Banking in India

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Structure of the organised

banking sector in India.
Number of banks are in
brackets.
Banking in India originated
in the last decades of the 18th
century. The oldest bank in
existence in India is the State
Bank of India, a government-
owned bank that traces its
origins back to June 1806 and
that is the largest commercial
bank in the country. Central
banking is the responsibility
of the Reserve Bank of India,
which in 1935 formally took
over these responsibilities
from the then Imperial Bank
of India, relegating it to
commercial banking
functions. After India's
independence in 1947, the
Reserve Bank was
nationalized and given
broader powers. In 1969 the
government nationalized the
14 largest commercial banks;
the government nationalized
the six next largest in 1980.
Currently, India has 88
scheduled commercial banks
(SCBs) - 27 public sector
banks (that is with the
Government of India holding
a stake), 31 private banks
(these do not have
government stake; they may
be publicly listed and traded
on stock exchanges) and 38
foreign banks. They have a
combined network of over
53,000 branches and 17,000
ATMs. According to a report
by ICRA Limited, a rating
agency, the public sector
banks hold over 75 percent of
total assets of the banking
industry, with the private and
foreign banks holding 18.2%
and 6.5% respectively
Contents
[hide]
 • 1 Early history
• 2 From World War I to
Independence
• 3 Post-independence
• 4 Nationalisation
• 5 Liberalisation
• 6 Further reading
• 7 Notes
• 8 See also
• 9 External links
[edit] Early history
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 Pondichery,
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
under capitalized and lacked
the experience and maturity
to compete with the
presidency and exchange
banks. This segmentation let
Lord Curzon to observe, "In
respect of banking it seems
we are behind the times. We
are like some old fashioned
sailing ship, divided by solid
wooden bulkheads into
separate and cumbersome
compartments."
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 India, Corporation
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".
[edit] From World War I to
Independence
The period during the First
World War (1914-1918)
through the end of the
Second World War (1939-
1945), and two years
thereafter until the
independence of India were
challenging for Indian
banking. The years of the
First World War were
turbulent, and it took its toll
with banks simply collapsing
despite the Indian economy
gaining indirect boost due to
war-related economic
activities. At least 94 banks
in India failed between 1913
and 1918 as indicated in the
following table:
Paid-
Number Authorised
up
of banks capital
Years Capital
that (Rs.
(Rs.
failed Lakhs)
Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
[edit] Post-independence
The partition of India in 1947
adversely impacted the
economies of Punjab and
West Bengal, paralyzing
banking activities for months.
India's independence marked
the end of a regime of the
Laissez-faire for the Indian
banking. 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 into 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 19 July,
1969.
[edit] Nationalisation
By the 1960s, the Indian
banking industry had become
an important tool to facilitate
the development of the Indian
economy. At the same time,
it had emerged as a large
employer, and a debate had
ensued about the possibility
to nationalise the banking
industry. Indira Gandhi, the-
then Prime Minister of India
expressed the intention of the
GOI in the annual conference
of the All India Congress
Meeting in a paper entitled
"Stray thoughts on Bank
Nationalisation." The paper
was received with positive
enthusiasm. Thereafter, her
move was swift and sudden,
and the GOI issued an
ordinance and nationalised
the 14 largest commercial
banks with effect from the
midnight of July 19, 1969.
Jayaprakash Narayan, a
national leader of India,
described the step as a
"masterstroke of political
sagacity." Within two weeks
of the issue of the ordinance,
the Parliament passed the
Banking Companies
(Acquisition and Transfer of
Undertaking) Bill, and it
received the presidential
approval on 9 August, 1969.
A second dose of
nationalization of 6 more
commercial banks followed
in 1980. The stated reason for
the nationalization was to
give the government more
control of credit delivery.
With the second dose of
nationalization, the GOI
controlled around 91% of the
banking business of India.
Later on, in the year 1993,
the government merged New
Bank of India with Punjab
National Bank. It was the
only merger between
nationalized banks and
resulted in the reduction of
the number of nationalised
banks from 20 to 19. After
this, until the 1990s, the
nationalised banks grew at a
pace of around 4%, closer to
the average growth rate of the
Indian economy.
The nationalised banks were
credited by some, including
Home minister P.
Chidambaram, to have helped
the Indian economy
withstand the global financial
crisis of 2007-2009.[1][2]
[edit] 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, and
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
with strong contribution from
all the three sectors of banks,
namely, government banks,
private banks and foreign
banks.
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 49% 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-savvy 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 (2007), 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 M&As,
takeovers, and asset sales.
In March 2006, the Reserve
Bank of India allowed
Warburg Pincus to increase
its stake in Kotak Mahindra
Bank (a private sector bank)
to 10%. This is the first time
an investor has been allowed
to hold more than 5% in a
private sector bank since the
RBI announced norms in
2005 that any stake
exceeding 5% in the private
sector banks would need to
be vetted by them.
In recent years critics have
charged that the non-
government 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 suicide. [3] [4][5]
[edit] Further reading
• The Evolution of the State
Bank of India (The Era of
 the Imperial Bank of India,
1921-1955) (Volume III)
• Banking Frontiers - a
monthly magazine,
published by Mumbai
based Glocal Infomart.
Editor - Manoj Agrawal
[edit] Notes
1. ^ PSU banks' policies
saved India from financial
blushes: Chidambaram
2. ^ The importance of public
banking
3. ^
http://www.parinda.com/ne
ws/crime/20070918/2025/i
cici-personal-loan-
customer-commits-suicide-
after-alleged-harassment-
recov
4. ^
http://www.hindu.com/200
8/06/30/stories/200806305
7470300.htm
5. ^
http://www.indiatime.com/
2007/11/07/icicis-third-
eye/
[edit] See also
• List of banks in India
• List of Cooperative Banks
in India
[edit] External links
• Private banks score over
public sector banks
• The importance of public
banking
• Brief profiles, 2008-09
performance, and 2009-10
outlook on 10 leading
Indian banks
[show]
 v•d•e
Banking in India

[show]
v•d•e
Banking in Asia
Retrieved from
"http://en.wikipedia.org/wiki/
Banking_in_India"
Categories: Banking in India
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