INTRODUCTION

Banking in India, originated in the last decade of 18th century. One of the first
country was Bank of Hindustan which was established in 1770 and liquidated in
1829-32. The largest bank, and the oldest existing bank is The State Bank of
India (SBI). It originated from Bank of Calcutta and was renamed as the Bank of
Bengal. It was one of the three banks funded by a presidency government, the
other two were the Bank of Bombay and Bank of Madras. The three banks
merged and formed Imperial Bank of India, which became State Bank of India.
Reserve Bank of India is India’s central banking institution, which controls the
monetary policy of Indian rupee. It commenced its operation on 1 st April 1935.
RBI plays an important part in Development Strategy of Government of India. It
is a member bank of the Asian Clearing Union.
 1960-1970

In India, banking has developed from early ancient stage to the

new progressive system of banking in a trendsetting that has
no parallel in the world history. The increasing tempo of
economic reforms and activity lead to drastic increase in the
volume and intricacy of banking activities. Therefore, the role
of banks has had to expand at a fast pace.
The post-independence era brought a revolutionary change in
the banking sector of India. Despite the progress in 1950s and
1960s it was sensed by the ruling government that the creation
of SBI was not for reaching enough the expectations and the
needs of a small-scale industries and the agriculture sector. In
the late 6os to satisfy the needs and meet the broad objective,
banking facilities were made available in hitherto uncovered
areas, with a motive to encourage and mop up potential
savings and to meet the credit gaps. In early 1960s significant
step towards the implementation of the two-fold objective of
channelizing deposits on a huge scale throughout the country
and strive for planned expansion of facilities provided by banks.
From the period of 1961 and the current era, over 158000 bank
branches are opened in India. Between 1960 to 1980, the
number of private branches grew with an alarming rate than
public banks.
The most significant and remarkable step was taken by
government in July 1969, the government nationalized all 14
banks whose national wise deposits were more than 500
million, which lead to resulting in nationalisation of 54% of the
branches in India and bringing the entire autonomy of the total
number of branches under government control upto 84%. This
major step was critically required because of many bank
failures and crisis over the two centuries, t damage they did
under ‘laissez faire’ conditions, the need of planned growth and
equitable distribution of credit. The core reason behind the
bank nationalisation in July 1969 with its objective to control
the commanding heights of the economy and to progressively
the needs of development of the economy. Two significant
purposes of nationalisation were rapid branch expansion and
mobilisation of credit according to plan priorities.
The India banking system progressed by leaps and bounds after
nationalisation under the system of branch licensing bank
branches diversified its ranges rapidly both in rural and urban
areas. There was a remarkable growth in deposits mobilised by
the banks, credit facilities also improvised.
Following the Nationalisation Act of 1969 and the
nationalisation of 14 largest commercial banks raised the
public-sector banks share of deposits from 31% to 86%. To
achieve the two-fold objective the nationalised banks received
the set quantitative targets for the growth and expansion of
their branch network and for the amount of credit they had to
extent certain sectors and ------- in the economy, they so called
priority sectors which initially stood at 33.3%. The major factor
that bestowed to degeneration of bank performance included.
 Lack of competition
 Administrated interest rate
 Directed and concessional landing
Before the year 1969, however the ownership and
organisational structure of banking was dominated by big
industrial units for the own self profit motive. As a result
there was a little flow of credit to the rural areas. Priority
sectors of the economy i.e. agriculture, small trades did
not got sufficient access to these facilities. Deposit
mobilisation was slow. The second phase was known
during which the banking sector made significant changes
due to various reason particularly the rapid change in
political scenario. There were certain committees were
formed as several official investigation such problems. On
of which was Dutt Committee 1969. So this period was a
very revolutionary one. There were remarkable changes
that took places in this period and especially 1964 year
turned the entire scenario of banking sector of India
around.
 1971-1980
The financial system is a weapon to counter the poverty. It is a tool to build a
good and strong economy. The financial system converts dreams into realities.
The wealth of a country can only be constructed through a better financial
system. It helps to increase the savings by offering better returns to the savers.
It enhances the efficiency of a business concern which is reflected in the
economic development. At present the Indian economy has a highly diversified
structure of financial institution. Similarly, a large number of new financial
institutions have to be introduced to fulfil the needs of the dynamic corporate
sector. Financial institutions are the active players in the capital market. These
organisation provide long term loans on easy instalment to corporate sector.
They help in promoting new business enterprises’ expansion and
diversification of existing companies. There was a strong need for the
establishment of the
Between 1969 and 1980, the number of private branches grew more quickly
than public banks and on 1st April 1980, they accounted for approximately
17.5% of bank branches of India. In April 1980, the government undertook a
second round of nationalisation, placing six under government control private
banks whose national wide deposits were above Rs 2 billion or a further 8% of
bank branches, living approximately 10% of bank branches in private hands. In
share of private bank branches stayed fairly constant between 1980-2000.
The further nationalisation of six more banks in 1980, raised the public-sector
banks share of deposits to 92%. The second wave of nationalisation occurred
because control over the banking system become increasingly more important
as a means to ensure priority sector lending reach the poor through a widening
branch network and to fund rising public deficits.
In the period of 1969-1991, the number of banks increased slightly, but savings
were successfully mobilized in part because relatively low inflation kept
negative real interest rates at a mild level and in part because the number of
branches was encouraged to expand rapidly. Nevertheless, many banks remain
unprofitable, inefficient and unsound owing to their poor lending strategy and
lack of internal risk management under government ownership. It was
reported the average return on asset in the second half of 1980, was only
0.15% while the capital and reserves averaged about 1.5% of asset.
The major factors that contributed to detonating bank performance included:
(a) Too stringent regulatory requirement of CRR and SLR that require banks to
hold a certain amount in government and eligible securities
(b) Low interest rates charged on government bonds as compared to
commercial advances.
These factors not only reduced incentives to operate properly but also
undermined regulators incentives to prevent banks from taking risks. While
government involvement in the financial sector can be justified at the initial
stage of economic development, the prolonged presence of excessively large
public sector banks often results in inefficient resource allocation and
concentration of power in a few banks.
 1991-2000

The 1991 report of the narasimham committee served as the

basis for the initial banking sector reforms. In the following
years, reforms covered the area of interest rate deregulation,
directed credit rules, statutory per emphasis and entry
deregulation for both domestic and foreign trade.
The objective of the banking sector reforms was in line with the
overall goal of the 1991 economic reforms of the opening the
economy giving a sector role to the markets in setting prices
and allocating resources, and increasing the role of the private
sector.
A brief overview of the most important reforms are as follows:
 Statutory pre-emptions
The degree of financial repression in the Indian banking
sector was significantly reduced with the lowering of CRR
(Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio)
which were regarded as one of the main cause of the low
profitability and high interest rate spreads in the banking
system.

 Entry barriers
Through the lowering of entry barriers, competition has
significant increase since the beginning of the 1990s.
Seven new private banks entered the market between
1994 and 2000. In addition, over 20 foreign banks started
operations in India since 1994.

 Structure of Banking system

The move as above should be brought about through a process
of mergers and acquisition after satisfying that the new unit will
be in a position to run its operation profitability,
  Duality of control
The duality of control over the banking system between
RBI and the ministry of finance should end, and RBI should
be the primary agency for the regulation of the banking
system.

Crisis and Reforms between 1991 to 2000

July 1991- External payment crisis rupee devalued in two
stages
November 1991- Reduction in SLR and CRR
March 1992- A dual exchange rate system called Liberalised
Exchange Rate Management System (LERMS) introduced. This
was the initial step to enable a transition to a market
determined exchange rate system.
April 1992- Income recognition and asset classification ---------
introduced.
December 1992- C. Rangarajan appointed governor of Reserve
Bank of India (RBI).
1992- Securities and Exchange Board of India formulated
insider trading regulation.
1993- Guidelines fees were established of private sector banks
issued.
1994- National Stock Exchanged commenced operations.
1995- Banks are allowed to fix their own interest rates on
domestic term deposits with maturity of two years.
1996- RBI website was made operational.
1997- RBI conducts first auction of 14 days Treasury Bills. Bimal
jalan was appointed as the governor of RBI.
1998- RBI monetary museum website was launched.
1999- RBI issued guidelines to banks for the issuance of debit
cards and smart cards to ease pressure on physical cash.
Foreign Exchange Management Act, 1999 replaces FERA, 1973
with objective of facilitating external trade and payments and
promoting development. The new act became operative from
2000.