Topic ROLE OF BANKS IN INDIA

Submitted to Prof.KAMLA Group members

Page 1

Priyanka patil Sayli pandhare NIKITA SAWANT 119 KRUPALI PATEL 125 PAYAL SHINDE 129

108 105

Page 2

Index

INTRODUCTION TO INDIAN BANKING INDUSTRY

GROWTH OF BANKING REFORMS IN BANKING SECTOR OVERVIEW OF ROLE OF BANKS IN THE ECONOMY

CONCLUSION BIBLOGRAPHY

Page 3

INTRODUCTION TO INDIAN BANKING INDUSTRY

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806.The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. The Public Sector emerged as the driver of economic growth consequent to the industrial revolution in Europe. With the advent of globalization, the public sector faced new challenges in the developed economies. No longer the public sector had the privilege of operating in a sellers market and had to face competition both from domestic and international competitors. Further, in the second half of the 20th century in the developed economies, the political opinion started swinging towards the views that the intervention as well as investment by Government in commercial activities should be reduced to the extent possible.

Page 4

WHY BANKING
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most 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. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.

Page 5

GROWTH OF BANKING
Journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Phase I: Early phase from 1786 to 1969 of Indian Banks Phase II: Nationalisation of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.

Phase III: New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.

Phase-I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and 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. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up 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. Reserve Bank of India came in1935. There were approximately 1100 banks, mostly small. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948.

Phase-II

Page 6

In 1955, it 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 of the Union and State Governments all over the country.14 major commercial banks in the country were nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalisation of State Bank of India. 1959: Nationalisation of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalisation of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalisation of seven banks with deposits over 200 crore. After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Phase-III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. Phone banking and net banking is introduced . The financial system of India has shown a great deal of resilience. It is sheltered from any crisis 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

Page 7

capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

REFORMS IN BANKING SECTOR

Page 8

I. RESERVE BANK OF INDIA:

Reserve Bank of India (RBI) is India's central bank - it formulates, implements and monitors India's monetary policy. Reserve bank of India was established in 1935 and nationalized in 1949. It is fully owned by the Government of India and its headquarters are located in Mumbai. RBI has 22 regional offices in the various state capitals of India. It has a majority stake in the State Bank of India. Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India was under Government ownership. After the nationalisation of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%. 1955: Nationalisation of State Bank of India. 1959: Nationalisation of SBI subsidiaries. 1969: Nationalisation of 14 major banks. 1980: Nationalisation of seven banks with deposits over 200 crores.

II. COMMERCIAL BANKS: The commercial banks in India play a major role in the development of the country itself. These banks are primarily concerned with providing loans and accepting
Page 9

deposits. Several other facilities are also provided by the commercial banks in India. The commercial banks in India generate funds for the purpose of financing their various financial requirements through a definite process. The commercial banks in India accept deposits from different sources like businesses and individuals. A wide range of financial products have been developed by these banks to encourage the savings habit of the clients. There are savings deposits, term deposits and many more to attract the investors. These deposits are recycled in the economy through the loans and other credit products. A.PSU banks Nationalized banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July1960, its seven subsidiaries were also nationalised with deposits over 200 crores. T h e s e subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT).

B. Private sector banks

Currently, India has 88 scheduled commercial banks (SCBs), 31 private banks and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, private and foreign banks holding 18.2% and 6.5% respectively, 0.3% non-scheduled commercial banks.

C. Foreign banks
Foreign banks working in India like Abn-amro, HSBC, CITI, Standard Chartered Bank brought the drastic changes in whole banking industry. Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accretive.

Page 10

Why Bank Nationalization?

The need for the nationalisation was felt mainly because private commercial banks were not fulfilling the social and developmental goals of banking which are so essential for any industrializing country. Despite the enactment of the Banking Regulation Act in 1949 and the nationalisation of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small-scale borrowers. The developmental goals of financial intermediation were not being achieved other than for some favored large industries and established business houses. Whereas industrys share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34 per cent to 68 per cent, agriculture received less than 2 per cent of total credit. Other key areas such credit to exports and small-scale industries were also neglected. The stated purpose of bank nationalisation was to ensure that credit allocation occur in accordance with plan priorities. Nationalisation took place in two phases, with a first round in1969 covering 14 banks followed by another in 1980 covering 7 banks. Currently there are 27nationalised commercial banks. Initially, the focus was on the physical extension of banking services. There is no doubt that the achievement has been impressive by any standards. From only 8261 in June 1969, the number of branches of commercial banks increased to 65,521 in 2000. (Indeed, they had increased to even more, but, as we shall see, the reforms of the nineties caused a decline in the number of rural branches.) The expansion of rural branches was especially noteworthy. The population covered by a branch decreased from 65,000 in 1969 to 15,000 in 2001. There were associated increases in both deposits and credit flow

III. CO - OPERATIVE BANKS:

Page 11

Co-operative banks in this country are a part of vast and powerful structure of cooperative institutions which are engaged in tasks of production, processing, marketing, distribution, servicing and banking in India. The beginning co-operative banking in this country dates back to about 1904. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Initiatives towards development of co-operative banks

1.

Reorganization of PACSs (a scheme by NABARD).

2. Licensing of new USBs liberalized. 3. National Co-operative Bank of India (NCBI) was registered in 1993. (Multistate co-operative society)-it has no regulatory functions. 4 . Co-operative development bank (set up by NABARD). 5. Lending and borrowing rates of all co-operative have been more or less completely freed or deregulated. 6. Allowing all PCBs to undertake equipment leasing and hire-purchase financing

IV. DEVELOPMENT BANKS:

In other words, institutions undertaking financial and developmental functions are considered as development banks. Structure of Development Banks/ Development Financial Institutions During the post-independence period, India is well-served by a network of development banks, at the national as well as state levels. At present, there are seven all India industrial development banks, viz.

Page 12

(1) The Industrial Development Bank of India (IDBI) (2) The Small Industries Development Bank of India (SIDBI) (3) National Bank for Agriculture and Rural development of India (NABARD) (4) Export Import Bank of India (EXIM) (5)The Industrial Finance Corporation of India (IFCI) (6)The Industrial Reconstruction Bank of India (IRBI) (7) The National Small Industries Corporation (NSIC) (8) The National Industrial Development Corporation (NIDC) (9) Shipping credit and Investment Corporation of India (SCICI)

Page 13

OVERVIEW OF ROLE OF BANKS IN THE ECONOMY

1. Capital Formation:
Capital formation implies the diversion of the productive capacity of the economy to the making of capital goods which increases future productive capacity. The process of Capital Formation involves three distinct but interdependent activities, viz., saving financial intermediation and investment. However, poor country/economy may be, there will be a need for institutions which allow such savings, as are currently forthcoming, to be invested conveniently and safely and which ensure that they are channeled into the most useful purposes. A well-developed financial structure will therefore aid in the collections and disbursements of investible funds and thereby contribute to the capital formation of the economy. Indian capital market although still considered to be underdeveloped has been recording impressive progress during the post-interdependence period.

2. Support to the Capital Market:

The basic purpose of DFIs particularly in the context of a developing economy, is to accelerate the pace of economic development by increasing capital formation, inducing investors and entrepreneurs, sealing the leakages of material and human resources by careful allocation thereof, undertaking development activities, including promotion of industrial units to fill the gaps in the industrial structure and by ensuring that no healthy projects suffer for want of finance and/or technical services. Hence, the DFIs have to perform financial and development functions on finance functions, there is a provision of adequate term finance and in development
Page 14

functions there include providing of foreign currency loans, underwriting of shares and debentures of industrial concerns, direct subscription to equity and preference share capital, guaranteeing of deferred payments, conducting techno-economic surveys, market and investment research and rendering of technical and administrative guidance to the entrepreneurs.

3. Rupee Loans:
Rupee loans constitute more than 90 per cent of the total assistance sanctioned and disbursed. This speaks eloquently on DFIs obsession with term loans to the neglect of other forms of assistance which are equally important. Term loans unsupplemented by other forms of assistance had naturally put the borrowers, most of whom are small entrepreneurs, on to a heavy burden of debt-servicing. Since term finance is just one of the inputs but not everything for the entrepreneurs, they had to search for other sources and their abortive efforts to secure other forms of assistance led to sickness in industrial units in many cases.

4. Foreign Currency Loans:

Foreign currency loans are meant for setting up of new industrial projects as also for expansion, diversification, modernization or renovation of existing units in cases where a portion of the loan was for financing import of equipment from abroad and/or technical know-how, in special cases.

5. Subscription to Debentures and Guarantees:

Regarding guarantees, it is well-known that when an entrepreneur purchases some machinery or fixed assets or capital goods on credit, the supplier usually asks him to furnish some guarantee to ensure payment of installments by the purchaser at regular intervals. In such a case, DFIs can act as guarantors for prompt of installments to the supplier of such machinery or capital under a scheme called Deferred Payments Guarantee.

Page 15

6. Assistance to Backward Areas:

Operations of DFIs in India have been primarily guided by priorities as spelt out in the Five- Year Plans. This is reflected in the lending portfolio and pattern of financial assistance of development financial institutions under different schemes of financing. Institutional finance to projects in backward areas is extended on concessional terms such as lower interest rate, longer moratorium period, extended repayment schedule and relaxed norms in respect of promoters contribution and debt-equity ratio. Such concessions are extended on a graded scale to units in industrially backward districts, classified into the three categories of A, B and c depending upon the degree of their backwardness. Besides, institutions have introduced schemes for extending term loans for project/area-specific infrastructure development. Moreover, in recent years, development banks in India have launched special programmes for intensive development of industrially least developed areas, commonly referred to as the No-industry Districts (NIDs) which do not have any large-scale or medium-scale industrial project. Institutions have initiated industrial potential surveys in these areas.

7. Promotion of New Entrepreneurs:

Development banks in India have also achieved a remarkable success in creating a new class of entrepreneurs and spreading the industrial culture to newer areas and weaker sections of the society. Special capital and seed Capital schemes have been introduced to provide equity type of assistance to new and technically skilled entrepreneurs who lack financial resources of their own even to provide promoters contribution in view of long-term benefits to the society from the emergence of a new class of entrepreneurs. Development banks have been actively involved in the entrepreneurship development programmes and in establishing a set of institutions
Page 16

which identify and train potential entrepreneurs. Again, to make available a package of services encompassing preparation of feasibility of reports, project reports, technical and management consultancy etc. at a reasonable cost, institutions have sponsored a chain of 16 Technical Consultancy organizations covering practically the entire country. Promotional and development functions are as important to institutions as the financing role. The promotional activities like carrying out industrial potential surveys, identification of potential entrepreneurs, conducting entrepreneurship development programmes and providing technical consultancy services have contributed in a significant manner to the process of industrialization and effective utilization of industrial finance by industry. IDBI has created a special technical assistance fund to support its various promotional activities. Over the years, the scope of promotional activities has expanded to include programmes for up gradation of skill of State level development banks and other industrial promotion agencies, conducting special studies on important issues concerning industrial development, encouraging voluntary agencies in implementing their programmes for the uplift of rural areas, village an cottage industries, artisans and other weaker sections of the society.

8. Impact on Corporate Culture:

The project appraisal and follow-up of assisted projects by institutions through various instruments, such as project monitoring and report of nominee directors on the Boards of directors of assisted units, have been mutually rewarding. Through monitoring of assisted projects, the institutions have been able to better appreciate the problems faced by industrial units. It also has been possible for the corporate managements to recognize the fact that interests of the assisted units and those of institutions do not conflict but coincide. Over the years, institutions have succeeded in infusing a sense of constructive partnership with the corporate sector. Institutions have been going through a continuous process of learning by doing and are effecting improvements in their systems and procedures on the basis of their cumulative experience. The promoters of industrial projects now develop ideas into specific projects more carefully and prepare project reports more systematically. Institutions insist on
Page 17

more critical evaluation of technical feasibility demand factors, marketing strategies and project location and on application of modern techniques of discounted cash flow, internal rate of return, economic rate of return etc., in assessing the prospects of a project. This has produced a favorable impact on the process of decision-making in the corporate seeking financial assistance from institutions. In fact, such impact is not continued to projects assisted by them but also spreads over to projects financed by the corporate sector on its own. The association of institutions in the management of corporate bodies has considerably facilitated the process of progressive professionalism of the corporate management. Institutions have been able to convince the corporate managements to appropriately re-orient their organizational structure, personal policies and planning and control systems. In many cases, institutions have successfully inducted experts on the Boards of assisted companies. As part of their project follow-up work and through their nominee directors, institutions have also been able to bring about progressive adoption of modern management techniques, such as corporate planning and performance budgeting in the assisted units. The progressive professionalism of industrial

Page 18

CONCLUSION:
The banking system in India has undergone significant changes during last 16 years. There have been new banks, new instruments, new windows, new opportunities and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment incomes, it has also entailed greater competition and consequently greater risks. India adopted prudential measures aimed at imparting strength to the banking system and ensuring its safety and soundness, through greater transparency, accountability and public credibility. Banking sector reform has been unique in the world in that it combines a comprehensive reorientation of competition, regulation and ownership in a nondisruptive and cost-effective manner. Indeed banking reform is a good illustration of the dynamism of the public sector in managing the overhang problems and the pragmatism of public policy in enabling the domestic and foreign private sectors to compete and expand. There has been no banking crisis in India. The Government took steps to reduce its ownership in nationalised banks and inducted private ownership but without altering their public sector character. The underlying rationale of this approach is to assure that the salutary features of public sector banking were not lost in the Trans formation process. On account of healthy market value of the banks shares, the capital infusion into the banks by the Government has turned out to be profitable for the Government.

Page 19

BIBLOGRAPHY
SEARCH ENGINE
GOOGLE

www.scribd.com

Page 20