Indian Banking system

Monetary Economics

SUBMITTED BY:
ANANT KUMAR
35190121618
BA. ECO, 2 n d YEAR

SUBMITTED TO:
Mr. AMIT KUMAR
Introduction

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and
well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks
are generally resilient and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative banking models like
payments and small finance banks. RBI’s new measures may go a long way in helping the
restructuring of the domestic banking industry.
The digital payments system in India has evolved the most among 25 countries with India’s
Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments
Innovation Index (FPII).*

Definition of Bank:
“A bank is defined as one which transacts the business of banking which means accepting, for
the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise and withdrawals by cheque ,draft, order, or otherwise.”- The Banking
Companies Act,1949

Need of the Banks:

Before the establishment of banks, the financial activities were handled by money lenders
and individuals. At that time the interest rates were very high. Again there were no security
of public savings and no uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits
and provide other services to their customers. The following functions of the bank explain the
need of the bank and its importance:
• To provide the security to the savings of customers.

• To control the supply of money and credit

• To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently.
• To avoid focus of financial powers in the hands of a few individuals and institutions.
• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers

-1-
Establishment of Reserve Bank of India (1935)
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions
of the Reserve Bank of India Act, 1934. The establishment of this central bank of the country
ended the quasi-central banking role of the Imperial Bank. The latter ceased to be bankers to
the Government of India and instead became agent of the Reserve Bank for the transaction of
government business at centre at which the central bank was not established. Even after the
formation as well as nationalization of RBI the growth of economy & banks was very slow and
banks still experienced periodic failure. Therefore in order to streamline the functioning and
activities of the 1100 commercial banks present then, the Government of India came up with
in March 1949, especial legislation, called the Banking Companies Act,1949.

The Banking Regulation Act

The Banking Act 1949 was a special legislation, applicable exclusively to the banking
companies. This Act was later renamed as the Banking Regulation Act from March 1966. The
Act vested in the Reserve Bank of India the responsibility relating to licensing of banks,branch
expansion, and liquidity of their assets, management and methods of working, amalgamation,
reconstruction and liquidation. Thus giving RBI authority along with responsibility & igniting
the first part of banking transformation in India. The second path braking &transformation
effort took place in 1955 with the establishment of the Indian Banking Sector' State Bank of
India.

Nationalization
The need for nationalization was felt because government believed that private commercial
banks were lacking in fulfilling the social & developmental goals of banking. This was evident
from the fact that the industries' share in loans almost doubled between1951 and 1968, from
34% to 68%. On the other hand, agriculture which was a major occupation (and still is) received
less than 2% of total credit Thus with a view to serve the mass Government of India
Nationalized14 banks (refer table 1) in 1969 bringing the total number of branches under
government control to 84.Once again in April of 1980, the Government of India undertook a
second round of nationalization, placing under government control the six private banks whose
nationwide deposits were above R s. 2 billion, leaving approximately 10 percent of bank
branches in private hands.

-2-
Banks Nationalized

S. No 1969 S. No 1980
1.Allahabad Bank 1. Andhra Bank
2.Bank of Baroda 2.Corporation Bank New Bank
3.Bank of India 3.Punjab & Sind Bank
4.Bank of Maharashtra 4.Vijaya Bank
5.Canara Bank 5.Oriental Bank of Commerce
6.Central Bank of India 6.UTI Bank
7.Syndicate Bank
8.UCO Bank
9.United Bank of India
10.Union Bank
11.Punjab National Bank
12.Indian Overseas Bank
13.Indian Bank
14.Dena Bank

Major recommendations by the Narasimham Committee

The Committee was set up under the chairmanship of M. Narasimham. They submitted their
recommendations in the 1990s in reports widely known as the Narasimham Committee-I
(1991) report and the Narasimham Committee-II (1998) Report. It was the recommendations
of the two Narasimham Committees that actually turned around the destiny of Indian Banking.

The year 1991 which is also called as the year of

'Banking Sector Reforms' opened the gates to the private sector & to foreign banks which in
turn significantly increased the level of competition . Seven new private banks entered the
market between 1994 and 2000. In addition, over 20 foreign banks started operations in India
since 1994. By March 2004, the new private sector banks and the foreign banks had a combined
share of almost 20% of total assets.
In addition to above recommendation the other major contributors to the revamping of the
banking sector was the progressive lowering of SLR & CRR, introduction of Basel Norms, ,
deregulation of interest rate, redefining of priority sectors, Golden Handshake Scheme &
merger of the week banks with the stronger banks.

Functions of RBI
Ø Bank of Issue
Ø Regulator-Supervisor of the financial system Ø Manager of exchange control
Ø Issuer of currency
Ø Developmental role
Ø Controller of Credit
Ø Supervisory Functions
Ø Promotional Functions

-3-
Functions of Banks

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and
unorganized sectors. The organized sector consists of Reserve Bank of
India, Commercial Banks and Co-operative Banks, and Specialized
Financial Institutions (IDBI, ICICI, IFC etc). The 28 unorganized sector,
which is not homogeneous, is largely made up of money lenders and
indigenous bankers.

An outline of the Indian Banking structure may be presented as follows:-

1. Reserve banks of India.
2. Indian Scheduled Commercial Banks.
a) State Bank of India and its associate banks.

b) Twenty nationalized banks.

c) Regional rural banks.
d) Other scheduled commercial banks. 3. Foreign Banks
4. Non-scheduled banks.
5. Co-operative banks.

-4-
Banking Structure in India

Profile of Scheduled Commercial Banks in India

-5-
Private Sector Banks:
In this type of banks, the majority of share capital is held by private individuals and corporate.
Not all private sector banks were nationalized in 1969, and 1980. The private banks which
were not nationalized are collectively known as the old private sector banks and include banks
such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector
banks was however prohibited during the post-nationalization period. In July 1993, as part of
the banking reform process and as a measure to induce competition in the banking sector, RBI
permitted the private sector to enter into the banking system. This resulted in the creation of a
new set of private sector banks, which are collectively known as the new private sector banks.

Foreign Banks:
Foreign Banks have their registered and head offices in a foreign country but operate through
their branches in India. The RBI permits these banks to operate either through branches; or
through wholly-owned subsidiaries. Foreign banks in India are required to adhere to all banking
regulations, including priority-sector lending norms as applicable to domestic banks. In
addition to the entry of the

new private banks in the mid-90s, the increased presence of foreign banks in India has also
contributed to boosting competition. There are a total 33 foreign banks with 316 offices across
India.. (Profile of Indian Banks, RBI 2011). Citi bank is the largest Foreign Bank in India
followed by Standard Chartered

Largest foreign Banks in India are CITI BANK,STANDARD

CHARTERED,HSBC,DEUTSCHE BANK,RBS,BARCLAYS

India’s Ten largest Banks are STATE BANK OF INDIA, PUNJAB NATIONAL BANK,
BANK OF BARODA, ICICI, BANK OF INDIA, CANARA BANK, HDFC, IDBI, AXIS
BANK, CENTRAL BANK OF INDIA

Market Size

The Indian banking system consists of 18 public sector banks, 22 private sector banks, 46
foreign banks, 53 regional rural banks, 1,542 urban cooperative banks and 94,384 rural
cooperative banks as of September 2019. In FY07-18, total lending increased at a CAGR of
10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit
market is the fourth largest in the emerging countries. It increased to US$ 281 billion on
December 2017 from US$ 181 billion on December 2014.

-6-
Investments/developments

Key investments and developments in India’s banking industry include:

• In October 2019, the Department of Post launched the mobile banking facility for all
post office savings account holders of the CBS (core banking solutions) post office.
• Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) stood at Rs 1.06 lakh crore
(US$ 15.17 billion
• In October 2019, Government e-Marketplace (GeM) signed a Memorandum of
Understanding (MoU) with Union Bank of India to facilitate a cashless, paperless and
transparent payment system for an array of services.
• Transactions through Unified Payments Interface (UPI) stood at 1.15 billion in October
2019 worth Rs 1.91 lakh crore (US$ 27.33 billion).
• In August 2019, the government announced the major mergers of public sector banks
which included United Bank of India and Oriental Bank of Commerce to be merged
with Punjab National Bank, Allahabad Bank will be amalgamated with Indian Bank
and Andhra Bank and Corporation Bank will be consolidated with Union Bank of India.
• The NPAs (Non-Performing Assets) of commercial banks has recorded a recovery of
Rs 400,000 crore (US$ 57.23 billion) in last four years including record recovery of Rs
156,746 crore (US$ 22.42 billion) in FY19.
• The board of Allahabad bank approved the merger with Indian bank for the
consolidation of 10 state-run banks into the large-scale lenders.
• As of September 2018, the Government of India launched India Post Payments Bank
(IPPB) and has opened branches across 650 districts to achieve the objective of
financial inclusion.
• The total value of mergers and acquisition during 2017 in NBFC diversified financial
services and banking was US$ 2,564 billion, US$ 103 million and US$ 79 million
respectively @.
• The total equity funding's of microfinance sector grew at the rate of 42 year-on-year to
Rs 14,206 crore (US$ 2.03 billion) in 2018-19.

Government Initiatives
• As per Union Budget 2019-20, the government has proposed fully automated GST
refund module and an electronic invoice system that will eliminate the need for a
separate e-way bill.
• Under the Budget 2019-20, government has proposed Rs 70,000 crore (US$ 10.2
billion) to the public sector bank.
• Government has smoothly carried out consolidation, reducing the number of Public
Sector Banks by eight.
• As of September 2018, the Government of India has made the Pradhan Mantri Jan Dhan
Yojana (PMJDY) scheme an open ended scheme and has also added more incentives.
• The Government of India is planning to inject Rs 42,000 crore (US$ 5.99 billion) in the
public sector banks by March 2019 and will infuse the next tranche of recapitalisation
by mid-December 2018.

-7-
Achievements

Following are the achievements of the government in the year 2017-18:

• As on March 31, 2019 the number of debit and credit cards issued were 925 million
and 47 million, respectively.
• As per RBI, as of October 25, 2019, India recorded foreign exchange reserves of
approximately US$ 442.58 billion.
• India ranks among the top seventh economies with a GDP of US$ 2,73 trillion in 2018
and economy is forecasted to grow at 7.3 per cent in 2018.
• To improve infrastructure in villages, 204,000 Point of Sale (PoS) terminals have been
sanctioned from the Financial Inclusion Fund by National Bank for Agriculture & Rural
Development (NABARD).
• The number of total bank accounts opened under Pradhan Mantri Jan Dhan Yojana
(PMJDY) reached 333.8 million as on November 28, 2018.

Road Ahead

Enhanced spending on infrastructure, speedy implementation of projects and continuation of

reforms are expected to provide further impetus to growth. All these factors suggest that India’s
banking sector is also poised for robust growth as the rapidly growing business would turn to
banks for their credit needs.
Also, the advancements in technology have brought the mobile and internet banking services
to the fore. The banking sector is laying greater emphasis on providing improved services to
their clients and also upgrading their technology infrastructure, in order to enhance the
customer’s overall experience as well as give banks a competitive edge.
India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion
by FY2023 driven by the five-fold increase in the digital disbursements.

Financial Inclusion:
In order to sustain a higher economic growth, it is important to bring the excluded segment of
the society into the fold of the formal financial sector. In recognition of this, the Reserve Bank
has taken a number of steps to take formal banking to door steps of habitations with population
over 2000 through the business correspondent (BC) model where the BCs provide basic
banking functions acting as agents of banks. Simultaneously, a number of initiatives such as
incentivisation of branch authorization scheme for banks to open branches in unbanked centres,
simplification of Know Your Customer (KYC) norms, technological interventions and
financial literacy-oriented programmes to increase awareness have been taken. While the initial
impact of these initiatives has been positive, it has created a huge potential for expansion in
banking business once the level of activity is scaled up and government social benefit transfers
increasingly take place through the banking sector.
While we have our own data source to gauge financial inclusion, the Census of India provides

-8-
useful information on access to banking. It shows that about 59 per cent of households had
access to banking services in 2011 as compared with only 35 per cent in 2001. Increase in
access for the eastern-region has also gone up significantly from about 29 per cent in 2001 to
47 per cent in 2011, though the region still lags behind the all-India average.

Conclusion:
The Indian Banks have managed to grow with resilience during the post reform era. However
the Indian banking sector still has a large market unexplored. With the Indian households being
one of the highest savers in the world accounting for 69% of India gross national saving of
which only 47% is accessed by the banks more than half of the Indian population still unbanked
with only 55 per cent of the population have a deposit account and 9 per cent have credit
accounts with banks. India has the highest number of households (145 million) excluded from
Banking &has only one bank branch per 14,000 people.

On the other hand, Indian banking industry has to face challenges like financial inclusion,
deregulation of interest rates on saving deposits, slow industrial growth, management of asset
quality, increased stress on some sectors, transition to the International Financial Reporting
System, implementation of Basel II & so on. Nevertheless seeing the credentials of the Indian
Banks one can safely conclude that the industry might have many stumbling blocks in the 'Road
Ahead' but when ever encountered with such blocks in the past it has used them as a stepping
stone & has always Transformed' itself ( for the better) and 'Evolved' as a winner.

-9-