Banking in India

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Banking in India

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three banks were established under charters from the British East India Company. For many years the Presidency banks acted as quasi – central banks, as their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honour belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed : HSBC established itself in Bengal in 1869.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

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The fervour of Swadeshi movement led to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks were started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as “Cradle of Indian Banking”. The Reserve Bank of India Act, 1934 regularised the central banking system in India for the first time. Until then the Imperial Bank of India, which is now known as ‘State Bank of India’ functioned as a Central Bank for all purposes.

The Reserve Bank of India came into existence on 1st April 1935 and was nationalised on 1st January 1949. The Reserve Bank is divided into two departments, the Issue Department and the Banking Department.

The primary functions of the Reserve Bank are issue of paper currency, acting as bankers to Government, controlling the activities of commercial banks, acting as bank of accommodation and lender in the last resort, maintenance of foreign exchange, provision of agricultural credit and collection and publication of monetary and financial information.

The Reserve Bank of India Act classified the banks into Scheduled and Non – Scheduled. The Scheduled Banks are those which satisfy the criteria laid down by Section 42 ( 6 ) ( a ) of the RBI Act 1934, to protect the interest of the depositors and investors. There are now 27 scheduled banks in the public sector, .8 in the private sector, and 12 foreign banks included in the second schedule of the Act.Originally the Scheduled banks are those with a minimum capital and reserves of over ₹ 5 lakhs. The role of Reserve Bank of India is two fold – promotional and regulatory. It helps the Government in its developmental projects by raising loans at low interests and providing funds for deficit financing. The credit control and other monetary directives announced by Reserve Bank of India from time to time have had a salutary effect on the Indian Economy.

Post – independence

After the partition of India in 1947, the Government of India initiated measures to play an active role in the economic life of the nation. And the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted in greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included :

  • In 1948, the Reserve Bank of India, India’s central banking authority, was nationalized, and it became an institution owned by the Government of India.
  • In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India ( RBI ) “to regulate, control, and inspect the banks in India.”
  • The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on July 19, 1969.

Nationalisation of Banks

The Presidential Ordinance of 19th July 1969 nationalised 14 major banks each with a deposit of ₹ 50 crore or more. In 1980, 6 more banks with deposits of ₹ 200 crore and more were nationalised. The public sector banks comprising the State Bank of India and its 7 subsidiaries and the 20 major banks nationalised, go to make a total of 28 banks. The objectives of the public sector banking system were outlined by the then Prime Minister in Parliament on July 21, 1969.

Commercial Banking System in India consists of 218 Scheduled Commercial Banks ( including 38 foreign banks ). There are 26 commercial banks in the public sector ( i.e., nationalised banks and SBI Group ). The banks in India have a combined network of over 53,000 branches and nearly 50,000 ATMs across the country. The SBI and its associate banks as a group account for around 33% of aggregate banking business ( aggregate of deposits and advances ) conducted by the public sector banks and around 23.3% of the aggregate business of all scheduled commercial banks. The nationalisation of banks according to some financial experts and analysts, have helped the Indian economy with stand the global financial crisis during 2008 and 2009. The RBI has reported that as on March 31, 2011 there are 89,396 Commercial Bank branches in the country out of which 37.4% branches are in rural areas, 29.2% are in semi – urban areas, 19.8% in urban area and 17.6% in metropolitan area.

Liberalisation

In the early 1990s, the then Narsimha Rao Government embarked on a policy of liberalization, licensing a small number of private banks.
These came to be known as New Generation tech – savvy banks, which included Global Trust Bank ( the first of such new generation banks to be set up ), which later amalgamated with Oriental Bank of Commerce, Axis Bank( earlier as UTI Bank ), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth withstrong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

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The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4 – 6 – 4 method ( Borrow at 4%;Lend at 6%; Go home at 4 ) of functioning. The new wave ushered in a modern outlook and tech – sawy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently, banking in India is generally fairly mature in terms of supply, product range and reach – even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.

The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate – and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time – especially in its services sector – the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect Mergers and Acquisitions, takeovers, and asset sales. In recent years critics have charged that the nongovernment owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks’ loan recovery efforts have driven defaulting borrowers to commission of suicides.

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Regional Rural Banks

RRBs were set up to take the banking services to the doorsteps of rural masses especially in remote rural areas. They are conceived as institutions that combine the local feel and familiarity with rural problems, which the co – operatives possess, and the degree of business organizations as well as the ability to mobilize deposits, which the commercial banks possess. The banks were also intended to mobilize and channelise rural savings for supporting rural activities.

The concept of priority sector lending was made applicable to RRBs. The interest rates on term deposits offered and interest rates on loans charged by RRBs have also been freed.

Small Industries Development Bank of India ( SIDBI )

SIDBI was established as a wholly – owned subsidiary of the Industrial Development Bank of India ( IDBI ) under the Small Industries Development Bank of India Act, 1989 as the – principal finance institution for promotion, financing and development of industries in the small scale sector. It started its operation from 2 April 1990 to provide assistance to the small scale industrial sector through the State Finance Corporation, Commercial Banks, etc.

Credit flow to Weaker Sections

To augment credit facilities to rural sector, Commercial Banks were advised by the Reserve Bank of India to provide atleast 10% of their net bank credit or 25% of their priority sector advances to weaker sections comprising of small and marginal farmers, landless labourers, tenant farmers and share – croppers, artisans, village and cottage industries, where individual credit limits do not exceed ₹ 50,000 to the beneficiaries of Schemes of Swarnajayanti Shahari Rozgar Yojana ( SSRY ) and beneficiaries of Swarnajayanthi Gram Swarojgar Yojana ( SGSY ) and Scheme for Liberation and Rehabilitation of Scavengers ( SLRS ), Scheduled Castes and Scheduled Tribes and beneficiaries of Differential Rate of Interest ( DRI ) Scheme.

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Differential Rate of Interest Scheme

Under this scheme, which was introduced in 1972, public sector banks are required to fulfil the target of lending atleast one percent of the total advances as at the end of the preceding year to the weakest of the weak sections of the society at the interest of four percent per annum.

This scheme covers poor borrowers having an annual income of not more than ₹ 6,400 in rural and ₹ 7,200 in other areas and not having more than 2.5 acres of unirrigated or one acre of irrigated land ₹ 6,500 is being given as term loan and working capital for productive ventures.

Credit Flow to Agriculture

Banks were initially given a target of extending 15% of the total advances as direct finance to the agriculture sector to be achieved by March 1985. This target was subsequently raised to 18% to be achieved by March 1990.
In terms of the guidelines issued by the RBI ( in October 1993 ), both direct and indirect loans for agriculture together are assessed at 18% provided lending for indirect credit should not exceed one fourth of the total lending of the net bank credit.

Advances to SC / ST Borrowers

Banks took special efforts to help the vulnerable section ( SC / ST ) to undertake self – employment ventures which would enable them to acquire income generating capital assets and thereby raise their standards of living.

Swarna Jayanthi Gram Swarozgar Yojana

Swarnajayanthi Gram Swarozgar Yojana ( SGSY ) has replaced IRDP and its allied sechemes.viz, TRYSEM, DWCRA, SITRA, GKY and MWS with effect from April 1999.

SGSY is a holistic programme covering all aspects of self – employment such as organisation of poor into self help groups, training, credit, technology infrastructure and marketing. The scheme will be funded on 75 : 25 basis by the Centre and the States and will be implemented by DRDAs, through Panchayat Samitis. Total of more than 12 lakhs Swarozgaris benefited under this scheme, with the representation of SC / STs 35.3% and women were 50.43% and physically handicapped were 1.72 %.

Prime Minister’s Rozgar Yojana ( PMRY )

PMRY for educated unemployed youth was launched on 2nd October, 1993. This scheme was implemented in urban areas during 1993 – 94 and from 1st April 1994, to provide employment to 10 lakh educated unemployed urban youth in micro – enterprises during the Eighth Five Year Plan. Self – employment Scheme for Educated Umemployed Youth ( SEEUY ) has been included under PMRY.

Swarnajayanthi Shahari Rozgar Yojana

This scheme ( SJSRY ) is in operation from 1st December 1997 in all urban and semi – urban towns of India. This scheme has two sub – schemes; namely, Urban Self – Employment Programme ( USEP ) and Development of Women and Children in Urban Areas ( DWCUA ).

Under this scheme, women are to be assisted to the extent of not less than 30 per cent, disabled at 3 per cent and SC / STs according to the proportion of their strength. This scheme is funded 75 : 25 basis between the Central and State Govts. Under USEP projects costing upto ₹ 50,000 are to be financed by banks. Subsidy is 15% of the project cost subject to maximum of ₹ 7,500. Under DWCUA, women groups should consist of atleast 10 urban poor women. The group is entitled to a subsidy of ₹ 1,25,000 or 50 per cent of the project cost whichever is less. During the end of March 2009, the number of beneficiaries 9,47,390 urban poor were assisted to set up individual / group micro enterprises and 14,84,209 urban poor were imparted skill training under SJSRY.

Industrial Development Bank of India ( IDBI )

IDBI established under Industrial Development Bank of India Act, 1964. IDBI was the principal financial institution for providing credit and other facilities for development of industry, co – ordinating working of institutions engaged in financing, promoting or developing industries and assisting the development of such institutions. With the Industrial Development ( Transfer of undertaking and Repeal ) Act, 2003, it became a limited company on September 30, 2004, RBI issued a notification declaring that IDBI – a scheduled Commercial Bank. It entered into the normal banking business on 1st Oct. 2004.

Industrial Finance Corporation of India ( IFCI )

Established in July 1948 with an authorised capital of ₹ 50 crore, IFCFs role now extends to the entire industrial spectrum in the country. IFCI was restructured from a statutory corporation of a company from July 1, 1993.

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Industrial Credit and Investment Corporation of India ( ICICI )

ICICI was established in 1955, as that initative of World Bank as a public limited company to encourage and assist industrial units in the country. It provides term loans in Indian and Foreign currencies, underwrites issues of shares and debentures, makes direct subscription to these issues. In 1994, a banking corporation in the name of ‘ICICI Bank Ltd.’ was founded as a separate legal entity. Then it became a normal Bank.

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Export – Import bank ( EXIM Bank )

EXIM Bank was established on 1st January, 1982 for financing, facilitating and promoting foreign trade in India. It co – ordinates with export – import institutions.
As of 2009 – 10 the bank has granted loan approvals to the tune of ₹ 38843 crore and a disbursal of ₹ 332119 crore registering a growth of 32% and 37% respectively. The bank has its headquarters in Mumbai and has 10 field offices in India and 7 overseas. As on March 2010 Exim bank has provided finance to 331 ventures set up by 268 Indian companies in 68 countries including Asian region.

National Housing Bank

National Housing Bank ( NHB ) the apex institution of housing finance in India was set – up as wholly – owned subsidiary of the Reserve Bank of India ( RBI ) under the National Housing Bank Act, 1987. It started its operation from July 1988. A major activity of NHB includes extending financial assistance to various eligible institutions by way of ( a ) refinance and ( b ) direct finance. During the 58th year of Independence, NHB had launched the Golden Jubilee Rural Housing Finance Scheme.

NABARD

The National Bank for Agriculture and Rural Development ( NABARD ) was established on 12th July 1982 by recommendation of B. Sivaraman Committee. The paid up capital of NABORD is ₹ 2000 crore as of March 2010. NABARD as the apex institution, is concerned with all policy planning and operations in the field of credit for agriculture and other economic activities in the rural areas.

NABARD provides refinance to the state land development banks, state co – operative banks, scheduled commercial banks and regional rural banks. The paid up capital of NABARD stood at ₹ 2000 crore as on 3rd March 2010. With a view of enhanced target for flow of agriculture credit capital base of NABARD to be strengthened by ₹ 3000 crore in phased manner was announced in Union Budget 2011 – 12.

Life Insurance Corporation of India ( LIC )

When India attained Independence there were 245 Indian and non – Indian insurance companies. The life insurance business was nationalised on 1st September 1956 and on that day came into existence LIC of India. LIC is associated with joint ventures abroad in the field of insurance.

The income consists of premium, investment and miscellaneous incomes, etc. LIC with its central office in Mumbai and eight zonal offices at Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Kanpur and Bhopal, operates through 113 divisional offices in important cities and 2,048 branch offices. It has 13,37,064 lakh agents. According to the Brand Trust Report 2011, LIC is the 8th most trusted branch in India.

Janashree Bima Yojana

The Janashree Bima Yojana was launched on 10th August, 2000. The scheme has replaced Social Security Group Insurance Scheme ( SSGIS ) and Rural Group Life Insurance Scheme ( RGLIS ). The Scheme provides for an insurance cover of ₹ 20,000 on natural death. The premium for the scheme is ₹ 200 per member. The Central Government will bear 50 per cent which will be met out of Social Security Fund. Social Security Group Scheme, Bima Yojana ( 10th August, 2000 ) and Krishi Shramik Samajik Suraksha Yojana ( 1st July, 2001 ), Siksha Sahayog Yojana ( 31st December, 2001 ) have also been introduced.

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General Insurance Corporation

The general insurance industry in India was nationalised and a government company known as General Insurance Corporation of India ( GIC ) was formed by the Central Government in November 1972. Following nationalisation with effect from 1 January 1973, these 107 units were grouped and merged into four operating companies formed as subsidiaries of the General Insurance Corporation of India. The General Insurance Corporation was set up as the Holding Company.

The four subsidiary companies are :

  • National Insurance Company Limited, Kolkata.
  • The New India Assurance Company Limited, Mumbai
  • The Oriental Insurance Company Limited, New Delhi
  • United India Insurance Company Limited, Chennai


General Insurance covers spectrum of economy, ranging from manufacture of shoes to aircraft, from agricultural wells to oil wells, from launching of satellites to manufacture of chemicals. The network consists of more than 4,100 offices.

Insurance Regulatory & Development. Authority ( IRDA ) was constituted on 19th April, 2000 has already notified 50 regulations. So far certificate of registration has been issued to 12new private companies.

The Mediclaim Insurance Policy ( MIP ) provides for reimbursement of medical expenses. Jan Arogya Bima Policy ( JABP ) is primarily meant for the larger segment of the population who cannot afford the high cost of medical treatment.

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Videsh Yatra Mitra Policy ( VYMP ) covering supplementary benefits besides providing indemnity for medical expenses during the period of travel has been introduced by the four nationalised general insurance companies with effect from 1st January 1998. Baghyashree Child Welfare Bima Yojana was introduced with effect from 19th October, 1998. Raj Rajeshwari Mahila Kalyan Yojna offers Security to women in the age – group of 10 to 75 years was introduced from 19th October, 1998. National Agricultureal Insurance Scheme ( NAIS ) was introduced from Rabi 1999 – 2000 season replacing the Comprehensive Crop Insurance Scheme.

Since the inception of Lok Adalat in 1985, it has participated in over 12,000 ‘Lok Adalats’; and settled 4,74,000 claims. Jald Rahat Yojana was introduced to expedite payment of compensation to road accident victims.

Unit Trust of India ( UTI )

It was created by the UTI Act of 1963. For more than two decades it remained as the sole vehicle for investment in the capital market for the Indian Citizens. Despite the setting up of Securities and Exchange Board of India in 1992 the UTI maintained its pre – eminent place till 2001. However, the two incidents viz; “Ketan Parekh” scam and the “US64” collapse ( Security Bonds ) shook the confidence of the investing public. The UTI was loosing grounds as an investment company and its stocks continued to slump. Thus, the Government came out with a bail – out package and the UTI was bifurcated into :

  • UTI Mutual Fund : With the State Bank of India, Punjab National Bank, Bank of Baroda and the Life Insurance Corporation as the managers of the fund on equal terms.
  • UTI Asset Management Company : These companies were created under the guidance of SEBI. The defunct US64 bonds were transferred to those companies for further management from 1st Feburary, 2003. The US64 bond came to an end on 31st May, 2003 bowing to the popular response.

Security Exchange Board of India ( SEBI )

Formed in 1992 under the SEBI Act 1992, it functions as the regulator of “Securities” market in India. Having its headquarters in Mumbai, its primary functions and responsibilities are :

  • Issues of securities.
  • Safeguarding of Investors’ interests.
  • To act as Market intermediaries. It has quasi – judicial powers. It conducts investigation and enforces action as an executive body and passes rulings and orders in its judicial capacity.

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Stock Exchanges

Bombay Stock Exchange ( BSE ) Formed in the 19th century – exactly in 1874 at Dalai Street, Mumbai, was named as “The Native Share and Stock Brokers” Association. It is the oldest Stock Exchange in Asia and currently the World’s No. 1 exchange in terms of the number of listed companies ( over 4900 ).

First Stock Exchange in India and the second in the World to obtain ISO 9001 : 2000 certification. It is the World’s 5th most active exchange in terms of number of transactions handled through its electronic system. As of February 2010, the companies listed in this exchange command a total market capitalisation of 1.63 Trillion US Dollars. Its 30 share index is known as Sensex.

National Stock Exchange Founded in 1992, it is head quartered in Mumbai. It is the largest stock exchange in India in terms of daily turnover and number of traders for both equities and derivative trading. Its 50 share index is known as Nifty. It has a market capitalisations of ₹ 1.59 trillion as of December 2010.

Foreign Capital Mobilisation Through Euro Issues ( ADRS / GDRS / FCCBS ) A scheme was initiated during 1992 to allow the Indian Corporate Sector to have access to the Global Capital markets through issue of Foreign Currency Convertible Bonds ( FCCBs ) / Equity Shares under the Global Depository Mechanism.

Under this scheme, companies with consistent track record of good performance ( financial or otherwise ) for minimum period of three years can have access to international capital market. The three year track record requirement has been relaxed for companies making Euro issues for financing projects in the infrastructure sector like power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. Cases involving funding of activities outside Annexure III and also where foreign equity holding after the Euro issue is likely to exceed 51 per cent would require FIPB approval after an in principle approval by the Department of Economic Affairs. Comprehensive guidelines for GDR issues were announced in a phased manner from time to time.

Taxes Indian taxing system is of two types – Direct and Indirect. Direct taxes play a significant role not only as a source of income but as an instrument for India’s socio – economic policies. Direct taxes include Income – Tax, Wealth – Tax, Gift – Tax, Estate Duty, Companies, Profit, etc.The tempo of search and survey operations is being maintained to combat tax evasion.

Implementation of VAT At the meeting of the Empowered Committee of State Finance Ministers held on 18 June 2004, it was resolved to introduce VAT at the State level from 1st April 2005. VAT being a State subject, the Central Government has been acting as a facilitator for its successful launching and implementation.

Anti – Smuggling Drive Drive against smuggling, tax evasion and other economic offences strengthening the intelligence network.
Narcotic Control Bureau, a separate authority was also created during 1986 for co – ordinating efforts in preventing and combating trafficking in narcotic drugs and psychotropic substances.

Corporate Sector – Companies at work 6,41,512 companies limited by shares were at work in the country. These comprised of 1,309 Government companies and 6,40,203 non – Government companies.

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