BASICS – COMMERCIAL BANKING

Prepared By NILESH SEN

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What You Must Learn…..2

Meaning Definition of Bank History of Commercial Banks in India Evolution Stages - Indian Banking Sector Reform Phases – Indian Banking Sector Structure of Indian Banking Sector Key Trends – Indian Banking Sector Growth Drivers – Indian banking Sector Key Opportunities

Meaning of Bank3

A Commercial Bank is a profit-seeking business firm, dealing in money and credit.

It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety.

So also, it deals in credit, i.e., it creates credit by making advances out of the funds received as deposits to needy people

Contd….4

It thus, functions as a mobiliser of saving in the economy.

A bank is, therefore like a reservoir into which flow the savings, the idle surplus money of households and from which loans are given on interest to businessmen and others who need them for investment or productive uses.

Definition of Bank5

Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.”

Horace White defined a bank, “As a manufacture of credit and a machine for facilitating exchange.”

According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use.”

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The Banking Companies Act of India defines Bank as “A Bank is a financial institution which accepts money from the public for the purpose of lending or investment repayable on demand or otherwise withdrawal by cheques, drafts or order or otherwise”

Hence bank is a financial institution which – - Deals in debts and credits - Accepts deposits and lends money and also creates money - Bridges the gap between borrowers and savers

History of Commercial Banks in India

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At the time of independence, there were 645 banks with more than 4,800 branches in India

But, with the nationalisation, in July 1969, 14 major banks were nationalised in first round

In second round, in 1980, another 6 banks were nationalised

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The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta. The Indian Government at that time established three Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843).

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In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government. The Imperial Bank of India was established with mainly European shareholders. It was only with the establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India came to an end.

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In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment of joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders. Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

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After independence, the Government of India started taking steps to encourage the spread of banking in India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state-associate banks.

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Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959, the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries.

To better align the banking system to the needs of planning and economic policy, it was considered necessary to have social control over banks.

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Important question arise – - Reasons & Objectives for Nationalisation - Does progressed achieved???Causes for Nationalisation Private ownership of commercial banks and

concentration of economic power Urban-bias Negligence of agriculture sector Violation of norms & Speculative activities Negligence for priority sector lending

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Objectives of Nationalisation Removal of control by a few Provision of adequate credit to agriculture and

small scale industry Giving a professional bent to management Encouragement to New Class of Entrepreneurs Provision of adequate training and services to

bank staff

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Progress Made through Nationalisation Expansion of branch

- Branch offices had increased from 8262 in

1969 to 68,500 in 2005

- Population per bank reduced from 55,000 in

1969 to 16,000 in 2005 Branch opening in Rural and Unbanked area

- From 22% branch office in 1969 in rural area

increased to 47% in 2005

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Deposit Mobilisation

- Increased from 4,665 crore in 1969 to

17,57,846 crore in 2005, a 67% increase Bank Lending

- In 1969, bank lend 3,399 crore which

increased to 11,69,090 crore in 2005 Promotion of new entrepreneurs in banking area

Evolution Stages 17

Reform Phases – Indian Banking Sector

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The Government of India appointed a committee under the Chairmanship of Mr. M. Narasimham (the former Governor of RBI) in July 1991 to examine India's financial system and to recommend improvements in the working of the financial system.

This is known as the Committee on Financial Sector Reforms.

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This was followed by another committee under him in 1998. The second committee was asked to look in to the progress of reforms till 1998 and to lay a course for further reforms.

This committee is known as Committee on Banking Sector Reforms, 1998.

The Reports of these two committees form the basis for reforms in the Indian banking sector

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Refer Material – Reforms in Indian Banking Sector provided to you

Structure of Indian Banking Sector

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Key Trends – Indian Banking Sector

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Growth Drivers – Indian Banking Sector

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Key Opportunities 25

Rising rural income pushing up demand for banking

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Mobile banking to provide a cost effective solution

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Thank you……