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EVOLUTION ON BANKING
Meaning of Bank
The term Bank refers to a Financial Institutions which leads with deposits and advances and
other related services . Bank receives money from those who want to save in the form of
deposits and it leads to money to those who need it
Definition of bank
According to Oxford dictionary defines a bank as "an establishment for custody of money
which it pays out on customers order".
Features of bank
1. Dealing in money: bank is a Financial Institutions which deals with the other peoples
money that is money gives by depositors.

2. Individual /firm /company: a bank may be a person person, firm or a company. A

banking company means a company which is in the business of Banking.

3. Acceptance of deposit: a bank accepts money from the people in the form of deposits
which are usually repayable on demand or after the expiry of a fixed period. it gives safety to
the deposits and acts as an a custodian of funds of its customers.

4. Giving advances: a bank lends out money in the form of loans to those who required it for
different purposes.

5. Payment and withdrawal: a bank provides easy payment and withdrawal facility to its
customers in the form of chucks and draft. it also brings bank money in circulation.

6. Agents and utility services: a bank provides various banking facilities to its customer the
include general utility services and Agencies services.

7. Profit and service Orientation: a bank is a profit seeking institution having service
oriented approach.

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8. Ever increasing function: banking is an evolutionary concept. there is continuous
expansion and diversification as regards the function services and activities of a bank.

9. Connecting link: a bank at a connecting link between borrows and lenders of money bank
collects money. from those who have surplus money and give the same to those who are in
need of money.

10. Banking business: a banks main activities should be to do business of Banking which
should not be subsidiary to any other business.

11. Name identify: a bank should always at the word "Bank" to its name to enable people to
know that it is a bank and that is dealing in money.

The evolution of banking in India / stages in Evolution of banking in India

Phase 1: Early Banking (1770-1860)
1. Establishment of First Banks: The first banks in India were the Bank of Hindustan
(1770) and the General Bank of India (1786).
2. East India Company's Influence: The East India Company played a significant role in
the development of banking in India.
3. Presidency Banks: The Presidency Banks, including the Bank of Bengal (1806), Bank of
Bombay (1840), and Bank of Madras (1843), were established.
Phase 2: Expansion and Nationalization (1860-1947)
1. Expansion of Banking: Banking expanded rapidly, with the establishment of new banks,
including the Imperial Bank of India (1921).
2. Nationalization of Banks: The Indian government nationalized several banks, including
the Imperial Bank of India, which became the State Bank of India (1955).
3. Reserve Bank of India (RBI): The RBI was established in 1935 as the central bank of
India.
Phase 3: Post-Independence and Nationalization (1947-1991)
1. Nationalization of Major Banks: The Indian government nationalized 14 major
commercial banks in 1969.
2. Expansion of Banking Services: Banking services expanded to rural areas, with the
establishment of Regional Rural Banks (RRBs) in 1975.

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3. Liberalization and Deregulation: The Indian government introduced liberalization and
deregulation policies in the 1980s.

Phase 4: Modernization and Globalization (1991-Present)

1. Economic Liberalization: India's economic liberalization policies led to increased
competition and globalization in the banking sector.
2. Private Sector Banking: Private sector banks, such as HDFC Bank (1994) and ICICI
Bank (1994), were established.
3. Technology Advancements: The banking sector adopted modern technologies, including
online banking, mobile banking, and digital payments.
4. Merger and Acquisitions: Consolidation in the banking sector led to mergers and
acquisitions, such as the merger of State Bank of India with its associate banks (2017).
5. Digital Banking: The rise of digital banking, including fintech and neobanks, has
transformed the banking landscape in India.

Structure of India banking system

The Indian banking system is structured into several layers, primarily categorized as follows:
1. Reserve Bank of India (RBI)
- The central bank of India, the RBI, is at the apex of the banking system. It regulates and
supervises the entire financial system of the country. Its main functions include:
- Issuing currency
- Managing monetary policy
- Regulating banks and financial institutions
- Ensuring financial stability

2. Scheduled Commercial Banks (SCBs)

These banks are categorized into:

- Public Sector Banks (PSBs):

These banks are government-owned, with the majority of shares held by the government.
Examples include:

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- State Bank of India (SBI)
- Bank of Baroda
- Punjab National Bank (PNB)
- Private Sector Banks:
These banks are privately owned and have limited government stake. Examples include:
- HDFC Bank
- ICICI Bank
- Axis Bank
- Foreign Banks:
Banks that are based outside India but have branches or operations within India, such as:
- Citibank
- Standard Chartered Bank
- Regional Rural Banks (RRBs):
These banks focus on rural and semi-urban areas, providing banking services to the
underserved population.
3. Cooperative Banks:
These banks are typically smaller, community-based banks that focus on providing credit and
financial services to cooperative societies, farmers, and small-scale businesses. They are
classified into two categories:
- Urban Cooperative Banks:
These operate in urban and semi-urban areas.
- Rural Cooperative Banks:
These cater to rural areas and are further divided into State Cooperative Banks, District
Central Cooperative Banks, and Primary Agricultural Credit Societies (PACS).

4. Development Banks and Other Financial Institutions:

These institutions provide long-term capital for specific sectors, such as agriculture,
infrastructure, and industry. Examples include:
- National Bank for Agriculture and Rural Development (NABARD)
- Industrial Development Bank of India (IDBI)
- Small Industries Development Bank of India (SIDBI)

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5. Non-Banking Financial Companies (NBFCs)
These are financial institutions that offer banking services like loans and credit facilities but
do not have a full banking license. Examples include:
- Bajaj Finance
- Mahindra Finance
6. Payment Banks and Small Finance Bank:
- Payment Banks: Focus primarily on providing basic payment services, mobile banking,
and remittances (e.g., Paytm Payments Bank).
- Small Finance Banks: These banks are set up to provide financial inclusion to underserved
areas and focus on microloans (e.g., Ujjivan Small Finance Bank).

Reserve Bank of India(RBI)

The Reserve Bank of India was established on April 1st 1935 in accordance with the
provisions of Reserve Bank of Indian act 1934.
The central office of Reserve Bank was initially established in Kolkata but was permanently
moved to Mumbai in 1937.
The central office is where the Governor sits and where policies are formulated.
Through originally privately won't since nationalisation in 1949 the Reserve Bank is fully
owned by the government of India.

Role of Reserve Bank of India

The Reserve Bank of India (RBI) plays a crucial role in India's financial and economic
stability. Here are its key functions:
1. Issue of currency: the Reserve Bank is the sole authority for the issue of currency in India
since currency is considered as a base of for the expansion of money supply regulation of
currency in an important element in monetary control of RBI
2. Government banker: The Reserve Bank is banker to the central bank as well as state
governments. all the current accounts of governments are maintained with RBI. All receipts
and payments are made on the of the government.
3. Banker's Bank: Reserve Bank is a statutory a Banker to the Government of India. It
maintains cash reserve with the central government to facilitate clearing operations and with
state government to facilitate funds for short term and provides economical Central Clearing
and remittance facilities.

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4. Supervising authority: RBI is responsible for the development of an adequate and sound
banking system for catering the needs of trade, commerce, industry, agriculture etc.

5. Exchange control authority: RBI is a custodian of the foreign exchange Reserve of the
country. It manages the exchange control in a very planned and meticulous manner.

6. Promoter of the financial system: The Reserve Bank serves as a advisor to government
on economic planning research mobilisation banking and financial matters it is responsible
for financial policies and other initiatives concerning loans, agriculture finance, industrial
finance etc.

7. Regulator of money and credit: RBI controls the money supply and credit in the
economy. this helps in achieving price stability full employment, economic growth,
equilibrium in the balance of payment etc.
Importance of Reserve Bank of India
The Reserve Bank of India (RBI) plays a crucial role in India's economy. Here are some key
reasons why it is important:
1. Monetary Policy: RBI controls inflation and manages the country's money supply through
tools like repo rates, reverse repo rates, and cash reserve ratio (CRR). By regulating interest
rates, it influences borrowing, lending, and investment in the economy.

2. Currency Issuance: The RBI has the sole authority to issue the Indian Rupee, ensuring
that the currency remains stable and sufficient for the economy’s needs.

3. Financial Stability: The RBI monitors and regulates the banking sector to ensure its
health. It sets norms and guidelines to maintain the stability and soundness of financial
institutions, preventing crises.

4. Foreign Exchange Management: The RBI manages India's foreign exchange reserves
and formulates policies regarding foreign trade, which helps stabilize the rupee and ensures
adequate foreign currency reserves for imports and international obligations.

5. Banker to the Government: It acts as the banker and financial advisor to the Indian
government, helping in managing government debt and facilitating public payments.

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6. Regulation of Payment Systems: It ensures that the payment systems in the country (like
NEFT, RTGS, UPI) are secure, efficient, and accessible for smooth financial transactions.

In short, the RBI ensures a stable and robust financial system in India, facilitating economic
growth while managing inflation and ensuring the security of financial transactions.

Functions of RBI:
The Reserve Bank of India (RBI) is the central bank of India, and its primary functions
include:
Monetary Policy Functions
1. Formulating Monetary Policy: RBI sets interest rates and regulates money supply to
control inflation, promote growth, and maintain financial stability.
2. Liquidity Management: RBI manages liquidity in the financial system through open
market operations, repo, and reverse repo.
3. Regulating Money Supply: RBI controls the money supply by adjusting reserve
requirements, cash reserve ratio, and statutory liquidity ratio.
Banking Supervision and Regulation
1. Licensing and Registration: RBI grants licenses to banks and non-banking financial
companies (NBFCs).
2. Prudential Norms: RBI sets prudential norms for banks, including capital adequacy, asset
quality, and provisioning.
3. Bank Supervision: RBI supervises banks to ensure their financial health and compliance
with regulations.
Financial Stability Functions
1. Maintaining Financial Stability: RBI works to maintain financial stability by monitoring
and responding to potential risks.
2. Managing Foreign Exchange: RBI manages India's foreign exchange reserves and
regulates foreign exchange transactions.
3. Regulating Payment Systems: RBI regulates payment systems, including credit cards,
debit cards, and electronic fund transfers.
Developmental and Promotional Functions:
1.Promoting Financial Inclusion: RBI works to promote financial inclusion by expanding
access to banking services.
2. Supporting Small and Medium-Sized Enterprises (SMEs): RBI provides support to
SMEs through refinancing facilities and other initiatives.

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3. Developing Financial Markets: RBI works to develop financial markets, including the
bond market, equity market, and derivatives market.

Other Functions
1. Currency Management: RBI manages the issuance and distribution of currency.
2. Banker to the Government: RBI acts as the banker to the central and state governments.
3. Regulator of NBFCs: RBI regulates NBFCs, including microfinance institutions and
housing finance companies.

Monetary policy tools

Repo rate (RR):
The repo rate, or repurchase rate, is the interest rate at which the Reserve Bank of India (RBI)
lends money to commercial banks. The RBI uses the repo rate to manage inflation, liquidity,
and economic growth.
Reserve Repo Rate(RRR):
The reserve repo rate is the interest rate at which commercial banks deposit money with the
Reserve Bank of India (RBI) for a short period of time. It's a key tool used by the RBI to
manage liquidity in the banking system.
Cash Reserve Ratio(CRR):
Cash Reserve Ratio - CRR. Cash Reserve Ratio or CRR is the minimum amount as specified
by the Central Bank, to be maintained by the Commercial banks of the public deposits with
the Central Bank.
Statutory Liquidity Ratio(SLR):
Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial
bank has to maintain in the form of liquid cash, gold or other securities. It is basically the
reserve requirement that banks are expected to keep before offering credit to customers.
Banking Regulation Act
The Banking Regulation Act, 1949 is a key legislation in India that governs the functioning of
banks and financial institutions in the country. It was enacted to regulate the banking sector
and ensure the stability, integrity, and orderly functioning of banks. The Act is administered
by the Reserve Bank of India (RBI), which is the central banking institution of India.

Key Features of the Banking Regulation Act:

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1. Regulation of Banking Companies: The Act defines the powers, functions, and
operations of banking companies in India, including the types of businesses they can engage
in.

2. Licensing of Banks: It mandates that all commercial banks must obtain a license from the
RBI to operate. Without this license, no entity can function as a bank.

3. Capital Requirements: The Act sets the minimum capital and reserves that a bank must
maintain, ensuring financial stability.

4. Inspection and Supervision: The RBI has the authority to inspect banks and their
operations to ensure compliance with regulations and prevent financial mismanagement.

5. Governance of Banks: The Act lays down the provisions regarding the management,
structure, and governance of banks, including the appointment and removal of directors.

6. Control over Advances and Loans: The Act allows the RBI to set limits on the lending
capacity of banks and regulate the types of loans they can issue.

7. Bank Mergers and Amalgamations: The RBI can intervene in the merger or acquisition
of banks and oversee the process to ensure smooth transitions and avoid disruptions in the
banking sector.

8. Protection of Depositors: It aims to protect the interests of depositors, ensuring that banks
operate with transparency and accountability.

9. Prohibition on Unauthorised Banking: The Act prohibits any individual or entity from
conducting banking business without a license, thus preventing illegal banking activities.

10. Resolution of Financial Distress: It provides a framework for the resolution of failing
banks, ensuring that measures are in place to manage insolvency or bankruptcy situations in
the banking sector.

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The Banking Regulation Act is a crucial tool for regulating India's banking industry,
safeguarding depositors' interests, and promoting the stability of the financial system.

Prompt corrective action ( PCA)

Prompt Corrective Action (PCA) is a supervisory tool used by the Reserve Bank of India
(RBI) to strengthen and improve the financial health of commercial banks in India.

Key Objectives
1. Identify banks with weak financials and take corrective action.
2. Prevent bank failures and protect depositors' interests.
3. Maintain financial stability and prevent systemic risk.

Triggers for PCA

1. Capital Adequacy Ratio (CAR): CAR falls below 10.25% (or 9% for some banks).
2. Net Non-Performing Assets (NNPA): NNPA exceeds 6% (or 5% for some banks).
3. Return on Assets (ROA): ROA is negative for two consecutive years.

PCA Framework
1. Risk Threshold 1: Banks with weak financials are placed under PCA, and corrective
actions are taken.
2. Risk Threshold 2: Banks with severe financial weakness are placed under PCA, and more
stringent corrective actions are taken.
3. Risk Threshold 3: Banks with critical financial weakness are placed under PCA, and
drastic corrective actions are taken.

Corrective Actions
1. Restrictions on Branch Expansion: Banks are restricted from expanding their branch
network.

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2. Restrictions on Hiring: Banks are restricted from hiring new employees.
3. Restrictions on Dividend Payments: Banks are restricted from paying dividends.
4. Capital Infusion: Banks are required to infuse capital to improve their financial health.
5. Merger or Acquisition: Banks may be required to merge or be acquired by another bank.

Benefits
1. Improved Financial Health: PCA helps banks improve their financial health and reduce
the risk of failure.
2. Enhanced Supervision: PCA enables the RBI to enhance its supervision and monitoring
of banks.
3. Systemic Stability: PCA helps maintain systemic stability and prevents the spread of
financial distress.

Thank you

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