BANKING SYSTEM AND

STRUCTURE IN INDIA

MODULE-1
Contents of the module
•Evolution of Indian Banks
•Types of Banks- Public sector, Regional Banks
•Performance of Public sector banks, Private
sector banks.
Commercial Banking
•Role of commercial banks
•Credit creation and Deployment of Funds
•Role of Reserve bank
•Banking Regulation Act & Reserve bank of India
Act
We Cannot Change The Direction Of The
Wind, But We Can Adjust The Sails To Reach
The Destination
 WE ALL CHANGE
FOR THE ONE WE
LOVE

 BUDDHISIM SAYS
~ YOU CANNOT
TAKE BATH IN
THE SAME RIVER
WATER TWICE
 VARIOUS DRASTIC VISIBLE CHANGES

 HOTEL  FAST FOOD DARSHINI

 POSTAL MAIL  EMAIL
 SCOOTER/CAR BOOKING  SHELF DELIVERY
 TRUNK BOOKING  MOBILE
 HIGH COST INDIAN AIRLINES  CHEAP PVT AIRLINES
 TICKET RESERVATION  ONLINE
VISITING RAILWAY STATION RESERVATION IRCTC
 SELLERS MARKET  BUYERS MARKET
Changes
 Canara Bank- Mitra- customer care & security guard
 City Union Bank- Lakshmi
 HDFC- humanoid
 Meaning of Financial System

Investments
Savings and
Consumption

Financial System
Evolution of Indian Banks

Phase I Early Phase 1786-1969

Phase II Nationalisation of Indian Banks

Phase III New Phase of Indian Banking System- Indian

Financial & Banking Sector Reforms after 1991
 Phase I
 The General Bank of India- 1786
 Bank of Hindustan & Bengal Bank
 East India Company:
 Bank of Bengal, Bank of Bombay, Bank of Madras- called as Presidency
Banks
 3 banks amalgamated- Imperial Bank of India-European Shareholders
1. First bank exclusively by Indians- 1865- Allahabad Bank
2. Punjab National Bank Ltd.-1894
3. Bank of India
4. Central Bank
5. Bank of Baroda
6. Canara Bank
7. Indian Bank
8. Bank of Mysore
Reserve Bank of India-1934
Banking Regulation Act-1949
Confidence was less- postal department provided better services
 Phase II
 After Independence- Indian Banking Sector Reform-1955
 Imperial Bank of India was nationalised –State Bank of India
Act
 1969- Nationalisation of Banks- list of 14 banks

1. Central Bank of India 8. Indian Overseas Bank

2. Bank of Maharashtra 9. Bank of Baroda
3. Dena Bank 10.Union Bank
4. Punjab National Bank 11.Allahabad Bank
5. Syndicate Bank 12.United Bank of India
6. Canara Bank 13.UCO Bank
7. Indian Bank 14.Bank of India
Phase III
 Chairmanship of M Narasimham- Liberalization of banking
practice-1991
 Time is more important than money
POST GLOBALISATION
 FINANCIAL DISINTERMEDIATION
 NEW PRIVATE BANKS/ FOREIGN BANKS WITH
LATEST TECHNOLOGY WITHOUT PAST
INHERITANCE
 HOT COMPETITION
 RBI DEREGULATED RATES OF INTEREST WITH
AUTONOMY TO BANKS FOR QUOTING VARIABLE
RATES OF INTEREST
 NET INTEREST MARGIN - THIN
Definition of Banking
 As per Section 5(b) of the Banking Regulation Act,
1949 , "banking" means the accepting, for the purpose
of lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.

 A BANK IS A PLACE WHERE THEY LEND YOU AN

UMBRELLA IN FAIR WEATHER AND ASK FOR IT BACK
WHEN IT BEGINS TO RAIN
ROBERT FROST
PRESENT BANK IS NOT ONLY EXPECTED TO LEND
AN UMBRELLA WHEN IT RAINS BUT ALSO NEED TO
TAKE BACK DURING FAIR WEATHER
 Types of Banks

Classification on Classification on
the basis of the basis of
ownership function

1. Public 2. Private
Sector Banks Sector Banks 1. Commercial Banks
2. Industrial Banks
3. Development Banks
4. Agricultural Banks
a. State Bank of India & 5.Savings Banks
Associates a. Indian Private Banks 6. Exchange Banks
b. Nationalised Banks b. Foreign Banks
7. Central Banks
c. Regional Rural Banks
Indian Private Banks
 Axis Bank.
 Development Credit Bank (DCB Bank Ltd)
 HDFC Bank-Housing Development Finance Corporation
Limite
 ICICI Bank-Industrial Credit and Investment Corporation
of India.
 IndusInd Bank.
 Kotak Mahindra Bank.
 Yes Bank.
Foreign Banks
 Standard Chartered Bank
 HSBC
 CitiBank
 Royal Bank of Scotland
 Deutsche Bank
 Barclays Bank
 BNP Paribas
 Bank of America
Industrial Bank:
 Industrial Development Bank of India (IDBI)
 Industrial Finance Corporation of India (IFCI)
 State Financial Corporations (SFCs)
Development Banks
 SIDBI
 IDBI
 IFCI
 ICICI
Agricultural banks
 Union Bank of India- Rural & Agri financing
 SBI
 NABARD
 Axis Bank etc.
Small Finance Banks
 The firms must have a capital of Rs.100 crore.
 Existing non-banking financial companies (NBFC), micro-
finance institutions (MFI) and local area banks (LAB) are
allowed to set up small finance banks.
 The promoters should have 10 years experience in banking
and finance.
 The promoters stake in the paid-up equity capital will be 40%
initially which must be brought down to 26% in 12 years.
 Joint ventures are not permitted.
 Foreign share holding will be allowed in these banks as per the
rules for FDI in private banks in India.
 The banks will not be restricted to any region.
 75% of its net credits should be in Priority Sector Lending and
50% of the loans in its portfolio must be in Rs. 25 lakh range
General Information
 State Bank Foreign Travel Card- 8 foreign currencies
 Citibank- Bank of America Debit card- dollars
 Airports- Hongkong- 20 currencies
 Most of the ATMs in India provide the foreign exchange
rate information
 Bancassurance
 LIC- max of 3 companies banks can have tie-up with.
 Commercial Banking- Structure
Commercial Banks

Scheduled Non-Scheduled
Commercial Banks Commercial Banks

Public Sector Banks Private Sector Banks

State Bank of Nationalised Regional

India Banks Rural Banks

Indian Private Banks Foreign Banks

Commercial Banking- Structure
 Scheduled Commercial Banks – included in the
second schedule of RBI Act, 1934
 Unscheduled Banks- which are not included in the
schedule
Eg.- The Coastal Area Bank Ltd.,Vijayawada
Capital Local Area Bank Ltd., Navsari
Krishna Bhima Samrudhi Local Area Bank Ltd., Mehabub
Nagar
Subhadra Local Area Bank Ltd., Kolhapur
Functions of Commercial Banks-
D Muraleedharan Pg.60

Primary Function Secondary Functions General Utility Functions

Acceptance of Agency Services Safe Custody

Deposits

Payment & Collection of Remittance of

Granting Loans & Cheques Funds
Advances

Bill of Exchange & Issuing Letters of

Promissory Notes Credit

Execution of Payment of Pension

Standing Orders
Performance of
Trustee Business Government
Transactions
 Where does every Rs. 100 deposited in
the banks go?
Credit Deposit Ratio- 72%
As per RBI data:-
100

72- Lending 18- purchase of

Government bonds

17- 28-
17- building & 10-
personal running
services Agriculture
loans factories
Acceptance of Deposits
1. Current deposits or demand deposits
2. Savings deposits
3. Fixed or time deposits

Granting Loans and Advances:

 Cash Credit
 Overdraft
 Bill Discounting
 Term Loan
Secondary Functions
 Agency Services
1. Collection of cheques, drafts, bills
2. Payment of commercial bills, collection of dividends,
interest coupons, payment of insurance premium etc
3. Stock exchange transactions- purchase and sale of
securities
4. Acting as executors and trustees
5. Providing income tax services
6. Foreign exchange business
Performance of Government Transactions
 Banks act on behalf of the government to accept its tax
and non-tax receipts
 Government disbursements-pension payments and tax
refunds
 Commercial Banks & Economic Development
-Gordon & Natarajan- Pg.343
 Mobilisation of savings
 Creation of credit
 Channelising the funds into productive investment
 Banks facilitate uniform growth of all regions
 Fuller utilisation of resources
 Encourage right type of industries
 Finance to Governments-Government securities, short
term finance- treasury bills
 Banks are entrepreneurs
 Implementation of Monetary Policy
Innovative Schemes
-Gordon & Natarajan- Pg.346
1. Lead bank scheme-1969
2. Village Adoption scheme- financing agricultural and
allied activities
3. Service area approach- to create direct relationship
between the rural branch personnel and rural
community
4. Self-employment programme for Urban poor
5. Swarnjayanthi Gram Swarojgar Yojana (SGSY)- micro
enterprises in rural areas
Innovative Schemes
6. Integrated Rural Development Programme (IRDP)- poverty
alleviation- BPL- credit, training,
7. Differential Interest Rate Scheme- 4 % interest rate- <Rs. 1000
pa in rural areas & <Rs. 3000 pa in urban areas
8. Small Farmers or Development Agency- problems, credit, input
9. Farmers’ Service Societies- loans, supply input, marketing
product
10. Priority Sector Lending- Agriculture, small scale industries,
retail trade, small business, self-employed persons, education,
housing for weaker sections, consumption loan
11. Microfinance
Latest Schemes & Apps Launched by Banks
-Examples
 Vijaya Bank- VPAYQWIK,Vijaya *99# and VeConnect+.
 MobiKwik- Bubble Pin-without data connection
 India’s first banking robot Lakshmi
 Yes Bank-SIMsePAY
 BHIM app- NPCI
 Airtel- India’s first payment bank service
 SBI- State Bank MobiCash Mobile Wallet- in association
with BSNL
 RBL- Aadhaar Payment Bridge System- microfinance loan
disbursement
List of Central Banks- few examples

Country Central Bank

 India  Reserve Bank of India

 USA  Federal Reserve System

 Europe  European System of Central Bank

 Australia  Reserve Bank of Australia

 Japan  Bank of Japan

 Egypt  Central Bank of Egypt

RESERVE BANK OF INDIA
Gordon & Natrajan- Pg.401

 The Functions of RBI:-

 Monetary Functions &
 Bank of Note Issue
 Banker to Government
 Adviser to the Government
 Controller of Credit
 Custodian of Foreign Exchange Reserve of the Country
 Bankers Bank
 Bank of Settlement and clearance
 Information and research functions
 Non-Monetary Functions
 Supervisory Functions
 Promotional Functions
Monopoly- Bank of Note Issue
System of note issue:-
a. Proportional Reserve System
b. Minimum Reserve System

a. Proportional Reserve System-

 a certain percentage of the note issue should be backed by
gold reserves
 the remaining amount of note issue should be covered by
government securities
 of the total assets, not less than 40% was to consist of coins,
bullions & Sterling securities.
 previously followed
Minimum Reserve System
 Minimum Reserve System- a minimum reserve of gold
or foreign securities or both.
 Total of 515 crore assets:-
 400 cr in foreign securities &
 115cr in gold coins & bullions
 Central bank can issue notes depending on the need
(since 1956- till date)
Banker to the Government
 RBI transacts the banking business of both Central and State
Governments
Functions:-
a. Accepts money
b. Makes payments
c. Exchange remittances
d. Public debt
e. Issue of new loans & treasury bills on behalf of the
Government
f. Advances
g. Agent of the government- IMF & International Bank for
Reconstruction and Development (IBRD)
Adviser to the Government
 Economic issues
 Resource mobilisation, Formulation of five year plans
 Floatation of new loans
 Small savings proposals
 Agricultural credit
 Industrial finance
 International finance
 Controller of Credit
 Instruments of Credit Control:-
(A) General or Quantitative Credit
1. The Bank Rate or Discount Rate Policy
2. Open Market Operations-buying and selling of commercial
papers and Government securities by the central bank
3. Variable Reserve Ratio
(B) Selective Credit Control or Qualitative Method
1. Minimum margin
2. Ceiling on amount of credit
3. Discriminatory rates of interest
4. Moral suasion
5. Regulation of consumer credit
6. Publicity
7. Direct Action
Custodian of Foreign Exchange Reserve
 Maintain the external value of rupee
 Holds the foreign exchange reserve
 RBI agent- IMF
Bankers Bank- lender of last resort
 RBI extensive powers of supervision and control over
commercial and cooperative banks.
 Establishment of banks
 Branch expansion
 Liquidity of their assets
 Management & method of working
 Amalgamation
 Reconstruction and liquidation
 Centralization of cash reserves- 5% of demand liabilities
and 2% of time liabilities
Bank of Settlement and clearance

 Member banks can adjust their claims against each other

in the books of RBI
 Avoids- banks entering into separate clearance and
settlement transaction with other banks individually
 RTGS,CTS- safe, secure and sound payment
 Build required legal and technological infrastructure
Information and research functions
 Research- collection and dissemination of information
 Periodical publication
Repo Rate
 The discount rate at which a central bank repurchases government securities from the

commercial banks

 Depending on the level of money supply it decides to maintain in the country's monetary

system.

 To temporarily expand the money supply, the central bank decreases repo rates (so that

banks can swap their holdings of government securities for cash).

 To contract the money supply it increases the repo rates.

 Alternatively, the central bank decides on a desired level of money supply and lets the market

determine the appropriate repo rate.

 Repo is short for repossession.

Sl Policy rates and reserve ratios
No.
1 Bank Rate 6.25%

2 Repo Rate 6.00%

3 Reverse Repo Rate 5.75%

4 Cash Reserve Ratio (CRR) 4%

5 Statutory Liquidity Ratio (SLR) 20.00%

RBI- A Few Recent Initiatives
- refer rbi.org
 Building a heterogeneous banking system
 Universal bank licensing policy
 Differentiated licensing of banks
 Capital for banks
 Management of Stressed Assets
 Reviewing Governance of Boards of Banks in India

 Paisa Bolta Hai!!

Provision of Banking Regulation Act &
Reserve Bank of India Act
Gordon & Natrajan- Pg.367

 Banking Regulation Act- 1949 is a legislation in India that

regulates all banking firms in India
1. Definition of Banking
2. Business of Banking Company and Prohibited Business
3. Capital Requirements
4. Management
5. Maintenance of Liquid Assets
6. Licensing of Banks
7. Opening of New Branches
8. Provisions Regarding Loan and Advances
 Provision of Banking Regulation Act-
Continued
9. Inspection of Banks
10. Powers of the RBI
11. Returns to be submitted
12. Acquisition of Business
13. Winding up of Banking Companies
14. Amalgamation of Banking Companies
15. Miscellaneous- Penalties
16. Application of the Act to Cooperative Banks
1. Definition of Banking- Section 5b
Accepting for the purpose of lending or investment of
deposit, of money from the public, repayable on demand
or otherwise, and withdrawable by cheque, draft, order or
otherwise.
2. Business of Banking Company
(i) Kinds of business that can be done
a. Main functions
b. Subsidiary function
(ii) Kinds of business that cannot be done
3. Capital Requirements
 Section 11 of the banking regulation act lays down the
minimum capital requirement.
 Minimum capital of Rs. 5 lakh only but RBI prescribes-
Rs. 100 crore for setting up of a new banking company
 Foreign bank- $10 million to India as capital
 Initial capital of Rs. 100 crore that is to be raised to
Rs. 300 crore within 3 years from commencement
4. Management- Section 10
 Board of Directors- 51 % of the Board of Directors:-
a. Accounting
b. Agricultural and rural economy
c. Banking
d. Economics
e. Law
They should not be proprietors of any trading, commercial
or industrial concern
Whole-time Chairman- Professional Banker
Maintenance of Liquid Assets
 Section 18- 3% of the total of time and demand liabilities in the
form of cash reserves
 Section 19- not to hold shares in other companies of more
than 30% of the paid-up capital
 Section 20- cannot make loans or advances on the security of
its own shares
 Cannot lend unsecured loans or advances to any of its
directors
 Prohibited from having Floating charge on property without
the consent of RBI
 Prevent speculative dealings, overtrading
 Foreign banks- 75%
 Cannot hold Immovable property- > 7 years
6. Licensing of Banks- from RBI
 Repay deposits
 Should not detriment the interest of the depositors
 Foreign banks- law of the Government, public interest,
comply with provisions of the act
7. Opening of New Branches- Sec 23
 Prior permission from RBI
 Change in location of bank
Conditions
a. Financial condition & management
b. Adequate Capital structure
c. Good earnings prospects
d. Interest of public
 Conditional license
8. Provisions Regarding Loan and Advances
1. Purpose- advances may or may not be made
2. The margins to be prescribed- secured advances
3. Maximum amount of advances a bank
4. Guarantee- maximum amount
5. Interest & other terms-loans & guarantees are given
9. Inspection of Banks
(i) Books of accounts
(ii) Furnish all the details
(iii) Right to examine any director/officer/employee of the
bank
(iv) RBI on it own or direction of Central Government
(v) RBI sends a copy of inspection to the concerned bank
& Government
(vi) If representation is not reasonable- action
10. Powers of the RBI
1. Power to issue license for new banks & for starting new branches
2. Determination of credit policy
3. Power of inspection
4. Power to issue directions- Section 35
5. Power to control management- remove from office
chairman/director/officer/employee- public interest
6. Power to advise banks
7. Power to assist in proposals for amalgamation
8. Power to receive and scrutinize returns
9. Power to grant moratorium(cease)
10. Power to appoint liquidator- winding up of a bank
11. Additional powers- call for meeting
12. Power to give advice to the Central Government
13. The Amended Ordinance 2007-Empowers RBI to supersede the BOD
and appoint an administrator
11. Returns to be submitted
1. Return of liquid assets and liabilities- Section 23(3)
2. Return of unclaimed deposits- Section 26
3. Monthly returns- Section 27-showing assets and
liabilities
4. Annual accounts- Section 31-Final accounts, balance
sheet- auditor’s report- its called as Annual Financial
Inspection (AFI)
5. Additional information- investment & classification of
advances
12. Acquisition of Business
 Sec 36AE and 36AJ – acquisition of banking companies by
the Central Government on the recommendation of RBI

13. Winding up of the Banking Companies

- Compulsory or voluntary winding up
- subject to supervision of High Court:-
a. Unable to pay its debts
b. Application made by RBI
 Defunct Banks
 Alliance Bank of Simla Punjab (merged with HDFC in  Mercantile Bank of India,
 Arbuthnot & Co 2008) London and China
 Bank of Bombay (merged to  Chartered Bank of India,  Miraj State Bank (merged with
form SBI) Australia and China (merged UBI in 1984)
with Standard Bank to  Nath Bank
 Bank of Calcutta (merged to form Standard Chartered)
form SBI)  Nedungadi Bank (rescued by
 Commercial Bank of India PNB in 2003)
 Bank of Chettinad (voluntarily
wound up in 1965)  Dass Bank  New Bank of India
 Bank of Cochin (merged with  Exchange Bank of India & Africa  Oriental Bank Corporation
SBI in 1984)  Global Trust Bank (rescued by  Oudh Commercial Bank
 Bank of Madras (merged to OBC in 2004)
 Palai Central Bank
form SBI)  Grindlays Bank
 Pandyan Bank
 Bank of Madura (merged with  Hindustan Commercial
ICICI in 2000) Bank (merged with PNB in  Sikkim Bank (merged with UBI
1985) in 1999)
 Bank of Rajasthan(merged with
ICICI in 2010)  Imperial Bank of India  State Bank of Indore (merged
with SBI)
 Bank of Thanjavur (rescued by  ING Vysya Bank (merged with
Indian Bank in 1990) Kotak Mahindra Bank)  State Bank of
Saurashtra (merged with SBI)
 Bareilley Corporation  Lakshmi Commercial
Bank (merged with BoB in Bank (merged with Canara bank  Times Bank (merged with
1999) in 1984) HDFC in 1999)
 Bengal Central Bank (merged to  Lord Krishna Bank (merged  United Industrial Bank(rescued
form UBI) with Centurion Bank of Punjab by Allahabad Bank in 1989)
 Bharat Overseas Bank (merged in 2007)  United Western Bank (rescued
with IOB)  Madhavpura Mercantile by IDFC Bank in 2006)
 Centurion Bank of Cooperative Bank (failed)
14. Amalgamation of Banking Companies
Procedure:-
i. Draft scheme
ii. Notice
iii. Shareholders consent
iv. RBI sanction
v. Transfer of assets and liabilities
vi. Registrar of companies
15. Miscellaneous Provisions
Penalties- Section 46
 For submitting false or inaccurate returns- Upto 3 years of
imprisonment and fine
 Failure to furnish documents, account or information-
inspection
 Acceptance of deposits in Contravention of an order by RBI
 Non-compliance- provisions- Rs.2000

16.Application of the Act to Cooperative Banks

Cooperative banks were brought under the purview of
Banking Regulation Act- passing resolution- 1965- Section 56-
act does not apply to land development banks and other credit
societies
Textbooks
 Banking Theory, Law and Practice- Gordon and Natrajan-
Himalaya Publishing House
 Modern Banking- D Muraleedharan- PHI
Questions
1. Explain the evolution of Indian Banking System/ Explain
the phases in the growth of Indian Banking Systems
2. Define Banking. List out the types of banks
3. Explain the structure of commercial banks
4. What are the functions of commercial banks
5. Explain the role of Commercial banks in the Socio-
economic development of a country
6. What are the innovative schemes launched by
commercial banks?
7. What are the functions of RBI? Explain in detail.
8. Explain the provisions of Banking Regulation Act.