INDIAN ECONOMY | MODULE 2
BANKING IN INDIA (Part 1)
- A bank is an institution which accepts money from public as deposits and gives loans to them. They also provide other services such as locker facilities, money transfer etc.
- The word ‘Bank’ is derived from ‘Banco’, the Italian word for ‘bench’, where they exchanged money and bills.
- Modern Banking practices in India originated in 18th century.
- First bank of India was Bank of Hindustan founded in 1770
- The second bank started in India was General Bank of India (1786).
- First successful bank in India was Bank of Bengal set up in 1806.
- Bank of Bombay was established in 1840 and Bank of Madras in 1843.
- Allahabad Bank is the oldest public sector bank in India, established in 1865.
- The oldest Joint Stock Bank of India was Bank of Upper India. It was failed in 1913.
- Oudh commercial Bank established in 1881 was the first commercial bank having limited liability.
- First complete indigenous bank in India was Punjab National Bank. It was founded by nationalist leader Lala Lajpat Rai in Lahore (1894).
- British East India company set up 3 presidency banks in Bengal, Madras and Bombay. In 1921, Imperial Bank of India was started by merging three presidency banks. After this, a number of banks were established.
- Reserve Bank was established in 1935 under the Reserve Bank of India Act, 1934.
- The Reserve Bank of India was nationalised with effect from 1st January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
- In 1949 India Government implemented the Banking Regulation Act with the intention of regulating commercial banks.
- At present the banking sector in India consist of these following banks
- One central bank [Reserve Bank of India]
- 21 public sector banks [including State Bank of India, IDBI, and 19 nationalised banks]
- 4 Financial Institutions
- 40 private Indian banks [3 Local Area Banks, 10 Small Finance Banks, 6 payment banks]
- 45 private foreign banks
- 31 state cooperative banks
- 56 Regional Rural Banks
- Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held by a government.
TYPES OF BANKS
- Banks can be generally classified into four:
- (1) The Central bank of the country
- (2) Commercial banks
- (3) Cooperative banks
- (4) Development banks
- Central Bank is the apex monetary authority of a country. It manages a country’s money supply, and interest rates.
- They also oversee and regulate the activities of commercial banks in that country.
- Central banks also act as a lender of last resort to the other banks during times of financial crisis.
- Issue of currency, control of credit, banker to the government, formulation of monetary policy etc. are some of the major functions of a Central Bank.
- Reserve Bank of India is the central bank of India. It was established in 1935.
- The banks which accept deposits and lend money for commercial purposes are called commercial banks.
- Commercial banking in India follows branch banking system, which means banks operate through branches at different locations and renders banking services to the customers of that area.
- There are many commercial banks which are under the public sector; for example- State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BOI), Indian Bank, Canara Bank, Bank of Baroda (BOB) etc.
- ICICI Bank, Yes Bank, HDFC Bank etc. are privately owned commercial banks.
- Cooperative banks are owned and operated by cooperative societies. They do not aim for profit maximization.
- Co-operative bank do banking business mainly in the agriculture and rural sector and provide loans to farmers and small scale businesses.
- Co-operative banks are relatively on a much smaller scale. Many co-operative banks follow only unit-bank system, means a small independent bank that renders banking services to its local community.
- Nowadays cooperative banks concentrate not only on rural development but also on lending money for urban development. The latter category is known as ‘Urban Cooperative Banks’.
- In urban areas the cooperative banks provide credit for self employment activities, small scale industry, purchase of durable goods such as television, refrigerator etc. and personal finance.
- Development banks provide long term credit to private business companies and public sector units who want to establish industries and create infrastructure.
- Land development banks, aiming at agricultural development, come under this category.
- Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), National Agricultural and Rural Development (NABARD), etc. are some other major development banks in India.
SCHEDULED BANKS AND NON-SCHEDULED BANKS
- Indian banks are broadly classified as scheduled and Non – scheduled banks in India.
- Scheduled Banks are those banks whose minimum paid up capital is Rs. 25. Lakhs and does not harm the interest of depositors. They are listed in the second schedule of Reserve Bank of India Act, 1934
- Non- Scheduled Banks are those banks not listed in the second schedule of RBI Act, 1934 and do not comply with the rules specified by RBI.
- Scheduled Banks are eligible for loans from Reserve Bank of India at Bank Rate. But Non-scheduled banks can avail loans from RBI only under emergencies and not for daily activities.
NATIONALISATION OF BANKS
- Nationalisation means transfer of ownership and management of an undertaking from private hands to the state.
- Banks nationalisation was undertook by the then Prime Minister Indira Gandhi
- First nationalisation of banks took place on 19 July 1969. Fourteen banks whose total reserves exceeded Rs. 50 crore were nationalised (Fourth Five Year Plan).
- The 14 banks nationalized in 1969 are :
- Central Bank of India
- Bank of India
- Punjab National Bank
- Canara Bank
- Syndicate Bank
- Bank of Baroda
- United Commercial Bank
- Union Bank of India
- Dena Bank
- United Bank of India
- Allahabad Bank
- Indian Bank
- Indian Overseas Bank
- Bank of Maharashtra
- On April 15, 1980 six more banks were nationalized. They are :
- Andhra Bank
- Punjab & Sindh Bank
- New Bank of India
- Vijaya Bank
- Corporation Bank
- Oriental Bank of Commerce
- In 1993, the New Bank of India merged with Punjab National Bank.
- Thus the total number of nationalized banks in India reduced to 19.
PUBLIC SECTOR BANKS
STATE BANK OF INDIA (SBI) AND ASSOCIATES
- State Bank of India is the largest commercial bank in India.
- SBI Group is the largest banking network with over 20,000 plus branches in India and another 173 offices in 34 countries across the world
- Headquarters of SBI is at Mumbai.
- SBI commands 22 % of share of the domestic Indian market
- Imperial Bank was formed in 1921 by merging three presidency banks such as Bengal Presidency bank, Bombay Presidency Bank & Madras Presidency Bank.
- The name Imperial Bank of India was suggested by John Maynard Keynes.
- In 1955 Imperial Bank was nationalised and renamed as State Bank of India to act as the principal agent of RBI and to handle banking transactions all over the country. First Chairman of State Bank of India was John Mathai
- SBI has the largest number of branches outside India. SBI is the first Indian Bank to start branch in Israel.
- SBI has the largest ATM network with 59,291 ATMs all over India. It has the largest ATM network in India.
- SBI introduced an integrated digital banking platform named ‘YONO’ in 2017.
- It is the first bank to touch a market capitalization of Rs. 1,00,000 crore in India.
Merger of Associate Banks
- Associate Banks of SBI had been established by princely states before the country’s independence to serve local populations. These came under the fold of SBI as Associate banks after the government passed the State Bank of India (Subsidiary Banks) Act in 1959.
- Under this Act, eight banks were nationalized and made subsidiaries of SBI in 1960.
- SBI merged State Bank of Bikaner and State Bank of Jaipur in 1963.
- The first subsidiary (associate) bank that merged with SBI was State Bank of Saurashtra in 2008
- Later State Bank of Indore also merged with SBI in 2009 (officially merged in August 2010).
- The remaining five Associate banks and Bharatiya Mahila Bank merged with SBI with effect from 1st April 2017
- The Banks that were merged with SBI:
- State Bank of Bikaner & Jaipur
- State Bank of Hyderabad
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Travancore
- Bharatiya Mahila Bank
- With this merger, SBI has joined the league of top 50 banks worldwide in terms of assets.
- First Chairman of SBI – John Mathai
- First Malayali Chairman of SBI – John Mathai
- First Woman Chairperson of SBI – Arundhathi Bhattacharya
- Present Chairman of SBI – Rajnish Kumar
- The poet and Nobel laureate who appear in advertisements of SBI as its customer – Rabindra Nath Tagore
- First core banking in India was introduced by – SBI (Mumbai Branch, 2004)
- First Financial super market established at – Jaipur (State Bank of Bikaner & Jaipur)
Bharatiya Mahila Bank (BMB)
- Bharatiya Mahila Bank (BMB) was inaugurated by the then Prime Minister Manmohan Singh in November 19, 2013 (on the birth anniversary of former Prime Minister Indira Gandhi)
- BMB was constituted to provide financial service predominantly to women and women self – help groups. It’s first branch was opened at Nariman Point, Mumbai.
- The first chairman & MD of Bharathiya Mahila Bank was Usha Anantha Subramanian.
- BMB was merged with SBI along with SBI five associate banks on April 1, 2017
PUNJAB NATIONAL BANK
- Lala Lajpat Rai founded Punjab National Bank at Lahore in 1894
- Headquarters of Punjab National Bank is in New Delhi.
- Punjab National Bank was registered on 19th May 1894 under the Indian Companies Act.
- It is one of the largest banks in India with 6081 branches
- ‘Maha Bachat Scheme’, a high interest yield fixed deposit scheme was started by Punjab National Bank.
- Punjab National Bank has started its first ‘Micro finance branch’ in New Delhi.
- First bank to introduced Voluntary Retirement Scheme(VRS) in India was Punjab National Bank.
FINANCIAL INSTITUTIONS IN INDIA
NATIONAL HOUSING BANK (NHB)
- National Housing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing.
- NHB has been established to achieve the following objectives:
- To promote a sound, healthy, viable and cost effective housing finance system to all segments of the population
- To integrate the housing finance system with the overall financial system.
- To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.
- To make housing credit more affordable.
- To regulate the activities of housing finance companies
- Industrial Finance Corporation of India was set up in 1948 (New Delhi).
- It is the first Development Financial Institution in the country established after independence.
- The primary business of IFCI is to provide medium to long term financial assistance to the manufacturing, services and infrastructure sectors (both public and private).
- IFCI is also a Systemically Important Non-Deposit taking Non-Banking Finance Company, registered with the Reserve Bank of India.
- SIDBI (Small Industries Development Bank of India) started operation on 2nd April 1990. Its Headquarters is in Lucknow
- It was established as a subsidiary to IDBI.
- It ensures financial assistance to micro, small and medium scale enterprises (MSMEs) in India.
INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
- IDBI (Industrial Development Bank) is an apex institution in the field of industry
- IDBI was set up in July 1964 by an Act of Parliament.
- Its headquarters is at Mumbai.
- It provides credit and other financial assistance for industrial development.
- Indian Parliament approved IDBI’s conversion into a universal bank in 2003
- It is the10th largest credit and other development bank in the world.
- NABARD (National Bank for Agriculture and Rural Development) was set up on 12th July 1982 with its headquarters at Mumbai for the upliftment of rural India.
- It is an apex bank for agriculture development and sole controller of credit in the field of agriculture.
- NABARD was established on the recommendation of Shivaraman Committee.
- It provides training facilities to the institutions working in the field of rural development.
RURAL INFRASTRUCTURE DEVELOPMENT FUND
- Rural Infrastructure Development Fund (RIDF) was set up the Government of India in 1995 – 96. It is maintained by NABARD.
- The primary objective of this fund is to provide loans to the state governments and state-owned corporations to enable them to complete the ongoing rural infrastructure development projects.
REGIONAL RURAL BANKS (RRB)
- Regional Rural Banks were established on October 2, 1975.
- Developing rural economy by providing credit and deposit facilities for agriculture and other productive activities of all kinds in rural area is the main objective of Regional Rural Banks.
- Government of India, the State Government and the sponsoring nationalized bank contribute the share capital of RRB in the proportion of 50%, 15 % and 35 % respectively
- Prathma Bank is the first Regional Rural Bank started in India with its headquarters at Moradabad (UP). It was sponsored by Syndicate Bank.
- R.R.B. was set up under the recommendation of Narasimham Committee.
- At present there are 56 RRB’s functioning in India.
- Uttar Pradesh has the most number of Regional Rural Banks in India.
- The area of operation of RRB is limited to notified few districts in the state.
- Kerala Gramin Bank is the largest Regional Rural Bank in India.
KERALA GRAMIN BANK (KGB)
- Kerala Gramin Bank (KGB) is a Regional Rural Bank (RRB) formed in 2013.
- The bank was formed by amalgamating the two RRBs of Kerala namely South Malabar Gramin Bank and North Malabar Gramin Bank through a notification by the government of India. Its headquarters is in Malappuram.
- It is the second largest bank in Kerala, in terms of branch network (as on 2017).
- Though the bank is an RRB, KGB delivers all the major functionalities of a PSB.
Exim Bank (Export – Import Bank of India)
- Established in 1982 and it acts as an apex institution relating to foreign trade.
- Headquarters is at Mumbai.
- It provides financial assistance to exporters and importers to promote cross – border trade and investment