Over view of Banking

Dr.S.Chatterje
( S2)

Learning Objectives
Historical Growth of Banks in India
Various developments in Indian Banking
system (in pre & post independent era)
Phases of evolution , Class to Mass
Banking
Migration to Social Banking.
Golden Reform
Liberalization for Globalization

Banking Development
Pre- Independence Era:1770 1st Bank - Called Hindustan Bank Closed
1832
1786 2nd Bank General Bank of Bihar-Bengal cl1791
a. 1809 The Bank of Bengal/Calcutta ( Estb by
E.I.Co)
b.1840 Bank of Bombay
c. 1843 Bank of Madras
1846 (a, b& c called ) Presidency Bank
1865 Allahabad Bank (First wholly run by Indians)
1894 PNB with H.Q at Lahore

Contd.
1906-1913 BOI,CBI, BOB, Can Bank, Indian
Bank and Bank of Mysore were set up.
1921 Amalgamated(a+b+c) to form Imperial
Bank of India on 27.01.1921 by the
Imperial Bank of India Act 1920
Functions: Sole Banker to G.O.I, Banker
to Banks, Manage public debts, Conduct
Clg, Provide remittance to banks &
public but no power to Issue Notes or
Control
currency.

Contd
Some more banks Opened Peoples bank, Allien Bank, Oudh
Bank, Union Bank, UCO,United
Bank,OBC, Corp Bank etc
Some Banks failed due to:Insufficient capital, Poor liquidity of
assets, irrational Credit policy,
Banking with Non Banking
activities, Deficiencies in
monitoring and supervision.

Contd
1934 RBI act was formulated
1935 RBI Starts functioning with paid up
cap = 5 cr , nominal shares was allotted to
GOI.
1913-1943 number of Banks failed
949 ?
The deterioration in the banking system
was analysed and measure initiated post
Independence.

Post Independence Era

Major Causes of failure :
Mismanagement, Over lending, Low C.R.R
U/s loan , Unreasonable pricing of assets,
Offering high Intt for Deposit ,Poor control
and supervision , No central bank etc
1948 RBI was Nationalized with added
responsibility as controller of currency as
well and taking bank to common people
1949 Banking Regulation act & amended
in 1965.

Contd
1955 July , Imperial Bank of India was
renamed as S.B.I, the first bank to be
nationalized with spl task of extending
Banking facilities on a large scale to rural
and semi-urban masses thro Agrl Dev
Branches.
1957-60 Seven Associate Banks of SBI was
Established of which 2 merged with SBI
and 5 are continuing.(SBBJ,SBH,SBM,SBP
& SBT).

Indian Banking Phases

Of Evolution (post
Independence)

Pre- Nationalisation
70s Migration to Social banking(Major
Banks Nationalisation)
80s Consolidation
90s Golden period of reforms
(i) Narsimham Committee Reform I
(1991)
(ii) Narsimham Committee Reform-II
(1998)

Pre Nationalization Before

1969. Major Developments:

Enactment of Banking Regulation Act 1949

In 1963 IDBI was set up by RBI as Term Lending

Institution in addition to ICICI which was also
acting as Term Lending Institution since 1947.

Introduction of Credit Authorization Scheme on

20th November 1965 as a part of Credit Policy
announcement.

Social Control on 14th December 1967to bring

most banks under social control for making
credit available to all productive endeavors.

National Credit Council was set up in 1967 for

discussing and assessing credit priorities.

Contd
Branch Expansion Policy,
Credit Authorization scheme
Credit deployment- Agrl Sector,
Pruiority Sect Concept
Formation of National Cr council
Formation of T/lending Inst. IFCI & SFCIs
Protect Investors, Formation of Deposit
Ins.corp.

NationalizationHistoric Expansion in
both geographical and functional
terms(1969-1991). Major development
Nationalization of 14 Major Banks on 19th
July 1969 which had deposit of Rs.50 Crores
and above. On 15th April 1980, six more
Banks with deposit Rs.200 Crores were
nationalized. Which are these Banks ?
Important objectives of Nationalisation :
i) Bringing banking services to public sector
ii) Transforming Class banking to Mass banking
iii) Provided need based Credit to core sectors,

Contd.
iv) Developing Professionalism in Bank
Management.
v) Developing efficient payment system
vi) Encouraging new classes of
entrepreneurs
vii) Creating alternative to Money lender
viii)Developing into dynamic vehicle for
Socio-economic growth.
ix) Providing adequate training and
reasonable terms of service to the
employees

Development post
Nationalisation
Lead Bank Scheme:

December 1969, following the recommendation of Gadgil

Committee followed by Nariman Committee, Lead Bank
Scheme was formulated based on service area approach.
Total 336 Districts were created and distributed
among
Scheduled Banks
1972 onwards various development schemes started :i) Deposit Scheme backed by Insurance
ii) Priority Sect concept & Rural Development
Scheme Village Adoption
iii) DRI Scheme
iv) Composite Loan Scheme
v) Branch expansion

Post Nationalisation (Devlpmt in

1970s & 80s).
Creation of RRB in1976 with authorized capital Rs.1Crore
and paid up capital Rs.25 Lakhs subscribed by GOI 50%,
State Govt. 15% and Sponsored Bank 35%.
Constitution of Tandon Committee for logical credit
assessment
Launching of IRDP/DPAP
Setting of NABARD
Service Area Approach
Establishment of SIDBI
New Instruments In Money Market ie. CP/CD & Treasury
Bills
Extensive Branch Expansion

Commercial Bank- Structure

Commercial Banks
Scheduled
Banks
PSU
Banks
6+21=27

RRBs
68

Non-Scheduled
Bank
Private
Banks
19

Foreign
Banks
32

Foreign Banks With Business in India 29

Foreign Banks having Representative
office in India -------41
F

Reform Era (1991 onwards)

The Measures include:
Progressive reduction of CRR & SLR. CRR
reduced from 15% to 6% and SLR from 39%
to 23%
Income Recognition & Asset Classification
Focus on NPA Reduction ,Setting up of Lok
Adalat, DRT and ARC
Board for Financial Supervision of Banks
Permission for entry of new Pvt. Banks to
inject Competition
Deregulation of Interest Rates

Post Reform Era (Contd.)

Implementation of CAR based on BASEL
Committee
Recommendation. Minimum
CAR 8%(internationally) and 9% (in India).
BASEL I (3 Pillars)
i) Minimum Capital Requirement (Comprises
Credit Risk & Market Risk Only)
ii) Supervisory Review
iii) Market Discipline
BASEL II Minimum Capital Requirement
includes
Operational Risks in addition to Credit and
Market Risks.

Post Reform Era

(Contd.)
Reduction of Govt Stake & Re
capitalization of Banks.
Access to Capital Market for Mobilizing
additional equity.
Liberalized Bank/Branch Licensing Policy.
Enactment of SARFAESI ACT, 2002.
Setting up of Asset Reconstruction
Company, Corporate Debt Restructuring.
Setting up of CIBIL.(SBI:HDFC:D & B:Trans
Union Intl -> 40:40:10:10)
Establishment of CCIL.( estb Feb 2002)

The major areas of

transformation

Risk Based Management

Efficiency Parameters/ CAMELS Rating
Value Added Services
IT initiatives
Rationalisation of Staff strength &
Branches.
Strong RBI Supervision & better Internal
Controls
Governance redressal mechanism.
Financial Inclusion

Banks and Its Functions

Defn: As per Banking Reg Act 1949
Intermediary organisation that
accepts Deposit of Money for the
purpose of Lending and/or
investment repayable on demand or
otherwise and withdrawable by cheq,
Drafts, order or otherwise.

Banks definition
contd

B - Banks are highly regulated, profit-oriented, Fis

in
the business of creating ,managing ,and
distributing
Money
A- Accepting Money for lending/investing and /or
remitting. Through
N - Networked Branches and multiple distribution
channels and has emerged as
K - Key players in offering value added and cost
effective financial services to the total cross
section of the society

Financial Systems
Banking , Insurance & Financial MKts
Regld. By RBI
IRDA
SEBI/FERA/FEMA
Financial Markets:(i)
Capital Mkt -> Primary & secdry Mkt
(ii) Debt Mkt > Deals in Govt Sec &
Bonds
(iii) Money Mkt -> Call/Notic,CD,CP,
T.Bills,
Comm. Bills, Repo & term money
(iv) Forex Market -> Forex trading,

Role of Banks
Three major roles:
A) Intermediation Reqd for economic
growth
(i) Credit Risk
(ii) Liquidity Risk
(iii) Interest rate Risk
(iv) Market rate Risk
(V) Operational Risk
B) Payment system facilitator:
C) Financial services Provider :

Banking Services &

Products
Role
Services
Products
Paying agent Payment/
Chq,DD,PO,Bchq,IOI, MCChq
Remittance EFT,RTGS, C.Card,D.Card
etc
Collection Local clg, National clg, ECS
CMS,Transfer,Bill collection
Intermediary Deposit
SB, Ct, TD, RD (Liab Products)
Loans
(S.Term Credit)
W/C- CC/OD/PC/ CP/
IBD/IBP
FBP/FBN/ Ch Disc,LC/ BG
Retail: C, C, E, F, H,P,S,V,
etc

Banking Services
Contd..

L.Term Credit: (i) Term loans

(ii) Leasing Finnce
Financial Serv 1)Sales/Dist
M.Fs , IPO, FPO, TPPs
(Ins,Bonds,Stamp Papers,)
Gold coin, D-Mat trading etc
2) Collection :- Taxes, School fees ,utilitty
3) Safe keeping : Safe deposit vault,
safe custody
4) Advisory serv: Proj Fin,Consort Fin,
Investment adv
5) E- Services : ATMs, Phone,Mobile(SMS),
Internet
Banking

Opportunities and
challenges for Indian
Banks
Assignment :- To be submitted at the end of

session.
Study Recent Journals and Magazines on Banking
& Finance viz The Economost, Indian Banker,
Bank Quest, RBI Bulletine etc and various
Pink Paper etc
Read p-19 & 20 of the text book.
Read Sub-prime Crisis 2007 p-4
Fate of Shadow Banking System in Financial Crisis