BANKING IN INDIA

BY

ANURAG VIKASH
INTRODUCTION

Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;
both are now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.
 OBJECTIVE
 History of banking sector after nationalization & Liberalisation
 Various types of banking groups
 Challenges in Banking Sector

REASEARCH METHODOLOGY

1. Identification of the Problem

2. Specify the Objectives

3. Implementation of the planning

4. Here the type of research mainly based on secondary data

Data Sources
The research involved gathering secondary data through various websites and books.
1. History of banking sector in India

Origination of banking in India dates to the last decades of the 18th century with the
General Bank of India, which started in 1786, and the Bank of Hindustan (both of
which are now defunct.) The oldest bank in existence in India is the State Bank of India
(SBI), the largest commercial bank in the country that traces its origins back to June
1806.The history of the banking sector can be better understood by dividing it into.

1. History of SBI and Associates

2. History of other banks in India (includes Nationalised Banks, Private Banks and
Foreign Banks)

1.1 History of SBI and Associates

The oldest bank in existence in India is the SBI, which originated as the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal in 1809. Bank
of Bengal was one of the three presidency banks, the other two being the Bank of Bombay
(established in 1840) and the Bank of Madras (established in 1843), all three of which were
established under charters from the British East India Company. For many years, the
Presidency banks acted as quasi-central banks, as did their successors. The three banks
merged in 1925 to form the Imperial Bank of India which started as private shareholders
banks, mostly Europeans shareholders.
State Bank of India Act was established in 1955. Pursuant to the provisions of the
State Bank of India Act (1955), the Reserve Bank of India (RBI), which is India's central
bank, acquired a controlling interest (60%) in the Imperial Bank of India. On April 30, 1955
the Imperial Bank of India was renamed as the State Bank of India. In 2008, the
Government took over the stake held by RBI.
In 1959, the Government passed the State Bank of India (Subsidiary Banks) Act,
enabling the SBI to take over eight former State-associated banks as its subsidiaries.

1. State Bank of Indore

2. State Bank of Bikaner & Jaipur
3. State Bank of Hyderabad
 4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Travancore
7. State Bank of Saurashtra
Later on in September 2008, State Bank of Saurashtra was merged with the parent bank -
SBI.

1.2 History of other banks in India (includes Nationalised Banks,

Private Banks and Foreign Banks)

No Year Period Characterized by

1 1840 to 1947 Pre Independence Small size, less regulated and bank
failures
2 1947 to 1969 Post-Independence to Slower growth, private sector
Nationalisation dominance
and start of regulation
3 1969 to1991 Nationalisation to Nationalised of banks by
Liberalisation government, high
regulation, secular growth in
business and
expansion & rising inefficiencies
4 1991 to 2010 Liberalisation to current De-regulation, entry of private and
date foreign banks and technological
advancement

1.2.1 Pre Independence (1840 to 1947)

 Indian merchants in Calcutta established the Union Bank in 1839, but it failed in
1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in
1865 and still functioning today, is the oldest Joint Stock bank in India. . (Joint Stock Bank:
A company that issues stock and requires shareholders to be held liable for the company's
debt) It was not the first though. That honor belongs to the Bank of Upper India, which was
established in 1863, and which survived until 1913, when it failed, with some of its assets and
liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.

The second entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank,
established in Lahore in 1895, which has survived to the present and is now one of the largest
banks in India.
The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and political
figures to form banks of and for the Indian community. A number of banks established then
have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank
of Baroda, Canara Bank and Central Bank of India.
The period during the First World War (1914-1918) through the end of the Second
World War (1939-1945), and two years thereafter until the independence of India were
challenging for the Indian banking industry. The years of the First World War were
turbulent, and it took its toll with banks simply collapsing despite the Indian economy
gaining indirect boost due to war-related economic activities. At least 94 banks in India
failed between 1913 and 1918 as indicated in the following table:
 Number of banks Authorised capital Paid-up Capital
Years
that failed (Rs. Lakhs) (Rs. Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1

1.2.2 Post-Independence to Nationalisation (1947 to 1969)

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime
of the Laissez-faire for the Indian banking. The Government of India initiated measures to
play an active role in the economic life of the nation, and 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 the economy including banking and finance.
The major steps to regulate banking included:

 The Reserve Bank of India, India's central banking authority, was nationalized on
January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
 In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
 The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors.

1.2.3Nationalisation to liberalisation (1969 to 1991)

By the 1960s, the Indian banking industry had become an important tool to facilitate
the development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had been ensued about the possibility to nationalise the banking
industry. On July 19, 1969, major process of nationalisation was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi by whom 14 major commercial banks
in the country were nationalised. The second phase of nationalisation of the Indian Banking
Sector was carried out in 1980 with seven more banks being nationalised. With the second
dose of nationalisation, the GOI controlled around 91% of the banking business of India.
Later on, in the year 1993, the government merged New Bank of India with Punjab National
Bank. It was the only merger between nationalised banks and resulted in the reduction of the
number of nationalised banks from 20 to 19. A number of questions were raised regarding the
procedure adopted by the then government in suddenly going for the nationalisation of banks.
There was no official report, which had gathered expert opinions and evidence on the need
either for social control or for nationalisation of banks. The chiefs of private banks had not
been consulted as to the need and implications of the proposed measure.

Arguments of government for nationalisation were as follows

Before the nationalisation, the privately-owned banks were operating on the criteria
of profit maximisation and lesser emphasis was placed on the development of rural areas.
Credit and deposits base was confined to large corporates and wealthy depositors.
The nationalised banking set-up would vigorously pursue expansion progrmmes to
cover rural areas, smaller towns and lower income groups.
To pay special attention to inter-sectoral balances and balanced regional development.
To take away the stranglehold of the few industrial houses on credit and reduce their
control over the community's resources. Ensure stability in the functioning of the credit
institutions and inspire more confidence among the depositors.
Encourage healthy competition between large and small industrial houses. In
summary, the following are the steps taken by the Government of India to regulate the
banking institutions in the country:
 1949: Enactment of Banking Regulation Act.
 1955: Nationalization of SBI.
 1959: Nationalization of SBI subsidiaries.
 1961: Insurance cover extended to deposits.
 1969: Nationalization of 14 major banks.
 1971: Creation of credit guarantee corporation.
  1975: Creation of regional rural banks.
 1980: Nationalization of seven banks with deposits over Rs.200 crores.

1.2.4 Liberalization to current date (1991 to 2011)

The policies of nationalization and social reforms that were supposed to promote a
more equal distribution of funds, also led to inefficiencies in the Indian banking system. To
alleviate the negative effects, some reforms were enacted in the second half of the 1980s. The
main policy changes were the introduction of Treasury Bills, the creation of money markets,
and a partial deregulation of interest rates. Despite the reform attempts, the Indian banking
sector had like the overall economy severe structural problems by the end of the 1980s. By
international standards, the Indian banks were extremely unprofitable despite a rapid growth
in deposits. In 1991, GOI liberalised the economy. The objective of banking sector reforms
was in line with the overall goals of the 1991 economic reforms of opening the economy.
Narsimhan Rao government embarked on a policy of liberalisation by licensing a small
number of private banks. These new banks came to be known as New Generation tech-savvy
banks, and included Global Trust Bank (the first of such new generation banks to be set up),
which later amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as
Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the
economy of India, revitalised the banking sector in India, which has seen rapid growth with
strong contribution from all the three sectors of banks, namely, government banks, private
banks and foreign banks.

Privatisation
1. In the year 1994, Private sector banks were permitted to commence operations in India.
Banks were allowed to raise the capital to meet the capital adequacy norms through capital
market route, provided the government holding does not fall below 51%.

2. FDI/FII limits on investments in shares of private sector banks were raised to 51% in 2001.

3. In 2004, FDI/FII limits on investments in shares of private sector banks was further relaxed
and increased to 74%, with no one FII holding more than 5% stake without the consent of
RBI and FII limit in PSBs was capped at 20%.

4. Foreign banks with restriction on branch opening and operation were allowed to enter on
selective basis in 2004. More liberal entry for foreign banks was proposed after April 2009.

Entry of foreign banks

RBI announced its policy decision on March 2004 for gradual entry of foreign banks in India
in synchronised manner in two phases. In order to allow the Indian Banks sufficient time to
prepare for global competition, initially the entry of foreign banks in first phase was more
restrictive.

Phase 1 (March 2005 to March 2009)

1. Foreign banks were allowed to establish presence in India and were given an option to
operate through branch presence or set up a 100% Wholly Owned Subsidiary (WOS).
2. Foreign banks were allowed to open 12 branches a year (the limit was in line with World
Trade Organisation (WTO) commitment). Branch licensing procedure was kept same as
applicable for private banks. More liberal branch opening policy was adopted in under-
banked areas.
3. The limit of 12 branches a year was raised to 20 branches for foreign banks in March 2006.
4. Acquisition of shares in Indian banks by foreign banks was permitted for banks which are
identified by RBI for restructuring.

Phase 2 (April 2009 onwards)

1. Branch expansion: - After reviewing the experience of the first phase, RBI has proposed
to remove the restriction on branch expansion and limited excess to Indian market and
treating them on par with domestic banks to the extent appropriate.
2. Listing of foreign banks: - After completion of the proposed year of operation in India,
WOS of foreign banks will be allowed to list and dilute the stake in the manner that at least of
26% of the paid-up capital remains with the resident Indian.
3. Mergers and acquisitions: - After a review is made with regard to the extent of
penetration of foreign investment in Indian banks and functioning of foreign banks, foreign
banks may be permitted, subject to regulatory approvals and such conditions as may be
prescribed, to enter into merger and acquisition transactions with any private sector bank in
India, subject to the overall investment limit of 74 per cent.

2 Various Banking Groups

 Banksin
Banks inIndia
India

ScheduledCommercial
Scheduled Commercial UnscheduledCommercial
Unscheduled Commercial
Banks
Banks Banks
Banks

Public PrivateSector
Private Sector Foreign Regional
Public Foreign Regional
Sector Banks
Banks Banks RuralBanks
Banks
Sector Banks Rural
Banks
Banks

StateBank
State BankofofIndia
India NationalisedBanks
Nationalised Banks
andAssociates
and Associates

2.1The commercial banking structure in India consists of:

􀂾 Scheduled Commercial Banks in India
􀂾 Unscheduled Banks in India
Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The
scheduled commercial banks in India comprise of SBI and its associates, nationalised banks,
foreign banks, private sector banks, co-operative banks and regional rural banks.
 Non-scheduled bank in India means a banking company as defined in clause (c) of section
5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank. SCBs in
India can be divided into five groups.
1. SBI and its associates
2. Nationalised banks
3. Private sector banks
4. Foreign banks.
5. Regional Rural Banks (RRBs)
We have done the analysis of first four banking groups and excluded RRBs in our report.

2.2 List of banks under various banking groups

2.2.1 SBI and Associates
1. SBI
2. State Bank of Bikaner and 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 Travancore

2.2.2 Nationalised Banks

1. Allahabad Bank 11. Indian Bank
2. Andhra Bank 12. Indian Overseas Bank
3. Bank of Baroda 13. Oriental Bank of Commerce
4. Bank of India 14. Punjab National Bank
5. Bank of Maharashtra 15. Punjab & Sind Bank
6. Canara Bank 16. Syndicate Bank
7. Central Bank of India 17. Union Bank of India
8. Corporation Bank 18. United Bank of India
9. Dena Bank 19. UCO Bank
10. IDBI Bank Ltd. 20. Vijaya Bank

2.2.3 Private Sector Banks

1. Axis Bank 12. Jammu & Kashmir Ban
2. Bank Of Rajasthan 13. Karnataka Bank
3. Catholic Syrian Bank 14. Karur Vysya Bank
4. City Union Bank 15. Kotak Mahindra Bank
 5. Development Credit Bank 16. Lakshmi Vilas Bank
6. Dhanalakshmi Bank 17. Nainital Bank
7. Federal Bank 18. Ratnakar Bank
8. HDFC Bank Bank 19. SBI Commercial & International
9. ICICI Bank 20. South Indian Bank 20. South Indian Bank
10. IndusInd Bank 21. Tamilnad Mercantile 21. Tamilnad Mercantile Bank
Bank
11. ING Vysya Bank 22. Yes Bank 22. Yes Bank

2.2.4 Foreign Banks

1. ABN AMRO Bank 15. DBS Bank
2. Abu Dhabi Commercial Bank 16. Deutsche Bank
3. Antwerp Diamond Bank 17. HSBC
4. Arab Bangladesh Bank 18. JP Morgan Chase Bank
5. Bank Of America 19. Krung Thai Bank
6. Bank Of Bahrain & Kuwait 20. Mashreq Bank\
7. Bank Of Ceylon 21. Mizuho Corporate Bank
8. Bank Of Nova Scotia 22. Oman International Bank
9. Bank Of Tokyo-Mitsubishi- UFI 23. Shinhan Bank
10. Barclays Bank 24. Societe Generale
11. BNP Paribas 25. Sonali Bank
12. Calyon Bank 26. Standard Chartered Bank
13. Chinatrust Commercial Bank 27. State Bank of Mauri
14. Citibank

3. CHALLENGES IN BANKING
The enhanced role of the banking sector in the Indian economy, the increasing levels of
deregulation along with the increasing levels of competition have facilitated globalisation of
the India banking system and placed numerous demands on banks. Operating in this
demanding environment has exposed banks to various challenges. The last decade has
witnessed major changes in the financial sector - new banks, new financial institutions, new
instruments, new windows, and new opportunities - and, along with all this, new challenges.
While deregulation has opened up new vistas for banks to augment revenues, it has entailed
greater competition and consequently greater risks. Demand for new products, particularly
derivatives, has required banks to diversify their product mix and also effect rapid changes in
their processes and operations in order to remain competitive in the globalised environment

3.1 Globalisation – a challenge as well as an opportunity

The benefits of globalisation have been well documented and are being increasingly
recognised. Globalisation of domestic banks has also been facilitated by tremendous
advancement in information and communications technology. Globalisation has thrown up
lot of opportunities but accompanied by concomitant risks. There is a growing realisation that
the ability of countries to conduct business across national borders and the ability to cope
with the possible downside risks would depend, inter-alia, on the soundness of the financial
system and the strength of the individual participants. Adoption of appropriate prudential,
regulatory, supervisory, and technological framework on par with international best practices
enables strengthening of the domestic banking system, which would help in fortifying it
against the risks that might arise out of globalisation. In India, we had strengthened the
banking sector to face the pressures that may arise out of globalisation by adopting the
banking sector reforms in a calibrated manner, which followed the twin governing principles
of non-disruptive progress and consultative process.

An online banking facility enables you to handle your finances efficiently. Online
banking uses modern computer technologies to offer the users convenient banking facilities.
If you have access to such a facility, there is absolutely no need for you to personally visit
your bank’s branch for any sort of transaction. You can simply login with the internet-
banking password that your banker has given you, and carry all the necessary work online. It
also eliminates the necessity of doing any paper-based work and saves considerable time for
the users. Private sector and foreign banks were using technology and computerized system
since its beginning while PSBs were not. So they found difficulty in managing all these
things. Many of Indian PSBs ignored technological change and had lost market share to
foreign banks and new private banks. Technology helps in having a huge branch network
easily and also it reduces the operational cost this may b clarified by an example as:-
Operational cost per transaction of an account via different type is-
 Via computers on counter- 40 Rs.
 Via ATM - 16-17 Rs.
 Via online - 46 paise
So it is cleared that manually/direct transaction cost comes very high and electronically and
online it is very low. So that’s why public sector banks should
improve their working system and should make it totally online but challenge is before PSBs
The users can do variety of work using your online banking pin code. The bankers benefit
equally from the online banking facilities. Besides offering their users the convenience of
banking, the online banking system means significant cost savings for the bankers
themselves. With such an automatic system in place, the bankers need not to hire employees
specialized in handling paper work and teller interactions. This reduces the bankers’
operating costs considerably, translating into significant cost savings over the long-term.
3.2 Non performing asset ( NPA)
Definition
A loan or lease that is not meeting its stated principal and interest payments. Banks
usually classify as nonperforming assets any commercial loans which are more than 90 days
overdue and any consumer loans which are more than 180 days overdue. More generally, an
asset which is not producing income. Non-Performing Asset means an asset or account of
borrower, which has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI. An amount due under any credit facility is treated as "past due"
when it has not been paid within 30 days from the due date. Due to the improvement in the
payment and settlement systems, recovery climate, up gradation of technology in the banking
system, etc., it was decided to dispense with 'past due' concept, with effect from March 31,
2001. Financial sector reform in India has progressed rapidly on aspects like interest rate
deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-
based supervision. But progress on the structural-institutional aspects has been much slower
and is a cause for concern. The sheltering of weak institutions while liberalizing operational
rules of the game is making implementation of operational changes difficult and ineffective.
Changes required to tackle the NPA problem would have to span the entire gamut of
judiciary, polity and the bureaucracy to be truly effective.
3.3TALENT MANAGEMENT

 Such personnel need to be identified, nurtured and motivated through a systematic

organizational plan to enable them to accept challenging roles early in the career.
Suitable changes in the promotion policies should take care of aspirations of such
extra ordinary and talented manpower.
 Banks will also have to pay increasing attention to education and training including
sponsorship of identified persons to MBA programmes, Phd programmes and other
long duration programmes in technology and financial management to develop a
wider managerial pool of competent people who can be developed fast to play the role
of modern banker in ever difficult and turbulent times.

 Banks will have to introduce innovative mechanism and process to respond to the
aspirations of such talented people by providing them sabbatical leave for
professional growth by sponsorship in seminars and conferences, both nationally and
internationally, to present papers and encouraging them to join professional
organisations to develop appropriate competencies and network with fellow
professionals.
 There is also need to develop organisation-wide awareness about banks keybusiness
problems including stagnant business units, strain on profitability, cost of operations,
unexplored business opportunities, manpower costs, NPAS etc.
 The preconditions for an effective talent management is clarity of where the
organisation is, i.e., the starting point and where it wishes to reach in a given time
horizon, i.e., the destination

3.4 GROWTH IN BUSINESS

 Public Sector Banks should now go global in search of new markets, customers and
profits.
 Some of the Public Sector Banks have their presence in overseas to a limited extent.
 The London based magazine ‘The Banker” has now listed only twenty Indian banks
 including private sector banks in the list of “Top 1000 World Banks”.
 The State Bank of India, the largest bank in India, ranks only 82nd amongst the top
global banks. It is not even a 10th in size of the 9th largest bank, Sumitomo Mitsui,
which has assets of $950 billion as against SBI’s assets of $91 billion.
 Therefore, our banks are not equipped enough to compete in the international arena.
 Realising the need to grow in size, the Indian banking system today is moving from a
regime of “large number of small banks” to “small number of large banks.”
 As per the Narasimhan Committee (II) recommendations, consolidations around
identified core competencies are taking place.
 Mergers and acquisitions in the banking sector are the order of the day.
 This trend may lead logically to promote the concept of financial super market chain,
making available all types of credit and non-fund facilities under one roof which is
challenge for public sectors bank and demand of time.