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Sr. No. Page No.
01 INTRODUCTION 03
02 HISTORY OF BANKING IN INDIA 03
03 THE BANKING STRUCTURE IN INDIA 06
04 THE BANKING STRUCTURE IN INDIA 08
05 TYPES OF BANKS 10
06 BANKING FUNCTIONS 13
07 FUNCTION OF COMMERCIAL BANKS 14
08 BIBLIOGRAPHY 18
INTRODUCTION
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India cannot have a healthy economy without a sound and effective banking system. The
banking system should be hassle free and able to meet the new challenges posed by
technology and other factors, both internal and external.
In the past three decades, India's banking system has earned several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer confined to
metropolises or cities in India. In fact, Indian banking system has reached even to the
remote corners of the country. This is one of the main aspects of India's growth story.
The government's regulation policy for banks has paid rich dividends with the
nationalization of 14 major private banks in 1969. Banking today has become convenient
and instant, with the account holder not having to wait for hours at the bank counter for
getting a draft or for withdrawing money from his account.
HISTORY OF BANKING IN INDIA
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases:
Early phase of Indian banks, from 1786 to 1969
Nationalization of banks and the banking sector reforms, from 1969 to 1991
New phase of Indian banking system, with the reforms after 1991
Phase 1
The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and
Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1840), and Bank of Madras (1843) as independent units and called them
Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of
India, a bank of private shareholders, mostly Europeans, was established. Allahabad Bank
was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894
with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of India,
Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. The Reserve
Bank of India came in 1935.
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During the first phase, the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1,100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government of India
came up with the Banking Companies Act, 1949, which was later changed to the Banking
Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of
India (RBI) was vested with extensive powers for the supervision of banking in India as the
Central banking authority. During those days, the general public had lesser confidence in
banks. As an aftermath, deposit mobilization was slow. Moreover, the savings bank facility
provided by the Postal department was comparatively safer, and funds were largely given to
traders.
Phase 2
The government took major initiatives in banking sector reforms after Independence. In
1955, it nationalized the Imperial Bank of India and started offering extensive banking
facilities, especially in rural and semi-urban areas. The government constituted the State
Bank of India to act as the principal agent of the RBI and to handle banking transactions of
the Union government and state governments all over the country. Seven banks owned by
the Princely states were nationalized in 1959 and they became subsidiaries of the State
Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second
phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80
percent of the banking sector in India came under the government ownership.
Phase 3
This phase has introduced many more products and facilities in the banking sector as part of
the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was
set up, which worked for the liberalization of banking practices. Now, the country is flooded
with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service
to customers. Phone banking and net banking are introduced. The entire system became
more convenient and swift. Time is given importance in all money transactions.
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The financial system of India has shown a great deal of resilience. It is sheltered from crises
triggered by external macroeconomic shocks, which other East Asian countries often
suffered. This is all due to a flexible exchange rate regime, the high foreign exchange
reserve, the not-yet fully convertible capital account, and the limited foreign exchange
exposure of banks and their customers.
Nationalization Process
1955: Nationalization of State Bank of India
1959: Nationalization of SBI subsidiaries
1969: Nationalization of 14 major banks
1980: Nationalization of seven banks with deposits over Rs 200 crore
The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then
prime minister. It nationalised 14 banks then. These banks were mostly owned by
businessmen and even managed by them.
Central Bank of India
Bank of Maharashtra
Dena Bank
Punjab National Bank
Syndicate Bank
Canara Bank
Indian Bank
Indian Overseas Bank
Bank of Baroda
Union Bank
Allahabad Bank
United Bank of India
UCO Bank
Bank of India
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THE BANKING STRUCTURE IN INDIA
The banking sector in India functions under the umbrella of the RBI—the regulatory, central
bank. The Reserve Bank of India Act was passed in 1934 and the RBI was constituted in 1935
as the apex bank. The Banking Regulations Act was passed in 1949. This Act brought the RBI
under government control. Under the Act, the RBI received wide-ranging powers in regards
to establishment of new banks, mergers and amalgamations of banks, opening and closing
of branches of banks, maintaining certain standards of banking business, inspection of
banks, etc. The Act also vested licensing powers and the authority to conduct inspections
with the RBI. Banks in India can broadly be classified as regional rural banks or RRBs,
scheduled commercial banks or SCBs, and co-operative banks.
The commercial banking structure in India consists of scheduled commercial banks and
unscheduled banks. Scheduled banks constitute those banks that are included in the Second
Schedule of Reserve Bank of India (RBI) Act, 1934.
As on June 30, 1999, there were 300 scheduled banks in India having a total network of
64,918 branches. The scheduled commercial banks in India comprise State Bank of India and
its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-
operative banks, and regional rural banks. Before the nationalization of Indian banks, the
State Bank of India (SBI) was the only nationalized bank, which was nationalized on July 1,
1955, under the SBI Act of 1955. The nationalization of seven State Bank subsidiaries took
place in 1959.
After the nationalization of banks in India, the branches of the public sector banks rose to
approximately 800 percent in deposits and advances took a huge jump by 11,000 percent.
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BANKING
STRUCTUREIN
INDIA
Scheduled
Commercial Banks
Nationalised Banks
Private Banks
Regional Rural bank
Scheduled Co-
OperativeBank
NAFSCOB
Urban Co-Operative
Banks
Rural Co-operative
Credit Institutin
Long Term Structure
State Co-operative
Agriculture & Rural
Development Banks
Primary Co-
operative Agriculture
& Rural
Development Banks
Short Term structure
Statee Co-operative
Banks
District centarl Co-
operative bBanks
Primar Agricultut=re
Credit Socities
All India Financial
Institution
NABARD
SIDBI
EXIM
IDBI
SCHEDULED
BANKS IN INDIA
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THE PRESENT BANKING SCENARIO
Indian banking had come a long way since India adopted reforms path. Today Indian Banks
are as technology savvy as their counter parts in developed countries. The
competitive and reform force have led to the emergence of internet, ebanking, ATM, credit
card and mobile banking too, to let banks attract and retain customers. This apart retail
lending has emerged as another major opportunity for banks. Due to globalization,
liberalization and privatization mode, Indian banks going global and many global banks
setting up shops in India, the Indian banking system is set to involve into a totally new level
it will help the banking system grow in strength going into the future.
In recent times economy is been pushing to increase the role of multi-national banks in the
banking sector.
But it is opposed on the front that it will lead to state run insurers loosing business and
workers their job. There are several reasons why giving foreign investor’s greater voting
rights are fraught with dangers. When domestic or foreign investors acquire a large share
holding in any bank and exercise proportionate voting rights, it creates potential problems
not only of excursive concentration in the banking sector but also can expose the economy
to more intensive financial crises at the slightest hint of panic.
Opposition is not considering the need of present situation. FDI in banking sector can solve
various problems of the overall banking sector. Such as –
Innovative Financial Products
Technical Developments in the Foreign Markets
Problem of Inefficient Management
Non-performing Assets
Financial Instability
Poor Capitalization
Changing Financial Market Conditions
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If we consider the root cause of these problems, the reason is low-capital base and all the
problems is the outcome of the transactions carried over in a bank without a substantial
capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will
directly solve the problem of capital base. Along with that it entails the following benefits
such as
Technology Transfer
As due to the globalization local banks are competing in the global market, where innovative
financial products of multinational banks is the key limiting factor in the development of
local bank. They are trying to keep pace with the technological development in the banks.
Now a days banks have been prominent and prudent in the rapid expansion of consumer
lending in domestic as well as in foreign markets. It needs appropriate tools to assess (how
such credit is managed) credit management of the banks and authorities in charge of
financial stability. It may need additional information and techniques to monitor for
financial vulnerabilities. FDI's tech transfers, information sharing, training programs and
other forms of technical assistance may help meet this need.
Better Risk Management
As the banks are expanding their area of operation, there is a need to change their
strategies exert competitive pressures and demonstration effect on local institutions, often
including them to reassess business practices, including local lending practices as the whole
banking sector is crying for a strategic policy for risk management.
Through FDI, the host countries will know efficient management technique. The best
example is Basel II. Most of the banks are opting Basel II for making their financial system
more safer.
Financial Stability and Better Capitalization
Host countries may benefit immediately. From foreign entry, if the foreign bank re-capitalize
a struggling local institution. In the process also provides needed balance of payment
finance. In general; more efficient allocation of credit in the financial sector, better
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capitalization and wider diversification of foreign banks along with the access of local
operations to parent funding, may reduce the sensitivity of the host country banking system
and lead towards financial stability.
So due to the aforesaid benefits economy has consistent flow of FDI over the past few years.
In addition to that, the govt. has also taken step to enhance the FDI (eg. Telecom, civil
aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a
no. of new sectors in 2005-06 such as Greenfield airport projects, export trading. All these
measures have been contributing towards increasing direct investment.
TYPES OF BANKS
TYPES OF
BANKS
Retail Banks
Commercial
banks
Central
banks
Specialized
banks
Cooperative
banks
Investment
Banks
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The banking industry can be divided into following sectors, based on the clientele served
and products and services offered:
Retail Banks
Commercial banks
Cooperative banks
Investment Banks
Specialized banks
Central banks
Retail Banks:
Retail banks provide basic banking services to individual consumers. Examples include
savings banks, savings and loan associations, and recurring and fixed deposits. Products and
services include safe deposit boxes, checking and savings accounting, certificates of deposit
(CDs), mortgages, personal, consumer and car loans.
Commercial Banks:
Banking means accepting deposits of money from the public for the purpose of lending or
investment. Commercial Banks provide financial services to businesses, including credit and
debit cards, bank accounts, deposits and loans, and secured and unsecured loans. Due to
deregulation, commercial banks are also competing more with investment banks in money
market operations, bond underwriting, and financial advisory work. Commercial banks in
modern capitalist societies act as financial intermediaries, raising funds from depositors and
lending the same funds to borrowers. The depositors’ claims against the bank, their
deposits, are liquid, meaning banks are expected to redeem deposits on demand, instantly.
Banks’ claims against their borrowers are much less liquid, giving borrowers a much longer
span of time to repay money owed banks. Because a bank cannot immediately reclaim
money lent to borrowers, it may face bankruptcy if all its depositors show up on a given day
to withdraw all their money.
There are two types of commercial banks, public sector and private sector banks.
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Public Sector Banks:
Public sectors banks are those in which the government has a major stake and they usually
need to emphasize on social objectives than on profitability.
Private sector banks:
Private sector banks are owned, managed and controlled by private promoters and they are
free to operate as per market forces.
Investment Banks:
An investment bank is a financial institution that assists individuals, corporations and
governments in raising capital by underwriting and/or acting as the client's agent in the
issuance of securities. An investment bank may also assist companies involved in mergers
and acquisitions, and provide ancillary services such as market making, trading of
derivatives, fixed income instruments, foreign exchange, commodities, and equity
securities.
Investment banks aid companies in acquiring funds and they provide advice for a wide range
of transactions. These banks also offer financial consulting services to companies and give
advice on mergers and acquisitions and management of public assets.
Cooperative Banks:
Cooperative Banks are governed by the provisions of State Cooperative Societies Act and
meant essentially for providing cheap credit to their members. It is an important source of
rural credit i.e., agricultural financing in India.
Specialized Banks:
Specialized banks are foreign exchange banks, industrial banks, development banks, export-
import banks catering to specific needs of these unique activities. These banks provide
financial aid to industries, heavy turnkey projects and foreign trade.
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Central Banks:
Central banks are bankers’ banks, and these banks trace their history from the Bank of
England. They guarantee stable monetary and financial policy from country to country and
play an important role in the economy of the country. Typical functions include
implementing monetary policy, managing foreign exchange and gold reserves, making
decisions regarding official interest rates, acting as banker to the government and other
banks, and regulating and supervising the banking industry.
These banks buy government debt, have a monopoly on the issuance of paper money, and
often act as a lender of last resort to commercial banks. The term bank nowadays refers to
these commercial banks. The Central bank of any country supervises controls and regulates
the activities of all the commercial banks of that country. It also acts as a government
banker. It controls and coordinates currency and credit policies of any country. The Reserve
Bank of India is the central bank of India.- Learn more at www.technofunc.com. Your online
source for free professional tutorials.
BANKING FUNCTIONS
The banking industry is growing rapidly. It's estimated that the assets of the 1,000 largest
banks are worth almost $100 trillion USD. With the growth in the industry banks manages a
diverse portfolio of functions. Apart from the segments discussed above banks also need to
manage following functions and can also be classified based on functions:
Banking Technology
Internal and External Reconciliations
Internal and External Clearing
Surveillance
Human Resources
Finance
Legal and Compliance
Sales and Trading
Transaction Banking- Learn more at www.technofunc.com. Your online source for
free professional tutorials.
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FUNCTION OF COMMERCIAL BANKS
These functions of banks are explained below.
Primary Functions of Banks
The primary functions of a bank are also known as banking functions. They are the main
functions of a bank.
These primary functions of banks are explained below.
1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of different types, such as
Saving Deposits
Fixed Deposits
Current Deposits
Recurring Deposits
a. Saving Deposits
This type of deposits encourages saving habit among the public. The rate of interest is low.
At present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain
restrictions. This account is suitable to salary and wage earners. This account can be opened
in single name or in joint names.
b. Fixed Deposits
Functions
of Banks
Primary
Functions
Accepting
Deposits
Saving Deposits
Fixed Deposits
Current Deposits
Recurring Deposits
Granting
Advances
Overdraft
Cash Credit
Loans
Discounting ofBills
Secoundry
Functions
Agency
Functions
Transfer of Funds'
Periodic Payment
CollectionofCheques
Portfolio Management
Periopdic Collection
Other Agency Functions
Utility
Functions
Drafts
Lockers
Underwriting
Project Reports
Social Welfare
Programmes
Other Utility Functions
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Lump sum amount is deposited at one time for a specific period. Higher rate of interest is
paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry
of the period. Those who have surplus funds go for fixed deposit.
c. Current Deposits
This type of account is operated by businessmen. Withdrawals are freely allowed. No
interest is paid. In fact, there are service charges. The account holders can get the benefit of
overdraft facility.
d. Recurring Deposits
This type of account is operated by salaried persons and petty traders. A certain sum of
money is periodically deposited into the bank. Withdrawals are permitted only after the
expiry of certain period. A higher rate of interest is paid.
2. Granting of Loans and Advances
The bank advances loans to the business community and other members of the public. The
rate charged is higher than what it pays on deposits. The difference in the interest rates
(lending rate and the deposit rate) is its profit.
The types of bank loans and advances are :-
Overdraft
Cash Credits
Loans
Discounting of Bill of Exchange
a. Overdraft
This type of advances are given to current account holders. No separate account is
maintained. All entries are made in the current account. A certain amount is sanctioned as
overdraft which can be withdrawn within a certain period of time say three months or so.
Interest is charged on actual amount withdrawn. An overdraft facility is granted against a
collateral security. It is sanctioned to businessman and firms.
b. Cash Credits
The client is allowed cash credit upto a specific limit fixed in advance. It can be given to
current account holders as well as to others who do not have an account with bank.
Separate cash credit account is maintained. Interest is charged on the amount withdrawn in
excess of limit. The cash credit is given against the security of tangible assets and / or
guarantees. The advance is given for a longer period and a larger amount of loan is
sanctioned than that of overdraft.
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c. Loans
It is normally for short term say a period of one year or medium term say a period of five
years. Now-a-days, banks do lend money for long term. Repayment of money can be in the
form of installments spread over a period of time or in a lumpsum amount. Interest is
charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest
may be slightly lower than what is charged on overdrafts and cash credits. Loans are
normally secured against tangible assets of the company.
d. Discounting of Bill of Exchange
The bank can advance money by discounting or by purchasing bills of exchange both
domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of
the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee
or acceptor of the bill and the amount is collected.
Secondary Functions of Banks
The bank performs a number of secondary functions, also called as non-banking functions.
These important secondary functions of banks are explained below.
1. Agency Functions
The bank acts as an agent of its customers. The bank performs a number of agency functions
which includes:-
Transfer of Funds
Collection of Cheques
Periodic Payments
Portfolio Management
Periodic Collections
Other Agency Functions
a. Transfer of Funds
The bank transfer funds from one branch to another or from one place to another.
b. Collection of Cheques
The bank collects the money of the cheques through clearing section of its customers. The
bank also collects money of the bills of exchange.
c. Periodic Payments
On standing instructions of the client, the bank makes periodic payments in respect of
electricity bills, rent, etc.
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d. Portfolio Management
The banks also undertakes to purchase and sell the shares and debentures on behalf of the
clients and accordingly debits or credits the account. This facility is called portfolio
management.
e. Periodic Collections
The bank collects salary, pension, dividend and such other periodic collections on behalf of
the client.
f. Other Agency Functions
They act as trustees, executors, advisers and administrators on behalf of its clients. They act
as representatives of clients to deal with other banks and institutions.
2. General Utility Functions
The bank also performs general utility functions, such as:-
Issue of Drafts, Letter of Credits, etc.
Locker Facility
Underwriting of Shares
Dealing in Foreign Exchange
Project Reports
Social Welfare Programmes
Other Utility Functions
a. Issue of Drafts and Letter of Credits
Banks issue drafts for transferring money from one place to another. It also issues letter of
credit, especially in case of, import trade. It also issues travellers' cheques.
b. Locker Facility
The bank provides a locker facility for the safe custody of valuable documents, gold
ornaments and other valuables.
c. Underwriting of Shares
The bank underwrites shares and debentures through its merchant banking division.
d. Dealing in Foreign Exchange
The commercial banks are allowed by RBI to deal in foreign exchange.
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e. Project Reports
The bank may also undertake to prepare project reports on behalf of its clients.
f. Social Welfare Programmes
It undertakes social welfare programmes, such as adult literacy programmes, public welfare
campaigns, etc.
g. Other Utility Functions
It acts as a referee to financial standing of customers. It collects creditworthiness
information about clients of its customers. It provides market information to its customers,
etc. It provides travellers' cheque facility.
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BIBLIOGRAPHY
www.wikipedia.org
www.investopedia.com
www.moneycontrol.com
money.livemint.com
http://www.technofunc.com/
www.finance-glossary.com
(For definition of certain financial terms)
Financial Management -by I. M. Pandey
Financial Management- by Ravi Kishor
