INTRODUCTION
Definition
Banking is "accepting, for the purpose of lending or investment of
deposits of money from the public, repayable on demand or otherwise
and withdrawable by cheques, draft, order or otherwise."
Bank is defined as a person who carries on the business of banking.
Banks also perform certain activities which are ancillary to this business
of accepting deposits and lending. Since Banking involves dealing
directly with money, governments in most countries regulate this sector
rather stringently.
Banking in India was defined under Section 5(A) as "any company which
transacts banking, business" and the purpose of banking business defined
under Section 5(B),"accepting deposits of money from public for the
purpose of lending or investing, repayable on demand through cheque
/draft or otherwise". In the process of doing the above-mentioned primary
functions, they are also permitted to do other types of business referred to
as Utility Services for their customers (Banking Regulation Act, 1949)
History of Banks
Banking in India originated in the last decades of the 18th century. The
first banks were The General Bank of India which 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 of which were
established under charters from the British East India Company. For
many years the Presidency banks acted as quasi-central banks, as did
their successors. The three banks merged in 1925 to form the Imperial
Bank of India, which, upon India's independence, became the State Bank
of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it
failed in 1848 as a consequence of the economic crisis of 1848-49. 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 honor
belongs to the Bank of Upper India, which was established in 1863, and
which survived until 1913, when it failed, with some of its assets and
liabilities being transferred to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire
from the Confederate States, promoters opened banks to finance trading
in Indian cotton. With large exposure to speculative ventures, most of the
banks opened in India during that period failed. The depositors lost
money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next
several decades until the beginning of the 20th century.
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 Pondicherry,
then a French colony, followed. HSBC established itself in Bengal in
1869. Calcutta was the most active trading port in India, mainly due to
the trade of the British Empire, and so became a banking center. The
Bank of Bengal, which later became the State Bank of India.
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.
Around the turn of the 20th Century, the Indian economy was passing
through a relative period of stability. Around five decades had elapsed
since the Indian Mutiny, and the social, industrial and other infrastructure
had improved. Indians had established small banks, most of which served
particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also
some exchange banks and a number of Indian joint stock banks. All these
banks operated in different segments of the economy. The exchange
banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally undercapitalized and lacked
the experience and maturity to compete with the presidency and exchange
banks.
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 and for the
Indian community. A number of banks established then have survived to
the present such as Bank of IndiaCorporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead 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 started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as
"Cradle of Indian Banking".
Organizational Structure of Banks in India:
In India banks are classified in various categories according to differ
rent criteria. The following charts indicate the banking structure:
Reserve Bank of India
Commercial Banks Co-operative Banks Development Banks
Nationalized Private Short-term Long-term
credit credit
Agricultural Urban
EXIM Industrial Agricultural
Credit Credit
• PUBLIC SECTOR BANKS (Nationalised banks)
Nationalised banks or public banks dominate banking System in India. The
nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then
prime minister. It nationalized 14 banks then. Majority of the banks were
mostly owned by businessmen and even managed by them.
The major objective behind nationalisation was to spread banking infrastructure in
rural areas and make available cheap finance to Indian farmers.
Before the steps of nationalization of Indian banks, only State Bank of
India (SBI) was nationalized. It took place in July 1955 under the SBI
Act of 1955. Nationalization of Seven State Banks of India (formed
subsidiary) took place on 19th July, 1960. The State Bank of India is
India's largest commercial bank and is ranked one of the top five banks
worldwide. It serves 90 million customers through a network of 9,000
branches and it offers -- either directly or through subsidiaries –a wide
range of banking services.
The second phase of nationalization of Indian banks took place in the
year 1980. Seven more banks were nationalized with deposits over 200
crores. Till this year, approximately 80% of the banking segment in India
was under Government ownership. After the nationalization of banks in
India, the branches of the public sector banks rose to approximately
800% in deposits and advances took a huge jump by 11,000%.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1969: Nationalization of 14 major banks.
1980: Nationalization of seven banks with deposits over 200 crores.
The need for the nationalization was felt mainly because private
commercial banks were not fulfilling the social and developmental goals
of banking which are so essential for any industrializing country. Despite
the enactment of the Banking Regulation Act in 1949 and the
nationalization of the largest bank, the State Bank of India, in 1955, the
expansion of commercial banking had largely excluded rural areas and
small-scale borrowers. The stated purpose of bank nationalization was to
ensure that credit allocation occur in accordance with plan priorities.
Currently there are 27 nationalized commercial banks.
Objectives of Nationalization of Banks
To control the commercial heights of the economy
To extend banking facilities to unbanked and under banked
centres, especially in rural areas
To ensure an increased flow of assistance to the neglected
sectors
To foster the growth of new and progressive entrepreneurs
Consequences of Nationalization
The quality of credit assets fell because of liberal credit
extension policy.
Political interference has been as additional malady.
Poor appraisal involved during the loan meals conducted for
credit disbursals.
The credit facilities extended to the priority sector at
concessional rates.
The high level of low yielding SLR investments adversely
affected the profitability of the banks.
The rapid branch expansion has been the squeeze on
profitability of banks emanating primarily due to the increase in the
fixed costs.
Public Sector Banks
Reserve Bank of India - Central Bank
Bank of India
Dena Bank
IDBI Bank
Indian Bank
Oriental Bank of Commerce
Punjab National Bank
United Bank of India
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Indian Overseas Bank
Syndicate Bank
Union Bank of India
Vijaya Bank
Punjab & Sind Bank
• PRIVATE SECTOR BANKS
Private sector banking in India received a flip in 1994 when Reserve Bank of India
encouraged setting up of private banks as part of its policy of liberalisation of the
Indian Banking Industry. Housing Development Finance Corporation Limited
(HDFC) was amongst the first to receive an 'in principle' approval from the Reserve
Bank of India (RBI) to set up a bank in the private sector. Private Banks have played a
major role in the development of Indian banking industry. They have made banking
more efficient and customer friendly. In the process they have jolted public sector
banks out of complacency and forced them to become more competitive. India has a
better banking system in place of other developing countries.
