indian banking system
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History of Banking System in India
India cannot have a healthy economy without a sound and effective banking system. The banking system should be hassle free and able to meet the new challenges posed by technology and other factors, both internal and external.
In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's growth story.
The government's regulation policy for banks has paid rich dividends with the nationalization of 14 major private banks in 1969. Banking today has become convenient and instant, with the account holder not having to wait for hours at the bank counter for getting a draft or for withdrawing money from his account.
History of Banking in IndiaThe first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases:
Early phase of Indian banks, from 1786 to 1969 Nationalization of banks and the banking sector
reforms, from 1969 to 1991 New phase of Indian banking system, with the
reforms after 1991
Phase 1The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was established. Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up. The Reserve Bank of India came in 1935.
During the first phase, the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1,100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested with extensive powers for the supervision of banking in India as the Central banking authority. During those days, the general public had lesser confidence in banks. As an aftermath, deposit mobilization was slow. Moreover, the savings bank facility provided by the Postal department was comparatively safer, and funds were largely given to traders.
Phase 2The government took major initiatives in banking sector reforms after Independence. In 1955, it nationalized the Imperial Bank of India and started offering extensive banking facilities, especially in rural and semi-urban areas. The government constituted the State Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector in India came under the government ownership.
Phase 3This phase has introduced many more products and facilities in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking are introduced. The entire system became more convenient
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and swift. Time is given importance in all money transactions.The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible capital account, and the limited foreign exchange exposure of banks and their customers.
The Banking Structure in India The commercial banking structure in India consists of scheduled commercial banks and unscheduled banks. Scheduled banks constitute those banks that are included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.
As on June 30, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise State Bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-operative banks, and regional rural banks. Before the nationalization of Indian banks, the State Bank of India (SBI) was the only nationalized bank, which was nationalized on July 1, 1955, under the SBI Act of 1955. The nationalization of seven State Bank subsidiaries took place in 1959.After the nationalization of banks in India, the branches of the public sector banks rose to approximately 800 percent in deposits and advances took a huge jump by 11,000 percent.
Nationalization Process
1955: Nationalization of State Bank of India 1959: Nationalization of SBI subsidiaries 1969: Nationalization of 14 major banks 1980: Nationalization of seven banks with
deposits over Rs 200 crore
Banks in IndiaIn India, banks are segregated in different groups. Each group has its own benefits and limitations in operations. Each has its own dedicated target market. A few of them work in the rural sector only while others in both rural as well as urban. Many banks are catering in cities only. Some banks are of Indian origin and some are foreign players.Banks in India can be classified into:
Public Sector Banks
Private Sector Banks Cooperative Banks Regional Rural Banks Foreign Banks
One aspect to be noted is the increasing number of foreign banks in India. The RBI has shown certain interest to involve more foreign banks. This step has paved the way for a few more foreign banks to start business in India.
Reserve Bank of India (RBI)The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs 5 Crore on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into fully paid shares of Rs 100 each, which was entirely owned by private shareholders in the beginning. The government held shares of nominal value of Rs 220,000.
The RBI commenced operation on April 1, 1935, under the Reserve Bank of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted to meet the following requirements:
Regulate the issue of currency notes Maintain reserves with a view to securing
monetary stability Operate the credit and currency system of the
country to its advantage
Functions of the RBI The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank with the Reserve Bank of India.
Bank of Issue: Under Section 22 of the Act, the Bank has the sole right to issue currency notes of all denominations. The distribution of one-rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as an agent of the government.
Banker to the Government: The second important function of the RBI is to act as the government’s banker, agent, and adviser.
Bankers' Bank and Lender of the Last Resort: The RBI acts as the bankers' bank. Since commercial banks can always expect the RBI to come to their help in times of banking crisis, the RBI becomes not only the banker's bank but also the lender of the last resort.
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Controller of Credit: The RBI is the controller of credit, i.e., it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations.
Custodian of Foreign Reserves: The RBI has the responsibility to maintain the official rate of exchange. Besides maintaining the rate of exchange of the rupee, the RBI has to act as the custodian of India's reserve of international currencies.
Supervisory Functions: In addition to its traditional central banking functions, the RBI has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949, have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.
Indian Banks’ Association (IBA)The Indian Banks’ Association (IBA) was formed on September 26, 1946, with 22 members. Today, IBA has more than 156 members, such as public sector banks, private sector banks, foreign banks having offices in India, urban co-operative banks, developmental financial institutions, federations, merchant banks, mutual funds, housing finance corporations, etc.The IBA has the following functions:
Promote sound and progressive banking principles and practices.
Render assistance and to provide common services to members.
Organize co-ordination and co-operation on procedural, legal, technical, administrative, and professional matters.
Collect, classify, and circulate statistical and other information.
Pool expertise towards common purposes such as cost reduction, increased efficiency, productivity, and improving systems, procedures, and banking practices.
Project good public image of banking through publicity and public relations.
Encourage sports and cultural activities among bank employees.
Banking Activities
Retail banking, dealing directly with individuals and small businesses
Business banking, providing services to mid-market businesses
Corporate banking, directed at large business entities
Private banking, providing wealth management services to high net-worth individuals
Investment banking, activities in the financial markets, such as "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities like mergers and acquisitions
Merchant banking is the private equity activity of investment banks
Financial services, global financial institutions that engage in multiple activities such as banking and insurance
Important Historical Events on Indian Banking System
Sl. Event Year
1 The first bank in India “Bank of Hindustan” established 1770
3 First general insurance company established 1850
5 Bombay Stock Exchange (BSE) started trading 1875
7 Oriental Life Insurance Company established 1918
9Bank of Bengal, Bank of Madras and Bank of Bombay were merged into Imperial Bank
1921
11Establishment of “Hilton-Young Commission” to suggest a central bank for the country
1926
13Establishment of “Reserve Bank of India” as the central bank
1935
15 Control of Capital Issues Act 1947
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imposed
17 Establishment of Industrial Finance Corporation (IFC). 1948
19
Imperial Bank taken over by State Bank of India; Establishment of Industrial Credit and Investment Corporation of India (ICICI)
1955
21 Life Insurance Company of India (LIC) was established 1956
25Insertion of a new Chapter in RBI Act, 1934 to effectively supervise, control and regulate NBFCs
1963
27Establishment of Industrial Development Bank of India(IDBI)
1964
29 Deposit insurance extended to co-operative banks 1966
31 Nationalisation of 14 largest banks commercial banks 1969
33
Nationalisation of general insurance companiesForeign Exchange Regulation Act (FERA) was promulgated which provided an opportunity to develop Indian equity market
1973
35 Establishment of Regional Rural Banks 1975
37Second round of nationalisation of 6 commercial banks
1980
39
Establishment of National Bank for Agriculture and Rural Development (NABARD)First credit rating agency established in India
1982
41Establishment of Small Industries Development Bank of India
1990
43 Report of the Committee on 1991
the Financial System, which provided the blueprint for first generation financial sector reforms.
45
Introduction of prudential norms for income recognition and asset classification;SEBI became capital market regulator
National Stock Exchange (NSE) was established as the first screen-based trading platform for traders.
1992
47 Introduction of Depositories 1993
49
Board for Financial Supervision, under RBI, establishedNew guidelines for entry of new private sector banks announced
Wholesale debt market operations started by NSE.
1994
51
Establishment of Institute for Development and Research in Banking TechnologyDepositories Act was passed which allowed for holding of securities in dematerialised form.
1996
53
Termination of automatic monetisation of Government deficitStatutory Liquidity Ratio (SLR) reduced to 25% (legal minimum)
1997
55
Insurance Regulation and Development Act passedDetailed guidelines on risk management in banks announced
1999
57 Guidelines issued regarding interest rate swaps and forward rate agreement
2000
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New guidelines for categorisation and valuation of banks’ investment portfolio announcedLiquidity Adjustment Facility introducedForeign Exchange Management Act
59 Credit Information Bureau of India Ltd was established 2001
61Revised guidelines announced for entry of new private banksClearing Corporation of India Limited became operational
2002
63Central Listing Authority was constituted 2003
Miscellaneous Facts First India bank Got ISO : Canara Bank First Governor of RBI : Mr. Osborne Smith First Indian governor of RBI : Mr. C D Deshmukh First Bank to Introduce ATM in India : HSBC First Bank to introduce saving Bank in
India : Presidency bank in 1833 First Bank to Introduce Cheque system in
India : Bengal Bank 1784 First Bank to introduce Internet Banking : ICICI
BANK First Bank to introduce Mutual Fund : State Bank of
India First Bank to introduce Credit Card in India : Central
Bank of India First Foreign Bank in India : Comptoire d’Escompte
de Paris of France in 1860 First Bank Set Up in India : Bank of Hindustan in
1770 First Joint Stock Bank of British India : State Bank of
India First Joint Stock Bank of India : Allahabad Bank First Bank that is oldest Public Bank in
India : Allahabad Bank First national bank that is merged with Punjab National
Bank : New Bank of India in 1993 First Indian bank to open branch outside India in
London in 1946 : Bank of India First Indian Bank started with Indian capital
/indigenous Bank of India : Punjab National Bank
First Regional Rural Bank name Prathama Grameen Bank Was started by : Syndicate Bank
BANKS IN INDIA
1. Central Bank – Reserve Bank of IndiaCommercial Bank2. Public Sector Bank – (Nationalised Bank) Total 26 = 14 were nationalized in 1969 + 6 were Nationalized in 1980 (out of these one bank new Bank of India was merged with PNB in 1983), + 1 IDBI + SBI + 5 Subsidiary/Associates banks of State Bank of India.3. Private Banks = RBI in 1993 gave licences to 12 Private bank in 2 phases 10 private bank in 1993 and 2 private bank in 2003-20044. Foreign Banks = 34 Foreign Banks are there in India.Cooperative Bank:Cooperative Banks = Bank those are registered under Co-operative Societies Act 1965, Co-operative Banks are also works as Commercial Bank, these are made by self Help Group, or by the Communities or by Groups.Specialised BankDevelopmental/Specialised Banks: Like IFCI, IDBI, EXIM, NABARAD, SCICI Ltd.
Personal Bank AccountsSaving Bank A/C= These accounts are maintained by individuals/salaried people. Such accounts offer interest on customer deposit. The internet on these accounts is de-regulated by RBI. No overdraft is allowed in such accounts. Habit of saving is developed, minimum Balance condition depends on Bank To Bank, Limit on transaction can be fixed.Fixed deposits Accounts= It is also known as term deposit, Fixed rate of interest or floating rate of Intt is offered on it. Rates are depends on money and maturities periods.Recurring Deposits Account = In this account money is fixed every months and rate of interest in the same as on fixed deposits accounts.
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Business Bank Accounts :Current Accounts = These accounts are used mainly by businessmen and are not generally used for the purpose of investment. These deposits are the most liquid deposits and there are no limits for number of transactions or the amount of the transactions in a day. No interest is paid by banks on these accounts. One of the prominent advantage of such account is that overdraft is allowed.Cash Credit Accounts = In this account money is lent against the commodities or stock, a set limit or a credit facility is provided as per the value of commodities. Interest is taken as per the limit availed by the customers.Banking Terminology:IFSC Code : = Indian Financial System Code. The code consist of 11 characters for identifying the bank and branch where the account in actually held. The IFSC code is used both by the RTGS and NEFT transfer systems.RTGS: = Real Time Gross settlement system is funds transfer system where transfer of money or securities takes place from bank to another on a “real time”. (‘Real time’ means within a fraction of seconds.) The minimum amount to be transfer through RTGS is Rs 2 Lakh. Processing charges/service charges for RTGS transactions vary from bank to bank.NEFT: National Electronic Fund transfer. This is a method used for transferring funds across bank in a secure manner. It usually takes 1-2 working days for the transfer to happen. NEFT is an electronic fund transfer system that operates on a deferred Net Settlement (DNS) basis which settles transactions in batches.(Note : RTGS is much faster than NEFT.)UTR Number: unique transactions reference number. A Unique Number which is generated for every transaction in NEFT & RTGS system. UTR is a 16-digit alphanumeric code. The first Four digit are a bank code in alphabets, the 5th on is the message code, the 6th and 7th mention the year, the 8th to 10thmention the date and the last 6 digits mention the day’s serial number of the message.
MICR: Magnetic Ink Character Recognition. A 9-digit code which actually shows whether the cheque is real or fake.IMPS: Interbank Mobile Payment Service is an instant interbank electronic fund transfer service through mobile phones. Both the customers must have MIMD (Mobile Money Identifier Number).
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