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Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest banks in the 1980¶s.Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
Early history 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 the Bank of Hindustan, both of which 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 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.
Corporation Bank. which was established in 1863. . It was not the first though. Bank of Baroda. is the oldest Joint Stock bank in India. then a French colony. established in 1881 in Faizabad. which has survived to the present and is now one of the largest banks in India. mainly due to the trade of the British Empire. The first entirely Indian joint stock bank was the Oudh Commercial Bank. India's central banking authority. particularly in Calcutta. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862. saw the establishment of banks inspired by the Swadeshi movement. but it failed in 1848 as a consequence of the economic crisis of 1848-49. It failed in 1958. HSBC established itself in Bengal in 1869. The next was the Punjab National Bank. followed. A number of banks established then have survived to the present such as Bank of India. Indian Bank. established in 1865 and still functioning today. was nationalized. This resulted into greater involvement of the state in different segments of the economy including banking and finance. in the 1860s. The period between 1906 and 1911. The Allahabad Bank.Indian merchants in Calcutta established the Union Bank in 1839. That honor belongs to the Bank of Upper India. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. The major steps to regulate banking included: y In 1948. and it became an institution owned by the Government of India. with some of its assets and liabilities being transferred to the Alliance Bank of Simla Foreign banks too started to arrive. the Reserve Bank of India. when it failed. and which survived until 1913. Calcutta was the most active trading port in India. branches in Madras and Pondicherry. and so became a banking center. Post-independence The Government of India initiated measures to play an active role in the economic life of the nation. established in Lahore in 1895. Canara Bank and Central Bank of India. and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy.
At the same time. it has emerged as a large employer. the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation. the .y In 1949. After this. the government merged New Bank of India with Punjab National Bank. the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. and a debate has ensued about the possibility to nationalise the banking industry. 1969. Within two weeks of the issue of the ordinance. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. 1969. and inspect the banks in India. her move was swift and sudden. the Indian banking industry has become an important tool to facilitate the development of the Indian economy. With the second dose of nationalization. The stated reason for the nationalization was to give the government more control of credit delivery. the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate. until the 1990s. Indira Gandhi. continued to be owned and operated by private persons. in the year 1993. However. control. This changed with the nationalisation of major banks in India on 19 July. Nationalisation By the 1960s." The paper was received with positive enthusiasm. Thereafter. banks in India except the State Bank of India. Later on. despite these provisions. and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19. and it received the presidential approval on 9 August. A second dose of nationalization of 6 more commercial banks followed in 1980. control and regulations. and no two banks could have common directors. the GOI controlled around 91% of the banking business of India." y 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.
Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as ³priority sectors´. closer to the average growth rate of the Indian economy. The share of foreign banks (numbering 42). The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology.41 percent. In terms of ownership.9 percent and 12. . These banks have over 67.85 percent respectively in credit during the year 2000. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased by eight-fold.2 percent of the deposits and 47. which is governed by the Banking Regulation Act of India. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks.5 percent of credit during the same period. The 20 nationalized banks accounted for 53. non-scheduled banks and scheduled banks. commercial banks can be further grouped into nationalized banks. 3.nationalised banks grew at a pace of around 4%. This in turn resulted in a significant growth in the geographical coverage of banks. regional rural banks and private sector banks (the old/ new domestic and foreign). regional rural banks and other scheduled commercial banks accounted for 5. the State Bank of India and its group banks. During the year 2000. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993.2 percent respectively in deposits and 8. 3.14 percent and 12. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980.7 percent.000 branches spread across the country.1 percent share in credit. the State Bank Of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28. which in turn helps them to save on manpower costs and provide better services. Scheduled banks comprise commercial banks and the co-operative banks. 1949 can be broadly classified into two major categories. Indian Banking industry.
The private players however cannot match the PSB¶s great reach. debit cards. which are the mainstay of the Indian Banking system are in the process of shedding their flab in terms of excessive manpower. Automatic Teller Machines (ATMs) and combined various other . which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000). Bank of Punjab. Indusind Bank.Global Trust Bank merger however opened a pandora¶s box and brought about the realization that all was not well in the functioning of many of the private sector banks. Therefore one of the means for them to combat the Public sector Banks has been through the merger and acquisition (M& A) route. the industry has witnessed several such instances. Centurion Bank. The Public sector Banks are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes. HDFC Bank¶s merger with Times Bank ICICI Bank¶s acquisition of ITC Classic. Over the last two years. lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. excessive non Performing Assets (Npas) and excessive governmental equity. For instance. the Public sector Banks. Anagram Finance and Bank of Madura. phone banking. The UTI bank.Current Scenario The industry is currently in a transition phase. while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. anywhere banking. mobile banking. On the one hand. great size and access to low cost deposits. Public sector Banks. Private sector Banks have pioneered internet banking. Vysya Bank are said to be on the lookout. falling revenues from traditional sources.
4 percent.0 percent as against the previous year¶s 6.8 percent during 1969-99. while bank credit expanded at a Cumulative average growth ratr of 16. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the Public sector Banks. foreign banks. money supply grew by around 16.3 percent in financial year 2000. Many of them are also entering the new vistas of Insurance. while the Public sector Banks are still grappling with disgruntled employees in the aftermath of successful VRS schemes. have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Aggregate Performance of the Banking Industry Aggregate deposits of scheduled commercial banks increased at a compounded annual average growth rate (Cumulative average growth rate) of 17. The whole price index (a measure of inflation) increased by 7.2 percent as against 14. Also. Similarly.1 percent as against 3. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector.3 percent per annum. following India¶s commitment to the W To agreement in respect of the services sector.services and integrated them into the mainstream banking arena. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. In financial year 2001 the economic slowdown resulted in a Gross domestic product growth of only 6. Banks¶ investments in government and other approved securities recorded a Cumulative average growth rate of 18. .6 percent a year ago.8 percent per annum during the same period. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. including both new and the existing ones.
0 percent by the year 2004 based on the Basle Committee recommendations. The nationalized banks (i. 223 banks are in the public sector and 51 are in the private sector. government-owned banks) continue to dominate the Indian banking arena. The industrial slowdown also affected the earnings of listed banks. Consequently. Any bank that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a percentage of the risk-weighted assets is maintained at the stipulated rate.4 percent in financial year 2001 percent was lower than that of 19. While the IPO route was a much-fancied one in the early µ90s. rural banks focus on areas of agriculture. which at present is 9. banks have been forced to explore other avenues to shore up their capital base.e.The growth in aggregate deposits of the scheduled commercial banks at 15.56 percent in the fourth quarter of 2000-2001.75 percent in the first quarter of 2000-2001.3 percent in the previous year. but dropped to 4.6 percent in financial year 2001 against 23 percent a year ago. while the growth in credit by SCBs slowed down to 15. rural development etc. The net profits of 20 listed banks dropped by 34.0 percent. Many are also going in for right issues at prices considerably lower than the market prices to woo the investors. Net profits grew by 40. The private sector bank grid also includes 24 foreign banks that have started their operations here. While some are wooing foreign partners to add to the capital others are employing the M& A route. is likely to be hiked to 12. The CAR.43 percent in the quarter ended March 2001. the current scenario doesn¶t look too attractive for bank majors. These co-operatives. Industry estimates indicate that out of 274 commercial banks operating in India. . On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms. Under the ambit of the nationalized banks come the specialized banking institutions. It is the foremost monitoring body in the Indian financial sector. Reserve Bank of India The Reserve Bank of India acts as a centralized body monitoring any discrepancies and shortcoming in the system. it was a feat achieved with its own share of difficulties.
Also. possible acquisitions of PSU banks will definitely give them the much needed scale of operations and access to lower cost of funds. Scheduled banks constitute of commercial banks and co-operative banks. The total assets of all scheduled commercial banks by end-March 2010 are estimated at Rs 40. 90. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Consequently. the low interest rate scenario is likely to affect the spreads of majors. This is one segment that is likely to witness a greater deal of action in the future.7 per cent that existed between 1994-95 and 2002-03. they have been amongst the first movers in the lucrative insurance segment. The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. It is expected that there will be large additions to the capital base and reserves on the liability side. with minimal pressure from the government.000 crores. banks such as ICICI Bank and HDFC Bank have forged alliances with Prudential Life and Standard Life respectively. This is likely to result in a greater focus on better asset-liability management procedures.4 per cent during the rest of the decade as against the growth rate of 16. The outlook for the private sector banks indeed looks to be more promising vis-à-vis other banks. Bank assets are expected to grow at an annual composite rate of 13. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan. thus increasing their efficiencies. the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. That will comprise about 65 per cent of Gross Domestic Product at current market prices as compared to 67 per cent in 2002-03. lower but more productive employee force etc will stand them good. Growth in Indian Banking Industry Foreign banks are likely to succeed in their niche markets and be the innovators in terms of technology introduction in the domestic scenario. only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future. Already. There are . These banks will continue to be the early technology adopters in the industry. In the near term. While their focused operations. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true.The Reserve Bank of India is an autonomous body.
SBI Commercial and International Bank Ltd. heightened competition and consolidation. Reputation Risk. Country Risk. Operational Risk. ANZ Grindlays Bank. Compliance Risk. to third parties who may be unrelated or member of the group/conglomerate as a means of both reducing cost and accessing specialist expertise. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry. Access Risk Concentration and Systemic Risk. Unfortunately they are burdened with excessive Non Performing assets (NPAs). mobile banking. Vijaya Bank. It would therefore be imperative for the bank outsourcing its activities to ensure effective management of these risks Indian banking industry is witnessing robust growth under the influence of a changing regulatory environment. rapid technological advancements. not available internally and achieving strategic aims. banks are increasingly using outsourcing. The failure to manage these risks can lead to financial losses/reputational risk for the bank and could also lead to systemic risks within the entire banking system in the country. Counterparty Risk. ATMs. On the other hand the Private Sector Banks are making tremendous progress. In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank. They are leaders in Internet banking. Outsourcing The world over.about 67. which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Oriental Bank. The Public Sector Banks(Public sector Banks). and banks from the Public Sector include Punjab National bank. This changing landscape in the banking industry is driving banks to explore the outsourcing option to achieve efficiencies.000 branches of Scheduled banks spread across India. Outsourcing brings in its wake. . ABN-AMRO Bank. UCO Bank. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. American Express Bank Ltd. Citibank are some of the foreign banks operating in the Indian Banking. several risks like Strategic Risk. Contractual Risk. Exit Strategy Risk. Bank of Rajasthan Ltd. Allahabad Bank among others. ING Vyasa Bank. phone banking. massive manpower and lack of modern technology.
where even after the global financial turmoil. 19 b by FY12. The Raghuram Rajan Committee. India¶s largest bank. rapid scale up and introduction of new services are driving outsourcing in this industry. Consolidation in Indian banks India prepares for competitive times. 4 b for FY08 and are expected to grow at a CUMULATIVE AVERAGE GROWTH RATR of 47% to touch Rs. The Committee has observed that given the fragmented nature of the Indian banking system and the small size of the typical bank. but not forcing. centralization and penetration of IT systems need to focus on core services. In a recent analysis of total assets of India¶s ten largest banks vis-à-vis size of its Gross domestic product at end of fiscal 2008-09. only two Indian banks. State Bank of India at the 64th position and ICICI Bank Ltd at 81st. The outsourcing potential in the Indian banking industry will increase rapidly as banks strengthen their IT systems. the largest private sector lender has attained the 148th position. Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households. Outsourcing revenues from the Indian banking industry are estimated at Rs. assets of only top five banks has grown to four times of Gross Domestic Product. Indian Government in a recent statement said that the initiatives for consolidation amongst the Public sector Banks should emanate from the management of the banks themselves with Government playing a supportive role as the common stakeholder.Apart from the growth in the industry. consolidation amongst Public Sector Banks (Public sector Banks). .a core measure of a bank¶s financial stringent terms of assets. more banks are planning to combine for competitive advantage. Combined assets of top ten banks constitute less than 60 per cent of the Gross domestic product unlike the banking system of European economies. figure among the global top 100 by tier I capital . ASSOCHAM has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. ICICI Bank Ltd. has recommended encouraging. SBI is now the world¶s 70th largest bank. in general. some consolidation may be in order for banks that aim to play on a larger stage. the ASSOCHAM Chief said. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets. On the other hand.
Consequently. Indian banks are not able to compete globally in terms of fund mobilisation. owing to changes in the global financial system. It will not only improve the operation efficiency of the banks but also augment their bottom line. banking transaction are carried out.ASSOCHAM feels that hampered by the fragmented nature of the banking industry. investment and rendering of financial services. General consensus is that more bank mergers may be inevitable. The role of Banking in the process of financial intermediation has been undergoing a profound transformation. the revolution in information technology has brought about sea changes in the way. credit disbursal. . keeping in view the perceived competitive environment. the impact and implications of emerging issues have been analysed in the book. The balance sheets of top 10 Indian banks suggest the greater scope of consolidation to reap the benefits of large sized globally competitive Indian banks. Emerging scenario The Economic Liberalisation process has increasingly exposed the Banking Sector to international competition. India needs to slowly but surely move from a regime of µlarge number of small banks to small number of large banks that consists largely of shareholders¶ capital. Hence. ASSOCHAM has called for Bank¶s consolidation without any delay despite dithering of Reserve Bank of India on the issue.
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