Over view of BankingDr.S.Chatterje( S2)

Learning ObjectivesHistorical Growth of Banks in IndiaVarious developments in Indian Banking system (in pre & post independent era)Phases of evolution , Class to Mass Banking Migration to Social Banking.Golden Reform Liberalization for Globalization

Banking DevelopmentPre- Independence Era:- 1770 1st Bank - Called Hindustan Bank Closed 1832 1786 2nd Bank General Bank of Bihar-Bengal cl1791 a. 1809 The Bank of Bengal/Calcutta ( Estb by E.I.Co) b.1840 Bank of Bombay c. 1843 Bank of Madras 1846 (a, b& c called ) Presidency Bank 1865 Allahabad Bank (First wholly run by Indians) 1894 PNB with H.Q at Lahore

Contd.1906-1913 BOI,CBI, BOB, Can Bank, Indian Bank and Bank of Mysore were set up. 1921 Amalgamated(a+b+c) to form Imperial Bank of India on 27.01.1921 by the Imperial Bank of India Act 1920 Functions: Sole Banker to G.O.I, Banker to Banks, Manage public debts, Conduct Clg, Provide remittance to banks & public but no power to Issue Notes or Control currency.

ContdSome more banks Opened - Peoples bank, Allien Bank, Oudh Bank, Union Bank, UCO,United Bank,OBC, Corp Bank etcSome Banks failed due to:- Insufficient capital, Poor liquidity of assets, irrational Credit policy, Banking with Non Banking activities, Deficiencies in monitoring and supervision.

Contd 1934 RBI act was formulated1935 RBI Starts functioning with paid up cap = 5 cr , nominal shares was allotted to GOI.1913-1943 number of Banks failed 949 ? The deterioration in the banking system was analysed and measure initiated post Independence.

Post Independence EraMajor Causes of failure : Mismanagement, Over lending, Low C.R.R U/s loan , Unreasonable pricing of assets, Offering high Intt for Deposit ,Poor control and supervision , No central bank etc1948 RBI was Nationalized with added responsibility as controller of currency as well and taking bank to common people 1949 Banking Regulation act & amended in 1965.

Contd1955 July , Imperial Bank of India was renamed as S.B.I, the first bank to be nationalized with spl task of extending Banking facilities on a large scale to rural and semi-urban masses thro Agrl Dev Branches.1957-60 Seven Associate Banks of SBI was Established of which 2 merged with SBI and 5 are continuing.(SBBJ,SBH,SBM,SBP & SBT).

Indian Banking Phases Of Evolution (post Independence)Pre- Nationalisation70s Migration to Social banking(Major Banks Nationalisation)80s Consolidation90s Golden period of reforms (i) Narsimham Committee Reform I (1991) (ii) Narsimham Committee Reform-II (1998)

Pre Nationalization Before 1969. Major Developments:

Enactment of Banking Regulation Act 1949

In 1963 IDBI was set up by RBI as Term Lending Institution in addition to ICICI which was also acting as Term Lending Institution since 1947.

Introduction of Credit Authorization Scheme on 20th November 1965 as a part of Credit Policy announcement.

Social Control on 14th December 1967to bring most banks under social control for making credit available to all productive endeavors.

National Credit Council was set up in 1967 for discussing and assessing credit priorities.

ContdBranch Expansion Policy,Credit Authorization schemeCredit deployment- Agrl Sector, Pruiority Sect ConceptFormation of National Cr councilFormation of T/lending Inst. IFCI & SFCIsProtect Investors, Formation of Deposit Ins.corp.

NationalizationHistoric Expansion in both geographical and functional terms(1969-1991). Major developmentNationalization of 14 Major Banks on 19th July 1969 which had deposit of Rs.50 Crores and above. On 15th April 1980, six more Banks with deposit Rs.200 Crores were nationalized. Which are these Banks ?Important objectives of Nationalisation :Bringing banking services to public sectorTransforming Class banking to Mass bankingProvided need based Credit to core sectors,

Contd.iv) Developing Professionalism in Bank Management. v) Developing efficient payment system vi) Encouraging new classes of entrepreneurs vii) Creating alternative to Money lender viii)Developing into dynamic vehicle for Socio-economic growth. ix) Providing adequate training and reasonable terms of service to the employees

Development post NationalisationLead Bank Scheme:December 1969, following the recommendation of Gadgil Committee followed by Nariman Committee, Lead Bank Scheme was formulated based on service area approach. Total 336 Districts were created and distributed among Scheduled Banks1972 onwards various development schemes started :-i) Deposit Scheme backed by Insuranceii) Priority Sect concept & Rural Development Scheme Village Adoptioniii) DRI Schemeiv) Composite Loan Scheme v) Branch expansion

Post Nationalisation (Devlpmt in 1970s & 80s).Creation of RRB in1976 with authorized capital Rs.1Crore and paid up capital Rs.25 Lakhs subscribed by GOI 50%, State Govt. 15% and Sponsored Bank 35%.

Constitution of Tandon Committee for logical credit assessment

Launching of IRDP/DPAP

Setting of NABARD

Service Area Approach

Establishment of SIDBI

New Instruments In Money Market ie. CP/CD & Treasury BillsExtensive Branch Expansion

Commercial Bank- Structure

Foreign Banks With Business in India - 29 Foreign Banks having Representative office in India -------41 FScheduled BanksNon-Scheduled BankPSU Banks6+21=27RRBs68Private Banks19Foreign Banks 32Commercial Banks

Reform Era (1991 onwards)

The Measures include:Progressive reduction of CRR & SLR. CRR reduced from 15% to 6% and SLR from 39% to 23% Income Recognition & Asset ClassificationFocus on NPA Reduction ,Setting up of Lok Adalat, DRT and ARCBoard for Financial Supervision of BanksPermission for entry of new Pvt. Banks to inject CompetitionDeregulation of Interest Rates

Post Reform Era (Contd.)

Implementation of CAR based on BASEL Committee Recommendation. Minimum CAR 8%(internationally) and 9% (in India). BASEL I (3 Pillars) i) Minimum Capital Requirement (Comprises Credit Risk & Market Risk Only)ii) Supervisory Reviewiii) Market Discipline BASEL II Minimum Capital Requirement includesOperational Risks in addition to Credit and Market Risks.

Post Reform Era (Contd.)

Reduction of Govt Stake & Re capitalization of Banks.Access to Capital Market for Mobilizing additional equity.Liberalized Bank/Branch Licensing Policy.Enactment of SARFAESI ACT, 2002.Setting up of Asset Reconstruction Company, Corporate Debt Restructuring.Setting up of CIBIL.(SBI:HDFC:D & B:Trans Union Intl -> 40:40:10:10)Establishment of CCIL.( estb Feb 2002)

The major areas of transformationRisk Based Management Efficiency Parameters/ CAMELS RatingValue Added ServicesIT initiativesRationalisation of Staff strength & Branches.Strong RBI Supervision & better Internal Controls Governance redressal mechanism. Financial Inclusion

Banks and Its FunctionsDefn: As per Banking Reg Act 1949 Intermediary organisation that accepts Deposit of Money for the purpose of Lending and/or investment repayable on demand or otherwise and withdrawable by cheq, Drafts, order or otherwise.

Banks definition contdB - Banks are highly regulated, profit-oriented, Fis in the business of creating ,managing ,and distributing Money A- Accepting Money for lending/investing and /or remitting. Through N - Networked Branches and multiple distribution channels and has emerged as K - Key players in offering value added and cost effective financial services to the total cross section of the society

Financial SystemsBanking , Insurance & Financial MKtsRegld. By RBI IRDA SEBI/FERA/FEMAFinancial Markets:- (i) Capital Mkt -> Primary & secdry Mkt (ii) Debt Mkt > Deals in Govt Sec & Bonds (iii) Money Mkt -> Call/Notic,CD,CP, T.Bills, Comm. Bills, Repo & term money (iv) Forex Market -> Forex trading,

Role of BanksThree major roles:A) Intermediation Reqd for economic growth (i) Credit Risk (ii) Liquidity Risk (iii) Interest rate Risk (iv) Market rate Risk (V) Operational RiskB) Payment system facilitator: C) Financial services Provider :

Banking Services & ProductsRole Services Products Paying agent Payment/ Chq,DD,PO,Bchq,IOI, MCChq Remittance EFT,RTGS, C.Card,D.Card etc Collection Local clg, National clg, ECS CMS,Transfer,Bill collection Intermediary Deposit SB, Ct, TD, RD (Liab Products) Loans (S.Term Credit) W/C- CC/OD/PC/ CP/ IBD/IBP FBP/FBN/ Ch Disc,LC/ BG Retail: C, C, E, F, H,P,S,V, etc

Banking Services Contd.. L.Term Credit: (i) Term loans (ii) Leasing FinnceFinancial Serv 1)Sales/Dist M.Fs , IPO, FPO, TPPs (Ins,Bonds,Stamp Papers,) Gold coin, D-Mat trading etc 2) Collection :- Taxes, School fees ,utilitty 3) Safe keeping : Safe deposit vault, safe custody 4) Advisory serv: Proj Fin,Consort Fin, Investment adv 5) E- Services : ATMs, Phone,Mobile(SMS), Internet Banking

Opportunities and challenges for Indian Banks Assignment :- To be submitted at the end of session.Study Recent Journals and Magazines on Banking & Finance viz The Economost, Indian Banker, Bank Quest, RBI Bulletine etc and various Pink Paper etc Read p-19 & 20 of the text book.Read Sub-prime Crisis 2007 p-4Fate of Shadow Banking System in Financial Crisis