Money Supply & Banking

Speaker :- Shyamal Banerjee

Barter Exchanges
Economic exchanges without the mediation of money are referred
to as barter exchanges.

However, they presume the rather improbable double

coincidence of wants.

Consider, for example, an individual who has a surplus of rice

which she wishes to exchange for clothing. Ifshe is not lucky
enough she may not be able to find another person
who has the diametrically opposite demand for rice with a surplus
of clothing to offer in exchange
 Money
Definition
• A medium of exchange.
• With the help of money any exchange of goods and
services can take place.
• Money is said to be the most liquid asset among all
the assets of a man.
• It has general acceptability as a means of payment
and liquid characteristic. Keynes called this
Liquidity preference.
Money
 Money
• Generally money is created by the Central
Bank or the Government of a country.
• These are legal tender money as there is
legal compulsion for their acceptance.
• They also called as Cash Money.
• Another considerable flow of money is Credit
Money—created by the commercial banks by their
loan transactions
• Fiat Money

>>The money which does not have any intrinsic value is

called fiat money.

>>For example, the value of currency notes and coins is

not based on its production cost but is derived from the face
value or guarantee provided by the issuing authority to the
bearer of that currency or coin Thus, all currency notes and
coins are fiat money.
.
• Seigniorage
Face value (say 2,000) of the currency note / coin - Actual
Production Cost (say 23.50) of that currency note / coin.

Seigniorage earned by the Reserve Bank of India (RBI)

through printing currency notes becomes a major source of
surplus or profit.

A part of that seigniorage is retained by RBI and the rest

of it is transferred to the Government of India
Cash Money Vs Credit Money
 Money

• Money is regarded any object which is generally

accepted as:
• medium of exchange
• unit of account i.e. common measure of value
• standard of deferred payment
• store of value
• transfer of value.
Money
Functions Of Money
Money
 Value Of Money

• It means Exchange Value.

• It implies how much of goods and services can
be obtained in-exchange of a unit of money.
• Value of money is inverse of price.
• When price level increases, the value of money
decrease and vice versa.
Exchange Value
 Forms of Money

• The total money supply of a country can

broadly be classified into two groups —
• Cash Money and Credit Money.
• It also includes all other financial assets.
• The degree of moniness varies widely from
asset to asset.
Cash Money and Credit Money
The Components of Money Supply
 Money Supply
• The total stock of money circulating in an
economy is the money supply.
• The circulating money involves the currency,
printed notes, money in the deposit accounts
and in The form of other liquid assets.
• Monetary policy of a country is concerned with
the supply of money.
• Narrow money supply is called M1 It consists
of notes and coins in circulation and demand
deposits with banks and central bank.
M0 is the sum of following
components:
ComponentsBillion Rupees in Aug’2014
i) Currency in Circulation 13610
ii) Bankers’ Deposits with RBI 3567
iii)’Other’ Deposits with RBI 97
Total M0: Reserve Money 17274

M0 is the base for creating Broad money supply (M3).

NCERT uses the term High powered money. According to

Nadar’s Banking book: M0 = Reserve money = High
powered money.
M1: Narrow Money

m0 + demand Deposit in all

banks
M1 includes Excludes

1. Currency with public India’s deposits with IMF,

2. Demand deposit in all banks (e.g. World bank, Foreign
current account, savings Government etc.
account) Interbank deposits
3. Other deposits with RBI
M2
M2= M1 + Post office bank savings

Similar to regular banks, Post office also offers their

time savings account, recurring deposit account, time
deposit account. Here we count the Post office savings
(=”DEMAND deposit” type) only.
M3 (Broad Money)
Also called Money aggregate
M3 = M1 + Time deposits with commercial banks (Fixed
deposits, Recurring deposits).
MIND IT: M3= M1+time and NOT M3=M2+time.

As of August 2014 Billion Rupees

Currency with public 13003.9
Bank’s Demand deposits 8142.3
Bank’s Time deposits 77963.5
other deposits with RBI 96.2
Total M3 (Broad Money) 99205.8
Numbers not important but interpretation is:

• Banks receive more money in TIME deposits than

in Demand deposits.
• If Banks received more money in Demand
deposits [current account-savings account
(CASA)], They’ve to pay less interest (0% and
4%) compared to Time deposits [e.g.Fixed
deposits (9%)] = cheaper raw material (money)
for loaning to others @13-18% and earning big
margin.
• Banks have more money >> than with currency
with juntaa.
 M4
M4= M3 + total post office deposits.*
*meaning those Post Office “time deposits” and “recurring
deposits” also. But excludes national savings certificate etc
NAME TYPE LIQUIDITY*
M1 Narrow money highest
M2 Narrow money less than M1
M3 Broad money less than M2
M4 Broad money lowest liquidity

*liquidity in the sense the how quickly you can get”Value” into
cash.
M4 has variety of “TIME DEPOSITS” (Fixed deposits etc) so you
can visualize it takes time to “BREAK” those deposits and takeout
cash. Hence lowest liquidity among the given.
Mindmap
Money multiplier
• It is the ratio of Broad money (M3) divided by Reserve
Money (M0)
• Therefore, Broad money (M3) = Reserve Money (M0) x
money multiplier
• In other words, when Reserve money increases, Broad money
will also increase. (Direct correlation).
• For 2013-14, Money multiplier was 5.5.
• Just for conceptual clarity, let’s derive for August 2014, using
the data from earlier tables
August 2014
M3 Broad money 99205
M0 Reserve money 17274
Money multiplier (M3 divided 5.74
by M0)
Velocity of money circulation
• It is the avg. number of times money passes from one hand to
another, during given time period.
• e.g. you bought pen worth Rs.10 from shopkeeper, he uses
same 10 rupee note to buy Cocacola=> then same currency
note performed function of TWENTY Rupees. This is called
“Velocity of money”

IF Velocity of money ___, Then money supply will__.

Increases Increase
Decreases decrease
 Banking
Speaker :- Shyamal Banerjee
History of Banking
Banking Ranking in India started in 1770 with the
later establishment of Bank of Hindustan”
Later three Presidency Banks were set up
1.Bank of Calcutta in 1806
2Bank of Bombay in 1840
3.Bank of Madras in 1849
These three banks worked as quasi - central banks
for many years . In 1921, all these three banks were
amalgamated to form the per Imperial Bank
continued functioning till 1955 after which it got
renamed as State Bank of India
 INTRODUCTION TO RBI
Established in April
1935 under the
RESERVE BANK OF
INDIAN ACT 1934.
Head Quarters –
MUMBAI
The Reserve Bank of India is
the central banking institution of
India and controls the monetary
policy of the rupee as well as
currency reserves.
 Present Governor –
Shaktikanta Das
 History Of RBI
It was set up on the recommendations of Hilton Young
Commission
It was started as share-holders bank with a paid up capital
of 5 crores
 Initially it was located in Kolkata
 It moved to Mumbai in 1937
 Initially it was privately owned
Since 1949, the RBI is fully owned by the Government of
India.
 Its First governor was Sir Osborne A.Smith
The First Indian Governor was “Sir Chintaman
D.Deshmukh
YEAR IMPORTANCE
1926 The Royal Commission on Indian Currency and Finance
recommended creation of a central bank for India.

1934 The Bill was passed and received the Governor General’s assent

1935 The Reserve Bank commenced operations as India’s central bank

on April 1 as a private shareholders’ bank with a paid up capital of
rupees five crore
1942 The Reserve Bank ceased to be the currency issuing authority of
Burma (now Myanmar).

1947 The Reserve Bank stopped acting as banker to the Government of

Burma
1948 The Reserve Bank stopped rendering central banking services to
Pakistan
1949 The Government of India nationalised the Reserve Bank under the
Reserve Bank (Transfer of Public Ownership) Act, 1948
Fact of RBI

• RBI started as a shareholder's company (i.e. privately

owned) but it became nationalisa in 1949 under RBI
(Transfer of Public Ownership) Act, 1948 and, thereafter, is
fully owned by the Government of India (Gol).
• The first Governor of RBI was Sir Osborne Smith (1935-
1937)
• The first Indian Governor of RBI was C.D. Deshmukh
(1943-1949)
• Manmohan Singh was the only Prime Minister till now
who also served as Governor of RBI during different spans
of time
• At first, RBI's main office was located in Kolkata. But, it
was moved to Mumbai in 1937, it has 4 Zonal Offices and
about 22 Regional Offices
Fact of RBI
• The emblem of RBI is a Tiger (earlier it was Lion) and a
Palm tree
• The RBI is entrusted with a variety of roles, including
overseeing the monetary policy, regulation and supervision
of the financial system and the payment systems,
management of foreign exchange, issue of currency,
promotion of national objectives and crediting short-term
loans to government.
• The Preamble of RBI describes the basic functions of RBI
as: 'to regulate the issue of bank notes and keeping of
reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of
the country to its advantage'.
• The financial year of RBI runs from 1st of July to 30th of
June.
Subsidiaries
RBI has four fully owned subsidiaries, namely:
1. Deposit Insurance and Credit Guarantee Corporation of
India (DICGC)
2. Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL)
3, Reserve Bank Information Technology Private Limited
(ReBIT)
4. Indian Financial Technology and Allied Services
(IFTAS)
No. of Press Four printing presses prints and
supply bank notes

Location

1. Dewas – Madhya Pradesh

2. Nashik – Maharashtra

3. Mysore – Karnataka

4. Salboni – West Bengal

Structure
• The affairs of the RBI are governed by a Central Board of
Directors which the following 21 members:

• Official Directors which include:

Governor + not more than 4 Deputy Governors (for a tenure not
more: 5 years)

• Non - Official Directors which include:

10 Directors from various fields (nominated by Gol and they
hold office 4 years)
• 1 Director nominated by each of the 4 Local Boards of RBI.
• 2 Government officials nominated by Gol.

• Governor and Deputy Governors of RBI are nominated by

Gol and have tenure more than 5 years.
Regional offices of RBI
 FUNCTIONS OF RBI

• Issuer Of Bank Notes

• Banker of teh Govt
• Banker’s Bank
• Lender of the last Resort
• Custodian of Foreign Exchange reserve
• Controller of Credit and money Supply
• Regulator of the Banks
Monetary authority

 Main monetary authority of the country.

It formulates, implements and monitors the
monetary policy as well as it has to ensure an
adequate flow of credit to productive sectors.
The RBI controls the monetary supply,
monitors economic indicators like the gross
domestic product and has to decide the design
of the rupee banknotes as well as coins.
 Issuer of currency
 Design, printing and
distribution.

 The bank issues and

exchanges or destroys
currency and coins not fit for
circulation.

 The objectives are giving the

public adequate supply of
currency of good quality and
to provide loans to
commercial banks to maintain
or improve the GDP.
 Minimum Reserve System
Principle of Currency Note Issue.

RBI can issue currency notes as much as the

country requires, provided it has to make a
security deposit of Rs. 200 crores, out of which
Rs. 115 crores must be in gold and Rs. 85
crores must be FOREX Reserves.

This principle of currency notes issue is known

as the 'Minimum Reserve System'.
 BANKER TO THE
GOVERNMENT
Banker to the Government: performs
merchant banking function for the central
and the state governments; also acts as
their banker.

BANKER TO THE BANK

FINANCIAL REGULATION AND MANAGEMENT

 As the regulator and the

supervisor of the banking
system, the Reserve Bank has a
critical role to play in ensuring
the system’s safety and
soundness on an ongoing basis.

 The objective of this function is to protect the interest of

depositors through an effective prudential regulatory
framework for orderly development and conduct of banking
operations, and to maintain overall financial stability
through various policy measures.
 Manager of Foreign Exchange
To facilitate external trade and payment.

It acts as a custodian and Manages the

Foreign Exchange Management
Act,(FEMA) 1999.

RBI buys and sells foreign currency to maintain the exchange

rate of Indian Rupee v/s foreign currencies like the US Dollar,
Euro, Pound and Japanese yen.

OBJECTIVE: TO FACILITATE EXTERNAL TRADE

AND PAYMENT AND PROMOTE ORDERLY
DEVELOPMENT AND MAINTENANCE OF FOREIGN
EXCHANGE MARKET IN INDIA.
 ROLE OF RBI IN INFLATION CONTROL

• Inflation arises when the demand increases and there is a

shortage of supply There are two policies in the hands of the
RBI.

• Monetary Policy: It includes the interest rates. When the bank

increases the interest rates than there is reduction in the
borrowers and people try to save more as the rate of interest
has increased.

• Fiscal Policy: It is related to direct taxes and government

spending. When direct taxes increased and government
spending increased than the disposable Income of the people
reduces and hence the demand reduces.
Instrument Of Credit Control
 Quantitative Measures

Quantitative Measures “BANK RATE” also called “Discount

Rate”.
 It also includes “Repo Rate”.
“Open Market Operations” buying and selling of government
securities.
 “Variable Reserve Ratio” it includes C.R.R and S.L.R

Qualitative Measures
1. Moral suasion
2. Direct Action
3. Prescription of margin.
4. Consumer credit regulation.
Quantative Tool
 BANK RATE

It’s the interest rate that is charged by a country’s central

bank on loans and advances to control money supply in the
economy and the banking sector.
 The present bank rate is 4.25%
REPO RATE
Whenever the banks have any shortage of funds they can
borrow it from the central bank. Repo rate is the rate at which
our banks borrow currency from the central bank.

 A reduction in the repo rate will help banks to get Money at a

cheaper rate.

 The present repo rate is 4.00 %

 REVERSE REPO RATE

 It’s the rate at which the banks park surplus funds

with reserve bank.

 While the Repo rate is the rate at which the banks

borrow from the central bank.

 It is mostly done , when there is surplus liquidity in

the market by the central bank.

 The present reverse repo rate is 3.35 %

 CASH RESERVE RATIO

• Cash Reserve Ratio (CRR) is the amount of

Cash(liquid cash like gold)that the banks have to keep
with RBI.

• The present CRR rate is 4 %.

 STATUTARY LIQUIDITY RATIO
•It is the amount a commercial bank needs to maintain
in the form of cash, or gold or govt. approved securities
(Bonds) before providing credit to its customers.

•SLR rate is determined and maintained by the RBI

(Reserve Bank of India) in order to control the
expansion of bank credit.

•The present SLR rate is 19.5%.

 BASE RATE

• The Base Rate is the minimum interest rate of

a Bank below which it cannot lend, except in
cases allowed by RBI.
 MARGINAL STANDING FACILITY

• The rate at which the scheduled banks could borrow

funds from the RBI overnight, against the approved
government securities is termed as MSF.

• Reserve Bank of India in its monetary policy (2011-12)

has defined the term Marginal Standing Facility rate as
the one, under which scheduled banks could borrow up
to 2 % of their respective Net Demand and time
Liabilities funds overnight from the Reserve Bank of
India (RBI) against approved government securities.
Qualitative Instruments of Credit Control

These instruments aid or restrict the flow of credit to specific

areas of the economic activity. Some of them are

Margin requirements: It refers to the part of loan amount

which cannot be borrowed from bank. This is the difference
between the value of securities offered for loans and the value
of loans granted. In order to decrease money supply, the
margin requirementis increased by RBI, and vice versa.

Rationing of credit: It refers to the credit ceilings (that can be

granted by SCBs) being controlled by the RBI
Qualitative Instruments of Credit Control

Moral (Per) suasion: RBI makes the banks adhere to the policy and
directives through persuasion or pressure in order to maintain a
certain level of money supply in the economy

Consumer Credit Regulation: RBI issues oral / written guidelines to

the banks with regard to the down payments and maximum
maturities of installment credit for purchase of of goods.

*******************************************************

Quantitative Easing (QE) - Itis a policy under which the RBI

purchases longer term securities from the open market and injects
money into the economy, thereby increasing the money supply to
encourage lending & investment and ultimately promote economic
growth. It is the last resort which is used by RBI to stimulate
spending in an economy when interest rates fail to work.
Inflation Control
 REGULATION OF BANKING SYSTEM

The prime duty of the reserve Bank is to regulate the banking

system of our country in such a way that the people of the country
can trust in the banking Up to perform its duty.
The Reserve Bank has following powers in this regard:

•Licensing:
According to the section 22 of the Banking Regulation Act, every
bank has to obtain license from the Reserve Bank. The Reserve
Bank issues such license only to those banks which fulfill
condition of the bank.
• Management:
Section 10 of the Banking Regulation Act embowered the
Reserve Bank to change manager or director of any bank if it
considers it necessary or desirable.

⚫ Branch Expansion:
Section 23 requires every bank to take prior permission from
Reserve Bank to open new places of business in India.

⚫ Power of inspection of Bank:

Under Section 35, the Reserve Bank may inspect any bank and
its books and accounts either at its own initiative or at the
instance of the Central Government.
Monetory policy comittee
About:

The Monetary Policy Committee is a statutory and

institutionalized framework under the Reserve Bank of India
Act, 1934, for maintaining price stability, while keeping in
mind the objective of growth.

Formation:

An RBI-appointed committee led by the then deputy governor

Urjit Patel in 2014 recommended the establishment of the
Monetary Policy Committee.
Monetory policy comittee
Chairman:

The Governor of RBI is ex-officio Chairman of the committee.

Members:

The committee comprises six members (including the Chairman) -

three officials of the RBI and three external members nominated by
the Government of India.

Decisions :
Decisions are taken by majority with the Governor having the casting
vote in case of a tie.

Function:
The MPC determines the policy interest rate (repo rate) required to
achieve the inflation target (4%).
Banking System in India
COMMERCIAL BANKS
• Commercial banks may be defined as any banking
organization that deals with the deposits and loans of
business organizations. Commercial banks issue bank
cheques and drafts, as well as accept money on term
deposits.
• Commercial banks also act as moneylenders, by way of
instalment, loans and overdrafts.
• Commercial banks also allow for a variety of deposit
accounts, such as current, savings, and time deposit.
• These institutions are run to make a profit and are owned
by a group of individuals.
• They lend to all sectors ranging from rural to urban.
• These banks do not charge concessional interest rates
unless instructed by the RBI.
• Public deposits are the main source of funds for these
banks.
• They have a unified structure and are owned by the
government, state, or any private entity.
SCHEDULED COMMERCIAL BANKS (SCB)
• Governed by the Banking Regulation Act-1949.
• Scheduled banks are those mentioned in the 2nd schedule
of RBI Act, 1934.
• Scheduled commercial banks (SCBs) account for a major
proportion of the business of the scheduled banks.
• Private sector banks include the old private sector banks
and the new generation private sector banks– which were
incorporated according to the revised guidelines issued by
RBI regarding the entry of private sector banks in 1993.
•
 PUBLIC SECTOR BANKS
These are banks where the majority stake is held by the
Government of India. Examples of public sector banks are:
SBI, Bank of India, Canara Bank, etc

EMERGENCE OF STATE BANK OF INDIA (SBI) GROUP

• State bank group implies, State bank of India and its

associates.
• Prior 1955, SBI was known as “Imperial Bank of India”.
• Imperial Bank of India created in 1921 by amalgamating 3
Presidency banks of – Bengal, Bombay and Madras.
• Post – independence, the economic model of Five-year
plan necessitated a reorganisation of banking. Following
this, on July 1, 1955 as per the SBI act 1955, the SBI
constituted and it took over the business and undertaking of
Imperial Bank.
• By enacting SBI Act, 1955 the government partially
nationalized Imperial Bank of India and renamed it as SBI.
• In 1959, by enacting SBI (Associates) Act, 1959 the
government brought 8 banks of former princely states
under SBI as its associates. They were –
• State bank of Bikaner
• State bank of Jaipur
• State bank of Hyderabad o State bank of Indore
• State bank of Mysore
• State bank of Saurashtra
• State bank of Patiala
• State bank of Travancore
• State bank of Bikaner and Jaipur were merged and known
as SBBJ (State Bank of Bikaner and Jaipur)
2008 – State bank of Saurashtra was merged with state bank of
India.
Now the number of associate banks is 5.
SBI associates and Bharatiya Mahila Bank was merged with
SBI w.e.f. April 1, 2017.
SBI is the largest public sector bank in India.
To unload RBI from its administrative work and to endow it
with only regulatory functions, RBI’s shareholding was
transferred to the government of India.

2019: Global top banks – 100 banks ???? China (18 banks),
USA (12 Banks), Japan > France >…..India (only 1 bank: SBI
at Rank 55).
The Union Cabinet in 2017, had approved
the merger of five associate banks along
with Bharatiya Mahila Bank with SBI. The
five banks were State Bank of Bikaner and
Jaipur, State Bank of Hyderabad, State Bank
of Travancore, State Bank of Mysore and
State Bank of Patiala. At present, there are
12 Public Sector Banks in India including
SBI.
NATIONALIZATION OF THE BANKS

• In India, the banks which were previously functioning under the

private sector were transferred to the public sector by the act of
nationalization and thus the nationalized banks came into
existence.
• Post-independence, the GOI adopted a planned economic
development model for the country. Nationalisation was in
accordance with the national policy of adopting the socialistic
pattern of society.
• The first major step was Nationalization of the Imperial Bank of
India in 1955 via the State Bank of India Act.
• SBI was made to act as the principal agent of RBI and handle
banking transactions of the Union and State Governments.
• After that, in a major process of nationalization, seven subsidiaries
of the SBI were nationalized via the SBI (Subsidiary Banks) Act,
1959.
• In 1969, a major phase of nationalization was carried out and 14
major commercial banks in India were nationalized.
• The second phase of nationalization Indian Banking Sector
NATIONALIZATION OF THE BANKS

1969 – 14 banks nationalized

1980 – 6 more banks nationalized The
nationalized banks controlled about 91% of
banking assets

1990 – Narsimhan Committee Reformss

New Economic Policies (NEP)
NATIONALIZATION OF THE BANKS
These 14 banks Nationalized in 1969 are shown in the below
table.
Sr. Bank
1. Central Bank of India
2 Bank of Maharashtra
3 Dena Bank
4 Punjab National Bank
5 Syndicate Bank
6 Canara Bank
7 Indian Bank
8 Indian Overseas Bank
9 Bank of Baroda
10 Union Bank
11 Allahabad Bank
12 United Bank of India
13 UCO Bank
14 Bank of India
NATIONALIZATION OF THE BANKS
• The above was followed by a second phase of
nationalization in 1980, when the Government of India
acquired the ownership of 6 more banks, thus bringing the
total number of Nationalized Banks to 20. This step
brought 80% of the banking segment in India under
Government ownership.
• The private banks at that time were allowed to function
side by side with nationalized banks and the foreign banks
were allowed to work under strict regulation.
• A few recent events as part of banking sector reforms
include:
• Deregulation of interest rates
• Differentiated banking – Small and Payment banks
• Increased autonomy to banks
• Basel III compatibility of banks
• Regulation of NBFCs etc.
REASONS FOR NATIONALIZATION OF BANKS
• Wars with China (1962) and Pakistan (1965) that put immense pressure on public
exchequer.
• Two successive years of drought had led to severe food shortages and also
compromised national security (PL 480 program).
• Resultant three-year plan holiday affected aggregate demand as public investment
was reduced.
• India’s economic growth barely outpaced population growth in 1960-70s and average
incomes stagnated.
• Share of the industrial sector in credit disbursement by commercial banks almost
doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less
than 2% of total credit, though more than 70 percent of the population was dependent
upon it.
• Priority Sector Lending – the agriculture sector and its allied activities were the
largest contributors to the national income.
• Nationalisation aimed at mobilizing the savings of the people to the largest possible
extent and to utilize them for productive purposes.
• Reducing inter and intra-regional imbalance to curb the urban-rural divide
• Controlling private monopolies over financial sectors.
• Ensuring Socio-economic welfare as enshrined in preamble of the Indian constitution.
• Expansion of banking to rural pockets to ensure financial inclusion.
• To shift from ‘class banking’ to ‘mass banking’ (social banki
OBJECTIVE OF NATIONALISATION
To Induce Confidence of Public in Banking Sector
To provide social orientation like loan to weaker
sections of society
Expansion of banking, Opening accounts in rural
areas – financial inclusion
To reduce inequalities in society.
Controlling private monopolies
Reducing regional imbalances
Developing banking habits
Priority sector lending to weaker sections –
inclusive growt
IMPACT OF NATIONALIZATION OF BANKS
• Nationalization of the Banks brought the public confidence in the
banking system of India.
• After the two major phases of nationalization in India, 80% of the
banking sector came under government ownership.
• After the nationalization of banks, the branches of the public
sector banks in India rose to approximately 800 per cent in
deposits, and advances took a huge jump by 11,000 per cent.
• Government ownership gave the public implicit faith and
immense confidence in the sustainability of public sector banks.
• Indian banking system has reached even to the remote corners of
the country.
• More equitable and prioritized disbursement of credit to different
sectors of economy.
• Nationalization of banks led to a smooth and streamlined Indian
growth process, particularly in the Green revolution.
• Aim of nationalization is to promote rapid growth in agriculture,
small industries and export, to encourage new entrepreneurs and
to develop all backward areas.
DOWN SIDE OF NATIONALISATION OF BANKING
• Efficiency and profitability of Banks declined drastically
• Issue of NPA becoming major roadblock in profitability of
banking sector
• Nationalization of banks led to an interest rate structure that was
incredibly complex – different rates of interest for different types
of loans.
• Nationalization drive has led to lesser competition between the
public sector and private sectors banks.
• Bureaucratic attitude and procrastination in the functioning of the
banking system.
• Lack of responsibility and initiative, red–tapism, inordinate delays
are common features of nationalized banks.
• Ruthless expansion of these banks are now facing the problems of
heavy overdue loans and economically unviable branches.
• Political interference led to disbarment of loans which were
against the sound banking rules and weakened the economic
viability of these institutions.
•
MERGERS/CONSOLIDATION OF BANKS
• The government has decided that Bank of Baroda, Vijaya Bank
and Dena Bank shall be “amalgamated” making the new entity
India’s third largest lender after SBI and ICICI.
• The GoI has proposed to merge 10 Public sector Banks into 4
large banks by April 1 2020.
•

• 1.3.1 CHRONOLOGY

• PJ Nayak Committee (2014) recommended for merger of PSBs

• 2017: Union Cabinet gave in-principle approval for amalgamation
of Public Sector Banks
• 2017: State Bank of India merged with 5 of its associate banks and
Bharatiya Mahila Bank – State Bank of Bikaner and Jaipur, State
Bank of Mysore, State Bank of Travancore, State Bank of
Hyderabad, and State Bank of Patiala.
• 2018: Vijaya Bank, Dena Bank and Bank of Baroda (Anchor bank
– BoB)
FOREIGN BANKS

Foreign banks are present in the country either

through complete branch/subsidiary route presence
or through their representative offices.
These banks are registered and have their
headquarters in a foreign country but operate their
branches in our country. Examples of foreign banks
in India are: HSBC, Citibank, Standard Chartered
Bank, etc
Local Area Banks (LAB)

Local Area Banks (LAB)

Introduced in India in the year 1996
These are organized by the private sector
Earning profit is the main objective of Local
Area Banks
Local Area Banks are registered under
Companies Act, 1956
At present, there are only 4 Local Area
Banks all which are located in South India
Small Finance Banks
Small Finance Banks
As the name suggests, this type of bank
looks after the micro industries, small
farmers, and the unorganized sector of the
society by providing them loans and
financial assistance. These banks are
governed by the central bank of the country.

Given below is the list of the Small Finance

Banks in our country
Payments Banks
Payments Banks
A newly introduced form of banking, the payments bank have
been conceptualized by the Reserve Bank of India. People
with an account in the payments bank can only deposit an
amount of up to Rs.1,00,000/- and cannot apply for loans or
credit cards under this account.

Options for online banking, mobile banking, the issue of

ATM, and debit card can be done through payments banks.
Given below is a list of the few payments bank in our country:

Airtel Payments Bank

India Post Payments Bank
Fino Payments Bank
Jio Payments Bank
Paytm Payments Bank
NSDL Payments Bank