Industry Profile

Introduction
Without a sound and effective banking system in India it cannot

have a healthy economy.The banking system of India should not only be hassle free but it should be able to meet newchallenges posed by the

technology and any other external and internal factors. Banking in Indiahas its origin as early as Vedic Period. It is believed that the transition from

money lending to banking must have occurred even before Manu, the great Hindu Jurist who has devoted a sectionof his work to deposits and

advances and laid down the rules relating to rates of interest. Duringthe days of East India Company it was the turn of the agency houses to

carry on the banking business.

History
The banking system of India should not only be hassle free but it should be able to meetnew

challenges posed by the technology and any other external and internal factors. For the pastthree decades India's banking system has several

outstanding achievements to its credit. Themost 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. The first bank in India, though

conservative, was established in 1786. From 1786 tilltoday, the journey of Indian Banking System can be segregated into three distinct

phases. Theyare as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks

and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian

Financial &Banking Sector Reforms after 1991.

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Phase I The General Bank of India was set up in the year

1786. Next came Bank of Hindustanand Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of

Bombay(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.These three banks were amalgamated in

1920 and Imperial Bank of India was establishedwhich started as private shareholders banks, mostly Europeans shareholders. In 1865

AllahabadBank was established and first time exclusively by Indians, Punjab National Bank Ltd. was setup in 1894 with headquarters at

Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were

set up. ReserveBank of India came in 1935.During the first phase the growth was very slow and banks also experienced periodicfailures

between 1913 and 1948. There were approximately 1100 banks, mostly small. Tostreamline the functioning and activities of commercial banks,

the Government of India came upwith The Banking Companies Act, 1949 which was later changed to Banking Regulation Act1949 as per

amending Act of 1965. Phase II Government took major steps in this Indian Banking Sector Reform after independence.In

1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scalespecially in rural and semiurban areas. It

formed State Bank of india to act as the principal agentof RBI and to handle banking transactions of the Union and State Governments all over

thecountry.By the 1960s, the Indian banking industry has become an important tool to facilitate thedevelopment of the Indian economy. At the

same time, it has emerged as a large employer, and adebate has ensued about the possibility to nationalise the banking industry. Indira Gandhi,

the-then Prime Minister of India expressed the intention of the GOI in the annual conference of theAll India Congress Meeting. Seven

banks forming subsidiary of State Bank of India wasnationalised in 1960 on 19th July, 1969, major process of

nationalisation was carried out.

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A second dose of nationalization of 6 more commercial banks followed in 1980. Thestated reason

for the nationalization was to give the government more control of credit delivery.With the second dose of nationalization, the GOI controlled

around 91% of the banking businessof India. Later on, in the year 1993, the government merged New Bank of India with

Punjab National Bank. It was the only merger between nationalized banks and resulted in the reductionof the number of

nationalised banks from 20 to 19. Phase III This phase has introduced many more products and facilities in the banking sector in itsreforms

measure. In 1991, under the chairmanship of M Narasimham, a committee was set up byhis name which worked for the liberalisation of banking

practices.The country is flooded with foreign banks and their ATM stations. Efforts are being putto give a satisfactory service to customers. Phone

banking and net banking is introduced. Theentire system became more convenient and swift. Time is given more importance than

money.The financial system of India has shown a great deal of resilience. It is sheltered from anycrisis triggered by any external macroeconomics

shock as other East Asian Countries suffered.This is all due to a flexible exchange rate regime, the foreign reserves are high, the

capitalaccount is not yet fully convertible, and banks and their customers have limited foreign exchangeexposure.

Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation, licensing a small number of private

banks. These came to be known as NewGeneration tech-savvy banks and included Global Trust Bank. This move, along with the

rapidgrowth in the economy of India, revitalized the banking sector in India, which has seen rapidgrowth with strong contribution from all the three

sectors of banks, namely, government banks, private banks and foreign banks.
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The next stage for the Indian banking

has been setup with the proposed relaxation in thenorms for Foreign Direct Investment, where all Foreign Investors in banks may be given

votingrights which could exceed the present cap of 10%,at present it has gone up to 49% with somerestrictions. Currently,

banking in India is generally fairly mature in terms of supply, productrange 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 areconsidered to have clean, strong and

transparent balance sheets relative to other banks incomparable economies in its region. With the growth in the Indian economy

expected to bestrong for quite some timeespecially in its services sector-the demand for banking services,especially retail banking,

mortgages and investment services are expected to be strong. One mayalso expect M&A, takeovers, and asset sales. In March 2006, the

Reserve Bank of India allowedWarburg 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 bankswould need to be vetted by them.

Indian Banking system

The Indian Banking Industry can be categorized

into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about67,000

branches of Scheduled banks spread across India. As far as the present scenario isconcerned the banking industry in India is in a

transition phase. The Public Sector Banks (Pubs),which are the foundation of the Indian Banking system account for more than 78 per cent of

total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets(NPAs), massive manpower and

lack of modern technology.On the other hand the Private Sector Banks are witnessing immense progress. They areleaders in

Internet banking, mobile banking, phone banking, ATMs. On the other hand the PublicSector Banks are still facing the problem of unhappy

employees. There has been a decrease of 20 percent in the employee strength of the private sector in the wake of the Voluntary RetirementSchem

es (VRS). As far as foreign banks are concerned they are likely to succeed in India
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Reserve Bank of India

Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank,SBI Commercial and International

Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd,Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the

Public Sector includePunjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank etc.ANZ Grindlays Bank,

ABN-AMRO Bank, American Express Bank Ltd; Citibank etc aresome foreign banks operating in India. Commercial banks
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Co-operative BanksRegional Rural BanksCommercial BanksState Bank GroupPrivat e Sector BanksI n d i an

BanksForeign B a n k s Public Sector Banks Nati onalizedBanksS t a te Bank of IndiaAssociat e B a n k s State CooperativeBanksCe

ntral CooperativeBanksPri mary Credit