI NABARD SIDBI 43

Types of banks
Based on their functions

 The banks, which perform all kinds of banking business and generally finance trade and commerce, their deposits are for a short period . . However, recently, the commercial banks have also extended their areas of operation to medium-term and long-term finance. Majority of the commercial banks are in the public sector. However, there are certain private sector banks operating as joint stock companies. Hence, the commercial banks are also called joint stock banks.

Commercial Banks

Industrial Banks
There mainly meet the medium-term and long-term financial needs of the industries.. They grant long-term loans to the industrialists to enable them to purchase land, construct factory building, purchase heavy machinery, etc..

Exchange Banks
Exchange banks deal in foreign exchange and specialise in financing foreign trade. They facilitate international payments through the sale, purchase of bills of exchange, and thus play an important role in promoting foreign trade..

Agricultural Banks:
Agricultural credit needs are different from those of industry and trade. Industrial and commercial banks normally do not deal with agricultural finance. The agriculturists require: (a) short-term credit to buy seeds, fertilizers and other inputs, and (b) long-term credit to purchase land, to make permanent improvements on land, to purchase agricultural machinery and equipment, etc. In India, agricultural finance is generally provided by cooperative institutions. Agricultural co-operatives provide short-term loans and Land Development Banks provide the long-term credit to the agriculturists.

Scheduled and Non-Scheduled Banks

In India, banks have been broadly classified into scheduled and nonscheduled banks. A Scheduled Bank is that which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 and fulfills the three conditions (a) it has paid-up capital and reserves of at least Rs. 5 lakhs. It ensures the Reserve Bank that its operations are not detrimental to the interest of the depositors; (c) It is a corporation or a cooperative society and not a partnership or a single owner firm. The banks which are not included in the Second Schedule of the Reserve Bank of India Act are non-scheduled banks.

Saving Banks
The main purpose of saving banks is to promote saving habits among the general public and mobilise their small savings. In India, postal saving banks do this job. They open accounts and issue postal cash certificates..

Classification based on ownership

 These are owned and controlled by the government. In India, the nationalized banks and the regional rural banks come under these categories.

These banks are owned by the private individuals or corporations and not by the government or co-operative societies,

 Cooperative banks are operated on the cooperative lines. In India, cooperative credit institutions are organised under the cooperative societies law and play an important role in meeting financial needs in the rural areas.

Classification on the Basis of Domicile Domestic banks Foreign Banks

Private Sector Banks

1. HDFC Bank 2. ICICI Bank 3. Federal Bank 4. ING Vysya Bank 1. Axis Bank (formerly UTI Bank) 5. Yes Bank 6. Bank of Rajasthan 7. Bharat Overseas Bank 8. Catholic Syrian Bank 9. Bassein Catholic Bank 10. City Union Bank 11. Development Credit Bank 12. Dhanalakshmi Bank 13. Ganesh Bank of Kurundwad

14. IndusInd Bank 15. Jammu & Kashmir Bank 16. Karnataka Bank Limited 17. Karur Vysya Bank 18. Kotak Mahindra Bank 19. Lakshmi Vilas Bank 20. Nainital Bank 21. Ratnakar Bank 22. SBI Commercial and International Bank 23. South Indian Bank 24. Amazing Mercantile Bank 25. Punjab National Bank 26. Rupee Bank 27. Saraswat Bank 28. Tamilnad Mercantile Bank 29. Thane Janata Sahakari Bank

Foreign Banks:

1. ABN AMRO 2. BNP Paribas 3. Citibank India 4. HSBC (Hongkong & Shanghai Banking Corporation) 5. JPMorgan Chase Bank 6. Bank of America 7. Standard Chartered Bank 8. Barclays Bank 9. Deutsche Bank 10. Royal Bank of Scotland 11. Abu Dhabi Commercial Bank Ltd 12. American Express Bank 13. Antwerp Diamond Bank 14. Arab Bangladesh Bank

15. Bank International Indonesia 16. Bank of Bahrain & Kuwait 17. Bank of Ceylon 18. Bank of Nova Scotia 19. Bank of Tokyo Mitsubishi UFJ 20. Calyon Bank 21. ChinaTrust Commercial Bank 22. Cho Hung Bank 23. DBS Bank 24. Krung Thai Bank 25. Mashreq Bank 26. Mizuho Corporate Bank 27. Oman International Bank 28. Socit Gnrale 29. State Bank of Mauritius 30. Scotia 31. Taib Bank