Indian Banking

MODULE 1

• Evolution of Banking Institutions in India-

• Role of Joint stock banks in India,
• Presidency banks,
• Imperial Banks,
• State Bank of India,
• Commercial Banks
• Nationalized Lead Banks,
• Regional Rural Banks (RRBs),
• Local Area Banks,
• Banking reforms after 1990.
• Private banks and Foreign Banks-
• Salient Features, Objectives, Functions.
 Banking: Banking Regulation Act of India, 1949 defines Banking as
“accepting, for the purpose of lending or of investment of deposits of money from the
public, repayable on demand or otherwise or withdrawable by cheque, draft order or
otherwise.” The Reserve Bank of India Act, 1934 and the Banking Regulation Act,
1949, govern the banking operations in India.
 Banking History
• Bank of Venice was the first bank to
start commercial banking operations
in 1157.
• Modern banking system began with
the opening of Bank of England in
1694.
• Bank of Hindustan was the first bank
to be established in India in 1770.
Important Milestones
of the
Banking Industry

Contd..
Important Milestones
of the
Banking Industry

Contd..
Important Milestones
of the
Banking Industry

Contd..
Important Milestones
of the Banking
Industry
Indian Banking History
• Name must include the word
‘Bank’, ‘Banker’ or ‘Banking’ for
banking operations in India.
• In the first half of the nineteenth
century, three Presidency Banks
were started in Bengal (1809),
Bombay (1840) and Madras (1843)

Contd..
 Indian Banking History
• The Imperial Bank came into existence on the 27 th
January, 1921 by the Imperial Bank of India Act of
1920.
• It was established by the amalgamation of the
three Presidency Banks.
• The Imperial Bank was the biggest bank until 1935.
• Until the establishment of the Reserve Bank of
India in 1935, the Imperial Bank performed certain
central banking functions, although it was purely a
commercial bank.
• It acted as the sole-banker to the Government up to
establishment of RBI.
 Banking Structure in India
• A well-regulated banking system is a key comfort for
local and foreign stake-holders in any country. Prudent
banking regulation is recognized as one of the reasons
why India was less affected by the global financial
crisis.
• Banks can be broadly categorized as Commercial
Banks or Co-operative Banks.
• Banks which meet specific criteria are included in the
second schedule of the RBI Act, 1934. These are called
scheduled banks. They may be commercial banks or
co-operative banks. Scheduled banks are considered to
be safer, and are entitled to special facilities like re-
finance from RBI. Inclusion in the schedule also comes
with its responsibilities of reporting to RBI and
maintaining a percentage of its demand and time
liabilities as Cash Reserve Ratio (CRR) with RBI.
Structure of Banks in India
Broad Classification of Banks in India
1) The RBI: The RBI is the supreme monetary and banking authority
in the country and has the responsibility to control the banking
system in the country. It keeps the reserves of all scheduled banks
and hence is known as the “Reserve Bank”.
2) Public Sector Banks:
∙ State Bank of India and its Associates (8)
∙ Nationalized Banks (19)
∙ Regional Rural Banks Sponsored by Public Sector Banks (196)
3) Private Sector Banks:
∙ Old Generation Private Banks (22)
∙ Foreign New Generation Private Banks (8)
∙ Banks in India (40)
4) Co-operative Sector Banks:
 State Co-operative Banks
 Central Co-operative Banks
 Primary Agricultural Credit Societies
 Land Development Banks
 State Land Development Banks

5) Development Banks: Development Banks mostly provide long term

finance for setting up industries. They also provide short-term finance (for
export and import activities)
 Industrial Finance Co-operation of India (IFCI)
 Industrial Development of India (IDBI)
 Industrial Investment Bank of India (IIBI)
 Small Industries Development Bank of India (SIDBI)
 National Bank for Agriculture and Rural Development (NABARD)
 Export-Import Bank of India
oint Stock Bank in India
• A bank which is a public company with shares owned by
investors rather than a government.
• State Bank of India (SBI)- Till the establishment of the
Reserve Bank of India(RBI) in 1935, the imperial Bank of
India was acting as the Central Bank or the Government's
Bank in Akola district. On 1st July 1955 the SBI was
constituted by a special Act and all the undertakings of the
Imperial Bank of India were taken over by it.
• SBI, however, also acts as agent to the RBI and conducts
Government transactions. In addition it provides remittance
facilities to scheduled banks, co-operative banks and co-
operative societies.
• Allahabad Bank- is a nationalized bank with its headquarters
in Kolkata founded on 24 April 1865. It is the oldest joint
stock bank in India
Role of Joint Stock Banks In India

• Foreign exchange services

– Buy & sell currency and travelers
cheque
– Clean Outward remittances
– Import services
– Inward remittances
– Export services
• Rural Credit
• Short term credit for trade
Presidency Banks
• ‘English Agency House’ were trading firms and carrying
banking business. Becouse of dual functions and lack of
capital they failed. Later East India company established
these three banks
– Bank of Bengal in 1809 for funding war against Tipu.
Had branches at Rangoon, Patna, Mirzapur and
Benares and was later amalgamated to Dacca Bank
– Bank of Bombay in 1840 for commercial banking
functions
– Bank of Madras in 1843
 Imperial Bank
• The Imperial Bank of India (IBI) was the oldest and the
largest commercial bank of the Indian subcontinent,
and was subsequently transformed into State Bank of
India in 1955.
• The Imperial Bank of India came into existence on 27
January 1921. When the three Presidency Banks
of colonial India, were reorganised and amalgamated to
form a single banking entity.
• Imperial Bank of India performed all the normal
functions which a commercial bank was expected to
perform. In the absence of any central banking
institution in India until 1935, the Imperial Bank of
India also performed a number of functions which are
normally carried out by a central bank.
State Bank of India
• State Bank of India (SBI) is an Indian multinational, public
sector banking and financial services company. It is a government-
owned corporation with its headquarters in Mumbai, Maharashtra. As
of 2016-17, it had assets of ₹30.72 trillion (US$460 billion) and more
than 14,000 branches, including 191 foreign offices spread across 36
countries, making it the largest banking and financial services company
in India by assets. The company is ranked 232nd on the Fortune Global
500 list of the world's biggest corporations as of 2016.
• The bank traces its ancestry to British India, through the Imperial Bank
of India, to the founding, in 1806, of the Bank of Calcutta, making it the
oldest commercial bank in the Indian subcontinent. Bank of
Madras merged into the other two "presidency banks" in British
India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank
of India, which in turn became the State Bank of India in
1955.Government of India owned the Imperial Bank of India in 1955,
with RBI taking a 60% stake, and renamed it the State Bank of India. In
2008, the government took over the stake held by the Reserve Bank of
India.
State Bank of India
• SBI now has one associate bank, down from the eight
that it originally acquired in 1959. The merger of SBI
with its five associate banks will come into effect from
April 1, 2017
– State Bank of Patiala (founded 1917)
– State Bank of Mysore (founded 1913)
– State Bank of Bikaner & Jaipur (founded 1963)
– State Bank of Hyderabad (founded 1941)
– State Bank of Travancore (founded 1945)
• Bharatiya Mahila Bank(founded 2013)
• The banks which are merged are:
– State Bank of Saurashtra (merged 2008)
– State Bank of Indore (merged 2010)
State Bank of India
• Functions of SBI
– Central Banking functions
a) Banker to the government
b) Banker to banks in a limited way
c) Maintenance of currency chest
d) Acts as clearing house
e) Renders promotional functions
– General Banking of India
 Commercial Banks
• Commercial banks comprising public sector banks, foreign banks, and
private sector banks represent the most important financial intermediary
in the Indian financial system.
The changes in banking structure and control have resulted due to wider
geographical spread and deeper penetration of rural areas, higher
mobilization of deposits, reallocation of bank credit to priority activities,
and lower operational autonomy for a bank management. Public sector
commercial banks, dominate the commercial banking scene in the
country. The largest commercial Banks in India is SBI

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Primary function of commercial banks
A ) Acceptance of deposits
• Fixed deposit account
• Saving bank account
• Current account

B ) Advancing of loan
• Cash credit
• Call loans
• Over draft
• Bills discounting

C ) Creation of credit
 Secondary function of commercial banks
A) Agency function
• Collecting receipts
• Making payments
• Buy and sell securities
• Trustee and executor

B) General utility function

• Issuing letters of credit, travelers cheques
• Underwriting share and debentures
• Safe custody of valuables
• Providing ATM and credit card facilities
• Providing credit information
Classification of Commercial Banks
on the Basis of system
• Branch
• Unit
• Group
• Chain
• Correspondence
• Saving
• Agricultural
• Foreign
Nationalized Bank
• Nationalization is a process whereby a national government or
State takes over the private industry, organisation or assets into
public ownership by an Act or ordinance or some other kind of
orders. This strategy has been frequently adopted by socialist
governments for transition from capitalism to socialism.
• In India since independence following major nationalizations have
taken place :-
– 1949 : RBI was nationalized (RBI was state owned at the time of Indian
independence).
– 1953 : Air India was nationalised under the Air Corporations Act 1953
– 1955 : Control of Imperial Bank of India was acquired by RBI
Nationalized Bank

– 1969 : 14 Indian private banks were nationalised;

– 1972 : 106 insurance companies were nationalised into
four insurance companies
– 1973 : Coal Industry and Oil companies were
nationalised
– 1980 : 6 more Indian private banks were nationalised
All those banks which were taken over through Banking
companies (Acquisition and Transfer of Undertaking) Bill
are called nationalised banks. GoI issued an Ordinance
(Banking Companies (Acquisition and Transfer of
Undertakings) Ordiance, 1969, and nationalised 14 largest
commercial banks in India from the midnight of 19th July,
1969. These banks at that time contained 85%of bank
deposits in India. Similarly in 1980, Govt nationalised 6
more banks. Thus, in total 20 banks were nationalised.
List of Nationalized Bank
1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank
Lead Bank
The National Credit Council was set up in Dec. 1967 to determine
the priorities of bank credit among various sectors of the economy.
The NCC appointed a study group on the organizational framework
for the implementation of social objectives in Oct. 68 under the
Chairmanship of Prof. D R Gadgil.
The lead bank scheme, introduced towards the end of 1969,
envisages assignment of lead roles to individual banks for the
district allotted to them. A bank having relatively large network of
branches in the rural areas of a given district and endowed with
adequate financial and manpower resources are generally entrusted
with the lead responsibility for that district.
The LEAD BANK acts as a leader for coordinating the efforts of all
credit institutions in the allotted district to increase the flow of
credit to agriculture, small-scale industries and other economic
activities included in the priority sector in the rural and semi-urban
areas, with the district being the basic unit in terms of geographical
area.
Lead Banks
Criteria for the selection of lead banks?
1. The bank should have significant number of branches in the given area/district.
2. The bank should have sufficient financial and manpower resources to fulfill the
responsibilities of lead bank
Effectiveness of the scheme?
The lead bank scheme has failed to achieve its targets. Few of the reasons being
1. No clear guidelines.
2. Change in policies and complexities in coordination
3. Shifting of Government's focus towards financial inclusion.
4. Lack of coordination between -> planning authorities of district-Lead banks-
NABARD.
5. No strict monitoring and lack of checks / balances have made the participating
bodies largely inactive.
Lead Bank Scheme
• The National Credit Council was set up in Dec.’67 to
determine the priorities of bank credit among various
sectors of the economy.
• The NCC appointed a study group on the
organizational framework for the implementation of
social objectives in Oct.’68 under the Chairmanship of
Prof. D R Gadgil.
• Prof. DR Gadgil recommended in Oct.’69 the adoption
of an “Area approach” for the development of credit
and banking in the country on the basis of local
conditions.
• The Committee of Bankers appointed by RBI under the
Chairmanship of Sr. F.K.F. Nariman also endorsed this
area approach.
 Lead Bank Scheme
• Under the scheme, the country was divided
into 338 districts and mostly public sector
banks to play he ‘Lead’ role in coordinating
the efforts of all credit institutions in the
district.
• The performance of the branches within the
lead area are monitored by Block Level
Bankers Committee at the block level,
District consultative committee at the
district level and State Level Bankers
Committee at the state level.
Returns submitted by the Lead
Bank
• Lead Bank Return 1 (Service area credit plan):
Details about annual credit plan of the
branch.
• Lead Bank Return 2 (Service area operation
scroll): Details about priority sector credit
disbursement made each day during the
month to Lead District Manager.
• Lead Bank Return U2 : Modified version
of LBR2, submitted by semi urban/urban
branches once in a quarter.
Returns submitted by the Lead
Bank
• Lead Bank Return 3 (Service area recovery and
outstanding statement): It is in 3 parts.
– Part A: Deposit and Advance Position – to be
submitted on quarterly basis.
– Part B: Outstanding under various Priority Sector
Advances – to be submitted on a half yearly basis.
– Part C: State of Recovery of Priority Sector
Advances giving details of demand, collection and
balances to be submitted on an annual basis.
Local Area Banks
 Objective
• Setting up of local area banks in
private sector to cater to the credit
needs of the local people and to
provide efficient and competitive
financial intermediation services in
their area of operation. The scheme
was introduced in 1996
 Scope of Activities
• These banks are being set up in
district towns, their activities will be
focused on the local customers.
• It is expected that their lending will
be to
– agriculture and allied activities,
– SSI,
– trading activities and
– the non-farm sector
Registration and Licensing
• The bank shall be registered as a
public limited company under
the Companies Act, 1956.
• It will be licensed under the
Banking Regulation Act, 1949
and will be eligible for including
in the Second Schedule of the
Reserve Bank of India Act, 1934.
 Capital
• The minimum paid up capital for
such a bank shall be Rs.5 crore.
• The promoters‘ contribution for
such a bank shall at least be Rs.2
crore.
 Promoters
• The promoters of the bank may
comprise individuals, corporate
entities, trusts and societies.
• In the application for a banking
licence the details of the initial
contribution of promoters, and the
manner and method through which
the minimum share capital of Rs.5
crore will be raised will need to be
indicated.
 Area of Operation & Head
Office
• The area of operation of the
proposed bank shall be a maximum
of three geographically
neighboring districts.
• The Head/Registered Office of the
bank will be located at a centre
within the area of operation of the
bank.
 Branch Licensing
• The bank shall be allowed to open
branches only in its area of
operation and in regard to branch
licensing, it shall be governed by the
existing policy.
Regional Rural Banks (RRBs)
• RRB was introduced in India based on the recommendations
of Narasimham Committee.
• Initially 5 RRBs were started in UP, Rajasthan, Haryana,
Bihar and West Bengal on 2nd October, 1975.
• Each RRB has a maximum authorized capital of Rs.5 cr.
• The shareholder-wise GoI/sponsor banks/State Governments
proportion and amount is 50:35:15 and Rs.11 billion: Rs.8
billion: Rs.3 billion respectively in the financial year 2012.
Regional Rural Banks (RRBs)
• As on March 31, 2012, RRBs had a network of
16,914 branches.
• Under the agenda of financial inclusion,
73,000 villages that are not covered by any
bank and have a population of 2,000 and
above were to be covered by RRBs through
ICT-enabled Business Correspondents by
March 31, 2012.
 Structure and Organisation of
the RRB
• The authorised capital of an RRB is fixed at Rs. 1 crore and
its issued capital at Rs. 2 lakhs. Of the issued capital, 50
per cent is to be subscribed by the Central Government, 15
per cent by the concerned State Government and the rest
35 per cent by the sponsoring bank.
• The working and affairs of the RRB are directed and
managed by a Board of Directors consists of a Chairman,
three directors to be nominated by the Central
Government, and not more than two directors to be
nominated by the State Government concerned, and not
more than 3 directors to be nominated by the sponsoring
bank. The chairman is appointed by the Central
Government and his term of office does not exceed five
years.
 Functions of the RRB
• Granting of loans and advances to small and
marginal farmers and agricultural labourers,
whether individually or in groups, and to co-
operative societies, agricultural processing societies,
co-operative farming societies, primarily for
agricultural purposes or for agricultural operations
and other related purposes;
• Granting of loans and advances to artisans, small
entrepreneurs and persons of small means engaged
in trade, commerce and industry or other productive
activities within its area of co-operation; and
• Accepting deposits.
 Cooperative Banks
• A co-operative bank is a financial entity which
belongs to its members, who are at the same
time the owners and the customers of their
bank.
• Co-operative banks are often created by
persons belonging to the same local or
professional community or sharing a common
interest.
 Cooperative Bank
• These banks play a vital role in mobilizing savings
and stimulating agricultural investment. Co-operative
credit institutions account for the second largest
proportion of 44.6% of total institutional credit. The
co-operative sector is very much useful for rural
people. The co-operative banking sector is divided
into the following categories.
• State co-operative Banks
• Central co-operative banks
• Primary Agriculture Credit Societies

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 Differences Between
Cooperative and Commercial
Banks Cooperative Banks
Commercial Banks

Banking Regulation Act, The Co-operative Societies Act,

Registration
1949 1904 of the concerned state.

To accept deposits from the

To accept deposits from
members and the public for the
public for the purpose of
Main Objective purpose of providing loans to
lending to industry and
farmers and small businessmen
commerce.
with a motto of service.

Availability of
Massive funds Limited funds
Funds

Area of Limited and mostly confined to

Operate over a larger area
Operation State.

Nationalisation Nationalised banks These are not nationalised banks.

 Differences Between
Cooperative and Commercial
Banks
Commercial Banks Cooperative Banks

Provide merchant banking

Merchant services such as advising the Do not provide merchant
Banking companies regarding the public banking services.
Services issue of shares.

Mutual
Funds Do operate mutual funds Do not operate mutual funds.

The basis of operations is on

Operates on the commercial
Basis of co-operative lines, i.e. service
principles. They operate to
operation to its members and the
earn a profit.
society.

Provide a lesser rate of interest A little higher rate of interest

Rate of as compared to co-operative on deposits as compared to
Interest banks. commercial banks.
 Some facts about
Cooperative banks in India

• Some cooperative banks in India are more forward than

many of the state and private sector banks.
• According to NAFCUB (National Federation of Urban Co-
operative Banks & Credit Societies Ltd.) the total deposits
& lending of Cooperative Banks in India is much more than
Old Private Sector Banks & also the New Private Sector
Banks.
• This exponential growth of Co operative Banks in India is
attributed mainly to their much better local reach,
personal interaction with customers, and their ability to
catch the nerve of the local clientele.
Indian Private Sector Banks
Private Sector Banks
• Nationalisation of 14 banks in the year 1969 and
another set of 6 banks in the year 1989 reduced the
importance of Private sector banks in India.
• As a part of liberalization programme Government took
the initiatives on Private Sector banks for creating
competition among the banks.
• The Indian economy’s liberalisation in the early 1990s
has resulted in the conception of various private sector
banks.
Private Sector Banks
• These are working under the guidelines of
RBI.
• HDFC was amongst the first to received an
approval from RBI to set up a bank in the
Private sector.
• Banks needs to maintain a net worth of
Rs.300 crore at all times.
• Aggregate foreign investment in private
banks from all sources (FDI, NRI, etc.), the
guidelines stipulate that it can’t exceed 74%
of the paid up capital of the bank.
Types of Private Banks
• Old Private sector banks are
those banks which were not
nationalized at the time of bank
nationalization that took place
during 1969 and 1980.
• New private sector banks
include those that were established
(after 1991) in the past twenty
years such as Yes Bank, Axis bank,
etc.

• Foreign Banks
ist of Old Private Sector Banks (13)
List of New Private Sector Banks (7)
 Functions
• Professional Management
• Healthy competition
• Encourage foreign Investment
• Access foreign markets
• Innovation and expertise
Foreign Banks
• Foreign banks are those banks whose branch offices are in India but they are
incorporated outside India, and have their head office in a foreign country.
These banks were allowed to set up their subsidiaries in India from the year
2002.
• They have to operate their business by following all the rules and regulations
laid down by the RBI - Reserve Bank of India. They have to pay more
attention to the priority sector by giving them a special place in bank
lending. These banks are expected to follow all the banking regulations, just
like any other domestic banks.
• The foreign banks can operate in India only, if they have a sound financial
status. They must have a minimum of 25 million US dollars in minimum 3
branches. The first branch and the second branch must have 10 million US
dollars each. The third branch should have a minimum of 5 million US
dollars.
• The foreign banks are permitted to open up more branches in the country, if
the performance of the bank is more than satisfactory and it matches the
criteria laid adopted by the domestic banks. There are 40 foreign banks from
21 different countries operating in India. The business is conducted with the
help of more than 205 branches.
Foreign Banks
• These branches are located in more than 15
states which includes union territories.
Apart from these banks there are
representative branches operating in India
from 12 different countries.
• Foreign banks who wish to open up
branches in India have to apply to the RBI.
These banks should be able to satisfy the
RBI regulations. The banks should also get
permission from their home country to set
up branches in India.
Foreign Banks
• Other factors that are considered while
approving the application of setting up the
presence of foreign banks in India are as
follows:
– Financial soundness of the foreign banks
– Economic and political relations between the home
country of the foreign banks and India.
– International ranking of the bank
– Home country ranking of the bank
– International presence of the bank
– Rating given to the bank by international rating
agencies
Foreign Banks
• Foreign banks have played an important role in the
Indian economy, especially in the priority sectors.
Globalization has compelled the banking sector to reach
out to more customers in order to expand their business.
• ROLE OF FOREIGN BANKS
– Enhance competition in Banking sector.
– Technology and skill transfer
– Both foreign and local Banks have been investing on financial
Innovation.
– Modern Banking services are expanded.
– Enhanced Customer satisfaction.
– Enhanced provision of foreign currency.
– Foreign Banks Participation in Foreign Exchange and money
market contribute for deepening of financial system.
Foreign Banks
• FUTURE OF FOREIGN BANKS
– Foreign Banks have opportunity in retail sector as
government has allowed overseas companies in multi-brand
retail and removed the cap on FDI in single brand Retail.
– India is a profitable market for foreign lenders.
– RBI is also following a liberal branch licensing policy for
those foreign banks who want to go to the unbanked pockets.

After the set up of foreign banks in India,the Banking

sector In India is also become competitive and
accurate.India is expected to find a place in the strategy
of these banks given the country’s growth prospects.
India’is a growing economy throwing up opportunities
for the banking sector.
List of Foreign Banks (41) in India
Development Banks
• A development bank may be defined as a financial institution concerned
with providing all types of financial assistance to business units in the form
of loans, underwriting, investment and guarantee operations and
promotional activities-economic development in general and industrial
development in particular
• A development bank is basically a term lending institution. It is a
multipurpose financial institution with a broad development outlook.
• The industrial finance corporation of India, the first development bank was
established in 1948. Subsequently many other institutions were set-up. Ex.
IDBI, IFCI, SIDBI etc.

64
Functions of Development Banks
• Fostering industrial growth
• Providing Long term assistant
• Balanced development
• Providing Promotional services
• Infrastructure building
• Entrepreneur Development
• Fulfilling Socio economic objectives

65
Investment Banks
• Meaning: Financial intermediaries that acquire the
savings of people and direct these funds into the
business enterprises seeking capital for the acquisition
of plant and equipment and for holding inventories are
called ‘investment banks’.
• Features: Long term financing, Security, merchandiser,
Security middlemen, Insurer, Underwriter
• Functions: Capital formation, Underwriting, Purchase
of securities, Selling of securities, Advisory services,
Acting as dealer.

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Merchant Banks
• Meaning: Institution that render wide range of services
such as the management of customer’s securities,
portfolio management, counseling, insurance, etc are
called ‘Merchant Banks’.
• Functions: Sponsoring issues, Loan syndication,
Servicing of issues, Portfolio, management, Arranging
fixed deposits, Helps in merger& acquisition

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