MAHATMA EDUCATION SOCITY`S

PILLAI`S COLLEGE OF
ARTS, COMMERCE & SCIENCE
Environment of Financial System
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INDIAN BANKING SYSTEM
%45.
Prepared BY
F.Y.F.M
Semester-II
GROUP MEMBER
NAME ROLL. NO
NIMISH PATANKAR 35
SACHIN PADOL 34
SHASHIKANT KAMBLE 18
SURAJ SHINDE 46
INTRODUCTION OF A BANK
The Banking Companies Act oI 1949, deIine
Banking Company as a company which transacts the business oI
banking in India. It deIines banking as, accepting Ior the purpose oI
lending or investment oI deposit money Irom the public, repayable on
demand or otherwise and withdraw able by cheque draIt , order or
otherwise
A bank as an institution dealing in money and credit. It saIeguard oI
the savings oI the public and gives loans and advances.
Origin oI Banking
The word oI 'Bank is said to be oI Germanic origin , cognate with the French word'Banque and the
Italian word 'Banca , both meaning 'bench.
Banking is as old as the authentic history and origins oI modern Commercial banking tare traceable to
ancient times. The New Testament mention about activities oI the money changers in the temple oI
Jerusalem. In ancient Greece around 2000 B.C . The Iamous temples oI Ephesus, Delphi and Olympia
were used as depositories Ior peoples surplus Iunds and these temples were the centers oI Money
lending transaction.
In, India the ancient Hindu scriptures reIer to money lending activities in the Vedic period. In India
The Ramayana and Mahabharata eras, banking had become a Iull Iledged activity and during the
Smriti period which Iollowed the Vedic period and Epic age the business oI banking was carried on
by the members oI the Vaish community.
Pre Independence banking system of India
Banking in India originated in the last decades oI the 18th century. The Iirst banks were
The General Bank oI India which started in 1786, and the Bank oI Hindustan, both oI
which are now deIunct. The oldest bank in existence in India is the State Bank oI India,
which originated in the Bank oI Calcutta in June 1806, which almost immediately
became the Bank oI Bengal . This was one oI the three presidency banks, the other two
being the Bank oI Bombay and the Bank oI Madras, all three oI which were established
under charters Irom the British East India Company.
Indian merchants in Calcutta established the Union Bank in 1839, but it Iailed in 1848 as
consequence oI the economic crisis oI 1848-49. The Allahabad Bank, established in
1865 and still Iunctioning today, is the oldest Joint Stock bank in India.
The presidency banks dominated banking in India but there were also some exchange
banks and a number oI Indian joint stock banks. All these banks operated in diIIerent
segments oI the economy. The exchange banks, mostly owned by Europeans,
concentrated on Iinancing Ioreign trade. Indian joint stock banks were generally under
capitalized and lacked the experience and maturity to compete with the presidency and
exchange banks.The Iirst entirely Indian joint stock bank was the Oudh Commercial
Bank, established in 1881 in Faizabad. It Iailed in 1958. The next was the Punjab
National Bank, established in Lahore in 1895, which has survived to the present and is
now one oI the largest banks in India.
Post Independence Banking system of India
In the post-independence period, India observed the emergence oI large number oI institutions
Ior providing Iinance to diIIerent sectors oI the economy.
There were two nationalizations oI banks in India, one in 1969 and the other in 1980. The entry
activities oI private sector and Ioreign banks were restricted through branch licensing and
regulation norms.
The over regulated and over administered polices eroded the capital base oI most oI the public
Sector banks and recapitalization oI 19 nationalized banks was made by government through oI
budgetary provision Nevertheless, acute problem arises in productivity, eIIiciency and proIitability
Iront oI the commercial banks. The policy oI directed investment in the Iorm high SLR and CRR,
directed credit programs, extra administrative interIerence in credit decision making, high
operating costs, regulated interest rates, non-transparent accounting system coupled Non existence
oI operational Ilexibility, internal autonomy and absence oI competition contaminated the health oI
the commercial banks and threatened their Iuture survival.
Liberal policies Iacilitate to increase market competition among banks to augment eIIiciency and
by productivity by the management to choose independent decisions about input-output and their prices
individual banks. The Committee on Financial Systems (GOI, 1998) suggested the road map Ior second
-generation reIorm to keep pace with liberalization oI Iinancial sector in other parts oI the world.
The other remarkable developments to enhance competition in banking sector reIorms
1) It abolished administered interest rate regime by allowing banks to determine lending and
deposit rates.
2) Competition has inIused by allowing the operation oI new private sector banks and more
liberal entry oI Ioreign banks.
3) Measures to broaden the ownership base oI PSBs have also taken.
4) The system has also observed greater levels oI transparency and standards oI disclosure.
5) It introduced ratiIication oI the legal structure to strengthen banks position in the areas oI loan and
deIault loan.
Nationalization of Indian banking system
Indian marched towards the establishment oI public sector banking through The progressive nationalisation
oI commercial banks. There were three phases oI bank nationalisation:
Nationalistion oI Imperial Bank oI India in1955 and its seven associate banks in 1959-60.
Nationlisation oI the 14 major commercial banks in 1969.
Nationlisation oI 6 more commercial banks in 1980.
On July 1, 1955 the government oI India nationlised the Imperial Bank oI India and converted it into the
State Bank oI India. The establishment oI the State Bank oI India was a pioneering attempt in public
introducing sector banking in the country. Later on in 1959-60, seven subsidiary State Banks were also
nationalised to Iorm the SBI Group.
For a short period during December 1967 to June 1969, the Government oI India pursued the banking oI
policy control oI banks, aiming at an equitable and purposeIul distribution oI credit towards developmenta
-l needs.
A such over 90 percent oI the banking activity in the country is brought under into the public sector.
In short, nationalization oI banks implied a bold and major economic step in the process oI banking
reIorms in the country. It has resulted in the evolution oI public sector banking.
Types of Banks
1) Central Bank
A bank which is entrusted with the Iunctions oI guiding and regulating the
banking system oI a country is known as its Central bank.
2) Commercial Banks
Commercial banks are oI three types
(i) Public Sector Banks
(ii) Private Sectors Banks
(iii) Foreign Banks
) Development Banks
Business oIten requires medium and long-term capital Ior purchase oI machinery
and equipment, Ior using latest technology, or Ior expansion and modernization.
Such Iinancial assistance is provided by Development banks.
4) Co-operative Banks
There are three types oI co-operative banks operating in our country.
(i) Primary Credit Societies
(ii) Central Co-operative Banks
(iii) State Co-operative Banks
) Specialised Banks
There are some banks, which cater to the requirements and provide overall
support Ior setting are examples oI such banks. They engage themselves in
some speciIic area or activity and thus, are called Specialised banks. Let us
know about them.
(i) Export Import Bank of India (EXIM Bank)
(ii) Small Industries Development Bank of India (SIDBI)
(iii) National Bank for Agricultural and Rural Development
(NABARD)
Policies of Indian Banking System during 1991
Recommendations of Narasimhan committee:
1) Establishment oI 4 tier hierarchy Ior the banking structure with 3 to 4 large banks at the top and rural
banks at bottom mainly engaged in agriculture and allied activities.
2) The supervisory Iunctions over banks and Iinancial institutions can be assigned to aquasi autonomous
body sponsored by RBI.
) Phased achievement oI 8 capital adequacy ratio. Abolition oI branch licensing policy. Phased
reduction in Statutory Liquidity Ratio. Deregulation oI interest rates which are related to the bank
rateCompetition among Iinancial institutions on a syndicating or participating approach .
4) Delegation oI direct lending activity oI the IDBI to a separate corporatebody . Proper classiIication oI
assets and Iull disclosure and transparency oI oI accounts oI banks and other Iinancial institutions.
) Setting up Asset Reconstruction Fund to make over a portion oI the loan portIolio oI banks whose
recovery has become diIIiculty
Globalization Of Indian Banking System
Banking sector in India is expanding at an incredibly Iaster pace, with more and more banks reliazing the
beneIits oIIered by globalization. Publicly owned banks handle more than 80 oI the banking business in
India and the rest is in the hands oI private sector banks. However, banking in both the government and
private sector is being revolutionized by this latest phenomenon called 'globalization.
As per the latest market research report named, 'Indian Banking Sector Analysis (2006-2007),published,
by RNCOS'The banking sector in India is heading towards consolidation. There are about 90 players in
.the banking sector in India, with 30competitors Irom each oI the public, private and Ioreign sectors With
so many players present in the banking sector in India, a Iew oI them will emerge as global competitors
in the near Iuture.
The report highlights:
1) An overview oI the current trends in banking sector in India to enable the clients ProIiles oI 5
prominent players, Irom each oI the public, private and Ioreign segment, in the banking sector.
2) Discussion oI the opportunities and challenges Iaced by the banking sector in India.
) Future Iorecast oI the banking industry in India till the year 2010.
Bank of India
Bank oI India, Iounded on 7th September in the year 1906 was nationalised along with 13 other
banks in July 1969. Then its paid-up capital was Rs.50 lakh with only 50 employees and the only
oIIice in Mumbai
The promoters incorporated the Bank oI India on 7 September, 1906 under Act VI oI 1882 with an
authorized capital oI Rs. 1 crore divided into 100,000 shares each oI Rs. 100. The promoters placed
55,000 shares privately, and issued 45,000 to the public by way oI IPO on 3 October, 1906; the bank
commenced operations on 1 November, 1906.
Today Bank oI India has been spread with 2594 branches including 93 specialised branches
controlled by 48 Zonal OIIices.
Bank oI India came up with its maiden public issue in the year 1997 and the total number oI
shareholders stands to 3,17,890 as on 30/06/2004.