indian banking system; history and structure

7/31/2019 Indian Banking System; History and Structure

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INDIAN BANKING SYSTEMNature, History and Structure


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Introduction

Banks are a subset of a variety of DepositTaking Institutions (DTI) with the special property

that their liabilities are included in the definitionof the money supply of a country.

The primary purpose of banks is lending, depositholding and providing a payment mechanism,but banks today provide a variety of otherfinancial services.


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Origins

Commercial Banking evolved from Goldsmiths. Liabilities (promises to pay) of such institutions gradually

got included in the money supply due to:

Relative ease of handling compared to gold or silver(or cows for that matter ) leading to reduction intransactions cost.

Undoubted reputation of repayment. This is nowbacked by legal procedures.

In effect, only a fraction of the deposits held with theinstitution are withdrawn by depositors at any given time.


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Fractional Reserve Banking

Banks only keep a legally determined minimumreserve ratio: fractional reserve banking

Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin ordeposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into

a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity ofdeposits as reserves

Fractional reserve banking leads to multiplicationof the currency supply in the form of newdeposits: newmoney

Money Supply multiplier=1/reserve ratio(%)
http://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Bank_reserveshttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Reserve_requirementhttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Bank_reserveshttp://en.wikipedia.org/wiki/Banking


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Role of Banks

Maturity Transformation: Borrow Short and Lendlong

(the maturity is the date the borrower must pay back the money he or she borrowed

through the issue of a bond)

Size Transformation: Average size of depositsmuch smaller than average size of loan

Risk Reduction: Drastically reduce the risk facedby any one depositor


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Role of Banks

Search and Transaction Cost reduction: Searchcosts reduced by acting as a known center for financialtransactions of borrowers and lenders. Transaction costsare reduced by standardized contracts.

Monitoring: Better dispersal of information, hire analystsfor risk analysis

Providing a Payments Mechanism: Liabilities ofBanks form a part of the money supply of the country


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History


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Origin in the last decades of 18th century

Bank of Hindustan (1770)

The General Bank of India (1786)

Both now defunct


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The East India Company established three

banks as independent units and called themPresidency Banks:

Bank of Bengal (2nd June 1806)

Bank of Bombay ( 15th April 1840)

Bank of Madras (1st

July 1843)


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Presidency Banks were amalgamated on 17th

January 1921 and Imperial Bank of India was

established to perform three fold role:

Commercial Bank

Bankers Bank

Banker to the Government


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Reserve Bank of India

Established in 1935

Wholly owned by the Government of India

Central banking functions of the Imperial Banktransferred to RBI

Acted as regulator and supervisor ofCommercial Banks


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State Bank of India

Created on 1st July 1955 as a successor toImperial Bank by an Act of Parliament

The State Bank of India (Subsidiary Banks) Act,1959, enabled the State Bank of India to takeover eight former State-associated banks as itssubsidiaries (later named Associates) on 10thSeptember 1959


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Subsidiaries

State Bank of Bikaner

State Bank of Jaipur

These two banks are merged and State Bank of Bikaner

and Jaipur is formed. State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala State Bank of Saurashtra (later merged into SBI)

State Bank of Travancore


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Establishment of Other Indian Banks

Bank of Allahabad

The Oldest Joint Stock Bank of the Country

Founded on April 24, 1865

Punjab National Bank Ltd. - set up in 1894

Headquarters at Lahore First Indian Bank established exclusively by

Indians


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Between 1906 and 1913

Bank of IndiaCentral Bank of India

Bank of Baroda

Canara Bank

Indian BankBank of Mysore

Set up as the Swadeshi Movement gained momentum

.


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Evolution of Banking Legislation

Presidency banks were ruled and governed bythe Royal Charter, East India Company andGovernment of India of that time

Indian Companies Act, 1913 contained fewprovisions applicable to banks


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Evolution of Banking Legislation

The Banking Regulation Act was passed as theBanking Companies Act, 1949

Subsequently it was changed to BankingRegulation Act 1949 w.e.f. 1st March 1966.


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Structure


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Banking Structure in India


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Scheduled Commercial Banks

According to the the RBI definition, commercialbanks which conduct the business of banking inIndia and which

(a) have paid up capital and reserves of an aggregate

real and exchangeable value of not less than five lakhsof rupees and(b) satisfy the RBI that their affairs are not beingconducted in a manner detrimental to the interest of theirdepositors

are eligible for inclusion in the Second Scheduleto the Reserve Bank of India Act, 1934, andwhen included are known as ScheduledCommercial Banks.


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Categories of SCB

SCBs in India are categorized in five differentgroups according to their ownership and/ornature of operation

State Bank of India and its associates

Nationalised Banks

Regional Rural Banks

Foreign Banks and

Other Indian Scheduled Commercial Banks


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By the end of 2010 India had 81 scheduledcommercial banks (excluding RRBs) of which

26 are public sector banks

21 are private sector banks and

34 are foreign banks


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List of Banks in Public Sector

State Bank of India Group:

1. State Bank of India

2. State Bank of Bikaner & Jaipur

3. State Bank of Hyderabad

4. State Bank of Indore

5. State Bank of Mysore

6. State Bank of Patiala

7. State Bank of Travancore

Banks nationalized in 1969

Central Bank of India

Bank of MaharashtraDena BankPunjab National BankSyndicate BankCanara BankIndian BankIndian Overseas Bank

Bank of BarodaUnion BankAllahabad BankUnited Bank of IndiaUCO BankBank of India

Banks nationalized in 1980Andhra BankNew Bank Of India (later merged into PNB)Oriental Bank of CommerceCorporation BankPunjab & Sindh Bank

Vijaya Bank

Public Sector Banks

Nationalized Banks + StateBank of India Group


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List of Banks in Private Sector

Old Private Sector Banks1. City Union Bank Ltd.2. ING Vysya Bank Ltd.3. SBI Commercial &

International Bank Ltd.4. Tamilnad Mecantile Bank Ltd.

5. The Catholic Syrian Bank Ltd.6. The Dhanalakshmi Bank Ltd.7. The Federal Bank Ltd.8. The Jammu & Kashmir Bank

Ltd.9. The Karnataka Bank Ltd.

10. The Karur Vysya Bank Ltd.11. The Lakshmi Vilas Bank Ltd.12. Nainital Bank Ltd.13. The Ratnakar Bank Ltd.14. The South Indian Bank Ltd.

1. New Private Sector Banks1. Axis Bank Ltd.2. Development Credit Bank Ltd.3. HDFC Bank Ltd.4. ICICI Bank Ltd.5. IndusInd Bank Ltd.

6. Kotak Mahindra Bank Ltd.7. YES Bank

Private Sector BanksOld Private Sector Banks +

New Private Sector Banks


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Banks in Foreign Bank Category1. Abu Dhabi Commercial Bank Ltd.

2. American Express Banking Corporation

3. Antwerp Diamond Bank N.V.4. Arab Bangladesh Bank Ltd.

5. Bank Internasional Indonesia

6. Bank of America NA

7. Bank of Bahrain and Kuwait B.S.C.

8. Bank of Ceylon9. Barclays Bank PLC

10.BNP Paribas

11.Chinatrust Commercial Bank

12.Citibank N.A.

13.Credit Agricole Corporate & Investment

14.Deutsche Bank AG

15.JPMorgan Chase Bank

16.JSC VTB Bank

17.Krung Thai Bank Public Company Ltd.

18.Mashreqbank psc

19.MIZUHO Corporate Bank Ltd.

20.Oman International Bank S.A.O.G.21.Shinhan Bank

22.Societe Generale

23.Sonali Bank

24.Standard Chartered Bank

25.State Bank of Mauritius Ltd.26.The Bank of Nova Scotia

27.The Bank of Tokyo-Mitsubishi UFJ Ltd.

28.The Development Bank of Singapore Lt

29.The Hongkong and Shanghai Banking

Corporation Ltd.30.The Royal Bank of Scotland NV

31.UBS AG

32.FirstRand Bank Ltd.

33.Commonwealth Bank of Australia

34.United Overseas Bank Ltd.


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Regional Rural Banks

Regionally oriented rural banks' toaddress the problems and requirements ofthe rural people with local feel, yet with the

same level of professionalism as ofcommercial banks

RRBs are under the control of NABARDNational Bank for Agriculture and Rural Development (NABARD) is an apexdevelopment bank in India having headquarters based in Mumbai (Maharashtra)[3] andother branches are all over the country.
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Maharashtrahttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/Maharashtrahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/India


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Initially, five RRBs were set up on October 2,

1975 at Moradabad and Gorkhpur in UttarPradesh; Bhiwani in Haryana; Jaipur inRajasthan and Malda in West Bengal

As on March 2010, total number was 82


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Co-operative Banks

The Co-operative Banks in INDIA have a historyof almost 100 years

Important constituent of the Indian FinancialSystem

Co operative Banks in India are registered under

the Co-operative Societies Act

Do not pursue the goal of profit maximization


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Co-operative Banks Types

Co-operative banking structure in India is

divided into five main categories :

1. Primary Urban Co-operative Banks.2. Primary Agricultural Credit Societies.

3. District Central Co-operative Banks.

4. State Co-operative Banks.5. Land Development Banks.


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Reserve Bank of India(Central Bank)


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The Reserve Bank is wholly owned by theGovernment of India.

The Central Board of Directors is theprimary authority that oversees theReserve Banks business. It delegates

specific functions to its committees andsub-committees.


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Structure of Central Board

Official Directors 1 Governor 4 Deputy Governors, at a maximum

Non-Official Directors 4 directorsnominated by the Central Government to

represent each local board 10 directors nominated by the Central Government with

expertise in various segments of the economy

1 representative of the Central Government

6 meetingsat a minimumeach year 1 meetingat a minimumeach quarter


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RBI is made up of :

26 Departments focusing on policy issues in theRBIs functional areas and internal operations.

26 Regional Offices and Branches: These arethe Reserve Banks operational arms andcustomer interfaces, headed by RegionalDirectors. Smaller branches / sub-offices are

headed by a General Manager / Deputy GeneralManager.


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Training centres:

Reserve Bank Staff College at ChennaiCollege of Agricultural Banking at Pune

The Zonal Training Centres

Research institutes:National Institute of Bank Management (NIBM), Pune

Indira Gandhi Institute of Development Research(IGIDR), Mumbai

Institute for Development and Research in BankingTechnology (IDRBT),Hyderabad


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Subsidiaries:

National Housing Bank (NHB)

Deposit Insurance and Credit Guarantee

Corporation (DICGC)Bharatiya Reserve Bank Note Mudran PrivateLimited (BRBNMPL)

The Reserve Bank also has a majority stake inthe National Bank for Agriculture and RuralDevelopment (NABARD)


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Functions of RBI

Monetary Authority

Issuer of Currency


Banker to Banks Regulator of the Banking System

Manager of Foreign Exchange

Regulator and Supervisor of the Payment andSettlement Systems

Developmental Role


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Monetary Authority

Monetary policy refers to the use of instruments underthe control of the central bank to regulate the availability,cost and use of money and credit.

The main objectives of monetary policy in India are:Maintaining price stability

Ensuring adequate flow of credit to the productivesectors of the economy to support economic growth

Financial stability

This is achieved through direct and indirect instruments


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Direct Instruments

Cash Reserve Ratio (CRR): The share of net demandand time liabilities that banks must maintain as cashbalance with the Reserve Bank.

Statutory Liquidity Ratio (SLR): The share of netdemand and time liabilities that banks must maintain insafe and liquid assets, such as, government securities,cash and gold.

Refinance facilities: Sector-specific refinance facilities(e.g., against lending to export sector) provided to banks.


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Indirect Instruments

Liquidity Adjustment Facility (LAF): Consists of dailyinfusion or absorption of liquidity on a repurchase basis,through repo (liquidity injection) and reverse repo(liquidity absorption) auction operations, using

government securities as collateral. Bank rate: It is the rate at which the Reserve Bank isready to buy or rediscount bills of exchange or othercommercial papers. It also signals the medium-termstance of monetary policy

Open Market Operations (OMO): Outrightsales/purchases of government securities, in addition toLAF, as a tool to determine the level of liquidity over themedium term.


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Issuer of Currency The Reserve Bank is the nations sole note

issuing authority (except Re 1 notes)

Four printing presses actively print notes: Dewas

in Madhya Pradesh, Nasik in Maharashtra,Mysore in Karnataka, and Salboni in WestBengal

Coins are minted by the Government of India.RBI is the agent of the Government fordistribution, issue and handling of coins


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Undertakes banking transactions for the central andstate governments to facilitate receipts and paymentsand maintaining their accounts.

Manages the governments domestic debt with theobjective of raising the required amount of public debt ina cost-effective and timely manner.

Develops the market for government securities to enablethe government to raise debt at a reasonable cost,provide benchmarks for raising resources by otherentities and facilitate transmission of monetary policyactions.


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Banker to Banks

Non-interest earning current accounts

Deposit Account Department

Remittance facilities Loans and advances


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Regulator of the Banking System

Department of Banking Operations and

Development (DBOD)

regulations for commercial banks Department of Banking Supervision (DBS)

supervision of commercial banks

Department of Non-Banking Supervision regulates and supervises the Non-Banking

Financial Companies (NBFCs)43


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Urban Banks Department (UBD)

regulates and supervises the Urban Cooperative

Banks (UCBs)

Rural Planning and Credit Department (RPCD)

regulates the Regional Rural Banks (RRBs) and

the Rural Cooperative Banks

supervision has been entrusted to NABARD44


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Manager of Foreign Exchange

Facilitates the development of the foreignexchange market

Ensures smooth conduct and orderlyconditions in the domestic foreignexchange market

Manages the foreign currency assets andgold reserves of the country

R l d S i f h


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Regulator and Supervisor of the

Payment and Settlement Systems

The Payment and Settlement Systems Act of

2007 (PSS Act) gives the Reserve Bank

oversight authority, including regulation and

supervision, for the payment and settlement

systems in the country.


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Developmental Role

Directed credit for lending to priority sectorand weaker sections

Lead Bank Scheme

Sector specific refinance

Strengthening and supporting small localbanks

Financial inclusion

indian banking system; history and structure

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