Banking and its Evolution

By Prof. Anita Sahoo

BANK:
A bank

is a financial institution whose primary activity is to act as a payment agent for customers & to borrow and lend money and to take care of financial affairs Here the trading item is itself money

Bank Vs. Banking

y y y y y

Its an organisation Its a noun Its a building Its a tangible object It refers to the physical resources like building, staffs, furniture, etc

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The activities carried out by a bank is known as banking Its a verb Its a financial transaction Its a service It is the output(financial services) of the bank by utilising those resources

Definition: Banking Regulation Act,1949

According to the Banking Regulation Act, 1949 Banking has been defined as accepting of the deposits of the public for the purpose of lending or investing, repayable on demand and withdrawable through cheques or otherwise.
the post office saving organisations are not treated as banks ?
Why

Origin of Banking
The word Bank is said to have derived from the French word Bancus which means a bench. y It is believed that the early jews in Lombardly transacted their banking business by sitting on benches on the market place. y Another common-held view is that the word bank originated from the German word Back which means a joint stock fund. y Finally the word Back anglicised in to Bank.
y

The banking (modern) system started with the establishment of Bank of England in 1694 with the advent of the English traders in the 17thy century, the East India Company encouraged setting up of trading houses which were performing dual activities of trading and banking operation

Banking in India

Objectives
To make an account of evolution of present day banking in India y To evaluate the interventions of state in banking sector over years and y To appraise the entry of foreign banks
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Evolutionary Phases
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Indigenous Reign Direct Intervention of the State Liberalization Transition Entry of Foreign Banks

Phase I: Indigenous banks

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Vedas and the Manusmriti: Kautalyas Arthashastra: Suggested Maximum and Minimum Interest rate Kautalya recommended 15 per cent interest per annum on capital. British rule almost wiped out these tribes by bringing European Banks from urban e.g. Alexander & Co. and Fergusson & Co. They moved to villages. They survive even today.

How did Sahukar lend?

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Borrower is known Very little documentation Sahukar usually a bad guy Exorbitant rates of interests Compounded Shorter Intervals Records Tampered Mostly Mortgaged lending on Land, Properties, Jewels etc Most cases poor borrowers surrendered their properties.

Phase II: Direct Intervention

y y

Government Interventions began in 1930s The Reserve Bank which is the Central Bank was created in 1935 by passing RBI Act 1934. The RBI is the sole authority for
issuing bank notes and the supervisory body for banking operations in India . Supervising exchange control and banking regulations, and administers the government's monetary policy. granting licenses for new bank branches.

Intervention: Nationalization
y

In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely,
Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd.

In 1955, Govt. nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions

Intervention: Nationalization
On July 19, 1969, 14 major banks nationalized and y in 15th April 1980 six more commercial y 80% of the banking segment in India under Government ownership in 1990. y the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
y

Effect of Nationalization
the focus of lending y priority sectors were agriculture, small-scale industry, retail trade, small business and small transport operators y poverty alleviation and employment generation programs. y the success of green revolution and the increase of aggregate food grain production
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Other sides of Nationalization

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Borrowings and lending restricted, not on business line Deterioration of Banker-customers relationship Poor Services Employees Strikes No Healthy competition among banks Mounting hidden NPAs

Phase III - Liberalization

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Constitution of Narasimham committee and its report on Banking reforms in 1991. It covered the areas of interest rate deregulation & directed credit rules, Statutory preemptions and entry deregulation for both domestic and foreign banks. Lowering of the CRR and SLR Interest rate liberalization Do away with Entry barriers. By March 2004, the new private sector banks and the foreign banks share shared almost 20% of total assets Prudential Norms act against NPAs

y y y

Phase IV: Transition

y y

y y y y

Most Indian banks lagging behind the areas of customer funds transfer and clearing systems. Over-staffed and not able to compete with new generation private banks While these new banks and foreign banks still face restrictions in their activities. New banks are well-capitalized, Use modern equipment and Attract high-caliber employees. Indian banks were given time to Indian Banks to strengthen their balance sheets, consolidate and overall become more robust, so that they could compete.

Phase V: Entry of Foreign Banks

y

Two of domestic banks in India have turned like Foreign Banks. About 74 per cent of holdings of ICICI and HDFC bank are in the hands of foreigners. Phase II of roadmap foreign banks may be permitted to have overall investment of 74 per cent in the private banks of India in April 2009 New banks to be in India
Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of China

Areas of Concentration are Risk Management, customizing the products and Value creation.

INDIAN BANKING SYSTEM

RBI
COMMERC IAL BANK IDBI NABARD NHB EXIM INVESTMENT INSTITUTION

FOREIGN BANK

INDIAN COMMERCIAL BANK

LIC

GIC

UTI

PRIVATE SECTOR

PUBLIC SECTOR

(HUDCO)

(SHB)

SCHEDULED COMMERCIAL BANK

Reserve Bank of India

Monopoly of note issue y As a Banker, an Advisor, an Agent to the Government y Bankers Bank and lender of the last resort y Controller of money supply and credit - Quantitative - Bank Rate - Variation in CRR and SLR - Open market operation
y

- Qualitative - Fixation of margin requirements on secured loans - Moralsuation

Commercial Bank
y

Acceptance of Deposits
- Current account Deposits - Fixed account Deposits - Saving account Deposits

Advancing Loans
- Cash Credit - Term Loans - Overdrafts

y y

Discounting Bills of Exchange Investment of funds

Agency

Function

- Transfer of funds - Collection of funds - Purchase and sale of shares on behalf of the customer - Collection of dividends and interests - Payment of bills and insurance premiums

Miscellaneous Functions
- Sale & purchase of foreign exchange - Issuing travelers cheque and gift cheque - Providing locker facility

Role of Commercial Banks in the Economic Development of a country Banks promote Capital Formation y Investment in new enterprises y Promotion of Trade & Industry y Development of Agriculture y Balanced development of different regions y Influencing economic activity y Implementation of Monetary policy y Monetization of the economy y Export promotion cells
y

THANK YOU