BANKING
Structure
of the organised banking sector in India. Number of banks are in
brackets.
Banking
in India,
in the modern sense, originated in the last decades of the 18th
century. Among the first banks were the Bank
of Hindustan,
which was established in 1770 and liquidated in 1829–32; and the
General Bank of India, established in 1786 but failed in 1791.
The
largest bank, and the oldest still in existence, is the State
Bank of India
(S.B.I). It originated as the Bank
of Calcutta
in June 1806. In 1809, it was renamed as the Bank
of Bengal.
This was one of the three banks funded by a presidency
government,
the other two were the Bank
of Bombay
in 1840 and the Bank
of Madras
in 1843. The three banks were merged in 1921 to form the Imperial
Bank of India,
which upon India's independence, became the State
Bank of India
in 1955. For many years the presidency banks had acted as
quasi-central banks, as did their successors, until the Reserve
Bank of
India.
was established in 1935, under the Reserve
Bank of India Act, 1934.
In
1960, the State Banks of India was given control of eight
state-associated banks under the State Bank of India (Subsidiary
Banks) Act, 1959. These are now called its associate
banks.
In 1969 the Indian
government
nationalised
14 major private banks, one of the big bank was Bank
of India.
In 1980, 6 more private banks were nationalised. These nationalised
banks are the majority of lenders in the Indian
economy.
They dominate the banking sector because of their large size and
widespread networks.
The
Indian banking sector is broadly classified into scheduled
banks
and non-scheduled banks. The scheduled banks are those included
under the 2nd Schedule of the Reserve Bank of India Act, 1934. The
scheduled banks are further classified into: nationalised banks;
State
Bank of India
and its associates; Regional
Rural Banks
(RRBs); foreign banks; and other Indian private sector banks. The
term commercial banks refers to both scheduled and non-scheduled
commercial banks regulated under the Banking
Regulation Act, 1949.
Generally
banking in India is fairly mature in terms of supply, product range
and reach-even though reach in rural India and to the poor still
remains a challenge. The government has developed initiatives to
address this through the State Bank of India expanding its branch
network and through the National
Bank for Agriculture and Rural Development (NABARD)
with facilities like microfinance.
Contents
History
Ancient India
The
Vedas
(2000–1400 BCE) are earliest Indian texts to mention the concept
of usury.
The word kusidin
is translated as usurer. The Sutras
(700–100 BCE) and the Jatakas
(600–400 BCE) also mention usury. Also, during this period, texts
began to condemn usury. Vasishtha
forbade Brahmin
and Kshatriya
varnas
from participating in usury. By the 2nd century CE, usury seems to
have become more acceptable. The Manusmriti
considers usury an acceptable means of acquiring wealth or leading a
livelihood.[12]
It also considers money lending above a certain rate, different
ceiling rates for different caste, a grave sin.
The
Jatakas also mention the existence of loan deeds.
These were called rnapatra
or rnapanna.
The Dharmashastras
also supported the use of loan deeds. Kautilya
has also mentioned the usage of loan deeds. Loans deeds were also
called rnalekhaya.
Later
during the Mauryan
period
(321–185 BCE), an instrument called adesha
was in use, which was an order on a banker directing him to pay the
sum on the note to a third person, which corresponds to the
definition of a modern bill
of exchange.
The considerable use of these instruments has been recorded . In
large towns, merchants also gave letters
of credit
to one another.
Medieval era
The
use of loan deeds continued into the Mughal
era
and were called dastawez.
Two types of loans deeds have been recorded. The
dastawez-e-indultalab
was payable on demand and dastawez-e-miadi
was payable after a stipulated time. The use of payment
orders
by royal treasuries, called barattes,
have been also recorded. There are also records of Indian bankers
using issuing bills of exchange on foreign countries. The evolution
of hundis,
a type of credit instrument, also occurred during this period and
remain in use.
Colonial era
During
the period
of British rule
merchants established the Union Bank of Calcutta in 1829, first as a
private joint stock association, then partnership. Its proprietors
were the owners of the earlier Commercial Bank and the Calcutta Bank,
who by mutual consent created Union Bank to replace these two banks.
In 1840 it established an agency at Singapore, and closed the one at
Mirzapore that it had opened in the previous year. Also in 1840 the
Bank revealed that it had been the subject of a fraud by the bank's
accountant. Union Bank was incorporated in 1845 but failed in 1848,
having been insolvent for some time and having used new money from
depositors to pay its dividends.
The
Allahabad
Bank,
established in 1865 and still functioning today, is the oldest Joint
Stock bank
in India, it was not the first though. That honour belongs to the
Bank of Upper India, which was established in 1863 and survived until
1913, when it failed, with some of its assets and liabilities being
transferred to the Alliance
Bank of Simla.
Foreign
banks too started to appear, particularly in Calcutta,
in the 1860s. The Comptoir
d'Escompte de Paris
opened a branch in Calcutta in 1860, and another in Bombay
in 1862; branches followed in Madras
and Pondicherry,
then a French possession. HSBC
established itself in Bengal
in 1869. Calcutta was the most active trading port in India, mainly
due to the trade of the British
Empire,
and so became a banking centre.
The
first entirely Indian joint stock bank was the Oudh
Commercial Bank,
established in 1881 in Faizabad.
It failed in 1958. The next was the Punjab
National Bank,
established in Lahore
in 1894, which has survived to the present and is now one of the
largest banks in India.
Around
the turn of the 20th Century, the Indian economy was passing through
a relative period of stability. Around five decades had elapsed since
the Indian
rebellion,
and the social, industrial and other infrastructure had improved.
Indians had established small banks, most of which served particular
ethnic and religious communities.
The
presidency banks dominated banking in India but there were also some
exchange banks and a number of Indian joint
stock
banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated
on financing foreign trade. Indian joint stock banks were generally
under capitalised and lacked the experience and maturity to compete
with the presidency and exchange banks. This segmentation let Lord
Curzon to observe, "In respect of banking it seems we are behind
the times. We are like some old fashioned sailing ship, divided by
solid wooden bulkheads into separate and cumbersome compartments."
The
period between 1906 and 1911 saw the establishment of banks inspired
by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and
political figures to found banks of and for the Indian community. A
number of banks established then have survived to the present such as
Catholic
Syrian Bank,
The
South Indian Bank,
Bank
of India,
Corporation
Bank,
Indian
Bank,
Bank
of Baroda,
Canara
Bank
and Central
Bank of India.
The
fervour of Swadeshi movement led to the establishment of many private
banks in Dakshina
Kannada
and Udupi
district,
which were unified earlier and known by the name South Canara (South
Kanara) district. Four nationalised banks started in this district
and also a leading private sector bank. Hence undivided Dakshina
Kannada district is known as "Cradle of Indian Banking".
The
inaugural officeholder was the Britisher Sir Osborne Smith(1 April
1935), while C. D. Deshmukh(11 August 1943) was the first Indian
governor.On September 4, 2016, Urjit R Patel begins his journey as
the new RBI Governor, taking charge from Raghuram Rajan.
During
the First
World War
(1914–1918) through the end of the Second
World War
(1939–1945), and two years thereafter until the independence
of India were challenging for Indian banking. The years of the First
World War were turbulent, and it took its toll with banks simply
collapsing despite the Indian
economy
gaining indirect boost due to war-related economic activities. At
least 94 banks in India failed between 1913 and 1918 as indicated in
the following table:
|
Years
|
Number
of banks
that failed |
Authorised
Capital
(₹ Lakhs) |
Paid-up
Capital
(₹ Lakhs) |
|---|---|---|---|
|
1913
|
12
|
274
|
35
|
|
1914
|
42
|
710
|
109
|
|
1915
|
11
|
56
|
5
|
|
1916
|
13
|
231
|
4
|
|
1917
|
9
|
76
|
25
|
|
1918
|
7
|
209
|
1
|
Post-Independence
The
partition
of India
in 1947 adversely impacted the economies of Punjab
and West
Bengal,
paralysing
banking activities for months.
India's independence
marked the end of a regime of the Laissez-faire
for the Indian banking. The
Government
of India
initiated measures to play an active role in the economic life of
the nation, and the Industrial
Policy Resolution adopted by the government in 1948 envisaged a
mixed
economy.
This resulted in greater involvement of the state in different
segments of the economy including banking and finance. The major
steps to regulate banking included:
-
The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).
-
In 1949, the Banking Regulation Act was enacted, which empowered the Reserve Bank of India (RBI) "...to regulate, control, and inspect the banks in India."
-
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
Nationalisation in the 1960s
Despite
the provisions, control and regulations of the Reserve
Bank of India,
banks in India except the State
Bank of India(SBI),
remain owned and operated by private persons. By
the 1960s, the Indian banking industry had become an important tool
to facilitate the development of the Indian
economy.
At
the same time, it had emerged as a large employer, and a debate had
ensued about the nationalisation
of the banking industry.
Indira
Gandhi,
the then Prime
Minister of India,
expressed the intention of the Government
of India
in the annual conference of the All India Congress Meeting in a
paper entitled "Stray
thoughts on Bank Nationalization."
The meeting received the paper with enthusiasm.
Thereafter,
her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance, 1969') and nationalised
the 14 largest commercial banks with effect from the midnight of 19
July 1969. These banks contained 85 percent of bank deposits in the
country.
Jayaprakash
Narayan,
a national leader of India, described the step as a "masterstroke
of political sagacity."
Within two weeks of the issue of the ordinance, the Parliament
passed the Banking Companies (Acquisition and Transfer of
Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
A
second dose of nationalisation of 6 more commercial banks followed in
1980. The stated reason for the nationalisation was to give the
government more control of credit delivery. With the second dose of
nationalisation, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government
merged New
Bank of India
with Punjab
National Bank.
It was the only merger between nationalised banks and resulted in the
reduction of the number of nationalised banks from 20 to 19. Until
the 1990s, the nationalised banks grew at a pace of around 4%, closer
to the average growth rate of the Indian economy.
Liberalisation in the 1990s
In
the early 1990s, the then government embarked on a policy of
liberalisation,
licensing a small number of private banks. These came to be known as
New
Generation tech-savvy banks,
and included Global Trust Bank (the first of such new generation
banks to be set up), which later amalgamated with Oriental Bank of
Commerce, UTI
Bank
(since renamed Axis
Bank),
ICICI
Bank
and HDFC
Bank.
This move, along with the rapid growth in the
economy
of India,
revitalised the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks.
The
next stage for the Indian banking has been set up, with proposed
relaxation of norms for foreign direct investment. All foreign
investors in banks may be given voting rights that could exceed the
present cap of 10% at present. It has gone up to 74% with some
restrictions.
The
new policy shook the Banking sector in India completely. Bankers,
till this time, were used to the 4–6–4 method (borrow at 4%; lend
at 6%; go home at 4) of functioning. The new wave ushered in a modern
outlook and tech-savvy methods of working for traditional banks. All
this led to the retail boom in India. People demanded more from their
banks and received more.
Current period
Main
article: List
of Banks in India
The
Indian banking sector is broadly classified into scheduled banks and
non-scheduled banks.All banks included in the Second Schedule to the
Reserve Bank of India Act, 1934
are Scheduled Banks. These banks comprise Scheduled Commercial Banks
and Scheduled Co-operative Banks. Scheduled Co-operative Banks
consist of Scheduled State Co-operative Banks and Scheduled Urban
Cooperative Banks.Scheduled
Commercial Banks in India are categorised into five different
groups according to their ownership and/or nature of operation:
-
State Bank of India and its Associates
-
Nationalised Banks
-
Private Sector Banks
-
Foreign Banks
-
Regional Rural Banks.
In
the bank group-wise classification, IDBI Bank Ltd. is included in
Nationalised Banks.
Growth
of Banking in India of Scheduled Commercial Banks
|
Indicators
|
31
March of
|
||||||||
|---|---|---|---|---|---|---|---|---|---|
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
|
|
Number
of Commercial Banks
|
284
|
218
|
178
|
169
|
166
|
163
|
163
|
169
|
151
|
|
Number
of Branches
|
70,373
|
72,072
|
74,653
|
78,787
|
82,897
|
88,203
|
94,019
|
102,377
|
109,811
|
|
Population
per Banks (in thousands)
|
16
|
16
|
15
|
15
|
15
|
14
|
13
|
13
|
12
|
|
Aggregate
Deposits
|
₹17,002
billion(US$270 billion)
|
₹21,090
billion(US$330 billion)
|
₹26,119
billion(US$410 billion)
|
₹31,969
billion(US$500 billion)
|
₹38,341
billion(US$600 billion)
|
₹44,928
billion(US$700 billion)
|
₹52,078
billion(US$810 billion)
|
₹59,091
billion(US$920 billion)
|
₹67,504.54
billion(US$1.1 trillion)
|
|
Bank
Credit
|
₹11,004
billion(US$170 billion)
|
₹15,071
billion(US$240 billion)
|
₹19,312
billion(US$300 billion)
|
₹23,619
billion(US$370 billion)
|
₹27,755
billion(US$430 billion)
|
₹32,448
billion(US$510 billion)
|
₹39,421
billion(US$610 billion)
|
₹46,119
billion(US$720 billion)
|
₹52,605
billion(US$820 billion)
|
|
62%
|
64%
|
69%
|
73%
|
77%
|
78%
|
78%
|
78%
|
79%
|
|
|
Per
Capita Deposit
|
₹16,281(US$250)
|
₹19,130(US$300)
|
₹23,382(US$360)
|
₹28,610(US$450)
|
₹33,919(US$530)
|
₹39,107(US$610)
|
₹45,505(US$710)
|
₹50,183(US$780)
|
₹56,380(US$880)
|
|
Per
Capita Credit
|
₹10,752(US$170)
|
₹13,869(US$220)
|
₹17,541(US$270)
|
₹21,218(US$330)
|
₹24,617(US$380)
|
₹28,431(US$440)
|
₹34,187(US$530)
|
₹38,874(US$610)
|
₹44,028(US$690)
|
|
Credit
Deposit Ratio
|
63%
|
70%
|
74%
|
75%
|
74%
|
74%
|
76%
|
79%
|
79%
|
By
2010, banking in India was generally 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.
In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure
from the government.
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. One may
also expect M&As, takeovers, and asset sales.
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
private sector banks would need to be vetted by them.
In
recent years critics have charged that the non-government owned banks
are too aggressive in their loan recovery efforts in connexion with
housing, vehicle and personal loans. There are press reports that the
banks' loan recovery efforts have driven defaulting borrowers to
suicide.
By
2013 the Indian Banking Industry employed 1,175,149 employees and had
a total of 109,811 branches in India and 171 branches abroad and
manages an aggregate deposit of ₹67,504.54 billion (US$1.1
trillion or €890 billion) and
bank
credit
of
₹52,604.59 billion (US$820 billion or €690 billion). The net
profit of the banks operating in India was ₹1,027.51 billion(US$16
billion or €14 billion) against a turnover of ₹9,148.59
billion (US$140 billion or €120 billion) for the financial
year2012–13.
Pradhan
Mantri Jan Dhan Yojana
(Hindi:
प्रधानमंत्री
जन धन योजना,
English: Prime Minister's People Money Scheme) is a scheme for
comprehensive financial
inclusion
launched by the Prime
Minister of India,
Narendra
Modi,
in 2014. Run by Department
of Financial Services,
Ministry
of Finance,
on the inauguration day, 1.5 Crore (15 million) bank accounts were
opened under this scheme. By 15 July 2015, 16.92 crore
accounts were opened, with around ₹20,288.37 crore(US$3.2
billion) were deposited under the scheme, which also has an option
for opening new bank accounts with zero balance.
Payments Bank
Payments
bank
is a new model of banks conceptualised by the Reserve
Bank of India
(RBI). These banks can accept a restricted deposit, which is
currently limited to ₹1
lakh per customer and may be increased further. These banks cannot
issue loans and credit cards. Both current account and savings
accounts can be operated by such banks. Payments banks can issue
services like ATM cards, debit cards, net-banking and mobile-banking.
The banks will be licensed as payments banks under Section 22 of the
Banking
Regulation Act, 1949,
and will be registered as public
limited company
under the Companies
Act, 2013.
Banking codes and standards
Main
article: The
Banking codes and standards Board of India
The
Banking Codes and standards Board of India is an independent and
autonomous banking industry body that monitors banks in India.To
improve the quality of banking services in India S S Tarapore (former
deputy governor of RBI) had the idea to form this committee.
Adoption of banking technology
The
IT revolution has had a great impact on the Indian banking system.
The use of computers has led to the introduction of online
banking
in India. The use of computers in the banking sector in India has
increased many fold after the economic liberalisation of 1991 as the
country's banking sector has been exposed to the world's market.
Indian banks were finding it difficult to compete with the
international banks in terms of customer service, without the use of
information technology.
The
RBI set up a number of committees to define and co-ordinate banking
technology. These have included:
-
In 1984 was formed the Committee on Mechanisation in the Banking Industry (1984) whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee were introducing MICR technology in all the banks in the metropolises in India. This provided for the use of standardised cheque forms and encoders.
-
In 1988, the RBI set up the Committee on Computerisation in Banks (1988) headed by Dr. C Rangarajan. It emphasised that settlement operation must be computerised in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made operational. It also focused on computerisation of branches and increasing connectivity among branches through computers. It also suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and computerisation began from 1993 with the settlement between IBA and bank employees' associations.
-
In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlementin the Banking Industry (1994) was set up under Chairman W S Saraf. It emphasised Electronic Funds Transfer(EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all those banks with more than 100 branches.
-
In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments (1995) again emphasised EFT system.
-
In July 2016, Deputy Governor Rama Gandhi of the Central Bank of India "urged banks to work to develop applications for digital currencies and distributed ledgers."
Automated teller machine growth
The
total number of automated
teller machines
(ATMs) installed in India by various banks as of end June 2012 was
99,218. The new private sector banks in India have the most ATMs,
followed by off-site ATMs belonging to SBI and its subsidiaries and
then by nationalised banks and foreign banks, while on-site is
highest for the nationalised banks of India.
Branches
and ATMs of Scheduled Commercial Banks as of end December 2014
|
Bank
type
|
Number
of branches
|
On-site
ATMs
|
Off-site
ATMs
|
Total
ATMs
|
|---|---|---|---|---|
|
Nationalised
banks
|
33,627
|
38,606
|
22,265
|
60,871
|
|
State
Bank of India
|
13,661
|
28,926
|
22,827
|
51,753
|
|
Old
private sector banks
|
4,511
|
4,761
|
4,624
|
9,385
|
|
New
private sector banks
|
1,685
|
12,546
|
26,839
|
39,385
|
|
Foreign
banks
|
242
|
295
|
854
|
1,149
|
|
TOTAL
|
53,726
|
85,000
|
77,409
|
1,62,543
|
Cheque truncation initiative
In
2008 the Reserve Bank of India introduced a system to allow cheque
truncation—the
conversion of checks from physical form to electronic form when
sending to the paying bank—in India, the cheque
truncation system
as it was known was first rolled out in the National Capital Region
and then rolled out nationally.
Expansion of banking infrastructure
Physical
as well as virtual expansion of banking through mobile banking,
internet banking, tele banking, bio-metric and mobile ATMs is taking
place [39]
since last decade and has gained momentum in last few years.
Data Breaches
2016 Indian Banks data breach
Main
article: 2016
Indian Banks data breach
A
huge data breach of data of debit cards issued by various Indian
banks was reported in October 2016. It was estimated 3.2 million
debit cards were compromised. Major Indian banks- SBI,
HDFC
Bank,
ICICI,
YES
Bank
and Axis
Bank
were among the worst hit. Many users reported unauthorised use of
their cards in locations in China.
This resulted in one of the India's biggest card replacement drive in
banking history. The biggest Indian bank State Bank of India
announced the blocking and replacement of almost 600,000 debit cards.
See also
-
Banking Frontiers – a monthly magazine, published in Mumbai
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