3. BANK-
๏ A bank is a financial intermediary that
accepts deposits and channels those
deposits into lending activities. A bank
links customers that have capital
deficits and customers with capital
surpluses.
KETAN - GNIOT
5. Banking Sectorโs history can be divided into
four phases โ
1. Evolutionary phase (Prior to 1947)
2. Foundation Phase (Between 1947 -1968)
3. Expansion Phase( 1968-1984)
4. Consolidation Phase( 1984-1990)
5. Reformatory Phase ( After 1990)
KETAN - GNIOT
6. Evolutionary phase (Prior to 1947)
๏ First Bank which was established with Indian
Ownership and management was Oudh Commercial
Bank, formed in 1881
๏ Next was Ayodhya Bank in 1884, followed by
Punjab National Bank in 1894.
๏ Allahabad Bank was established in 1865 with the
help of European Management was also very
prominent in those days.
๏ In 20th Century ,We had twelve more scheduled
banks coming up with the major ones being Bank
of Baroda(1906), Canara Bank (1906), The Indian
Bank (1907),The Bank of India(1908), Central Bank of
India(1911).
KETAN - GNIOT
7. CONTโฆ.
๏ By 1935 , Reserve Bank of India came into existence
๏ Banking Companies Act was passed in 1949 to conduct
and control commercial banks
๏ Transformation of Imperial Bank of India to State Bank
of India
๏ By 1921, the need of a State bank which had all support
and resources from the government was felt.
KETAN - GNIOT
8. Foundation Phase (Between 1948 -1968)
๏ Period of reorganizing and consolidation for
existing banking system
๏ Banking Companies Act was passed in 1949 to
conduct and control commercial banks
๏ Banking sector which in the pre-independence era
was supporting the needs of the government , rich
individuals and traders opened its doors .
๏ Credit was extended to small borrowers,
agricultural sector
๏ Transformation of Imperial Bank of India to State
Bank of India.
๏ Defining the role of SBI in Indian economy
๏ Strengthening the cooperative credit structure
๏ Setting up framework for providing long term
finance to agriculture and Industry.
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9. Expansion Phase( 1968-1984)
๏ The Year 1969 brought the โFirst Banking
Revolutionโ
๏ Socialization of Banking.
๏ Nationalization of 14 Banks to make
banking services reach the masses.(19 July 1969)
๏ Rapid branch expansion, credit creation ,deposits mobilization
๏ Penetration of banks into rural areas.
๏ Banks funded all major Government projects and Schemes.
๏ Second Phase of Banking revolution came in April,1980 with
nationalization of 6 more banks.
๏ Birth of Regional Rural Bank in 1975 and NABARD in 1982
๏ Commercial Banks declined from 281 in 1968 to 268 in 1984.
KETAN - GNIOT
10. Consolidation Phase( 1984-1990)
WHY WE NEED THIS PHASE--
๏ Competition amongst the banks was at a low.
๏ Gross inefficiency and loss of control was
widespread in many offices.
๏ Customer service was least priority to banks.
Performance of banks was measured in terms of
growth of deposits , advances and quality took a
backseat.
KETAN - GNIOT
11. Steps taken in consolidation phase -
๏ Relaxation of tight regulations under which banks were operating
๏ Serious attention was given to improving housekeeping, customer
services, credit management, staff productivity and profitability of
the banks.
๏ Concrete steps were taken to rationalize the rates of bank deposits
and lending.
๏ Composition of assets was fixed at 63.5% of bank funds as CRR
and SLR
๏ Salary structure was negotiated by IBA and validated by
government
KETAN - GNIOT
13. Reformatory Phase ( After 1990)
WHY REFORM ARE NEEDED-
๏ The reforms were initiated in the middle of a โcurrent
accountโ crisis that occurred in early 1991.
๏ The crisis was caused by poor macroeconomic
performance, characterized by :-
๏ a public deficit of 10 per cent of GDP,
๏ a current account deficit of 3 per cent of GDP,
๏ an inflation rate of 10 per cent
๏ Growing domestic and foreign debt, and
๏ A temporary oil price boom following the Iraqi invasion
of Kuwait in 1990.
KETAN - GNIOT
16. REFORMSโฆ
RBIโs approach
๏ Cautious and proper sequencing of various measures giving
adequate time to the various agents to undertake the necessary
norms e.g. gradual introduction of prudential norms
๏ Mutually reinforcing measures, that as a package would be enabling
reform but non-disruptive of the confidence in the system e.g.
reduction in refinance with reduction in CRR
๏ Complementarily between reforms in banking sector and changes in
fiscal, external and monetary policies, especially in terms of co-ordination
with Government e.g.recapitalisation of Government
owned banks coupled with prudential regulation
๏ Developing financial infrastructure in terms of supervisory body,
audit standards, technology and legal framework; e.g.,
establishment of Board for Financial Supervision
๏ Taking initiatives to nurture, develop and integrate money, debt and
forex markets, in a way that all major banks have an opportunity to
develop skills, participate and benefit; e.g., gradual reduction in the
minimum period for maturity of term deposits.
KETAN - GNIOT
17. Reform Measures..
Interest rate liberalization-
Prior to the reforms, interest rates were a tool of cross-subsidization
between different sectors of the economy.
๏ Interest rate structure had grown increasingly complex with both
lending and deposit rates set by RBI
๏ At present, RBI is only setting the interest rates for NRI deposits.
Statutory Pre-emptions-
Major problem faced by the banking system was on account of
statutory pre-emption of banks resources to finance Government's
budgetary needs
โข Removal of these constraints meant a planned reduction in statutory
pre-emption
โข Effective CRR reduced from 15% in 1991 to 4.75% at present
โข SLR reduced from 38.5% in 1992 to 24% at present
KETAN - GNIOT
18. Reform Measures..
Competition and Transparency-
๏ Competition is sought to be fostered by permitting
new private sector banks, and more liberal entry of
branches of foreign banks
Supervision-
๏ An independent Board for Financial Supervision under
aegis of the RBI has been established, and consistent
with international practice, focus is also on offsite
inspections and on control systems internal to the banks.
KETAN - GNIOT
19. Reform Measures..
๏ The guidelines for licensing of new banks in the private
sector were issued by RBI in January 1993
๏ RBI granted licenses to 10 banks in the private sector
during 1993 to 2000
๏ By March 2005, the new private sector banks and the
foreign banks had a combined share of almost 20% of
total assets.
KETAN - GNIOT
20. IMPACT OF REFORMS IN THE
BANKING SECTOR IN INDIA
๏ India has lead to improve access to credit through newly
established domestic banks, foreign banks and bank-like
intermediaries. Government debt markets have developed,
enabling greater operational independence in monetary policy
making.
๏ Significant improvement in Information infrastructure.
๏ Operational and Managerial freedom to State owned Banks
๏ Government of India removed limits on banks Statutory
Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
requirements, and gave the central bank greater flexibility to
set the limits.
๏ In the first phase, between March 2005 and 2009, foreign
banks will be allowed to establish a wholly owned subsidiary
or to convert existing operations into a subsidiary.
KETAN - GNIOT
21. CONTโฆ.
๏ The RBI has raised the limit of Foreign Direct
Investment in private banks to 74 percent from 49
percent.
๏ 5 per cent foreign investment limit in private banks by
individual foreign banks
๏ 10 per cent foreign investment limit in private banks by
foreign institutional investors or individual investors or
individual corporate entities.
KETAN - GNIOT
