HISTORY AND EVOLUTION OF BANKING IN INDIA
• The first bank of India called Bank of Hindustan was established in 1770.
• First Bank managed by Indians was Oudh Commercial Bank set up in
1881.
• Three Presidency banks were set up under charters from the British East
India Company- Bank of Calcutta (1806), Bank of Bombay (1840) and
Bank of Madras (1843).
• In 1921, the three presidency banks were amalgamated to form Imperial
Bank of India.
• In 1955, this Imperial Bank of India was nationalized and renamed
as State Bank of India (SBI).
• India’s Oldest Joint Stock Bank is Allahabad Bank. It is also known as
India’s oldest public sector bank. It was established in 1865.
• The first bank purely managed by Indians was Punjab National Bank,
established in Lahore in 1895.
• However, the first Indian commercial bank which was wholly owned and
managed by Indians was the Central Bank of India which was established
in 1911.
Year Bank
1770 The first bank of India called Bank of Hindustan was established in 1770
1861 Paper Currency Act was enacted by British Government of India
1865 Oldest Joint-Stock bank Allahabad Bank was established
Oudh Commercial Bank, the first Bank of India with Limited Liability to be
1881
managed by Indian Board was established at Faizabad.
Punjab National Bank was established. It was first bank purely managed by
1895
Indians
Central Bank of India, first Indian commercial bank which was wholly owned
1911 and managed by Indians, was established. It was called First Truly
Swadeshi bank
Three presidency banks – Bank of Calcutta, Bank of Bombay and Bank of
1921
Madras amalgamated to form Imperial Bank of India
1935 Creation of Reserve Bank of India
1949 Nationalization of Reserve Bank of India
1949 Enactment of Banking Regulation Act
1955 Nationalization of Imperial Bank of India, which then became the SBI
1969 Nationalization of 14 major Banks
1980 Nationalization of 7 more banks with deposits over Rs. 200 Crore
Classification of Banks
Indian Banks are classified into commercial banks and Co-
operative banks.
Commercial banks comprise:
– Schedule Commercial Banks (SCBs) and
– Non-scheduled commercial banks.
SCBs are further classified into:
– Public, Private & Foreign banks and Regional Rural Banks
(RRBs); and
– Co-operative banks which include urban and rural Co-
operative banks.
Scheduled Banks
• Scheduled banks are covered under the 2nd Schedule of
the Reserve Bank of India Act, 1934. To qualify as a
scheduled bank, the bank should conform to the
following conditions:
– A bank that has a paid-up capital of Rs. 5 Lakh and above
qualifies for the schedule bank category.
– A bank requires to satisfy the central bank that its affairs
are not carried out in a way that causes harm to the
interest of the depositors.
– A bank should be a corporation rather than a sole-
proprietorship or partnership firm.
Non Scheduled Banks
• Non-scheduled banks refer to the local area banks which are
not listed in the Second Schedule of Reserve Bank of India.
Non-Scheduled Banks are also required to maintain the cash
reserve requirement, not with the RBI, but with them.
• Non- Scheduled Banks have to follow CRR conditions. These
banks can have CRR fund with themselves as no compulsion
has been made by the RBI to deposit it in the RBI.
Public Sector banks
• Majority of stake is held by the government in Public Sector.
• Finance Minister of India announced in 2019 about the merger
of ten banks into four and on 1st April 2020 this announcement
came into effect.
• Currently India has 12 Public sector banks
Private Banks
• Private sector holds the majority share
• The number of Private sector banks is reduced to 22.
Foreign Banks:
• These are the banks with Head office outside the country in
which they are located. Examples of Foreign Sector Banks are;
Standard Chartered Bank, American Express, and Citi Bank etc.
Cooperative Banks in India
• Cooperatives occupy an important position in the Indian
financial system. Cooperatives were the first formal
institution to be conceived and developed to purvey credit to
rural India. Thus far, cooperatives have been a key instrument
of financial inclusion in reaching out to the last mile in rural
areas.
• Cooperative banks are under dual control of Registrar of
Cooperative Societies and RBI.
• Recently, the Union cabinet approved changes to the Banking
Regulation Act to give the Reserve Bank of India wider
powers to regulate cooperative lenders and prevent frauds
such as the one seen at Punjab and Maharashtra Co-
operative Bank Ltd.
CLASSIFICATION OF BANKS
NBFC CLASSIFICATION
REGIONAL RURAL BANK
• Regional Rural Banks were set up on the basis of the
recommendations of the Narasimham Working Group
(1975).
• The first Regional Rural Bank “Prathama Grameen
Bank” was set up on 2nd October, 1975.
• Subsequently Regional Rural Banks Act was passes in
1976.
Main objectives of RRBs
• The ideology behind RRB is to focus on the upliftment
of the rural economy because it is assumed that Real
growth of Indian Economy lies in the freeing of rural
masses from unemployment, acute poverty and socio-
economic backwardness.
Shareholders:
• The equity of a regional rural bank is held by the Central
Government(50%), concerned State Government(15%) and
the Sponsor Bank(35%).
Problems with RRBs
• The RRB concept was based upon the policy that they would
lend only to the weaker sections of rural society, charging
lower interest rates, opening branches in remote and rural
areas and keep a low cost profile.
• But the commercial motivation was absent.
In 2015, the government had passed the Regional Rural Banks
(Amendment) Bill, which seeks to enhance authorized and
issued capital of RRBs, strengthen their capital base and bring
flexibility in the shareholding between central government,
state government and sponsor bank.
There are 56 RRBs functioning in the country, and State Bank of
India, is the biggest sponsor with 14 RRBs.
Recently, the Centre has approved a ₹1,340-crore
recapitalization plan for Regional Rural Banks (RRBs).
The move is crucial to ensure liquidity in rural areas during the
lockdown due to the COVID-19 crisis.
Small Finance Bank & Payment Bank
Small Finance Bank
• The RBI had issued guidelines for licensing of SFBs in November
2014.
• The small finance bank will primarily undertake basic banking
activities of acceptance of deposits and lending to unserved and
underserved sections including small business units, small and
marginal farmers, micro and small industries and unorganized
sector entities.
• It can also undertake other financial services activities such as the
distribution of mutual fund units, insurance products, pension
products, etc. with the prior approval of the RBI.
Eligibility for setting up of SFB
• Resident individuals/professionals with 10 years of
experience in banking and finance.
• Existing Non-Banking Finance Companies (NBFCs), Micro Finance
Institutions (MFIs), Local Area Banks (LABs) and payment banks that are
owned and controlled by residents.
• It needs to open at least 25% of its banking outlets in unbanked rural
areas.
• The bank will be required to extend 75% of its adjusted net bank credit
to the Priority Sector Lending (PSL).
• At least 50% of its loan portfolio should constitute loans and advances of
up to ₹ 25 lakhs.
Payments banks
• The payments banks are “differentiated banks” as compared to
commercial banks. Reserve Bank of India had issued guidelines on
November 24, 2014, for setting up payment banks in the country.
• On 23 September 2013, Committee on Comprehensive Financial
Services for Small Businesses and Low-Income Households, headed
by Nachiket Mor, was formed by the RBI.
• The Nachiket Mor committee submitted its final report on 7
January 2014. Among its various recommendations, it
recommended the formation of a new category of a bank called
payment bank.
Features of Payment Bank
• The payment banks will banks can accept deposits up to a maximum of Rs.
1 lakh from a customer.
• Payments banks will be entitled to issue ATM or debit cards to their
customers but cannot issue a credit card.
• Payments banks cannot provide loans or lending services to customers.
• Payments banks cannot accept deposits from the Non-Resident Indians
(NRIs).
• Payments Banks will have to invest a minimum of 75% of its demand
deposits in government treasury/securities bills with maturity up to one
year and hold a maximum of 25 %in currents and fixed deposits with
other commercial banks for operational purposes.
Non-Banking Financial Company (NBFC)
• A Non-Banking Financial Company (NBFC) is a company registered
under the Companies Act, 1956 engaged in the business of loans
and advances, acquisition of shares/stocks/bonds/debentures/
securities issued by Government or local authority or other
marketable securities of a like nature.
• NBFC does not include any institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of
any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
Difference between Banks & NBFCs
However there are a few differences as given below:
• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement
system and cannot issue cheques drawn on itself;
• Deposit insurance facility of Deposit Insurance and Credit
Guarantee Corporation is not available to depositors of
NBFCs, unlike in case of banks.
Recently, The Reserve Bank of India (RBI) has decided to
merge three categories of Non Banking Financial Companies
(NBFCs) into a single category to provide greater operational
flexibility to non-banking lenders.
Asset Finance Companies (AFC), Loan Companies (LCs) and
Investment Companies (ICs), will be merged into a new
category called NBFC - Investment and Credit Company
(NBFC-ICC).
Non-Performing Assets (NPAs)
• A non performing asset (NPA) is a loan or advance for which the principal
or interest payment remained overdue for a period of 90 days.
• Description: Banks are required to classify NPAs further into Substandard,
Doubtful and Loss assets.
• 1. Substandard assets: Assets which has remained NPA for a period less
than or equal to 12 months.
• 2. Doubtful assets: An asset would be classified as doubtful if it has
remained in the substandard category for a period of 12 months.
• 3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of
such little value that its continuance as a bankable asset is not warranted,
although there may be some salvage or recovery value.”
Reasons for prevalence of Non-Performing Assets
(NPAs)
• bad lending practices lacking in transparency
• Inefficiencies related to monitoring of loans in the post- disbursement
phase.
• Crony capitalism
• lapses due to lack of diligence and at times they have led to fraudulent
transactions.
• Slowdown of the economy
• Lack of Corporate Governance:
Steps Taken
• The Debt Recovery Tribunals (DRTs) – 1993
• SARFAESI Act – 2002: The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
• ARC (Asset Reconstruction Companies)
• Corporate Debt Restructuring – 2005
• 5:25 rule – 2014:Flexible Structuring of Long Term Project Loans to
Infrastructure
• Joint Lenders Forum – 2014: To prevent the instances where one person
takes a loan from one bank to give a loan of the other bank.
• Strategic debt restructuring (SDR) – 2015: convert the complete or part of
their loans into equity shares”
• Asset Quality Review – 2015: classification of stressed assets and timely
identification of assets
• Sustainable structuring of stressed assets (S4A) – 2016: Only the
unsustainable potion of the loan is converted into equity.
• Insolvency and Bankruptcy code Act-2016
• PARA-2017: The Economic Survey 2016-17 says that NPAs are “an
economic problem, not a morality play”. Hence, pragmatism has to be
the hallmark of dealing with the vexed issue of the NPAs. The Survey had
actually acknowledged that the RBI and government are running out of
options and thus mooted a novel idea, i.e.,public Sector Asset
Rehabilitation Agency (PARA) which is called bad bank.
Priority Sector Lending
• Priority sectors are those sectors which are considered as
crucial for the development of the country and are to be
given priority over other sectors. The banks are mandated
to make certain provision for timely and adequate credit to
such sectors.
• The overall objective of priority sector lending is to ensure
that adequate institutional credit flows into some of the
vulnerable sectors of the economy, which may not be
attractive for the banks from the point of view of
profitability.
• It is mandated in India that Priority sector lending (PSL)
should constitute 40 percent of Adjusted Net Bank Credit.
• Sub-targets are specified for certain sectors like 18% to
agriculture with 8% to small and marginal farmers, 7.5% to
micro units etc.
Priority Sector Lending Certificates (PSLCs) are negotiable
certificates issued against priority sector loans of banks. PSLCs
aims that, banks can earn a premium for surpassing targets of
priority sector lending.
Priority Sector Lending Certificates (PSLCs) scheme was first
suggested in the report of former governor of RBI Dr. Raghu
Ram Rajan led Committee on Financial Sector Reforms – ‘A
Hundred Small Steps’
List of Piority Sectors
• Agriculture
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others
Basel Norms
What are Basel Norms?
• Basel is a city in Switzerland. It is the headquarters of Bureau of
International Settlement (BIS), which fosters co-operation among
central banks with a common goal of financial stability and
common standards of banking regulations.
• Basel guidelines refer to broad supervisory standards formulated
by this group of central banks – called the Basel Committee on
Banking Supervision (BCBS).
• The set of agreement by the BCBS, which mainly focuses on risks
to banks and the financial system are called Basel accord.
• The purpose of the accord is to ensure that financial institutions
have enough capital on account to meet obligations and absorb
unexpected losses.
• India has accepted Basel accords for the banking system
BASEL-I:
• Introduced in 1988.
• Focused almost entirely on credit risk, it defined capital and structure of
risk weights for banks.
• The minimum capital requirement was fixed at 8% of risk-weighted assets
(RWA).
• India adopted Basel 1 guidelines in 1999.
BASEL-II:
• Published in 2004.
The guidelines were based on three parameters:
• Banks should maintain a minimum capital adequacy requirement of 8% of risk
assets.
• Banks were needed to develop and use better risk management techniques in
monitoring and managing all the three types of risks that is credit and increased
disclosure requirements. The three types of risk are- operational risk, market
risk, capital risk.
• Banks need to mandatory disclose their risk exposure to the central bank.
Basel III:
• In 2010, Basel III guidelines were released. These guidelines were
introduced in response to the financial crisis of 2008.
• Basel III norms aim at making most banking activities such as their trading
book activities more capital-intensive.
• The guidelines aim to promote a more resilient banking system by
focusing on four vital banking parameters viz. capital, leverage, funding
and liquidity.
• Presently Indian banking system follows Basel II norms.
