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A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital market. A bank connects customers with capital deficits to customers with capital surpluses.

INTRODUCTION “ A bank is a financial institution and a financial intermediary that accepts deposits and

Evolution of banking service

The history of banking begins




prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods

between cities. This began around 2000 BC

in Assyria

and Babylonia. Later, in ancient

Greece and

during the Roman Empire, lenders based in temples made

loans and added





accepted deposits and changed money. Archaeology from this period in ancient China and India also shows evidence of money lending activity

Banking System in India

The first bank in India, though conservative, was established

in 1786. From 1786 till today, the journey of Indian Banking

System can be segregated into three distinct phases:

Early phase of Indian banks, from 1786 to 1969.

Nationalization of banks and the banking sector reforms, from 1969 to 1991.

New phase of Indian banking system, with the reforms after


Phase 1

The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was established.

Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906 and 1913,

Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935

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the Government






the Banking

Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as per amending Act of 1965

(Act No. 23 of 1965). The Reserve Bank of India (RBI) was

vested with extensive powers for the supervision of banking in India as the Central banking authority

During those days, the general public had lesser confidence in banks. As an aftermath, deposit mobilization was slow.

Moreover, the savings bank facility provided by the Postal

department was comparatively safer, and funds were largely given to traders.

Phase 2

  • 1. In 1955, Indian government nationalized the Imperial Bank of India and started offering extensive banking facilities, especially

in rural and semi-urban areas.

  • 2. The government constituted the State Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country.

  • 3. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India.

  • 4. In 1969, 14 commercial banks in the country were nationalized,

seven more banks were nationalized in 1980

With this, 80 percent of the banking sector in India came under the government ownership.

Phase 3

This phase has introduced many more products and facilities

in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking are introduced. The entire system became more convenient and swift. Time is given importance in all money transactions

Indian Banks’ Association (IBA)

The Indian Banks’ Association (IBA) was formed on September 26, 1946,

with 22 members. Today, IBA has more than 156 members, such as public sector banks, private sector banks, foreign banks having offices in

India, urban co-operative banks, developmental financial institutions,

federations, merchant banks, mutual funds, housing finance corporations, etc.

The IBA has the following functions:

Promote sound and progressive banking principles and practices. Render assistance and to provide common services to members Organize co-ordination and co-operation on procedural, legal, technical, administrative, and professional matters. Collect, classify, and circulate statistical and other information.


Pool expertise towards common purposes such as cost reduction, increased efficiency, productivity, and improving systems, procedures, and banking practices. Project good public image of banking through publicity and public relations. Encourage sports and cultural activities among bank employees.

Structure of Indian Banking System

Reserve Bank of India

Established in 1935

Central Board of

Directors with 20 members

1local Board for each of

the four regions

Traditional central

banking functions Regulatory functions

Promotional functions

Commercial Banks

Public Sector Banks:

Private Sector Banks:

Indian,foreign & New Generation Banks

Scheduled & Non-

Scheduled banks

Development Banks

IFCI Ltd in 1948

ICICI Ltd in 1955

18 SFCs

Industrial Investment Bank of India (IRCI in 1971 and reincorporated in 1997

IDBI in 1964

Regional Rural Banks

Product of 20 point programme of the govt. Scheduled Banks & Non-Scheduled Banks Treated as cooperative societies Sponsored by a public sector bank 196 RRBs covering 451 districts spread over 23 states having 14,552 branches Area Restriction

Co-operative Banks

Three Tier Structure Different Economic Groups Most of the Functions of Commercial Banks


Set-up in 1982

Took over ARC


Inspection of RRBs

Routing Branch

Expansion applications of RRBs

Asscn with World Bank & others

Linking SHGs and NGOs

Kisan Credit Card

Scheme in collab with

RBI,Comm. Banks, Coop


Micro-Finance Initiative

Land Development Banks

Long-term finance to agriculture Co-operative institutions Mortgage is created on the land

50% of the market value of the land given as loan

Severe criticisms

Foreign Exchange Banks

Collection of Foreign Bills Accepting Foreign Bills Issue of letter of credit Dealing in Foreign Currencies Discounting foreign bills Providing International trade Information to exporters & importers

Growth drivers of Indian Banking


High growth of Indian Economy. Rising per capita income.

New channel Mobile banking is expected to become the second largest channel for banking after ATMs.

Financial Inclusion Program.

Maintenance of Service customers quality customers Increased Attracting new customers reputation More price
Maintenance of
Attracting new
More price

market share

Decreased cost






Increased Profit margin Increased profit Increased







purchase volume

Sale to more price

Word of mouth advertisement

Maintenance of Service customers quality customers Increased Attracting new customers reputation More price market share Decreased

SWOT Analysis Indian Banking


Indian banks have compared favourably on growth, asset quality and profitability with other emerging economies banks over the last few years. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks


PSUs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic &

strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels.

The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies.

Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak

corporate governance and ineffective regulations beyond

Scheduled Commercial Banks (SCBs), unless industry utilities and

service bureaus.


The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side

With increased interest in India, competition from foreign banks will only intensify.

New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated

business models.

Reach in rural India for the private sector and foreign banks.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking

services, especially retail banking, mortgages and investment services are

expected to be strong.

Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.


Threat of stability of the system: failure of some weak banks has

often threatened the stability of the system.

Rise in inflation figures which would lead to increase in interest rates.

Increase in the number of foreign players would pose a threat to

the PSB as well as the private players.