Commercial banking in

India
Prof.b.p.mishra
XIMB

Banking Sector in India

The first bank in India was established in

1770. From 1770 till today, the journey of
Indian Banking System can be segregated
into three distinct phases.
Early phase from 1770 to 1969 of Indian
Banks..Phase I
Nationalisation of Indian Banks in 1969
and up to 1991 prior to Indian banking
sector Reforms....Phase II
New phase of Indian Banking System with
the advent of Indian Financial & Banking
Sector Reforms after 1991....Phase III
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Banking Sector Reforms in India

Bank of Hindustan was the first bank to be established in India,

in 1770.
The General Bank of India was set up in the year 1786.
The East India Company established Bank of Bengal
(1806),
Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These
three banks were amalgamated in 1921 and Imperial
Bank of India was established which started as private
shareholders banks, mostly Europeans shareholders.

Which in turn became the State Bank of

India in 1955.

Banking Sector Reforms in India

In 1865 Allahabad Bank was established

and first time exclusively by Indians
Punjab National Bank Ltd. was set up in
1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India,
Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of
Mysore were set up.

RBI Act 1934

RBI Act 1934. Reserve Bank of
India came in 1935. Main function as
per statute usually known as traditional
functions of a central bank .. issue of
currency, banker / debt manager to the
government , banker to the banks.

The Reserve Bank of India Act 1934

The Second Schedule of RBI Act 1934
contains a list of Scheduled Banks.
They have to maintain CRR (Sec 42) and
SLR (Sec 24).
This Schedule contains Commercial Banks,
Certain Categories of Cooperative Banks
and Regional Rural Banks
It is the discretion of RBI to select Banks in
this schedule.
The scheduled banks are more regulated as
against the non scheduled banks.
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Banking Sector Reforms in India

Reserve Bank of India was vested

with extensive powers for the
supervision of banking in India as the
Central Banking Authority.
Government of India came up with
The Banking Companies Act, 1949
which was later changed to Banking
Regulation Act 1949 as per amending
Act of 1965 (Act No. 23 of 1965).
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Indian Law.The Banking Regulation (BR) Act, 1949

Banking is defined as
the accepting, for the
purpose of lending or
investment, of deposits of
money from the public,
repayable on demand
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Definition of banking
as per provisions of BR ACT,1949

The Banking Regulation Act 1949 defines

'Banking as accepting for the purpose of
lending or investment of deposits of
money from the public, repayable on
demand or otherwise and withdrawal by
cheque , draft order or otherwise
(Section 5b) and says that any company
which transacts the business of banking
is a 'Banking Company' (Section 5c). It
further stipulates that a company which
carries the business of banking in India
9
must use the words, 'Bank, Banker,

BR ACT,1949

The subscribed capital of the company should

not be less than one half of the authorized
capital, the paid up capital should not be less
than one half of the subscribed capital.
Voting Rights of any shareholder not to exceed 10
% of the total voting rights.
Empowers RBI to issue license to a company to
carry on banking business in India.RBI can also
cancel such license.
Without obtaining prior permission from RBI no
banking company shall open a new place of
business in India or change (otherwise than
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within the same city, town , village)the location of
an existing place of business situated in India.

Banking Sector Reforms in India

1949 : Enactment of Banking Regulation Act.

1955 : State Bank of India (Earlier Imperial
Bank Of India)was given legal recognition in
terms off an Act of the Parliament of India,
1959 : Nationalisation of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee
corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with
deposits over 200 crore.
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Banking Sector Reforms in India

This phase has introduced many
more products and facilities in the
banking sector in its reforms
measure.
In 1991, under the chairmanship of
M Narasimham, a committee was set
up by his name which worked for the
liberalisation of banking practices.
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Banking Sector Reforms in India

Narasimham Committee I (1991).
Narasimham Committee II
(1998).
1.Competition Enhancing Measures

2.Measures enhancing role of market forces

3.Prudential measures
4. Institutional and legal measures
5. Supervisory Measures

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Types of reform measures for the banking sector

1.Competition Enhancing Measures

Allowing operational autonomy and reduction
of public ownership in public sector banks by
raising capital from equity market up to 49
percent of paid up capital.
Transparent norms for entry of Indian private
sector banks, foreign banks and joint venture
banks.
Permission for foreign investment in the
financial sector through foreign direct
investment (FDI) as well as portfolio
investment.

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Contd.
The banks are allowed to diversify
product portfolio and business
activities.
Roadmap for foreign banks and
guidelines for mergers and
amalgamation of private sector
banks with other banks and NBFCs.
Instructions and guidelines on
ownership and governance in private
sector banks.

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2.Measures enhancing role of

market forces
Reduction in pre-emption through reserve
requirement, market determined pricing for
Govt. securities, disbanding of administered
interest rates and enhanced transparency
and disclosure norms to facilitate market
discipline.
Introduction of auction-based repos and
reverse repos for short term liquidity
management, facilitation of improved
payments and settlement mechanism.
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Significant advancement in

3.Prudential measures

Introduction of international
best practices norms on capital
to risk asset ratio (CRAR)
requirement, accounting, income
recognition, provisioning and
exposure.
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3.Prudential measures
Measures to strengthen risk
management though recognition of
different component of risk, assignment
of risk weights to various asset classes,
norms of connected lending, risk
concentration, application of marked to
market principle for investment portfolio
limits on deployment of fund in
sensitive activities.

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3.Prudential measures
Introduction of capital charge for market
risk, higher graded provisioning for NPAs,
guidelines for ownership and
governance, securitization and debt
restructuring mechanism norms, etc.
Introduction and roadmap for
implementation of Basel II by 31 March
2007.
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4. Institutional and legal

measures
Setting up of debt recovery tribunals,
asset
reconstruction
companies,
settlement
advisory
committees,
corporate debt reconstructing mechanism,
Lok-Adalat (peoples court), etc. for quick
recovery of debts.
Promulgation
of
Securitization
and
Reconstruction of Financial Assets and
Enforcement
of
Securities
Interest
(SARFAESI) Act, 2002 and its subsequent20
amendment to ensure creditor rights.

 Setting up of Clearing Corporation of

India Limited (CCIL) to act as a
counter party for facilitating payment
and settlement system relating to
fixed income securities and money
market instruments.
Setting up of Credit Information Bureau
of India Limited (CIBIL) for information
sharing on defaulters as also other
borrowers.
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5.Supervisory measures
Establishment of Board of Financial
Supervision as the apex supervisory
authority for commercial banks, financial
institutions and non-banking financial
companies.
Move towards risk based supervision,
consolidated supervision of
conglomerates, strengthening of off-site
surveillance through control
returns.Annual Financial Inspection
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 Recasting of the role of statutory

auditors, increased internal control
through strengthening of internal
audit.
Strengthening corporate
governance, enhance due diligence
on important shareholders, fit and
proper test for directors.
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NARASIMHAN COMMITTEE
ENTRY OF PRIVATE BANKS- 92-93
PROGRESIVE REDUCTION OF CRR /SLR
MARKET RELATED GOVT BORROWING
FIXATION OF CAPITAL ADEQUACY
NORMS8% (92-93) /9% 98-99 )
ACCOUNTING INTL LEVEL
ASSET CLASSIFICATION & INCOME
RECOGNITION
SPECIAL DEBT RECOVERY TERMINAL
REORGANISATION OF BANKING
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INDUSTRY

Commercial Banking System..India

Scheduled Banks

Scheduled Commercial
Banks(157)

Scheduled Co-operative
Banks(53)

Public
State
Urban
Regional
Foreign
Private
Sector
Co-operative
Bank Rural Bank Co-operative
Sector Bank Bank
Bank
Bank
64
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24(16+8)
26
25

TRENDS IN BANKING in India

since 1991

DEREGULATION
DIVERSIFICATION
TECHNOLOGY APPLICATION

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DEREGULATION:

INTEREST RATE

NO DISTINCTION BETWEEN Commercial Bank

OTHER FINANCIAL INTERMEDIARIES

LOWERING ENTRY BARRIERS

00 cr/2002, 25USD MILLION )
TOWARDS UNIVERSAL
BANKING

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EFFECTS ON BANKS
RAISE CAPITAL
TRADITIONAL INCOME DECLINED
MORE RISK TAKING BUSINESS
CUT COST
ENTER NEW BUSINESS AREA
MERGER OF BANKS TO RAISE SCALE
ECONOMIES
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DIVERSIFICATION

BANCASSURANCE- CORPORATE
SECURITIES TRADING
MUTUAL FUND
SECURITISATION
VENTURE FUNDING
PE FUNDING

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AGENT

SPREAD OF SYSTEMIC
RISK
RISK OF MULTIPLE
GEARING
NEW RISK ADDED TO EXISTING
RISK
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BASEL COMMITTEE ON BANKING

SUPERVISION
INTERNATIONAL ORGANIZATION OF
SECURITIES COMMISSION
INTERNATIONAL ASSOCIATION FOR
INSURANCE SUPERVISORS

JOINT FORUM REPORT (1999)

SUPERVISION OF FINANCIAL CONGLOMERATE

UIDELINES FOR REGULATORS TO DETECT MULTIPLE GEA

FORMATION SHARING
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FATF- FINANCIAL ACTION TASK FORCE-G

10- 1989
MONEY LAUNDERING
(G-10 CENTRAL BANKS)
ISSUE OF e-MONEY & PAYMENT SECURITY
RELATED TO MONEY LAUNDERING.
COMMITTEE ON PAYMENT &
SETTLEMENT SYSTEM
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TECHNOLOGY
A.PRODUCTS OFFERED
B.DELIVERY CHANNELS
C.CHANGE IN MARKET
STRUCTURE
D.ELECTRONIC TRADING SYSTEM

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CUSTOMER IMPERATIVES
KEEP YOUR CUSTOMERS HAPPY & SURVIVE

Channel improvement
Service accessibility
Customer Serviceability
Data privacy and security
Simplified Banking

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Financial Inclusion
Segmented banking:
Please refer to RBI press release of
NOV.27,15
for both.
Small Finance banks-10
(https://rbi
.org.in/scripts/BS_PressReleaseDisplay.a
spx?prid=32614
)
(https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?
prid=32615) Payments banks-11
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On-tap Banking license

Promoting private banks but
Cautiously:
RBI proposes granting on- tap banking
licences to Individuals,
Groups or entities and corporates.
For a business house to apply for a Universal
Bank Licence,
its 60% income should come from
financial services.
A corporate entity should also have a
minimum asset size of
Rs 5000 cr and a successful track record of36

On-tap Banking license

NBFCs having a track record of at least 10
years can either convert themselves in to a
bank or promote a new bank.
If found fit and proper for the licence, the
minimum capital required to float a bank is
Rs500 crore .
The lender needs to maintain a minimum
net worth of Rs 500 crore at all times.
Foreign holding not to exceed 49%

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NOFHC
The holding company can carry out other
commercial, industrial, and financial activities but
none of them should overlap each others activities
i.e. separate activities can be carried under one
umbrella but must not encroach upon the functions
of one another
NOFHC will have to follow a separate set of
Corporate Governance Rules and registered
with RBI
Let us not forget that some of the developed
countries in the world like Canada, UK, Australia,
and Germany have allowed the conversion of
industrial houses into banks under close observance
of strict regulations and have attained successes
whereas such a practice has not given fruitful
results in countries like Brazil and many others. The38
Guidelines have taken extra care

Indradhanush-I

Bank Appointments:
Ds & Non-Executive Chairman can be Outsiders
Banks Board BureauB begins functioning from April,1, 2016 with
Cag Vinod Rai as Chairman
come up with mechanism for resolution of NPA in Ba
Capitalization:
5,000 crores allocated to PSBs in fy16.
ditional rs25,000 crore to be infused in Fy17,
owed by Rs 10,000 crore in fy18,fy19.
has promised additional capital allocation, if needed
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DE-STRESSING PSBs:
Imposed anti-dumping duty and
minimum import price on steel
Launched UDAY to bailout power
Discoms
Action on textiles and further action on
steel being planned
CONSOLIDATION
SBI is to merge with itself 5 Associates
and BMB
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Indradhanush-II

OCUS AREAS:

Moving from just recgnizing NPAs to setting up

resolution mechanism-S4A
cheme for Sustainable Structuring of Stressed Assets
Risk analysis strategies and Risk management pract
Financial Inclusion and expansion of Digital banking
Credit Growth & use of Modern Technology
Further push to restructuring as well as M&As
Creating Bank Investment company(BIC)
A holding company for PSBs
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Banking Code and Standards

Board of India(BCSBI)

BCSBI is an independent and autonomous

institution to monitor and ensure that the
Banking Codes and Standards adopted by
the banks are adhered to in true spirit while
delivering their services.

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The Charter of Customer

Rights
The Charter of Customer Rights outlines
overarching principles of customer
rights based on global best practices.
The five rights for bank customers
according to this Charter are:
Right to Fair Treatment
Right to Transparency, Fair and
Honest Dealing
Right to Suitability
Right to Privacy
Right to Grievances Redressal and

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thanks
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