History of Banking in India 123

7/30/2019 History of Banking in India 123

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HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthyeconomy. The banking system of India should not only be hassle free but it should

be able to meet new challenges posed by the technology and any other external and

internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking

system has reached even to the remote corners of the country. This is one of the

main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich

dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone

are days when the most efficient bank transferred money from one branch to other

in two days. Now it is simple as instant messaging or dial a pizza. Money have

become the order of the day.

There are three different phases in the history of banking in India.

1) Pre-Nationalization Era.

2) Nationalization Stage.

3) Post Liberalization Era.


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1) Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early times.

The remittance of money through Hundies, an indigenous credit instrument, was

very popular. The hundies were issued by bankers known as Shroffs, Sahukars,

Shahus or Mahajans in different parts of the country.

The modern type of banking, however, was developed by the Agency Houses of

Calcutta and Bombay after the establishment of Rule by the East India Company in

18 th and 19 th centuries.

During the early part of the 19 th Century, ht volume of foreign trade was relatively

small. Later on as the trade expanded, the need for banks of the European type was

felt and the government of the East India Company took interest in having its own

bank. The government of Bengal took the initiative and the first presidency bank,

the Bank of Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank

of Bombay and IN 1843, the Bank of Madras was also set up.

These three banks also known as Presidency Bank. The Pr esidency Banks had

their branches in important trading centers but mostly lacked in uniformity in their

operational policies. In 1899, the Government proposed to amalgamate these three

banks in to one so that it could also function as a Central Bank, but the Presidency

Banks did not favor the idea. However, the conditions obtaining during world war

period (1914-1918) emphasized the need for a unified banking institution, as a

result of which the Imperial Bank was set up in1921. The Imperial Bank of India

acted like a Central bank and as a banker for other banks.


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The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of

the Country. In 1949, the Banking Regulation act was passed and the RBI was

nationalized and acquired extensive regulatory powers over the commercial banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of

India, Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey, committee of

Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of

the Imperial Bank of India and ten others banks into a newly established bank

called the State Bank of India (SBI). The Government of India accepted the

recommendations of the committee and introduced the State Bank of India bill in

the Lok Sabha on 16 th April 1955 and it was passed by Parliament and got the

presidents assent on 8 th May 1955. The Act came into force on 1 st July 1955, and

the Imperial Bank of India was nationalized in 1955 as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of Indiawas to extend banking facilities on a large scale more parti cularly in the rural and

semi- urban areas and to diverse other public purposes.

In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-

associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1 st October 1959

2. State Bank of Bikaner 1 st January 1960

3. State Bank of Jaipur 1 st January 1960

4. State Bank of Saurashtra 1 st May 1960


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5. State Bank of Patiala 1 st April 1960

6. State Bank of Mysore 1 st March 1960

7. State Bank of Indore 1 st January 1968

8 . State Bank of Travancore 1 st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and State Bank of

Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank

of India formed the SBI Group. The SBI Group under statutory obligations was

required to open new offices in rural and semi-urban areas and modern banking

was taken to these unbanked remote areas.

On 19 th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the

nationalization of 14 major scheduled Commercial Banks each having deposits

worth Rs. 50 crore and above. This was a turning point in the history of

commercial banking in India.

Later the Government Nationalized six more commercial private sector banks with

deposit liability of not less than Rs. 200 crores on 15 th April 1980, viz.

i) Andhra Bank.

ii) Corporation Bank.

iii) New Bank if India.

iv) Oriental Bank of Commerce.

v) Punjab and Sind Bank.

vi) Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to

every corner of the country. Later in 1975, Regional Rural Banks were set up to


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supplement the activities of the commercial banks and to especially meet the credit

needs of the weaker sections of the rural society.

Nationalization of banks paved way for retail banking and as a result there has

been an alt round growth in the branch network, the deposit mobilization, credit

disposals and of course employment.

The first year after nationalization witnessed the total growth in the agricultural

loans and the loans made to SSI by 87% and 48% respectively. The overall growth

in the deposits and the advances indicates the improvement that has taken place in

the banking habits of the people in the rural and semi-urban areas where the branchnetwork has spread. Such credit expansion enabled the banks to achieve the goals

of nationalization, it was however, achieved at the coast of profitability of the

banks.

Consequences of Nationalization:

The quality of credit assets fell because of liberal credit extension policy.

Political interference has been as additional malady. Poor appraisal involved during the loan meals conducted for credit

disbursals.

The credit facilities extended to the priority sector at concessional rates.

The high level of low yielding SLR investments adversely affected the

profitability of the banks.

The rapid branch expansion has been the squeeze on profitability of banks

emanating primarily due to the increase in the fixed costs.

There was downward trend in the quality of services and efficiency of the

banks.


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3) Post-Liberalization Era---Thrust on Quality and Profitability:

By the beginning of 1990, the social banking goals set for the banking industry

made most of the public sector resulted in the presumption that there was no need

to look at the fundamental financial strength of this bank. Consequently they

remained undercapitalized. Revamping this structure of the banking industry was

of extreme importance, as the health of the financial sector in particular and the

economy was a whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater with the initiation

of the real sector reform process in 1992. the reforms have enhanced theopportunities and challenges for the real sector making them operate in a

borderless global market place. However, to harness the benefits of globalization,

there should be an efficient financial sector to support the structural reforms taking

place in the real economy. Hence, along with the reforms of the real sector, the

banking sector reformation was also addressed.

The route causes for the lackluster performance of banks, formed the elements of

the banking sector reforms. Some of the factors that led to the dismal performance

of banks were.

Regulated interest rate structure.

Lack of focus on profitability.

Lack of transparency in the banks balance sheet.

Lack of competition.

Excessive regulation on organization structure and managerial resource.

Excessive support from government.


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Against this background, the financial sector reforms were initiated to bring about

a paradigm shift in the banking industry, by addressing the factors for its dismal

performance.

In this context, the recommendations made by a high level committee on financial

sector, chaired by M. Narasimham, laid the foundation for the banking sector

reforms. These reforms tried to enhance the viability and efficiency of the banking

sector. The Narasimham Committee suggested that there should be functional

autonomy, flexibility in operations, dilution of banking strangulations, reduction in

reserve requirements and adequate financial infrastructure in terms of supervision,

audit and technology. The committee further advocated introduction of prudential

forms, transparency in operations and improvement in productivity, only aimed at

liberalizing the regulatory framework, but also to keep them in time with

international standards. The emphasis shifted to efficient and prudential banking

linked to better customer care and customer services.

Private Sector Banks

The concept of private banking was introduced about 15 years ago. These are the

banks that do not have any government stakes.

Private Banks have gained quite a strong foothold in the Indian banking industry

over the last few years especially because of optimum use of technology. The

Private Banks are accountable for a share of 18.2 percent of the Indian banking

industry. IndusInd Bank was the first private bank in India. Currently the bank is

among the fastest growing Bank Private Banks in the country. IDBI which is

ranked as the tenth largest global development bank is counted as one of the finest

financial institutions in the subcontinent.


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The first Private Bank in India to receive an in principle approval from the Reserve

Bank of India was Housing Development Finance Corporation Limited, to set up a

bank in the private sector banks in India as part of the RBI's liberalization of the

Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled

Commercial Bank in January 1995.

ING Vaysya, yet another Private Bank of India was incorporated in the year 1930.

Bangalore has a pride of place for having the first branch inception in the year

1934. With successive years of patronage and constantly setting new standards in

banking, ING Vaysya Bank has many credits to its account.

Entry of Private Sector Banks:

There has been a paradigm shift in mindsets both at the Government level in the

banking industry over the years since Nationalization of Banks in 1969,

particularly during the last decade (1990-2000). Having achieved the objectives of

Nationalization, the most important issue before the industry at present is survivaland growth in the environment generated by the economic liberalization greater

competition with a view to achieving higher productivity and efficiency in January

1993 for the entry of Private Sector banks based on the Nationalization Committee

report of 1991, which envisaged a larger role for Private Sector Banks.

The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank

and the shares are to be listed at stock exchange. Also the new bank after being

granted license under the Banking Regulation Act shall be registered as a public

limited company under the companies Act, 1956.


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Subsequently 9 new commercial banks have been granted license to start banking

operations. The new private sector banks have been very aggressive in business

expansion and is also reporting higher profile levels taking the advantage of

technology and skilled manpower. In certain areas, these banks have even our

crossed the other group of banks including foreign banks.

Current scenario

Currently, overall, banking in India is considered as fairly mature in terms of

supply, product range and reach-even though reach in rural India still remains a

challenge for the private sector and foreign banks. Even in terms of quality of

assets and capital adequacy, Indian banks are considered to have clean, strong andtransparent balance sheets-as compared to other banks in comparable economies in

its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government. The stated policy of the Bank on the Indian Rupee

is to manage volatility-without any stated exchange rate-and this has mostly been

true. With the growth in the Indian economy expected to be strong for quite some

time-especially in its services sector, the demand for banking services-especially

retail banking, mortgages and investment services are expected to be strong.

M&As, takeovers, asset sales and much more action (as it is unraveling in China)

will happen on this front in India.

Private SectorBanks

Old Pvt. SectorBanks (25)

New Pvt. SectorBanks (9)


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In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time

an investor has been allowed to hold more than 5% in a private sector bank since

the RBI announced norms in 2005 that any stake exceeding 5% in the privatesector banks would need to be vetted by them. Currently, India has 88 scheduled

commercial banks (SCBs) - 27 public sector banks (that is with the Government of

India holding a stake), 31 private banks (these do not have government stake; they

may be publicly listed and traded on stock exchanges) and 38 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs .

According to a report by ICRA Limited, a rating agency, the public sector banks

hold over 75 percent of total assets of the banking industry, with the private and

foreign banks holding 18.2% and 6.5% respectively.

BANKING SERVICES

Banking covers so many services that it is difficult to define it. However, these

basic services have always been recognized as the hallmark of the genuine banker.

These are

The receipt of the customers deposits The collection of his cheques drawn on other banks The payment of the customers cheques drawn on himself

There are other various types of banking services like:

1) Advances Overdraft, Cash Credit, etc.

2) Deposits Saving Account, Current Account, etc.

3) Financial Services Bill discounting etc.
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4) Foreign Services Providing foreign currency, travelers cheques, etc.

5) Money Transmission Funds transfer etc.

6) Savings Fixed deposits, etc.

7) Services of place or time ATM Services.8) Status Debit Cards, Credit Cards, etc.

Customer Services in Commercial Banks:

Customer service is the service provided in support of a banks core products.

Customer service often includes answering questions; handling complaints.

Customer service can occur on site (as when an onstage employee helps a customeror answers a question) or it can occur over the phone or the Internet. Quality

customer service is essential to building cordial customer relationship.

Banking being a service industry, a lot depends on efficient and prompt customer

service. Customer service is the most important duty of the banking operations.

Prompt and efficient service with smile will develop good public relations reduce

complaints and increase business.

Why is Customer Service Important?

Changing customer expectations: Today the customer is more demanding

and more sophisticated than he or she was thirty years ago.

The increased importance of customer service: With changing customer

expectations, competitors are seeing customer service as a competitiveweapon with which they differentiate their products and services.

The need for a relationship strategy: To ensure that a customer service

strategy that will create a value preposition for customers should be

formulated implemented and controlled. It is necessary to give it a central


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role and not one that is subsumed in the various elements of the marketing

mix.

The customer is the kingpin in growth organizations like commercial banks. Only

those institutions which work according to his dictates will flourish. Quality,

Consistency and Durability at low price are the final expectations of a customer.

Quality will have to be unambiguous, of world class quality. Quality cannot be of

minimum acceptable standards. Customer responsiveness must be quick and also

competent. Speed, performance and cost will be the new values mantra for

success.

The ten key areas of c ustomers services to be attended timely and regularly are:

i. Submission of statement of A/Cs to customers

ii. Updating of savings pass books.

iii. Teller system efficiency.

iv. Cleanliness and Upkeep of premises.

v. Intermediate Credit for institution cheques/land bills.vi. Advance intimation to customers for rewards of Term Deposits Receipts on

maturity.

vii. Advance for Debit/credit to accounts.

viii. Punctuality of staff.

Documents

History of Banking in India 123