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Reforms in Banking Sector
Reforms in Banking Sector
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 2 nd June
1806 promoted the Bank of Calcutta. In the mean while two other banks
Bank of Bombay and Bank of Madras were started on 15 th 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 19 th 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
twenty.
STRUCTURE OF INDIAN BANKING INDUSTRY
CENTRAL BANK
Private Sector
Private Sectors Foreign Banks
Banks
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.
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
Bank
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.
REFORMS IN BANKING SECTOR IN INDIA
2. The financial sector was not driven by any crisis and the reforms
have not been an outcome of multilateral aid.
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.
EFFECT OF REFORMS
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.
CONCLUSION
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
sector.
REFERENCES
1. www.google.com
2. www.rbi.org.in
3. www.wikepedia.org
4. “Report on Trend and Progress of Banking in India” by RBI .
5. www.jstor.org
6. www.ssrn.com
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