banking system evolution and growth

8/8/2019 Banking System Evolution and Growth

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Banking & Financial Systemin India :Evolution and Growth

Prof. S. P. Garg


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H istory and Growth

The longer you look back, the future youcan look forward

Sir Winston Churchill


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Finance : General AspectsFinance as medium of exchange

Barter system for exchange of commoditiesFinancing of trade and commerce

Finance of government business andcross country activitiesImpact of industrial development


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Mismanagement and Frauds in financeImpact of Great Depression 1930s on

global economyStress on SUPERVISORY ASPECTS


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Banking & Finance System in India

Lifeline of any EconomyDeployment of saving in productive sectors

Now Financial Power H ouse

Indias credit to GDP Ratio has increased from36.1% in FY 03 to 82.6% FY 08Regulated under:Banking Regulation Act 1949Section 5(1)(b) of BR Act 1949 :the acceptingfor the purpose of lending or investment of deposits of money from the public, repayable ondemand or otherwise and withdrawable bycheque, draft, order or otherwise


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Scenario :Barter system

Money lenders N idhis/ chit fundsCooperative Banking

Private banksConsolidation

Nationalization


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Development Financial Institutions Merchant Banks, Stock Exchanges

Entry of N ew Generation private banksUniversal Banking

Phases of Growth path

Active State InterventionDeregulation, Rationalization and SimplificationTotal L iberalization


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P H ASES:Vedic literature mentions about coins,

weights,ornamentsEven before 5 th century B.C.,small statesof M aghadha state had issued coins

Coins inM

auryan Age (4th

- 2 century B.C.) Mention of Rupyarupa and Suvarnarupa inKautilya Arthasashtra (4 th century B.C.)

From RUPYA ------------ RUPEE


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Coins as currency began in M auryan timePORTRAITS of Kings, and GodsRupee in silver as standard currency from M oughal period

(Sher Shah), also gold mohurs and copper paise.During Indo European period, opening of a mint in Goa in1510 by Portuguese, adoption of term Rupia for coins in1775

Mints in Bombay in1717,Subsequently mints in M adras,

Dacca,Patna, M urshidabad, Calcutta,Banaras Surat andother places


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East India Company divided its holdings in tothree Presidencies : Bombay, Calcutta, M adrasand each Presidency its own Rupee coins.Uniform coinage since 1835 with the image of King William IV reversing M ughual emperor On August 15 th, 1950 , the Rupee went Indian,

replacing BritishM

onarch King George VI withthe Indian emblem : the L ion Capital of AshokaPillar at SarnathOn 1 st April 1957, adoption of decimal coinage


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H istory 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 IndiaCompany1770: Alexander & Co ( a premier British AgencyH ouse set up Bank of H indostan : notes circulated bythe bank were accepted in private markets

Set up of Agency houses :Forbes of BombayParrys of M adrasPalmers of Calcutta


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H istory and Growth

Communities:Shroffs, M ahajans,Sahukars,Banias,Shettys,Chettiiars,Pathans,Parsees,PaisIndian M erchants(1813)

Ram Dulal DeySheikh Gulan H ussain

India British PartnershipsCarr, Tagore & Co. (Dwarka N ath Tagore)Rustamji Turner & Co.Jessop & Co.

Banking along with other Business activities


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In 1806,East India Company set a Government Bank : Bank of Calcutta later known as Bank of M adras.

Between 1970 &1850,establishment of :The Bank of H industanThe Commercial Bank( By M ackintosh & Co)The Calcutta Bank (Palmer & Co)

The Bank of Bengal, the Presidency Bank suggested to openbranches in Bombay and M adras, but the Supreme Govt decided toopen separate Banks as : The Bank of M adras (1840) & The Bankof Bombay (1843)

Merger of the Commercial Bank , the Calcutta Bank to form theUnion Bank with the support of influential business leader DwarkaN ath Tagore


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Liquidation of Union Bank in 1847 due to financial crisisBank of India by Raj Kiskore Dutta, an Indian N ationalBank of H indostan & Bank of India collapsed within a

short spanBritish Originated Banks in 1880s: Oriental Bank,Chartered Bank of India, L ondon & Eastern Bank of Corporation ,Bank of India ,China & Japan

First CompanyL

aw adoption in 1850 Adoption of new Company L aw in 1857


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1862: Bank of Rohilkund by N awab of Rampore1865: Setting of Allahabad Bank by a few European

residents in Allahabad1875: Alliance Bank of Simla1861: Paper Currency Act : Presidency Banks not toissue Currency notes , to be done by the Government

1876: Presidency Banks Act : M erger of all threePresidency Banks1881 : M erger of Bank of Rohilkund with OudhCommercial Bank


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Swadeshi M ovement :Emergence of L eading IndianJoint Stock Banks

The Punjab N ational Bank L td.(1894)The Bank of India L td.(1906)The Indian Bank L td.(1907)

The Bank of Baroda L td.(1908)The Central Bank of India L td.(1911)The Union Bank of India L td.(1919)

1913- 1917 Failure of Banks (87 banks failed)

1921: Formation of Imperial Bank of India by the merger of three Presidency BanksEnactment of Banking Companies Act 19491955: Formation of State Bank of India on the Basis of Recommendations of The All India Rural Credit SurveyCommittee Recommendations

H istory and Growth


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Reconstruction/merger of weak Banks from 548 in 1947to 89 in 1969

Nationalization of Banks in 1969 by an ordinance,subsequently replaced by an Act of Parliament : TheBanking Companies (Acquisitions & Transfer of Undertaking Act 1970

Nationalization of another 6 Banks in 1980Rapid Expansion of N et Work of branches

At the time of N ationalizationN umber of branches : 8262

Banking Density : 64,000Banking Compounded Growth Rate : 18 19%

Special focus on Development & Credit to Prioritysectors


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Comprehensive Reforms in 1991 -92Entry of N ew private sector Banks in 1993.


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N ow

CompetitivenessProfitability &Development

Are main consideration


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Indian Banking System

Commercial BanksPublic Sector Banks (PSBs)Private Sector Banks (Old & N ew generation)Foreign Banks

Co-Operative BanksRegional Rural Banks


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Scheduled Commercial Bank are those included in the2nd Schedule of the Reserve Bank of India Act,1934.Classification of Commercial Banks

PSBs (27 N ow 26)Private Sector (27) (old 12) (new 7)Foreign Banks in India (30)RRBs (83)

PSBs : SBI & its associatesN ationalised Banks,

IDBI Bank Merger of N ew Bank of India with P N BRecent merger of State Bank of Saurashtra with SBITalks for merger of State Bank of Indore with SBI


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Narsimaham Committee recommended for the freedom of entry in the financial System & establishment of new Banks

in private sector with certain requirementsIncrease in Paid up Capital from Rs.50 Crores to Rs.100Crores & then Rs. 200 Crores to Rs.300 Crores

Also allowed N BFCs to convert into Banks Subject toeligibility

Industrial H ouses not permitted to set up Banks Latest entry Yes Bank (2004)Foreign Investment in Private sector Banks permitted uptocomposite 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


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Growth of Banking SystemGrowth since 1948

Rs. In Crs.Branches Deposits Advances

1948 160 114

June 1969 8262 4646 3599June 1974 16936 10756 78581985 93404 54939

1991 273566131520

Sept., 2008

All Com. Banks 77069 34 Lacs 25 LacsOut of which RRBs 14735 101495 57706


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Growth of Banking SystemN o. of Schedule Com. Banks : 79SBI Group : 7N ationalized Banks : 20Private Sector Banks : 23

Foreign Banks : 29N o. of Branches : 61132(i) Urban & Metro : 26520(ii) Rural & Semi Urban : 34612N o. of ATMs : 34789N o. of Credit Cards : 34Mllns.N o. of Debit Cards : 70Mllns.Total Deposits : Rs.36 lacs Crs.Total Advances : Rs.26 lacs Crs.C:D Ratio : 73.83 %


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Banking Data ( Dec 2009) No of Commercial Banks : 169

Schedule:165RRBs : 84

N on Schedule : 4

Offices: 82,511

Rural : 32,024Semi urban : 19,841Urban : 16,277M etro : 14,369

Banked centres : 34,731


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Growth of Public Sector Banks

parameter June1969 JU N E 1989 June2006

No of offices 7015 53269 62704

Deposits 3897 131016 1550402

Advances 3017 83715 1093038

Rs.in Crore


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Salient features of SCBs

Parameters M arch 1997 M arch 2008CAR 2% 13.08 %Gross N PAs 15.7% 2.4 %N

etN

PAs 8.1% 1.08%

N ote: M ost of the Banks are over threshold level of 12%of CAR with mandatory requirement of 9%


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Foreign Banks in India

Operations as a Branch subsidiary ( N BFC) for diversified business, globally owned subsidiary for BPO activities.Roadmap for foreign Banks:

wholly owned subsidiary to have a minimumcapital of Rs.300 crores

Strong Corporate Governance

Standard Chartered Bank (Stand Chart) acquiredGrindlays business in west Asia &South Asia in2000


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RRBs

A new Category of Scheduled Banks in 1975 withSetting up of 5 RRBs under the RRBs ordinance1975,formulated by GOI on 26 th September 1975,subsequently replaced by the Regional Rural Bank

Act 1976

Authorized Capital Rs.1 CroreIssued Capital 25 L akhs

Sharing Pattern ; GOI : Sponsor Bank : State Govt.50 : 35 : 15

Sponsoring Institution: Commercial Bank (a public sector Bank)


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No.of RRBs : 1975 : 62001 : 1962008 : 962009: 84

District Covered : 500(37% of Total rural branches)

Restructuring Pattern : After merger 96 RRBsInstitutional Development Activities:

I. Regular training arrangements by N ABARD & sponsor Bank

II. Relocation of L

oss making branchesIII. Sponsor Banks : Total M anagement and operational

responsibilityIV. RBI and N ABARD : Regulatory and supervisory Bank


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V. Special Focus on M icro Finance, Group L endingS H Gs

VI. Regular M aintaining : by N ABARD & Sponsor BankVII. Salary Structure at par with sponsor BankVIII. Three tier structure : H O, Centrally office Branches

Issue Involved:Sustainable ViabilityDiversified loan portfolios


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Co-op. Banking SystemExistence with the enactment of the Co-operative creditSocieties Act 1904.Establishment of Co-operative Central Banks in 1912Two Institutions : Rural Co-operative Credit Institution

Urban Co-operative Credit Institution

Rural :Short Term : State Co-operative Banks

District Co-operative BanksPACS

L ong Term : State Co-operative Agricultural & RDBanks (SCARDB)Primary Co-operative agricultural & RD Bank( PCARDB)


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Urban:Scheduled UCBs M ulti State

Single StateN on Scheduled UCBs M ulti State

Single State Major Concentration in M aharasthra, Gujarat, Karnataka,

A.P., Tamil N adu.UCBs are covered under 2 nd schedule of the RBI

Act.1934,if their net demand & Time L iability ( N DTL ) areatleast Rs 100 crore increased to 250 Crore w.e.f. 30 th

October 2003Supervisors

UCBs RBIRural N ABARD


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M ultiState UCBs are registered under M ultiState

Co-operative Societies ActOwn UCBs with Rs.50 crore of net owned funds can beM ultistate UCBUCBs were covered under BankingRegulation Act 1949 in1966

Licensing Policy based on minimum bare Capitalmembership & population.(2000 N orms)

Share Capital M embership PopulationRs.4 crores 3000 710 L akhsRs. 2 crores 2000 5-10 L akhsRs. 1 crores 1500 1-5 L akhsRs. 25 L akhs 500 < 1 L akhs


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Supervision & Inspection by RBI Maintenance of CRR,S L R & CAR MOUs with RBI& State Govt.

Task Force for Co-operative Urban Bank for revival

Rural Co-operative BanksIntegrated part of rural credit delivering systemConstitutes 40% of rural credit & about 55% of short term credit

Refinance facility from N ABARDSCBs Control (CCBs)PACS Deal Directly with benificiaries


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Policy Issues for cooperative Banking System :Organizational viabilityOperational issues

NPA

ManagementRecapitalization

Simplification of Procedures

Revival Packages :Prof A Vaidhyanathan Task Force for restructuring &revamping of rural

credit structureRequirement of Rs 15000 crores for capital infusionRevival package of Rs 13,5000crores for short term credit for 25 StatesIntroduction of L egal & Institutional reforms for member centric &

member governed institution Amendment in B R ActCRAR requirementsComputerization & H RD issuesInterest subvention for short term loansThe ADWDR Scheme :Rs 65000 crores covering 3.6 crore farmers


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Indian Banking System

To sum-up :In the present scenario of competitiveness, Market/Customer driven economy, all Banks will have toreworkout their strategies to improve their market

share, Brand equity & future business growth

banking system evolution and growth

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