Banking & Insurance UNIT_I

8/3/2019 Banking & Insurance UNIT_I

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Evolution of BankingEvolution of Banking

UNIT IUNIT I


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Evolution of Banking in the WestEvolution of Banking in the West

PeriodofAncient BankingPeriodofAncient Banking

PeriodofModern BankingPeriodofModern Banking


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Period of Ancient BankingPeriod of Ancient Banking

The banking business cameintoexistenceonly afterThe banking business cameintoexistenceonly after

money was inventedmoney was invented

In ancient Greece, around 2000 B.C. thefamousIn ancient Greece, around 2000 B.C. thefamous

temples ofDelphi, Olympia etc. were used astemples ofDelphi, Olympia etc. were used as

depositoriesdepositories

The business ofmoney exchange began in theseThe business ofmoney exchange began in these

templestemples They also started providing loans at interest andThey also started providing loans at interest and

interest on depositsinterest on deposits


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Period of Ancient BankingPeriod of Ancient Banking

During the Middle Age money lending activities wereDuring the Middle Age money lending activities werelargely in the hands ofJews and thefinancers oflargely in the hands ofJews and thefinancers ofLombardy.Lombardy.

Christians wereforbidden by Canon lawChristians wereforbidden by Canon law The Medieval Church regarded money lending as anThe Medieval Church regarded money lending as an

unpardonable sin.unpardonable sin.

Therefore there was monopoly ofJews in thefieldofTherefore there was monopoly ofJews in thefieldof

Banking.Banking. Jews dominated the business ofbanking in manyJews dominated the business ofbanking in many

European countriesEuropean countries


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Period of Modern BankingPeriod of Modern Banking

In 13In 13thth century the holdofthe church on the laymancentury the holdofthe church on the layman

weakened.weakened.

Christians enteredinto profitable business ofmoneyChristians enteredinto profitable business ofmoney

lendinglending

This resultedin competition to Jews whoenjoyedThis resultedin competition to Jews whoenjoyed

monopolymonopoly

In 14In 14thth

centurycentury-- negotiable bill ofexchange cameintoexistence &negotiable bill ofexchange cameintoexistence &

-- overdraft facility was given to customersoverdraft facility was given to customers


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Important Public Banking institutions:Important Public Banking institutions:

YearofestablishmentYearofestablishment Nameofthe BankNameofthe Bank

11571157 Bank ofVeniceBankofVenice

14011401 Bank ofBarcelonaBankofBarcelona

14071407 Bank ofGenoaBankofGenoa


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Features :Features :

In theinitial period banks issued currency notesIn theinitial period banks issued currency notes

The concept ofcentral bank was in its infant stageThe concept ofcentral bank was in its infant stage

ExpansionExpansion ofof tradingtrading andand commercialcommercial activityactivity inin northernnorthern

EuropeEurope ledled toto establishmentestablishment ofof variousvarious PrivatePrivate andand PublicPublic

bankingbanking houseshouses

TheThebankbankofofAmsterdamAmsterdam waswas establishedestablished inin 16091609


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(United Kingdom)(United Kingdom) RegimeRegime ofof QueenQueen ElizabethElizabeth II bank ingbanking byby moneymoney

lenderslenders andand GoldsmithsGoldsmiths..

Regime

Regime ofof KingKing CharlesCharles tooktook possessionpossession ofof goldgold keptkeptbyby merchantsmerchants inin TowerTower ofofLondonLondon..

ThereforeTherefore merchantsmerchants depositeddeposited valuablesvaluables withwith goldsmithsgoldsmiths

atat aa commissioncommission..

GoldsmithsGoldsmiths realisedrealisedbetterbetter opportunityopportunity toto earnearn byby lendinglendingthethe merchantsmerchants depositsdeposits..

ReceiptsReceipts werewere issuedissued toto acknowledgeacknowledge depositsdeposits..

SurplusSurplus depositsdeposits keptkept werewere withwith nationalnational treasurytreasury..


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GovernmentGovernment refusedrefused toto paypay backback depositsdeposits duedue toto whichwhichgoldsmithsgoldsmiths businessbusiness waswas ruinedruined..

ThisThis ledled toto growthgrowth ofof privateprivate sectorsector bankingbanking --establishmentestablishment ofofBankBankofofEnglandEngland inin 16941694..

PassagePassage ofof BankingBanking Act,Act, 19331933 permittedpermitted establishmentestablishment ofofJointJoint StockStock BanksBanks withwith unlimitedunlimited liabilityliability..

ExpansionExpansion ofof internationalinternational tradetrade ledled toto JSBsJSBs openingopeningbranchesbranches && manymany partnershippartnership firmsfirms startedstarted operatingoperating asasbranchesbranches ofofJSBsJSBs..

AfterAfter 19601960 duedue toto mergers,mergers, thethe numbernumber ofof banksbanksreducedreduced fromfrom 1313 toto 55..


(United Kingdom)(United Kingdom)


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(United States of America)(United States of America) PriorPriortoto 17821782 bankingbanking atat preliminarypreliminary levellevel..

17821782 FirstFirst ModernModern Bank Bank waswas establishedestablished inin

Philadelphia,Philadelphia, issuingissuing convertibleconvertiblepaperpapermoneymoney.. ByBy 18001800 -- AdditionalAdditional 3030 banksbanks setset upup..

17911791 -- FirstFirst BankBankofofUSUS setset upup

18161816 -- SecondSecond BankBankofof USUS setset upup.. FederalFederal GovtGovt.. ownedowned

11//55thth ofofStockStockofofthisthis bankbank.. ByBy 18371837 -- 700700 banksbanks werewere inin existenceexistence totoprovideprovide financefinance

towardstowards infrastructureinfrastructure..


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Several unincorporated banks failed.Several unincorporated banks failed.

18291829 -- New York State passed Safety Fund Act toNew York State passed Safety Fund Act to

avoid loss due tofailure.avoid loss due tofailure.

18831883 -- Free Banking Act passedin Michigan.Free Banking Act passedin Michigan.

The Act permitted anyone toestablish banks. This ledThe Act permitted anyone toestablish banks. This led

to confusion about genuine notes.to confusion about genuine notes.

Around 10,000 different currency notes; henceAround 10,000 different currency notes; hencelegislation passedformaintaining cash reserve.legislation passedformaintaining cash reserve.

18621862 Act passed permitting establishment ofJSBsAct passed permitting establishment ofJSBs

with limited liability.with limited liability.

19131913 -- Central BankCentral Bank Federal Reserve Bank set up.Federal Reserve Bank set up.

Period of Modern BankingPeriod of Modern Banking(United States of America)(United States of America)


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USUS Bank ingBanking classificationclassification UnitUnit bank ing,banking, chainchainbankingbanking && branchbranch bankingbanking..

USUS banksbanks createcreate depositsdeposits whilewhile givinggiving loansloans..

ObligatoryObligatory toto keepkeep certaincertain amountamount ofof depositdeposit.. TheThe agreementagreement enteredentered intointo decideddecided when,when, howhow muchmuch

andand whywhy moneymoney waswas withdrawnwithdrawn..

ExtremeExtreme importanceimportance toto documentationdocumentation ofof proceduresprocedures;;

hencehence notnot flexibleflexible..

SupervisionSupervision ofof AmericanAmerican BanksBanks ByBy FederalFederal ReserveReserve

BankBank ((estbestb.. 19131913)) andand FederalFederal DepositDeposit InsuranceInsurance

CorporationCorporation ((estbestb.. 19331933))..

Period of Modern BankingPeriod of Modern Banking(United States of America)(United States of America)


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(France)(France) 17161716 BankBank GeneralGeneral establishedestablished.. ItIt acceptedaccepted depositsdeposits

butbut waswas prohibitedprohibited fromfrom givinggiving loansloans..

17201720 BankBank GeneralGeneral failedfailed..

17761776 BankBank byby thethe namename CaisseCaisse dd EscompleEscomple waswasestablishedestablished toto issueissue notesnotes..

17931793 -- FailedFailed duedue toto govtgovt.. loanloan nonnon--repaymentrepayment..

18001800 BanqueBanque dede FranceFrance waswas setset upup..

18601860 CreditCredit MobilierMobilier (a(a newnew generationgeneration bank)bank) waswasestablishedestablished toto provideprovide termterm fundsfunds toto industryindustry &&infrastructureinfrastructure..

ItIt failedfailed duedue toto lacklackofofliquidityliquidity..


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18801880 New banking system established having two typesNew banking system established having two types

ofbanks;ofbanks;

(i)(i) Deposit banks to collect savings & lend short term funds toDeposit banks to collect savings & lend short term funds toindustry and commerce, andindustry and commerce, and

(ii)(ii) Banks to provideresources forcapital market operations viz.Banks to provideresources forcapital market operations viz.

foreign govt. loans and public utilities.foreign govt. loans and public utilities.

22

ndnd

halfof

19halfof

19

thth

Centu

ryC

entu

ry Establ

ishm

ent

ofJSBs; wh

ichEstabl

ishm

ent

ofJSBs; wh

ichstarted using cheques.started using cheques.

Classification ofbanks in FranceClassification ofbanks in France

a.a. Nationalised banksNationalised banks

b.b. LargeR

egional Private BanksLargeR

egional Private Banksc.c. Deposit Banks in ParisDeposit Banks in Paris

Last of19Last of19thth CenturyCentury Establishment ofcoEstablishment ofco--operativeoperative

banks forprovision ofagricultural loans.banks forprovision ofagricultural loans.


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(Germany)(Germany)

18341834 11ststbank set up toissue notes.bank set up toissue notes.

After1848After1848 Set up oflarge JSBs.Set up oflarge JSBs.

Germany conductedinvestment banking; shiftingGermany conductedinvestment banking; shiftinglending from railways toindustry.lending from railways toindustry.

Provided current account andoverdraft facility.Provided current account andoverdraft facility.

18701870 banking business andindustry progressed.banking business andindustry progressed. 18751875 the numberoflarge JSBs was 33.the numberoflarge JSBs was 33.


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Industry had todependon banks due toinfancy ofIndustry had todependon banks due toinfancy ofshare market.share market.

After1After1stst World WarWorld War banking system collapsedbanking system collapseddue to small capital base.due to small capital base.

Reich bank unprepared to be lenderoflast resort.Reich bank unprepared to be lenderoflast resort.

Bank system rebuilt with stateintervention.Bank system rebuilt with stateintervention.

After2After2ndnd World WarWorld War Germany was dividedin twoGermany was dividedin twoparts; East Germany and West Germany.parts; East Germany and West Germany.

This adversely impacted banking business.This adversely impacted banking business.


(Germany)(Germany)


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(Russia)(Russia) Communist revolution impacted banking.Communist revolution impacted banking.

1414thth December1917December1917 Nationalisation ofall banks.Nationalisation ofall banks.

19241924 Separate banks established tofinancedifferentSeparate banks established tofinancedifferent

sectors oftheeconomy.sectors oftheeconomy. 19321932--36 banks merged to shape up to banking system.36 banks merged to shape up to banking system.

Important banks in Russia:Important banks in Russia:

BANKBANK YEAR OF ESTLMT.YEAR OF ESTLMT.GOS BankGOS Bank 19211921

Stroi BankStroi Bank 19221922

VhanestorgVhanestorg 19241924


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Evolution of Banking in India

Stage PeriodF

eaturesI From Vedic period to

1769

Noformal bank

II 1770-1900 Slow development of

Banking

III 1901-1947 Emergenceofmany

banks

IV 1948-1968 Restrictions on banks

V 1969-1990 Restrictions on banks

strengthened

VI 1991-onwards Era ofliberal banking


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Stage I : ( From Vedic period to 1769 )

Indigenous bankers and money lenders have been in

existence since Vedic period

Deposit banking cameintoexistencein the 2nd and 3rd

century

Kautilayas Arthashastra -

Maximum rates ofinterest on advances 15% - 60% p.a

In caseofhigh risk Maximum of240% rateofinterest

Discounting ofHundies by Indigenous bankers



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Moghul period (1526- 1707)

Indigenous bankers played a very important role in

money lending, financing internal and external tradeand giving financial assistance to kings

Several Kings issued metallic money

Indigenous bank ers were appointed as revenue

collectors andbankers to the King



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Moghul period (1526- 1707)

Aurangzeb in his reign conferred the title of Seth on

the most eminent banker ofhis time Manakchand.

Emperor Farrukshiyer confered on Fatehchand, the

title of Jagat seth (banker ofthe world)

The Indian Banking system received a certain amount

ofsetbackduring the reign of emperorAurangzeb



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Moghul period

Aurangzeb in his reign conferred the title of Seth on

the most eminent banker ofhis time Manakchand.

Emperor Farrukshiyer confered on Fatehchand, the

title of Jagat seth (banker ofthe world)

The Indian Banking system received a certain amount

ofsetbackduring the reign of emperorAurangzeb



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Decline ofShroff

Nawab of Oudh and Peshwas, sought the

assistance ofthesebankers

The principal occupation of these bankers was

that ofShroffs and money changers

Unification of currency under the East India

Company took away the most profitablebusiness

ofmoney changing



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East India Company was establishedin 1600

It was established to carry on trade between India and U.K

Several Europeans came to India

Indigenous bankers satisfied banking needs ofthe East IndiaCompany,its employees andothers

But due to theincreasein the volumeofinternational trade,it

becamedifficult fortheindigenous bankers.

Few agency houses wereestablished to provide banking facilities.

Agency houses started accepting deposits at a high rateofinterest

The money was usedforspeculative activities which was harmful.

This resultedin theestablishment ofthefirst modern bankin India



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Stage II : ( 1770 - 1900 )

Since the money collected by Agency Houses was not

being utilised properly, sofew Agency Houses in

Calcutta established thefirst bankin 1770- BankofHindustan.

Afterthis bank several banks wereestablished andin

ordertoregulateits activities the General Bankin

Bengal and Biharwas establishedin 1773.

In orderto provide banking facilities to the government

Presidency banks wereestablished



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Stage II : ( 1770 - 1900 )

Yearofestablishment Nameofthe Bank

1806 Presidency BankofBengal

1840 Presidency Bankof

Bombay

1843 Presidency BankofMadras


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Stage II : ( 1770 - 1900 )

In 1813 the British Government passed the legislation

removing all restrictions on British coming to India

This led to the establishment of several insurance

companies andbanks (unlimited liability)

Since theprinciple ofunlimited liability was not proper for

the growth of the business activities, in 1860 the principle

oflimited liability was introduced.


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Evolution of Banking in IndiaEvolution of Banking in India

(Stage III(Stage III 1901 to 1947)1901 to 1947)

SwadeshiSwadeshi MovementMovement startedstarted inin 19061906..

19061906--19131913 SeveralSeveral banksbanks werewere setset upup.. EgEg;; BOI,BOI, BOB,BOB,IndianIndian bank,bank, etcetc..

11stst worldworld warwar((19141914--19181918)) 8787 banksbanks closedclosed..

19211921 toto bringbring uniformityuniformity inin policiespolicies ofof PresidencyPresidencyBanks,Banks, theythey werewere amalgamatedamalgamated intointo ImperialImperial BankBank ofofIndiaIndia..

TillTill 19351935 -- ItIt operatedoperated partlypartly asas centralcentral andand partlypartlycommercialcommercial bankbank.. ItIt waswas thethe largestlargest commercialcommercial bankbank.. ItItperformedperformed allall centralcentral bank ingbanking functionsfunctions exceptexcept notenoteissueissue..


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Depression (1929Depression (1929--1933)1933) badly impacted banking.badly impacted banking.

19351935 toregulate banking system,RBI was set up intoregulate banking system,RBI was set up in

the private sector.the private sector.

22ndnd world war(1939world war(1939--1945) badly impactedindustry.1945) badly impactedindustry.

Special efforts tofinanceforreconstruction.Special efforts tofinanceforreconstruction.

19471947 Partition ofPakistan from India resultedinPartition ofPakistan from India resultedinfinancial losses offew banks.financial losses offew banks.

Evolution ofcoEvolution ofco--operative credit to solveruraloperative credit to solveruralindebtedness.indebtedness.

19041904 Official launch ofcoOfficial launch ofco--operative movement byoperative movement byenacting Coenacting Co--op Societies Act.op Societies Act.

RBIRBI playedplayed a key rolein promotion ofcoa key rolein promotion ofco--op banks.op banks.

CoCo--op banks satisfy banking needs ofurban poortoo.op banks satisfy banking needs ofurban poortoo.


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(Stage IV(Stage IV 1948 to 1968)1948 to 1968)

EVENTEVENT YEAR YEAR

Nationalisation ofRBINationalisation ofRBI 19491949

Banking Regulation ActBanking Regulation Act 19491949

Establishment ofSBIEstablishment ofSBI 19551955

Subsidiaries ofSBISubsidiaries ofSBI 19591959

Deposit Insurance and Credit GuaranteeDeposit Insurance and Credit Guarantee

CorporationCorporation

19621962

Social ControlSocial Control 19681968


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ToTo ensureensure monetarymonetary disciplinediscipline && economiceconomicdevelopment,development, RBIRBI waswas nationalisednationalised..

19491949 legislationlegislation waswas passedpassed toto regulateregulate bankingbankingbusinessbusiness.. InitiallyInitially calledcalled thethe BankingBanking CompaniesCompaniesAct,Act, thethe amendmentamendment ofof 19661966 changedchanged itsits namename toto

BankingBanking RegulationRegulation ActAct.. 19551955 ImperialImperial Bank Bank waswas nationalisednationalised andand

convertedconverted intointo SBI,SBI, thethe largestlargest commercialcommercial bankbank..

19591959 SBISBI SubsidiarySubsidiary BanksBanks ActAct waswas passedpassed andandEIGHTEIGHT statestate associatedassociated banksbanks becamebecame subsidiarysubsidiarybanksbanks ofofSBISBI..


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STATE BANKSUBSIDIARY BANKSSTATE BANKSUBSIDIARY BANKS

1. State bankofBikanerand Jaipur1. State bankofBikanerand Jaipur

2. State bankofSaurashtra2. State bankofSaurashtra

3. State bankofHyderabad3. State bankofHyderabad

4. State bankofIndore4. State bankofIndore

5. State bankofMysore5. State bankofMysore

6. State bankofPatiala6. State bankofPatiala

7. State bankofTravancore7. State bankofTravancore

1962 DIC was established as a wholly owned subsidiary ofRBI toinsuredepositors. Deposit insurance covercurrently is

Rs. 1,00,000 foreach depositor. This reduces risk & builds

confidence among deposits, thereby increasing deposits.

1968 A bill was passed to have social control overbanks.


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(Stage(Stage VV 19691969 toto 1990)1990)

EVENTEVENT YEAR YEAR

Social controls cameintoforceSocial controls cameintoforce Feb. 1969Feb. 1969

NationalisationNationalisation of14 banksof14 banks July, 1969July, 1969

Credit guarantee corporation ofIndiaCredit guarantee corporation ofIndia Jan, 1971Jan, 1971

Regional Rural banksRegional Rural banks Oct , 1975Oct , 1975

NationalisationNationalisation of6 banksof6 banks April, 1980April, 1980


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To derive the benefits of nationalization without

nationalizing banks, Social Control scheme was

implemented with the following objectives:

To prevent banks from lending to concerns in which directorswere involved

To provide sufficient credit to priority sectors and neglected

sectors.

Toprevent banks from lending forunproductive activities

Toprevent concentration of economic power in a few hands.

To check the growth ofmonopolistic trends in industrial sectors.

To achieve the optimum rate of economic growth.


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Nationalisation ofbanks

Reasons :

Expansion of bank credit to priority and neglected

sectors.Prevention of concentration of economic power in few

hands

Branch expansion programmes in unbank ed and

underbanked areasRemoval of bankers indifferent attitude towards

economic development

Provision oftraining facilities tobanking personnel.

Removal of deficiencies ofSocial Control Schemes.


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Credit Guarantee Corporation of India Ltd. 1971:

Established to provide guaranteeforloans provided by

banks.Participation in the grarantee scheme was optional for

banks.

1978 takeoverofCGCI by Deposit Insurance

Corporation ofIndia.At present it is known as Deposit Insurance and Credit

Guarantee Corporation ofIndia

Provides Insurancefacility toreducerisks in banking

business.


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Regional Rural Banks, 1975

The GOI appointed a working group to study banking

facility in the rural areas and suggest measures forimprovement.

The working group suggested the establishment of an

institution having professional approach and access to all

parts ofthe financial market.As a result, RRBs were established in 1975. The RRB

Act was passed in 1976.


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Nationalisation of6 banks:

On 15th April, 1980 six more banks having deposits of

Rs. 200 crore were nationalized.

They were:Andhra Bank

Oriental bankofCommerce

Corporation Bank

New BankofIndiaThe Punjab and Sind Bank

Vijaya Bank


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(Stage(Stage VIVI 1991 onwards)1991 onwards)

Introduction of LPG model

Formation ofNarsimhan committee

Important developments after1991

liberal licensing forIndian bank

Liberal licensing for foreign banks

Liberal branch licensing policy

Liberal personnel policy

Use ofadvanced technology


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(Stage(Stage VIVI 1991 onwards)1991 onwards)

Freedom to decide the rates of interest

Diversification ofbusiness

Increasing capital by banks

New schemes of deposits and loans

Reduction in CRRand SLR

Identification ofNPAs and reduction in NPAs.

Documents

Banking & Insurance UNIT_I