Banking in India

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Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India originated in the last decades of the 18th century. The oldest bank in existence
in India is the State Bank of India, a government-owned bank that traces its origins back to June
1806 and that is the largest commercial bank in the country. Central banking is the responsibility
of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the
then Imperial Bank of India, relegating it to commercial banking functions. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the
government nationalized the 14 largest commercial banks; the government nationalized the six
next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 31 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) 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, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively
Contents
[hide]

 1 Early history
 2 From World War I to Independence
 3 Post-independence
 4 Nationalisation
 5 Liberalisation
 6 Further reading
 7 Notes
 8 See also
 9 External links

[edit] Early history

Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now
defunct. The oldest bank in existence in India is the State Bank of India, which originated in the
Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India Company.
For many years the Presidency banks acted as quasi-central banks, as did their successors. The
three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in 1863, and which survived
until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance
Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate
States, promoters opened banks to finance trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India during that period failed. The depositors
lost money and lost interest in keeping deposits with banks. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondichery, then a French colony, followed. HSBC established itself in
Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the
British Empire, and so became a banking center.

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period
of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial
and other infrastructure had improved. Indians had established small banks, most of which
served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and
a number of Indian joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally under capitalized and lacked the experience and
maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon
to observe, "In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Kanara ) district. Four nationalised banks started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian
Banking".

[edit] From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World War
(1939-1945), and two years thereafter until the independence of India were challenging for
Indian banking. The years of the First World War were turbulent, and it took its toll with banks
simply collapsing despite the Indian economy gaining indirect boost due to war-related economic
activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following
table:

Number of
Authorised capital Paid-up Capital
Years banks
(Rs. Lakhs) (Rs. Lakhs)
that failed

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

[edit] Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of the
Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The major steps to
regulate banking included:

 In 1948, the Reserve Bank of India, India's central banking authority, was nationalized,
and it became an institution owned by the Government of India.
 In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
  The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank
of India, continued to be owned and operated by private persons. This changed with the
nationalisation of major banks in India on 19 July 1969.

[edit] Nationalisation
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
debate had 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 the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The
paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and
the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from
the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the
step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it
received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
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 business of
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 reduction
of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised
banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

The nationalised banks were credited by some, including Home minister P. Chidambaram, to
have helped the Indian economy withstand the global financial crisis of 2007-2009.[1][2]

[edit] Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%,at present it has gone up to 74% with some
restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range
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 are considered to
have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.

In March 2006, the Reserve Bank of India allowed Warburg 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 banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connection with housing, vehicle and personal loans. There are
press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[3][4]
[5]

[edit] Further reading

 The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921-
1955) (Volume III)
 Banking Frontiers - a monthly magazine, published by Mumbai based Glocal Infomart.
Editor - Manoj Agrawal

[edit] Notes
1. ^ PSU banks' policies saved India from financial blushes: Chidambaram
2. ^ The importance of public banking
 3. ^ http://www.parinda.com/news/crime/20070918/2025/icici-personal-loan-customer-
commits-suicide-after-alleged-harassment-recov
4. ^ http://www.hindu.com/2008/06/30/stories/2008063057470300.htm
5. ^ http://www.indiatime.com/2007/11/07/icicis-third-eye/

[edit] See also

 List of banks in India
 List of Cooperative Banks in India
 Banking in Kerala

[edit] External links

 Private banks score over public sector banks
 The importance of public banking
 Brief profiles, 2008-09 performance, and 2009-10 outlook on 10 leading Indian banks

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Banking in India
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Banking in India
Central bank Reserve Bank of India

Allahabad Bank · Andhra Bank · Bank of Baroda · Bank of India ·

Bank of Maharashtra · Canara Bank · Central Bank of India ·
Corporation Bank · Dena Bank · IDBI Bank · Indian Bank · Indian
Nationalised banks
Overseas Bank · Oriental Bank of Commerce · Punjab & Sind
Bank · Punjab National Bank · Syndicate Bank · UCO Bank ·
Union Bank of India · United Bank of India · Vijaya Bank

State Bank of India · State Bank of Bikaner & Jaipur · State Bank of
State Bank Group Hyderabad · State Bank of Indore · State Bank of Mysore · State
Bank of Patiala · State Bank of Travancore
Private banks Axis Bank · Bank of Rajasthan · Bharat Overseas Bank · Catholic
Syrian Bank · City Union Bank · Development Credit Bank ·
Dhanalakshmi Bank · Federal Bank · Ganesh Bank of Kurundwad ·
HDFC Bank · ICICI Bank · IndusInd Bank · ING Vysya Bank ·
Jammu & Kashmir Bank · Karnataka Bank Limited · Karur Vysya
Bank · Kotak Mahindra Bank · Lakshmi Vilas Bank · Nainital
 Bank · Ratnakar Bank · Rupee Bank · Saraswat Bank · SBI
Commercial and International Bank · South Indian Bank · Tamil
Nadu Mercantile Bank · Yes Bank

ABN AMRO · Abu Dhabi Commercial Bank · Antwerp Diamond

Bank · Arab Bangladesh Bank · Bank International Indonesia ·
Bank of America · Bank of Bahrain & Kuwait · Bank of Ceylon ·
Foreign bank
Bank of Nova Scotia · Bank of Tokyo Mitsubishi UFJ · Barclays
Bank · Citibank India · HSBC · Standard Chartered · Deutsche
Bank  · Royal Bank of Scotland

Regional Rural South Malabar Gramin Bank · North Malabar Gramin Bank ·
banks Pragathi Gramin Bank · Shreyas Gramin Bank

Real Time Gross Settlement(RTGS)  · National Electronic Fund

Financial Services Transfer (NEFT) · Structured Financial Messaging System
(SFMS) · CashTree · Cashnet · Automated Teller Machine (ATM)
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