Evolution of Banking

UNIT I

Evolution of Banking in the West

Period of Ancient Banking Period of Modern Banking

Period of Ancient Banking

The banking business came into existence only after money was invented In ancient Greece, around 2000 B.C. the famous temples of Delphi, Olympia etc. were used as depositories The business of money exchange began in these temples They also started providing loans at interest and interest on deposits

Period of Ancient Banking

During the Middle Age money lending activities were largely in the hands of Jews and the financers of Lombardy. Christians were forbidden by Canon law The Medieval Church regarded money lending as an unpardonable sin. Therefore there was monopoly of Jews in the field of Banking. Jews dominated the business of banking in many European countries

Period of Modern Banking

In 13th century the hold of the church on the layman weakened. Christians entered into profitable business of money lending This resulted in competition to Jews who enjoyed monopoly In 14th century - negotiable bill of exchange came into existence & - overdraft facility was given to customers

Period of Modern Banking

Important Public Banking institutions: Year of establishment Name of the Bank 1157 1401 1407 Bank of Venice Bank of Barcelona Bank of Genoa

Period of Modern Banking

Features :

In the initial period banks issued currency notes The concept of central bank was in its infant stage

Expansion of trading and commercial activity in northern Europe led to establishment of various Private and Public banking houses The bank of Amsterdam was established in 1609

Period of Modern Banking (United Kingdom)

Regime of Queen Elizabeth I banking by money lenders and Goldsmiths. Regime of King Charles took possession of gold kept by merchants in Tower of London. Therefore merchants deposited valuables with goldsmiths at a commission. Goldsmiths realised better opportunity to earn by lending the merchants deposits. Receipts were issued to acknowledge deposits. Surplus deposits kept were with national treasury.

Period of Modern Banking (United Kingdom)

Government refused to pay back deposits due to which goldsmiths business was ruined. This led to growth of private sector banking establishment of Bank of England in 1694. Passage of Banking Act, 1933 permitted establishment of Joint Stock Banks with unlimited liability. Expansion of international trade led to JSBs opening branches & many partnership firms started operating as branches of JSBs. After 1960 due to mergers, the number of banks reduced from 13 to 5.

Period of Modern Banking (United States of America)

Prior to 1782 banking at preliminary level. 1782 First Modern Bank was established in Philadelphia, issuing convertible paper money. By 1800 - Additional 30 banks set up. 1791 - First Bank of US set up 1816 - Second Bank of US set up. Federal Govt. owned 1/5th of Stock of this bank. By 1837 - 700 banks were in existence to provide finance towards infrastructure.

Period of Modern Banking

(United States of America)

Several unincorporated banks failed. 1829 - New York State passed Safety Fund Act to avoid loss due to failure. 1883 - Free Banking Act passed in Michigan. The Act permitted anyone to establish banks. This led to confusion about genuine notes. Around 10,000 different currency notes; hence legislation passed for maintaining cash reserve. 1862 Act passed permitting establishment of JSBs with limited liability. 1913 - Central Bank Federal Reserve Bank set up.

Period of Modern Banking

(United States of America)

US Banking classification Unit banking, chain banking & branch banking. US banks create deposits while giving loans. Obligatory to keep certain amount of deposit. The agreement entered into decided when, how much and why money was withdrawn. Extreme importance to documentation of procedures; hence not flexible. Supervision of American Banks By Federal Reserve Bank (estb. 1913) and Federal Deposit Insurance Corporation (estb. 1933).

Period of Modern Banking (France)

1716 Bank General established. It accepted deposits but was prohibited from giving loans. 1720 Bank General failed. 1776 Bank by the name Caisse d Escomple was established to issue notes. 1793 - Failed due to govt. loan non-repayment. 1800 Banque de France was set up. 1860 Credit Mobilier (a new generation bank) was established to provide term funds to industry & infrastructure. It failed due to lack of liquidity.

1880 New banking system established having two types of banks;

(i)

(ii)

Deposit banks to collect savings & lend short term funds to industry and commerce, and Banks to provide resources for capital market operations viz. foreign govt. loans and public utilities.

2nd half of 19th Century Establishment of JSBs; which started using cheques. Classification of banks in France a. Nationalised banks b. Large Regional Private Banks c. Deposit Banks in Paris Last of 19th Century Establishment of co-operative banks for provision of agricultural loans.

Period of Modern Banking (Germany)

1834 1st bank set up to issue notes. After 1848 Set up of large JSBs. Germany conducted investment banking; shifting lending from railways to industry. Provided current account and overdraft facility. 1870 banking business and industry progressed. 1875 the number of large JSBs was 33.

Period of Modern Banking (Germany)

Industry had to depend on banks due to infancy of share market. After 1st World War banking system collapsed due to small capital base. Reich bank unprepared to be lender of last resort. Bank system rebuilt with state intervention. After 2nd World War Germany was divided in two parts; East Germany and West Germany. This adversely impacted banking business.

Period of Modern Banking (Russia)

Communist revolution impacted banking. 14th December 1917 Nationalisation of all banks. 1924 Separate banks established to finance different sectors of the economy. 1932-36 banks merged to shape up to banking system. Important banks in Russia: BANK GOS Bank Stroi Bank Vhanestorg YEAR OF ESTLMT. 1921 1922 1924

Evolution of Banking in India

Stage I II III IV V VI Period From Vedic period to 1769 1770-1900 1901-1947 1948-1968 1969-1990 1991-onwards Features No formal bank Slow development of Banking Emergence of many banks Restrictions on banks Restrictions on banks strengthened Era of liberal banking

Evolution of Banking in India

Stage I : ( From Vedic period to 1769 )

Indigenous bankers and money lenders have been in existence since Vedic period Deposit banking came into existence in the 2nd and 3rd century Kautilayas Arthashastra Maximum rates of interest on advances 15% - 60% p.a In case of high risk Maximum of 240% rate of interest Discounting of Hundies by Indigenous bankers

Evolution of Banking in India

Stage I : ( From Vedic period to 1769 )

Moghul period Indigenous bankers played a very important role in money lending, financing internal and external trade and giving financial assistance to kings

Several Kings issued metallic money Indigenous bankers were appointed as revenue collectors and bankers to the King

Evolution of Banking in India

Stage I : ( From Vedic period to 1769 )

Moghul period Aurangzeb in his reign conferred the title of Seth on the most eminent banker of his time Manakchand.

Emperor Farrukshiyer confered on Fatehchand, the title of Jagat seth (banker of the world) The Indian Banking system received a certain amount of setback during the reign of emperor Aurangzeb

Evolution of Banking in India

East India Company was established in 1600

It was established to carry on trade between India and U.K Several Europeans came to India Indigenous bankers satisfied banking needs of the East India Company, its employees and others But due to the increase in the volume of international trade, it became difficult for the indigenous bankers. Few agency houses were established to provide banking facilities. Agency houses started accepting deposits at a high rate of interest The money was used for speculative activities which was harmful. This resulted in the establishment of the first modern bank in India

Evolution of Banking in India

Stage II : ( 1770 - 1900 )

Decline of Shroff Nawab of Oudh and Peshwas, sought the assistance of these bankers The principal occupation of these bankers was that of Shroffs and money changers Unification of currency under the East India Company took away the most profitable business of money changing

Evolution of Banking in India

Stage II : ( 1770 - 1900 )

Since the money collected by Agency Houses was not being utilised properly, so few Agency Houses in Calcutta established the first bank in 1770- Bank of Hindustan. After this bank several banks were established and in order to regulate its activities the General Bank in Bengal and Bihar was established in 1773. In order to provide banking facilities to the government Presidency banks were established

Evolution of Banking in India

Stage II : ( 1770 - 1900 ) Year of establishment 1806 1840 1843 Name of the Bank Presidency Bank of Bengal Presidency Bank of Bombay Presidency Bank of Madras

Evolution of Banking in India

Stage II : ( 1770 - 1900 )

In 1813 the British Government passed the legislation removing all restrictions on British coming to India This led to the establishment of several insurance companies and banks (unlimited liability) Since the principle of unlimited liability was not proper for the growth of the business activities, in 1860 the principle of limited liability was introduced.

Evolution of Banking in India (Stage III 1901 to 1947)

Swadeshi Movement started in 1906. 1906-1913 Several banks were set up. Eg; BOI, BOB, Indian bank, etc. 1st world war (1914-1918) 87 banks closed. 1921 to bring uniformity in policies of Presidency Banks, they were amalgamated into Imperial Bank of India. Till 1935 - It operated partly as central and partly commercial bank. It was the largest commercial bank. It performed all central banking functions except note issue.

Depression (1929-1933) badly impacted banking. 1935 to regulate banking system, RBI was set up in the private sector. 2nd world war (1939-1945) badly impacted industry. Special efforts to finance for reconstruction. 1947 Partition of Pakistan from India resulted in financial losses of few banks. Evolution of co-operative credit to solve rural indebtedness. 1904 Official launch of co-operative movement by enacting Co-op Societies Act. RBI played a key role in promotion of co-op banks. Co-op banks satisfy banking needs of urban poor too.

Evolution of Banking in India (Stage IV 1948 to 1968)

EVENT Nationalisation of RBI Banking Regulation Act Establishment of SBI Subsidiaries of SBI Deposit Insurance and Credit Guarantee Corporation Social Control YEAR 1949 1949 1955 1959 1962 1968

To ensure monetary discipline & economic development, RBI was nationalised. 1949 legislation was passed to regulate banking business. Initially called the Banking Companies Act, the amendment of 1966 changed its name to Banking Regulation Act. 1955 Imperial Bank was nationalised and converted into SBI, the largest commercial bank. 1959 SBI Subsidiary Banks Act was passed and EIGHT state associated banks became subsidiary banks of SBI.

STATE BANK SUBSIDIARY BANKS 1. State bank of Bikaner and Jaipur 2. State bank of Saurashtra 3. State bank of Hyderabad 4. State bank of Indore 5. State bank of Mysore 6. State bank of Patiala 7. State bank of Travancore

1962 DIC was established as a wholly owned subsidiary of RBI to insure depositors. Deposit insurance cover currently is Rs. 1,00,000 for each depositor. This reduces risk & builds confidence among deposits, thereby increasing deposits. 1968 A bill was passed to have social control over banks.

Evolution of Banking in India (Stage V 1969 to 1990)

EVENT Social controls came into force Nationalisation of 14 banks Credit guarantee corporation of India Regional Rural banks Nationalisation of 6 banks YEAR Feb. 1969 July, 1969 Jan, 1971 Oct , 1975 April, 1980

Evolution of Banking in India (Stage V 1969 to 1990)

To derive the benefits of nationalization without nationalizing banks, Social Control scheme was implemented with the following objectives:
To prevent banks from lending to concerns in which directors were involved To provide sufficient credit to priority sectors and neglected sectors. To prevent banks from lending for unproductive activities To prevent concentration of economic power in a few hands. To check the growth of monopolistic trends in industrial sectors. To achieve the optimum rate of economic growth.

Evolution of Banking in India (Stage V 1969 to 1990)

Nationalisation of banks Reasons : Expansion of bank credit to priority and neglected sectors. Prevention of concentration of economic power in few hands Branch expansion programmes in unbanked and underbanked areas Removal of bankers indifferent attitude towards economic development Provision of training facilities to banking personnel. Removal of deficiencies of Social Control Scheme.

Evolution of Banking in India (Stage V 1969 to 1990)

Credit Guarantee Corporation of India Ltd. 1971: Established to provide guarantee for loans provided by banks. Participation in the guarantee scheme was optional for banks. 1978 takeover of CGCI by Deposit Insurance Corporation of India. At present it is known as Deposit Insurance and Credit Guarantee Corporation of India Provides Insurance facility to reduce risks in banking business.

Evolution of Banking in India (Stage V 1969 to 1990)

Regional Rural Banks, 1975 The GOI appointed a working group to study banking facility in the rural areas and suggest measures for improvement. The working group suggested the establishment of an institution having professional approach and access to all parts of the financial market. As a result, RRBs were established in 1975. The RRB Act was passed in 1976.

Evolution of Banking in India (Stage V 1969 to 1990)

Nationalisation of 6 banks: On 15th April, 1980 six more banks having deposits of Rs. 200 crore were nationalized. They were: Andhra Bank Oriental bank of Commerce Corporation Bank New Bank of India The Punjab and Sind Bank Vijaya Bank

Evolution of Banking in India (Stage VI 1991 onwards)

Introduction of LPG model Formation of Narsimhan committee Important developments after 1991 liberal licensing for Indian bank Liberal licensing for foreign banks Liberal branch licensing policy Liberal personnel policy Use of advanced technology

Evolution of Banking in India (Stage VI 1991 onwards)

Freedom to decide the rates of interest Diversification of business Increasing capital by banks New schemes of deposits and loans Reduction in CRR and SLR Identification of NPAs and reduction in NPAs.