Banking & Financial System

in India :Evolution and Growth

Prof. S. P. Garg
 History and Growth

“The 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
 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
36.1% in FY 03 to 82.6% FY 08
• Regulated under:Banking Regulation Act 1949
• “Section 5(1)(b) of BR Act 1949 :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”
 Banking & Finance System in India
• Scenario:
• Barter system
• Money lenders
• Nidhis/ chit funds
• Cooperative Banking
• Private banks
• Consolidation
• Nationalization
 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, Rationalization and Simplification
• Total Liberalization
 Banking & Finance System in India

• PHASES:
• Vedic literature mentions about coins,
weights,ornaments
• Even before 5th century B.C.,small states of
Maghadha state had issued coins
• Coins in Mauryan Age (4th- 2 century B.C.)
• Mention of Rupyarupa and Suvarnarupa in
Kautilya Arthasashtra (4th century B.C.)
• From RUPYA ------------ RUPEE
 Banking & Finance System in India
• Coins as currency began in Mauryan time
• PORTRAITS of Kings, and Gods
• Rupee in silver as standard currency from Moughal period
(Sher Shah), also gold mohurs and copper paise.
• During Indo European period, opening of a mint in Goa in
1510 by Portuguese, adoption of term Rupia for coins in
1775
• Mints in Bombay in1717,
• Subsequently mints in Madras,
Dacca,Patna,Murshidabad, Calcutta,Banaras Surat and
other places
 Banking & Finance System in India

• East India Company divided its holdings in to

three Presidencies : Bombay, Calcutta, Madras
and each Presidency its own Rupee coins.
• Uniform coinage since 1835 with the image of
King William IV reversing Mughual emperor
• On August 15th, 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, adoption of decimal coinage
 History and Growth
• Mughal Period : Collection of revenue by Cash- AKBAR
• Modern Banking emerged between 18th& 19th centuries
with the entry of European houses.
• 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
 History and Growth
• Communities:Shroffs,Mahajans,Sahukars,
Banias,Shettys,Chettiiars,Pathans,Parsees,Pais
• Indian Merchants(1813)
Ram Dulal Dey
Sheikh Gulan Hussain
• India British Partnerships
Carr, Tagore & Co. (Dwarka Nath Tagore)
Rustamji Turner & Co.
Jessop & Co.
Banking along with other Business activities

•
• In 1806,East India Company set a Government Bank :Bank of
Calcutta later known as Bank of Madras.
• Between 1970 &1850,establishment of :
The Bank of Hindustan
The Commercial Bank( By Mackintosh & Co)
The Calcutta Bank (Palmer & Co)
• The Bank of Bengal, the Presidency Bank suggested to open
branches in Bombay and Madras, 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, the Calcutta Bank to form the
Union Bank with the support of influential business leader Dwarka
Nath Tagore
• Liquidation of Union Bank in 1847 due to financial crisis
• Bank of India by Raj Kiskore Dutta, 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, London & Eastern Bank of
Corporation ,Bank of India ,China & Japan
• First Company Law adoption in 1850
• Adoption of new Company Law in 1857
• 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 , 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
 History and Growth
• Swadeshi Movement :Emergence of Leading Indian Joint
Stock Banks
The Punjab National Bank Ltd.(1894)
The Bank of India Ltd.(1906)
The Indian Bank Ltd.(1907)
The Bank of Baroda Ltd.(1908)
The Central Bank of India Ltd.(1911)
The Union Bank of India Ltd.(1919)
• 1913- 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
• Reconstruction/merger of weak Banks from 548 in 1947
to 89 in 1969
• Nationalization of Banks in 1969 by an ordinance,
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 : 64,000
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
• Scheduled Commercial Bank are those included in the
2nd Schedule of the Reserve Bank of India Act,1934.
• 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
• 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.50 Crores to Rs.100
Crores & then Rs. 200 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. to recapitalize 18 state owned banks

“Internationally active Banks” those banks which have cross

– border business exceeding 20% of their total business”
 Growth of Banking System
Growth since 1948
Rs. In Crs.
Branches Deposits Advances
• 1948 160 114

• June 1969 8262 4646 3599

• June 1974 16936 10756 7858
• 1985 93404 54939

• 1991 273566
131520

• Sept., 2008

 All Com. Banks 77069 34 Lacs 25 Lacs

 Out of which RRBs 14735 101495 57706
 Growth of Banking System
• No. of Schedule Com. Banks : 79
SBI Group : 7
Nationalized Banks : 20
Private Sector Banks : 23
Foreign Banks : 29
No. of Branches : 61132
(i) Urban & Metro : 26520
(ii) Rural & Semi Urban : 34612
No. of ATMs : 34789
No. of Credit Cards : 34Mllns.
No. of Debit Cards : 70Mllns.
Total Deposits : Rs.36 lacs Crs.
Total Advances : Rs.26 lacs Crs.
C:D Ratio : 73.83 %
• Banking Data ( Dec 2009)
• No of Commercial Banks : 169
Schedule:165
RRBs : 84
Non Schedule : 4
• Offices: 82,511
Rural : 32,024
Semi urban : 19,841
Urban : 16,277
Metro : 14,369
• Banked centres : 34,731
 Growth of Public Sector Banks
Rs.in Crore

parameter June1969 JUNE 1989 June2006

No of 7015 53269 62704

offices
Deposits 3897 131016 1550402

Advances 3017 83715 1093038

 Salient features of SCBs

Parameters March 1997 March 2008

CAR 2% 13.08 %
Gross NPAs 15.7% 2.4 %
Net NPAs 8.1% 1.08%

Note: Most of the Banks are over threshold level of 12%

of CAR with mandatory requirement of 9%
Foreign Banks in India

• Operations as a Branch subsidiary (NBFC) for

diversified business, globally owned subsidiary for
BPO activities.
• Roadmap for foreign Banks:
wholly owned subsidiary to have a minimum
capital of Rs.300 crores
Strong Corporate Governance
• Standard Chartered Bank (Stand Chart) acquired
Grindlays business in west Asia &South Asia in
2000
 RRBs
• A new Category of Scheduled Banks in 1975 with Setting
up of 5 RRBs under the RRBs ordinance
1975,formulated by GOI on 26th September
1975,subsequently replaced by the Regional Rural Bank
Act 1976
• Authorized Capital – Rs.1 Crore
Issued Capital – 25 Lakhs
Sharing Pattern ; GOI : Sponsor Bank : State Govt.
50 : 35 : 15
Sponsoring Institution: Commercial Bank (a public sector
Bank)
• No.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:
I. Regular training arrangements by NABARD & sponsor
Bank
II. Relocation of Loss making branches
III. Sponsor Banks : Total Management and operational
responsibility
IV. RBI and NABARD : Regulatory and supervisory Bank
V. Special Focus on Micro Finance, Group Lending
SHGs
VI. Regular Maintaining : by NABARD & Sponsor Bank
VII. Salary Structure at par with sponsor Bank
VIII. Three tier structure : HO, Centrally office Branches

• Issue Involved:
Sustainable Viability
Diversified loan portfolios
 Co-op. Banking System
• Existence with the enactment of the Co-operative credit
Societies Act 1904.
• 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)
• Urban:
Scheduled UCBs – Multi State
Single State
Non Scheduled UCBs – Multi State
Single State
• Major Concentration in Maharasthra, Gujarat, Karnataka,
A.P., TamilNadu.
• UCBs are covered under 2nd schedule of the RBI
Act.1934,if their net demand & Time Liability (NDTL) are
atleast Rs 100 crore increased to 250 Crore w.e.f. 30th
October 2003
• Supervisors
UCBs –RBI
Rural –NABARD
 MultiState UCBs are registered underMultiState
Co-operative Societies Act
• Own UCBs with 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.(2000 Norms)
Share Capital Membership Population
Rs.4 crores 3000 710 Lakhs
Rs. 2 crores 2000 5-10 Lakhs
Rs. 1 crores 1500 1-5 Lakhs
Rs. 25 Lakhs 500 < 1 Lakhs
• Supervision & Inspection by RBI
• Maintenance of CRR,SLR & CAR
• MOUs with RBI& State Govt.
• 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
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 3.6 crore farmers
 Indian Banking System

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