Commercial Banking In India

Chapter Contents
Commercial Banking during pre nationalization Phase Nationalization of Commercial Banking Banking development during the postnationalisation Phase Appraisal of banking since nationalisation Banking sector reforms during the liberalisation period Recommendation of the committee on banking sector Reforms

Banking sector is mainly divided into Organized and Unorganized Sector

Organized

sector

Commercial Banks Regional banks Cooperative banks

Commercial Banking during pre nationalization Phase

Major Changes The no of Scheduled banks reduced from 94 to 76 Steady decline in the importance of nonscheduled banks Regulatory Power was with RBI Deposits increased Rate of growth of time deposits increased

Major Changes
Establish State Bank of India In1960 Create the State Bank Group by Nationalizing eight Regional Banks Opened new branches in rural and semi urban areas Started Term lending ,lending for industries 1n 1962 Established the deposit Insurance Corporation

Major events happen after Independence

1949

Banking Regulation act was passed Nationalisation of RBI

Nationalization Of Commercial Banks

On

July 19,1969 fourteen commercial banks with deposits worth Rs.50 crore or were nationalised

Why, Nationalised the Banks?

Removal of control by a few Provision for adequate credit for agriculture and small industry and export Giving a professional bent for management To encourage new entrepreneurs The provision of adequate training as well as terms of service for bank staff. Nationalized banks can act as a catalyst to improve the growth

Why, Nationalised the Banks?

For

the rapid growth in agriculture Small Industries Exports Raising of employment Encourage new entrepreneurs Development of backward areas

Banking development during the postnationalisation Phase

Expansion

of Branches(1969-91) Deposit Mobilization Bank Lending

Lead Bank Scheme

Lead

bank Scheme by Narimann Committee came into existence .Under the scheme districts were allotted to the state Bank Group,then nationalized banks and three private groups They Conducted survey

Major Changes
No

of offices of Commercial banks increased from 8,262 to 60,220 giving an annual increase of 2,362 Bank offices locate in rural areas increased from 22.2% to 58.5% Regional Imbalances also reduced

Deposit Mobilization
Bank

deposits increased from 4,665 crore in July 1969 to 1,92,541 crore Rise was due to
Inflationary increase in the quantity of currency Rise of National Income Partially due to the deposit mobilization efforts of the commercial banks.

Bank Lending
Total

bank credit also rose up from 3,399 crore in 1969 to 1,16,301 on ,March 1991 Before nationalization the credit given to agriculture was very less(2.2% in 1968) and large and medium industries(60.6%)

Appraisal of Banking since Nationalization

Bank

deposit of Household sector rose from 15% to 38.7% of GDP No of branches increased from 8,26260,220 (period 1969-91)

Appraisal of Banking since Nationalization

Directed

Investment Directed Credit Programme Subsidization of Credit Increase in expenditure Lack of Competition

Banking Sector Reforms

Prudential

Regulation and Supervision Rehabilitation of Public Sector Banks Reduction in SLR and CRR Deregulation of Interest rates Competition Phasing out of Directed Credit

Recommendations of the committee on the banking Sector

Narasimham

Committees Recommendations (April 1998) on Banking Sector Reforms

 The

Major recommendations are as follows:

1.Strong banks should be merged and relatively weak and unviable ones should be closed. Mergers between banks and development financial institutions may be considered if it makes economic and commercial sense.

Narasimham Committees Recommendations

2.The country should have two or three banks with international orientation, eight to ten national banks and a large number of local banks. The third tier banks should remain confined to smaller geographical regions. The first and the second tier banks should take care of the needs of the corporate sector.

Narasimham Committees Recommendations

3.The Committee recommended new and higher norms for capital adequacy. It suggested that the minimum capital to risk assets ratio be increased to 10 percent from it earlier level of 8 percent.

Narasimham Committees Recommendations

4. Budgetary support for recapitalization is not viable and should thus be abandoned. 5. Legal frame work is not adequate for credit recovery. It should be strengthened. 6. Net non-performing assets for all banks be brought down to below 5 percent by the year 2000 and to 3 percent by 2002. 7. There should be rationalization of branches and staff. 8. Bank boards should be depoliticized under the RBI supervision.

Narasimham Committees Recommendations

9.The policy of licensing new private banks may be continued. 10. Foreign banks may be allowed to set up subsidiaries or joint ventures in India. Such subsidiaries or joint ventures should be treated on par with other private banks and subject to the same conditions with regard to branches and directed credit as these banks.

Narasimham Committees Recommendations

11.There has to be an integrated system of regulation and supervision to regulate and supervise the activities of banks, financial institutions and non-bank finance companies. The agency for this purpose be renamed as the Board for Financial Regulation and supervision (BFRS).