Banking and Insurance
Unit 1
Origin of banking in India
• Banking in India, originated in the last decades of the 18th century.
Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829–32; and the General Bank of
India, established in 1786 but failed in 1791.
• The largest bank, and the oldest still in existence, is the State Bank of
India (S.B.I). It originated as the Bank of Calcutta in June 1806. In 1809, it
was renamed as the Bank of Bengal. This was one of the three banks
funded by a presidency government, the other two were the Bank of
Bombay in 1840 and the Bank of Madras in 1843. The three banks were
merged in 1921 to form the Imperial Bank of India, which upon India's
independence, became the State Bank of India in 1955. For many years
the presidency banks had acted as quasi-central banks, as did their
successors, until the Reserve Bank of India was established in 1935,
under the Reserve Bank of India Act, 1934
• In 1960, the State Banks of India was given control of eight state-associated banks
under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its
associate banks. In 1969 the Indian government nationalised 14 major private banks,
one of the big bank was Bank of India. In 1978, 6 more private banks were
nationalised. These nationalised banks are the majority of lenders in the Indian
economy. They dominate the banking sector because of their large size and
widespread networks.
• The Indian banking sector is broadly classified into scheduled and non-scheduled
banks. The scheduled banks are those included under the 2nd Schedule of the
Reserve Bank of India Act, 1934. The scheduled banks are further classified into:
nationalised banks; State Bank of India and its associates; Regional Rural Banks
(RRBs); foreign banks; and other Indian private sector banks. The term commercial
banks refers to both scheduled and non-scheduled commercial banks regulated
under the Banking Regulation Act, 1949.
• Generally banking in India is fairly mature in terms of supply, product range and
reach-even though reach in rural India and to the poor still remains a challenge. The
government has developed initiatives to address this through the State Bank of India
expanding its branch network and through the National Bank for Agriculture and
Rural Development (NABARD) with facilities like microfinance.
Banking
• Banking is an industry that handles cash, credit,
and other financial transactions. Banks provide a
safe place to store extra cash and credit.
• A bank is a financial institution that accepts
deposits from the public and creates credit.
Lending activities can be performed either directly
or indirectly through capital markets. Due to their
importance in the financial stability of a country,
banks are highly regulated in most countries.
Types of bank
• Public sector bank
• Private sector bank
• Foreign sector bank
• Regional rural bank
• Cooperative bank
Public sector bank
• Public Sector Banks (PSBs) are banks where a majority
stake (i.e. more than 50%) is held by a government. The
shares of these banks are listed on stock exchanges. There
are a total of 21 PSBs in India.
• The Central Government entered the banking business
with the nationalization of the Imperial Bank of India in
1955. A 60% stake was taken by the Reserve Bank of India
and the new bank was named as the State Bank of India.
• The seven other state banks became the subsidiaries of the
new bank in 1959 when the State Bank of India (Subsidiary
Banks) Act, 1959 was passed under the Nehru government.
• The next major government intervention in banking took place
on 19 July 1969 when the Indira Gandhi government
nationalised an additional 14 major banks. The total deposits in
the banks nationalised in 1969 amounted to 50 crores. This
move increased the presence of nationalised banks in India, with
84% of the total branches coming under government control.
• The share of the banking sector held by the public banks
continued to grow through the 1980s, and by 1991 the public
sector banks accounted for 90% of the banking sector. A year
later, in March, 1992, the combined total of branches held by
public sector banks was 60,646 across India, and deposits
accounted for Rs. 1,10,000 crore. The majority of these banks
were profitable, with only one out of the 21 public sector banks
reporting a loss.
Private sector bank
• The private-sector banks in India represent part of the Indian
banking sector that is made up of private and public sector banks.
The "private-sector banks" are banks where greater parts of share
or equity are not held by the government but by private share
holders.
• Banking in India has been dominated by public sector banks (since
the 1969) when all major banks were nationalised by the Indian
government. However, since liberalisation in government banking
policy in the 1990s, old and new private sector banks have re-
emerged. They have grown faster & bigger over the two decades
since liberalisation using the latest technology, providing
contemporary innovations and monetary tools and techniques.
• The private sector banks are split into two groups by
financial regulators in India, old and new. The old
private sector banks existed prior to the
nationalisation in 1969 and kept their independence
because they were either too small or specialist to
be included in nationalisation. The new private
sector banks are those that have gained their
banking license since the liberalisation in the 1990s.
• The Nedungadi Bank was the first private sector
bank in India which was founded in 1899 by Rao
Bahadur T.M. (Thalakodi Madathil) Appu Nedungadi
in Kozhikode, Kerala.
Old private-sector banks
• The banks, which were not nationalized at the time of
banks are closely held by certain communities their
operations are mostly restricted to the areas in and
around their place of origin.
• Their Board of directors mainly consist of locally
prominent personalities from trade and business circles.
( Private sector banks) One of the positive points of these
banks is that, they lean heavily on service and technology
and as such, they are likely to attract more business in
days to come with the restructuring of the industry
round the corner.
New private-sector banks
• The banks, which came in operation after 1991, with the
introduction of economic reforms and financial sector reforms
are called "new private-sector banks". Banking regulation act
was then amended in 1993, which permitted the entry of new
private-sector banks in the Indian banking s sector. However,
there were certain criteria set for the establishment of the
new private-sector banks, some of those criteria being:#The
bank should have a minimum net worth of Rs. 200 crores.
• The promoters holding should be a minimum of 25% of the
paid-up capital.
Foreign bank
• A foreign branch bank is a type of foreign bank that
is obligated to follow the regulations of both the
home and host countries. Because the foreign
branch banks' loan limits are based on the parent
bank's capital, foreign banks can provide more
loans than subsidiary banks. This is because the
foreign branch bank, while possibly small in one
market, is technically part of a larger bank —
hence, it enjoys the capital base of the larger
parent entity.
Reasons for foreign bank enter in India
• India's GDP is seen growing at a robust pace of around 7% over the next few
years, throwing up opportunities for the banking sector to profit from.
• The credit of banks has risen by over 25% in 2004-05 and the growth
momentum is expected to continue over the next four to five years.
• Participation in the growth curve of the Indian economy in the next four
years will provide foreign banks a launch pad for greater business expansion
when they get more freedom after April 2009.
• RBI is following a liberal branch licensing policy for those foreign banks who
want to go to the unbanked pockets. They have started sensing enormous
business opportunities in financing trade and small and medium sectors in
small towns in the world's second fastest growing economy.
Regional rural bank
• Regional Rural Banks (RRBs) are scheduled commercial banks
(Government banks) operating at regional level in different
States of India. They have been created with a view to serve
primarily the rural areas of India with basic banking and
financial services. However, RRBs may have branches set up
for urban operations and their area of operation may include
urban areas too.
• Regional Rural Banks came into existence on Gandhi Jayanti in
1975 with the formation of a Prathama Grameen Bank. The
rural banks had the legislative backing of the Regional Rural
Banks Act 1976 . This act allowed the government to set up
banks from time to time wherever it considered necessary.
• The RRBs were owned by three entities with their respective
shares as follows:
• Central Government → 50%
• State government → 15%
• Sponsor bank → 35%
• Regional Rural Banks were conceived as low cost institutions
having a rural ethos, local feel and pro poor focus. Every bank
was to be sponsored by a “Public Sector Bank”, however, they
were planned as the self sustaining credit institution which
were able to refinance their internal resources in themselves
and were excepted from the statutory pre-emptions.
Regulation of RRBs
• Regional Rural Banks are regulated by National
Bank for Agriculture and Rural Development
(NABARD). Currently seven states viz. Tripura,
Nagaland, Manipur, Mizoram, Arunachal Pradesh
Meghalaya and Puducherry, have state-level
RRBs. Gujarat and Karnataka too have demanded
formation of state level RRB. In case of West
Bengal, the state Assembly took unanimous
resolution in favor of State level RRB in the year
2004.
Structure and Functions of the Regional Rural Banks
• The Regional Rural Banks (RRBs) aimed at providing credit and other
facilities to the small and marginal farmers, agricultural laborers,
artisans and small entrepreneurs in rural areas.
• The RRB Act, 1986, empowers the Central Government to establish
in a State or Union Territory one or more RRBs when any sponsor
bank makes such a request The sponsor bank assists the RRB in
many ways by subscribing to its share capital, by helping in its
establishment, by assisting in recruitment and training of its cadre,
and in general providing such managerial and financial assistance
sought by the RRB.
• The RRB functions within the local limits as specified by government
notification. It can have its branches at any place as notified by the
government.
Structure and Organisation of the RRB:
• The authorised capital of an RRB is fixed at Rs. 1 crore and its
issued capital at Rs. 2 lakhs. Of the issued capital, 50 per cent
is to be subscribed by the Central Government, 15 per cent by
the concerned State Government and the rest 35 per cent by
the sponsoring bank.
• The working and affairs of the RRB are directed and managed
by a Board of Directors consists of a Chairman, three directors
to be nominated by the Central Government, and not more
than two directors to be nominated by the State Government
concerned, and not more than 3 directors to be nominated by
the sponsoring bank. The chairman is appointed by the Central
Government and his term of office does not exceed five years.
Functions of the RRB:
• The functions of the RRB are as follows:
• (1) Granting of loans and advances to small and marginal
farmers and agricultural labourers, whether individually or in
groups, and to co-operative societies, agricultural processing
societies, co-operative farming societies, primarily for
agricultural purposes or for agricultural operations and other
related purposes;
• (2) Granting of loans and advances to artisans, small
entrepreneurs and persons of small means engaged in trade,
commerce and industry or other productive activities within
its area of co-operation; and
• (3) Accepting deposits.
Cooperative Banks
• Cooperative Banks in India have become an
integral part of the success of Indian Financial
Inclusion story. They have achieved many
landmarks since their creation and have
helped a normal rural Indian to feel
empowered and secure. The story has not
been smooth and has its share of procedural
glitches and woes placed at various pockets.
Co-operative bank
• Cooperative bank is retail and commercial banking
organized on a cooperative basis. Cooperative banking
institutions take deposits and lend money in most parts
of the world.
• Cooperative banking includes retail banking carried out
by credit unions, mutual savings banks, building
societies and cooperatives, as well as commercial
banking services provided by mutual organizations (such
as cooperative federations) to cooperative businesses.
• Indian cooperative structures are one of the largest such
networks in the world with more than 200 million
members. It has about 67% penetration in villages and fund
46% of the total rural credit. It also stands for 36% of the
total distribution of rural fertilizers and 28% of rural fair
price shops.
• Structure of Cooperative Banking in India
• The structure of cooperative network in India can be
divided into 2 broad segments-
Urban Cooperative Banks
Rural Cooperatives
Urban Cooperatives
• Urban Cooperatives can be further divided into
scheduled and non-scheduled. Both the categories
are further divided into multi-state and single-state.
• Majority of these banks fall in the non-scheduled
and single-state category. Banking activities of
Urban Cooperative Banks are monitored by RBI.
Registration and Management activities are
managed by Registrar of Cooperative Societies
(RCS). These RCS operate in single-state and Central
RCS (CRCS) operate in multiple state.
Rural Cooperatives
• The rural cooperatives are further divided into
short-term and long-term structures. The short-
term cooperative banks are three tiered operating
in different states. These are-
• State Cooperative Banks- They operate at the apex
level in states
• District Central Cooperative Banks-They operate at
the district levels
• Primary Agricultural Credit Societies-They operate
at the village or grass-root level.
Schedule and non-schedule bank
• Scheduled Banks in India refer to those banks
which have been included in the Second
Schedule of Reserve Bank of India Act, 1934.
RBI in turn includes only those banks in this
Schedule which satisfy the criteria laid down
vide section 42(6)(a) of the said Act. Banks not
under this Schedule are called Non-Scheduled
BASIS FOR COMPARISON SCHEDULED NON-SCHEDULED
BANKS BANKS
Meaning Scheduled banks are Non-scheduled banks are
a banking corporation the banks which do not
whose minimum paid comply with the rules
up capital is Rs. 25 specified by the Reserve
lakhs and does not Bank of India, or say the
harm the interest of banks which do not come
the depositors under the category of
scheduled banks.
Second Schedule Listed in the second Not-listed in the second
schedule. schedule.
Cash Reserve Ratio Maintained with RBI Maintained with themselves
Returns To be submitted No such provision of
periodically. submitting periodic returns.
Borrowing Scheduled banks are Non-Scheduled banks are not
allowed to borrow money allowed to borrow money from RBI
from RBI for regular for regular banking purposes.
banking purposes.
