INDIAN BANKING INDUSTRY

Compiled by Ravi Ranjan Sir

TOPICS

• Banking History and all the first in Banking

• RBI structure and Function
• Currency Circulation and Management in India- Lending Rates
• Nationalization of Banks in India Monetary Policy
• Types of Bank Accounts in India
• Financial Inclusions
• Marginal Cost of Funds based Lending Rate (MCLR)
• Non-Performing Assets (NPA)
• Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act
• Deposit Insurance and Credit Guarantee Corporation (DICGC)
• Accounts of NRI/PIO
• Codes used in the Banking Sector
• Transfer System in India
• ATM in India
• Types of Cards
• Risks in Banking Sector
• Role of Banking Ombudsman in Banking Sector
• Basel III Accord
• Banking Related Schemes
 • Types of Money and Measures of Money Supply
• Financial Markets in India
• Negotiable Instruments (NI)
• Government Securities Market in India
• Inflation-Indexed Bonds (IIBs)
• Financial Institutions (FIs) and Financial Regulators in India
• Non-Banking Financial Company (NBFC)
• Ratings of Banks
• Foreign Investment in India
• External Commercial Borrowings (ECB) and Trade Credits
• Rupee Denominated Bonds
• Remittances (Money Transfer Service Scheme (MTSS) and Rupee Drawing
Arrangement (RDA)

History of Banking in India – Introduction

As per the Banking Companies Act of 1949, Banking is defined as, A financial
institution which accept deposits for the purpose of lending or investment from the
public, repayable on demand or otherwise and with drawable by cheque draft, order
or otherwise.

History of Banking in India – Stages of Evolution

We can categorize the history of Banking into 3 stages –

1. Pre-Independence Stage – Before 1947
2. II Phase – 1947 to 1991
3. III Phase – 1991 & beyond
Pre-Independence Stage

• More than 600 banks were present at that phase.

• The first bank of India was established in 1770 thus marking the Banking system
in India with the foundation of the Bank of Hindustan.
• Top three banks were merge during this phase – Bank of Bengal, Bank of Bombay
& Bank of Madras and came into being as Imperial Bank, which was later taken over
by SBI in 1955
• Some other banks were also established during this period like Allahabad Bank
1865, Punjab National Bank 1894, Bank of India 1906, Bank of Baroda 1908, Central
Bank of India 1911

History of Banking from 1947 to 1991

• Nationalization of the Bank took place during this period.

• Central bank of India was also nationalised during this period on 1st January 1949.
• With the recommendation of Narsimha committee, Regional Rural Banks were
formed on 2nd October 1975.

History of Banking – Beyond 1991

• Liberalized economic policies were formed to mark the progress of banks in the
year 1991.
• This phase was know was the phase of expansion, consolidation, and increment in
many ways.
• RBI also gave license to 10 private entities which include – ICICI, Axis Bank,
HDFC, DCB, Indusland Bank.

Current Situation Of Banks

Banks in India are Currently 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.

Currently, Banks in India can be categorized into Scheduled and Non-

scheduled Banks-
1) Scheduled Banks

Scheduled Banks in India are those banks which constitute those banks, which have
been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.

It basically comprises Commercial Banks and Cooperative Banks. Commercial Banks

majorly comprises of scheduled and Non-scheduled commercial banks regulated
Banking Regulations Act 1949.

Commercial Banks primarily works on a ‘Profit Basis’ and is engaged in the business
of accepting deposits for the purpose of advances/loans. We can categorize
scheduled commercial banks into four types:
• Public Sector Banks
 • Private sector Banks
• Foreign Banks
• Regional Rural Banks
2) Non-scheduled bank

Non- Scheduled Banks defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949), which is not a scheduled bank”.

Reserve Bank of India is the only central bank of India and all Banks in India are
required to follow the guidelines as issued by RBI. We can also classify Banks in
India as:
• Public Sector Banks: These are those entities which are owned by Govt. having
more than 51% stake in the capital.
• Private Sector Banks: Private Banks are those entities which are owned by
private individuals/institutions and these are registered under the Companies Act
1956 as Limited Companies.
• Regional Rural Banks (RRBs): These entities are completely under government
and work for the betterment of the rural sector of the society.
• Development Banks: These basically include Industrial Finance Corporation of
India (IFCI) which was established in 1948, Export-Import Bank of India (EXIM
Bank) which was established in 1982, National Bank for Agriculture & Rural
Development (NABARD) which was established in 1982, and Small Industries
Development Bank of India (SIDBI) which was established on 2nd April 1990

he Firsts In Indian Banking System:

• First bank in India was Bank of Hindustan (1770)

• First Bank managed by Indians was Oudh Commercial Bank
• First Bank with Indian Capital was Punjab National Bank (Founder of the Bank is
Lala Lajpat Rai)
• First Foreign Bank in India is HSBC
• First bank to get ISO certificate is Canara Bank
• First Indian bank outside India is Bank of India
• First Bank to introduce ATM is HSBC (1987, Mumbai)
• First Bank to have a joint-stock public bank (Oldest) is Allahabad Bank
• First Universal bank is ICICI (Industrial Credit and Investment Corporation of
India)
• First bank to introduce saving account is Presidency Bank (1833)
• First Bank to Introduce Cheque system is Bengal Bank (1833)
• First bank to give internet banking facility is ICICI
• First bank to sell mutual funds is State Bank of India
• First bank to issue credit cards is Central Bank of India
• First Digital Bank is Digibank
• First Rural Regional Bank (Grameen Bank) is Prathama Bank (sponsored by
Syndicate Bank)
• First bank to get ‘in principle’ banking license is IDFC and Bandhan Bank
• First Bank to introduce merchant banking in India is Grind lays bank
• First bank to introduce blockchain technology is ICICI
• First bank to introduce voice biometric is Citi Bank
• First bank to introduce robot in banking service is HDFC

RBI History
The Reserve Bank of India was founded in 1935, under
RBI Act 1934 on the recommendations of John Hilton Young
Commission in 1926 which was also called Royal
Commission on Indian Currency & Finance), is the central
 bank of the country & was nationalized w.e.f 01st Jan 1949
and since then it is fully owned by Government Of India.
Initially the Central Office of the Reserve Bank of India
was established in Calcutta but later on it was permanently
moved to Mumbai in 1937.

Functions Of RBI:
• Issuance of currency: RBI is the main and sole authority
in India to issue currency notes under signatures of
Governor of RBI. RBI distributes currency all across the
nation with the help of currency chests.
• Banker to Government: RBI is also known as the banker to
government because it provides loan and monetary help to
government with the help of an instrument know as ways
and means advances.
• Bankers’ bank: One of the important function that it does is
to provide timely supply of credit to other banks whenever
required by them through monetary instruments and
thus acts as lender of last resort by providing financial
assistance to banks. It also provides export credit refinance,
Liquidity Adjustment Facility & MSF.
• Controller of Banks: One of the greatest need of central
bank was to control other banks and regulated them on the
 basis of the set guidelines so that there is no monopoly and
timely credit is available to all the sectors of an economy.
RBI as a controller of banks issues directions, carries
inspection (on-site as well as off-site) & exercises
management control.
• Controller of credit: Liquidity in the market is maintained
by RBI as it can fix interest rates (including Bank Rate) &
exercise selective credit controls. There are various
monetary tools such as change in cash reserve ratio,
stipulation of margin on securities, directed credit guidelines
etc. are used for this purpose.
• Maintenance of external value: RBI is also responsible for
maintaining external value of Indian currency as well as the
internal value. Maintaining Foreign exchange reserves are
held by RBI & it also holds a wide power to regulate foreign
exchange transactions under Foreign Exchange
Management Act.

RBI Structure
The Reserve Bank’s affairs are governed by a wide panel of
central board of directors. Some of the members of the
board is appointed by the Government of India in keeping
 with the Reserve Bank of India Act. They are
appointed/nominated for a period of four years

Official Directors:

Full-time : Governor and not more than four Deputy

Governors

Currently:

• Shaktikanta Das (Governor)

• Shri Dr. M. D. Patra (Deputy Governor)
• Shri M. K. Jain (Deputy Governor)
• Shri B.P. Kanungo (Deputy Governor)
Subsidiaries of RBI:

Fully owned: Deposit Insurance and Credit Guarantee

Corporation of India(DICGC), Bharatiya Reserve Bank Note
Mudran Private Limited(BRBNMPL)

Other Important facts related to RBI:

• RBI does not perform the function of accepting deposits
from the general public.
• Prime lending rate is not decided by RBI of the individual
banks.
• RBI holds the responsibility to decides the following rates
namely; Bank rate, repo rate, reverse repo rate & cash
reserve ratio.
• One of the instrument of RBI is quantitative instruments of
RBI are – bank rate policy, cash reserve ratio & statutory
liquidity ratio.
• The objective of monetary policy set by RBI is to control
inflation; discourage hoarding of commodities & encourage
flow of credit into neglected sector.
• RBI is lender of the last resort which means that RBI
advances credit against eligible securities.
• Minting of coins quantity is decided by GOI.
• Currently in India to issue currency note the method which is
used is minimum reserve system. For issuing notes, RBI is
required to hold the minimum reserves of Rs. 200 crores of
which note less than Rs. 115 crores is to be held in gold
• Emblem of RBI are Panther and Palm Tree.
• Chintaman Dwarkanath Deshmukh (C D Deshmukh) was
the first Indian governor of RBI at the time of nationalization
of RBI in 1949.
• K.J.Udeshi. was first women Deputy Governor of RBI.

Different Types of Bank Accounts &

their features
What is a Bank Account?
A ‘bank account’ can be referred to as suitable negotiation
you happen to do with a bank to safeguard your hard-
earned money in exchange for certain terms and conditions
that vary on the choice you make under different types of
bank accounts and also on the bank. Once you agree to the
terms and condition of the bank, it then keeps your money
and provides you with an account number which functions
as a reference number for all further transactions which you
make as a customer of that bank. The bank also pays you
interest on the money you keep safe with the bank.

How to open a Bank Account?

Given below is the process of opening a bank account
which is easy and simple and can be summed up in a few
steps:
• Research about the good banks and compare the facilities
that it provide including the percentage of interest they offer.
• Choose a favorable bank as per your need.
• Visit the nearest branch of that bank and choose the type of
account you want to open.
• Fill in your details carefully in the ‘account opening form’
provided by the bank officer.
• Attach a copy of valid ID proof with the form as asked by the
bank.
• You will be required to produce an ‘introducer’ to open your
account, wherein the introducer’s signature will be required
on the form itself. This is done to safeguard the bank’s
interest.
• Submit the carefully filled form along with all the required
documents. The officer then will verify the information
provided by you.
• Deposit the initial amount as required by the bank to
activate the account. This amount may vary depending on
the bank.
A passbook, checkbook and an ATM card will be issued as
per the choices you tick in the form.
Types of Bank Accounts
Bank Accounts are mainly four different types. They are as
given below:
1) Current Account
2) Savings Account
3) Recurring Deposit Account
4) Fixed Deposit Account

Current Account
A ‘current account ‘ is mainly meant for businessmen,
companies, firms, and public enterprises, as it is not
suitable for those who want to invest or save for a longer
time also no interest if paid in these types of accounts.
There is no provision of interest being paid, on the money
that is deposited in such accounts. A customer can deposit
and withdraw his/her money any number of time in a
day. The deposits which are made under these accounts
can be termed as the most ‘liquid’ deposits, always
being in the flow and operational also, the deposits in
these accounts are more like a liability than an asset to
the bank. Bank may charge a penalty if minimum balance is
not maintained in a current account.
Saving Account
The saving account is the most popular and widely
preferred deposit account by the bank customers who
want to safeguard their money as well as wants to earn
some interest on it. These types of bank accounts are like
an asset to the bank because there is a limit on the number
of transactions that can be made by a customer having
these accounts and there is also limit on the amount per day
that can be transacted. The rate of interest offered to
savings accounts holders usually varies between 4% – 6
% and it also varies according to the bank.

Fixed Deposit
Fixed deposits are more Popularly known as FD account, it
is a type of financial instrument that is provided by
banks which offers an even higher rate of interest on
the deposits made by an account holder, as compared
to a regular savings account, until the period of
maturity. Fixed Deposit account can also be called ‘Term
Deposits’ / Bonds. A customer deposits his/her money in
these types of accounts for a fixed period and cannot
withdraw it until the maturity period. If he/she withdraws the
money before the maturity time-period then a fine is to be
paid which varies bank to bank. The interest rate in a Fixed
Deposit Account varies between 4% – 7.25% depending
on the bank. The period of an FD can vary from 7 days
to 10 years.

Recurring Deposits
Recurring Deposits refers to an account that provides the
facility of saving a small amount of money for a certain
period and also earn a high-interest rate. the
term ‘recurring’ basically indicates to something that occurs
periodically or repeatedly. These types of accounts are
more commonly known as RD accounts. It offers a fixed
interest on the amount that has been already invested
(through monthly installments) at a specific frequency and
the same rates as applicable for Fixed Deposits (FDs). Any
individual above 10 years of age is also eligible to open a
recurring account along with a valid ID proof. The minimum
amount can be 100 or can be even lesser than that. The
interest rate offered on the recurring account usually varies
in a range of 3.5% – 8.5% depending on the bank as well as
 it also varies according to the period of the deposit. The
minimum time-period for a deposit in this account can
be 6 months and the maximum is 10 years. The period
for a recurring account is classified into three types as given
below:
• Short-term Tenure: The period usually ranges between 6
months to 1 year.
• Medium-term Tenure: The period usually ranges from
more than 1 year to 5 years.
• Long-term Tenure: The period usually lasts from more than
5 years to 10 years.

Insurance and Credit Guarantee

Corporation (DICGC)

Recently, Union Finance Minister Nirmala Sitharaman in her

budget speech 2020 has proposed to hike the bank deposit
insurance in scheduled commercial banks to Rs 5 lakh per
depositor from the current Rs 1 lakh which was not hiked
since a long time and was much needed to restore the faith
of the customers in banks.
Currently, as per the RBI guidelines, the deposits of all the
customers with commercial banks and cooperative banks
are insured under the Deposit Insurance and Credit
Guarantee Corporation (DICGC). Only Primary Cooperative
Societies are not covered under DICGC. It means that
when a bank will run out of money or will be bankrupt
then upto 5 lakh rupees of a customer money will be
insured and not more than that.

Let’s Understand this with an example:

If you have 5000 deposit in a bank and that bank go

bankrupt in future then you will be given 5000 from DICGC.

If you have 6 lakh deposit in a bank account and that bank

go bankrupt in future then you will be given 5 lakh from
DICGC because this is the maximum limit.

History
DICGC was established on 15th July 1978. It was in the
year 1948 that the concept of insuring deposits kept with
banks received attention for the first time after the banking
crises in Bengal. In 1949 it was again came in the limelight
for the reconsideration. It was in 1950 the Rural Banking
 Enquiry Committee also supported the concept. It was
after the crash of palai central bank ltd. that serious thought
to the concept was given by the Reserve Bank of India and
the Central Government in 1960.
It was in August 21, 1961 that the Deposit Insurance
Corporation (DIC) Bill was introduced in the
Parliament. After it was passed by the Parliament, the
Bill got the assent of the President on December 7, 1961
and the Deposit Insurance Act, 1961 came into force on
January 1, 1962.

The functioning of the scheme was initially

extended commercial banks only whic also included the
State Bank of India and its subsidiaries, other commercial
banks and the branches of the foreign banks operating in
India.

Functions Of DICGC

• Its primary function is to provide insurance of the deposited

Money in all banks.
• It provide insurance facility for all type of Saving deposit ,
Fixed deposit , Recurring deposit up to a maximum limit of 5
Lakh for each separate deposits in a bank.
• The deposits with Regional Rural Bank (RRB) are also
covered by DICGC.
• All Scheduled commercial Banks & Cooperative Banks are
covered under DICGC
• It also covers the insurance of foreign banks which is
running in India also be covered under DICGC.
• It also covers the insurance of Indian Banks which is
functioning outside India.
• Primary Agricultural Credit Society, Cooperative banks from
Meghalaya , Chandigarh , Lakshadweep & Dadra & Nagar
Haveli are some of the exception which are not covered by
DICGC

Types of Deposit covered under DICGC –

• Saving Bank Deposits

• Fixed deposits
• Recurring deposits
• It also include some exception which is listed below –
• It won’t accept Deposits for Foreign Governments
• The deposits by Indian Government & State Govt. also not
accepted under this Act.