Banking & Financial System in India :Evolution and Growth

Prof. S. P. Garg

History and Growth

³The longer you look back, the future you can look forward´ Sir Winston Churchill

‡ Finance : General Aspects ‡ Finance as medium of exchange ‡ Barter system for exchange of commodities ‡ Financing of trade and commerce ‡ Finance of government business and cross country activities ‡ Impact of industrial development

‡ Mismanagement and Frauds in finance ‡ Impact of Great Depression 1930s on global economy ‡ Stress on SUPERVISORY ASPECTS .

6% FY 08 ‡ Regulated under:Banking Regulation Act 1949 ‡ ³Section 5(1)(b) of BR Act 1949 :the accepting for the purpose of lending or investment of deposits of money from the public. draft.Banking & Finance System in India ‡ ‡ ‡ ‡ Lifeline of any Economy Deployment of saving in productive sectors Now Financial Power House India¶s credit to GDP Ratio has increased from 36. repayable on demand or otherwise and withdrawable by cheque. order or otherwise´ .1% in FY 03 to 82.

Banking & Finance System in India ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Scenario: Barter system Money lenders Nidhis/ chit funds Cooperative Banking Private banks Consolidation Nationalization .

Rationalization and Simplification ‡ Total Liberalization .Banking & Finance System in India ‡ ‡ ‡ ‡ Development Financial Institutions Merchant Banks. Stock Exchanges Entry of New Generation private banks Universal Banking Phases of Growth path ‡ Active State Intervention ‡ Deregulation.

) ‡ Mention of Rupyarupa and Suvarnarupa in Kautilya Arthasashtra (4th century B.) ‡ From RUPYA -----------.ornaments ‡ Even before 5th century B.2 century B..small states of Maghadha state had issued coins ‡ Coins in Mauryan Age (4th.Banking & Finance System in India ‡ PHASES: ‡ Vedic literature mentions about coins.C.C.C.RUPEE . weights.

Patna. Dacca. and Gods ‡ Rupee in silver as standard currency from Moughal period (Sher Shah).Banaras Surat and other places . also gold mohurs and copper paise. opening of a mint in Goa in 1510 by Portuguese. Calcutta. ‡ Subsequently mints in Madras.Murshidabad.Banking & Finance System in India ‡ Coins as currency began in Mauryan time ‡ PORTRAITS of Kings. adoption of term Rupia for coins in 1775 ‡ Mints in Bombay in1717. ‡ During Indo European period.

adoption of decimal coinage . Madras and each Presidency its own Rupee coins.Banking & Finance System in India ‡ East India Company divided its holdings in to three Presidencies : Bombay. Calcutta. 1950. the Rupee went Indian. replacing British Monarch King George VI with the Indian emblem : the Lion Capital of Ashoka¶ Pillar at Sarnath ‡ On 1st April 1957. ‡ Uniform coinage since 1835 with the image of King William IV reversing Mughual emperor ‡ On August 15th.

History and Growth ‡ Mughal Period : Collection of revenue by Cash. ‡ 1763:the first bank was setup by the East India Company ‡ 1770: Alexander & Co ( a premier British Agency House set up Bank of Hindostan : notes circulated by the bank were accepted in private markets ‡ Set up of Agency houses : Forbes of Bombay Parrys of Madras Palmers of Calcutta .AKBAR ‡ Modern Banking emerged between 18th& 19th centuries with the entry of European houses.

Parsees.Pais ‡ Indian Merchants(1813) Ram Dulal Dey Sheikh Gulan Hussain ‡ India British Partnerships Carr. Banias.Sahukars. Jessop & Co.Chettiiars. (Dwarka Nath Tagore) Rustamji Turner & Co. Tagore & Co.Shettys. Banking along with other Business activities ‡ .History and Growth ‡ Communities:Shroffs.Pathans.Mahajans.

‡ In 1806. but the Supreme Govt decided to open separate Banks as : The Bank of Madras (1840) & The Bank of Bombay (1843) ‡ Merger of the Commercial Bank.establishment of : The Bank of Hindustan The Commercial Bank( By Mackintosh & Co) The Calcutta Bank (Palmer & Co) ‡ The Bank of Bengal. the Calcutta Bank to form the Union Bank with the support of influential business leader Dwarka Nath Tagore . the Presidency Bank suggested to open branches in Bombay and Madras. ‡ Between 1970 &1850.East India Company set a Government Bank :Bank of Calcutta later known as Bank of Madras.

Bank of India . London & Eastern Bank of Corporation .China & Japan ‡ First Company Law adoption in 1850 ‡ Adoption of new Company Law in 1857 . an Indian National ‡ Bank of Hindostan & Bank of India collapsed within a short span ‡ British Originated Banks in 1880s: Oriental Bank. Chartered Bank of India.‡ Liquidation of Union Bank in 1847 due to financial crisis ‡ Bank of India by Raj Kiskore Dutta.

to be done by the Government ‡ 1876: Presidency Banks Act : Merger of all three Presidency Banks ‡ 1881 : Merger of Bank of Rohilkund with Oudh Commercial Bank .‡ 1862: Bank of Rohilkund by Nawab of Rampore ‡ 1865: Setting of Allahabad Bank by a few European residents in Allahabad ‡ 1875: Alliance Bank of Simla ‡ 1861: Paper Currency Act : Presidency Banks not to issue Currency notes .

(1907) The Bank of Baroda Ltd.(1906) The Indian Bank Ltd.(1911) The Union Bank of India Ltd.(1908) The Central Bank of India Ltd.(1894) The Bank of India Ltd.History and Growth ‡ Swadeshi Movement :Emergence of Leading Indian Joint Stock Banks The Punjab National Bank Ltd.1917 ± Failure of Banks (87 banks failed) 1921: Formation of Imperial Bank of India by the merger of three Presidency Banks Enactment of Banking Companies Act 1949 1955: Formation of State Bank of India on the Basis of Recommendations of The All India Rural Credit Survey Committee Recommendations ‡ ‡ ‡ ‡ .(1919) 1913.

subsequently replaced by an Act of Parliament : The Banking Companies (Acquisitions & Transfer of Undertaking Act 1970 ‡ Nationalization of another 6 Banks in 1980 ‡ Rapid Expansion of Net Work of branches ‡ At the time of Nationalization Number of branches : 8262 Banking Density : 64.‡ Reconstruction/merger of weak Banks from 548 in 1947 to 89 in 1969 ‡ Nationalization of Banks in 1969 by an ordinance.000 Banking Compounded Growth Rate : 18 ± 19% ‡ Special focus on Development & Credit to Priority sectors .

.‡ Comprehensive Reforms in 1991 -92 ‡ Entry of New private sector Banks in 1993.

Now Competitiveness Profitability & Development Are main consideration .

Indian Banking System ‡ Commercial Banks Public Sector Banks (PSBs) Private Sector Banks (Old & New generation) Foreign Banks  Co-Operative Banks  Regional Rural Banks .

‡ Classification of Commercial Banks PSBs (27 Now 26) Private Sector (27) (old 12) (new 7) Foreign Banks in India (30) RRBs (83) ‡ PSBs : SBI & its associates Nationalised Banks. IDBI Bank ‡ Merger of New Bank of India with PNB ‡ Recent merger of State Bank of Saurashtra with SBI ‡ Talks for merger of State Bank of Indore with SBI .1934.‡ Scheduled Commercial Bank are those included in the 2nd Schedule of the Reserve Bank of India Act.

to recapitalize 18 state owned banks ³Internationally active Banks´ those banks which have cross ± border business exceeding 20% of their total business´ .‡ Narsimaham Committee recommended for the freedom of entry in the financial System & establishment of new Banks in private sector with certain requirements ‡ Increase in Paid up Capital from Rs.100 Crores & then Rs. 200 Crores to Rs.50 Crores to Rs.300 Crores ‡ Also allowed NBFCs to convert into Banks Subject to eligibility ‡ Industrial Houses not permitted to set up Banks ‡ Latest entry ± Yes Bank (2004) ‡ Foreign Investment in Private sector Banks permitted upto composite ceiling of 74% During 2009-10 Govt.

2008 34 Lacs 101495 25 Lacs 57706 8262 16936 4646 10756 93404 273566 Deposits Advances 160 3599 7858 54939 114  All Com. Banks 77069  Out of which RRBs 14735 .Growth of Banking System Growth since 1948 Rs.. Branches ‡ ‡ ‡ ‡ ‡ ‡ 1948 June 1969 June 1974 1985 1991 131520 Sept. In Crs.

70Mllns. of Debit Cards Total Deposits Total Advances C:D Ratio : : : : : : : : : : : : : : 79 7 20 23 29 61132 26520 34612 34789 34Mllns. of Schedule Com. Rs. of ATMs No. of Branches (i) Urban & Metro (ii) Rural & Semi Urban No.83 % . of Credit Cards No. 73.Growth of Banking System ‡ No. Banks SBI Group Nationalized Banks Private Sector Banks Foreign Banks No.26 lacs Crs. Rs.36 lacs Crs.

277 Metro : 14.369 ‡ Banked centres : 34.‡ Banking Data ( Dec 2009) ‡ No of Commercial Banks : 169 Schedule:165 RRBs : 84 Non Schedule : 4 ‡ Offices: 82.024 Semi urban : 19.841 Urban : 16.731 .511 Rural : 32.

in Crore parameter No of offices Deposits Advances June1969 7015 3897 3017 JUNE 1989 June2006 53269 131016 83715 62704 1550402 1093038 .Growth of Public Sector Banks Rs.

1% March 2008 13.08% Note: Most of the Banks are over threshold level of 12% of CAR with mandatory requirement of 9% .08 % 2.4 % 1.Salient features of SCBs Parameters CAR Gross NPAs Net NPAs March 1997 2% 15.7% 8.

‡ Roadmap for foreign Banks: wholly owned subsidiary to have a minimum capital of Rs. globally owned subsidiary for BPO activities.300 crores Strong Corporate Governance ‡ Standard Chartered Bank (Stand Chart) acquired Grindlays business in west Asia &South Asia in 2000 .Foreign Banks in India ‡ Operations as a Branch subsidiary (NBFC) for diversified business.

50 : 35 : 15 Sponsoring Institution: Commercial Bank (a public sector Bank) . GOI : Sponsor Bank : State Govt.formulated by GOI on 26th September 1975.RRBs ‡ A new Category of Scheduled Banks in 1975 with Setting up of 5 RRBs under the RRBs ordinance 1975.subsequently replaced by the Regional Rural Bank Act 1976 ‡ Authorized Capital ± Rs.1 Crore Issued Capital ± 25 Lakhs Sharing Pattern .

No.‡ ‡ ‡ ‡ I. II.of RRBs : 1975 : 6 2001 : 196 2008 : 96 2009: 84 District Covered : 500(37% of Total rural branches) Restructuring Pattern : After merger 96 RRBs Institutional Development Activities: Regular training arrangements by NABARD & sponsor Bank Relocation of Loss making branches Sponsor Banks : Total Management and operational responsibility RBI and NABARD : Regulatory and supervisory Bank . IV. III.

Special Focus on Micro Finance.V. VIII. VII. VI. Centrally office Branches ‡ Issue Involved: Sustainable Viability Diversified loan portfolios . Group Lending SHGs Regular Maintaining : by NABARD & Sponsor Bank Salary Structure at par with sponsor Bank Three tier structure : HO.

Banking System ‡ Existence with the enactment of the Co-operative credit Societies Act 1904.Co-op. ‡ Establishment of Co-operative Central Banks in 1912 ‡ Two Institutions : Rural Co-operative Credit Institution Urban Co-operative Credit Institution ‡ Rural : Short Term : State Co-operative Banks District Co-operative Banks PACS Long Term : State Co-operative Agricultural & RD Banks (SCARDB) Primary Co-operative agricultural & RD Bank ( PCARDB) .

Gujarat. A. ‡ UCBs are covered under 2nd schedule of the RBI Act. TamilNadu..if their net demand & Time Liability (NDTL) are atleast Rs 100 crore increased to 250 Crore w. Karnataka.e. 30th October 2003 ‡ Supervisors UCBs ±RBI Rural ±NABARD .P.1934.f.‡ Urban: Scheduled UCBs ± Multi State Single State Non Scheduled UCBs ± Multi State Single State ‡ Major Concentration in Maharasthra.

1 crores 1500 1-5 Lakhs Rs. 25 Lakhs 500 < 1 Lakhs .4 crores 3000 710 Lakhs Rs.50 crore of net owned funds can be Multistate UCB ‡ UCBs were covered under BankingRegulation Act 1949 in 1966 ‡ Licensing Policy based on minimum bare Capital membership & population.MultiState UCBs are registered underMultiState Co-operative Societies Act ‡ Own UCBs with Rs. 2 crores 2000 5-10 Lakhs Rs.(2000 Norms) Share Capital Membership Population Rs.

Task Force for Co-operative Urban Bank for revival Rural Co-operative Banks Integrated part of rural credit delivering system Constitutes 40% of rural credit & about 55% of short term credit Refinance facility from NABARD SCBs Control (CCBs) PACS ± Deal Directly with benificiaries ‡ ‡ ‡ ‡ ‡ .SLR & CAR MOUs with RBI& State Govt.‡ ‡ ‡ ‡ Supervision & Inspection by RBI Maintenance of CRR.

6 crore farmers .Policy Issues for cooperative Banking System : Organizational viability Operational issues NPA Management Recapitalization Simplification of Procedures Revival Packages : Prof A Vaidhyanathan Task Force for restructuring &revamping of rural credit structure Requirement of Rs 15000 crores for capital infusion Revival package of Rs 13.5000crores for short term credit for 25 States Introduction of Legal & Institutional reforms for member centric & member governed institution Amendment in B R Act CRAR requirements Computerization & HRD issues Interest subvention for short term loans The ADWDR Scheme :Rs 65000 crores covering 3.

Market/ Customer driven economy. all Banks will have to reworkout their strategies to improve their market share.Indian Banking System To sum-up : In the present scenario of competitiveness. Brand equity & future business growth .

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