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Evolution of Indian Banking system

Introduction

Important pillar in the financial system


Unique system in the world

Important to nation's economy


Pivotal role in economic development Forms core of money market in country Dominant sector & Accounts for 3/4ths of countrys assets
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Contd

Remained conservative and insulated from crisis


Extensive reach Ability to meet new challenges Service to customer

Early phase- Pre-Independence

1685- 1st bank in Madras by East India Co


1770 & 1850- Bank of Hindustan,Commercial Bank Calcutta Bank,Bank of Calcutta and Bank of Bombay . Commercial and Calcutta Bank merged to form Union Bank

3 presidency banks amalgamated to Imperial bank of India in 1921.


No of banks increased rapidly to 1100 , mostly small RBI established in 1935.

Post independence phase

Large no of uneconomic banks failed Banking Regulation Act , 1949 Small unviable banks weeded out or merged with stronger banks (Nos 566 in 1951 to 108 in 1966)

Conversion of Imperial bank to SBI in 1955 followed by its 7 subsidiaries


Introduction of deposit insurance Upsurge in bank credit with 5 year plans
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Post Nationalisation

1969-Nationalisation of 14 major banks and 6 more in 1980


Thus led to significant shift in policies Equitable distribution of credit Directed credit to priority sectors in conformity with national policies

Growth between 1969-1992

Branches 8262 to 60570


Deposits Rs 4646 Cr to 2,37,566

Advances Rs 3599 Cr to 1,31,520


Share of priority sector 14 to 43 %

Banking density 64000 to 14000 people/branch


Gross domestic savings 15.7 to 24.2 %

Weaknesses

Dearth of competition
Decline in productivity & efficency

Erosion in profits & viability


Directed Credit

Political / administrative interference


Inadequate supervision/lack of autonomy

Lack of transparency in a/c practices

Post Reform Phase

Sweeping changes in Indian Fin Sector


WTO membership & IMF pressures

Narasimham Committee report in 1991


Financial sector reforms 1992

Objective to create viable & efficient banking system Cleaning up balance sheets of banks and greater disclosures & transparency in

Contd

Switch from administered to market based environment


Quantitative restrictions on credit flows due to high reserve requirements Low levels of investment and growth

Competition,service level expectations


Technology dominated Regulator's drive for Capital efficency/asset quality Entry of pvt/foreign banks

Types of banks

Scheduled and non-scheduled banks


Commercial banks- Public sector,private sector(indian /foreign) Co-operative banks -state coop,central /district coop,

Regional rural banks

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Public sector banks

Created in 3 phases
Conversion of Imperial bank into SBI in 1955 followed by establishment of its subsidiaries

Nationalisation of 14 major banks in 1969


Nationalisation of 6 more banks in 1980

SBI holds dominant position


Advantages of size,geographical reach,low cost deposit,diversified portfolio

After 1994,most of these made public issue of shares ,still govt holds >51%

Private sector banks

Not allowed for almost 2 decades after 1969


Narasimham committee recommended freedom of entry to Pvt banks.

Level playing field between banks in various sectors.


Foreign investment permitted upto 74% of equity

New generation pvt banks are technology driven withinnovative products,offerred superior financial services,tapped new markets ,accessed low cost deposits and had greater efficiency

Foreign banks

In operation in India through branches since decades


Smaller network Operations are technology driven Active in foreign exchange,trade finance and investment banking augmenting fee based income

Branch licensing made liberal


Led to enhanced competition

Cooperative banks

Established under coop soc acts of state


3 tier set up state,central/dist and primary credit soc. Focus on mobilising savings and meeting credit needs rural and small & medium income groups Only state coop banks have access to funds from RBI Restricted operations

Regional rural banks

Came into existence after 1975


To bridge vast gap in rural credit Combining merits of coop / commercial banks Sponsor commercial bank (35%), GOI (50%) and State Govt (15%)

Though network expanded due to low productivity,lack of functional autonomy,high transaction cost and NPAs financial performance adversely impacted
Many merged with sponsor banks