A

PROJECT ON

Banking Structure in India

SUBMITTED TO-

Dr. Kiran Kori

(FACULTY BANKING LAW)

ROLL NO. -166

SEMESTER-IX (B.A.LL.B HONS.)

SUBMITTED BY-

Tigmika Srivastava

DATE OF SUBMISSION: 5th October, 2017

HIDAYATULLAH NATIONAL LAW UNIVERSITY

1
Acknowledgement
First & foremost, I take this opportunity to thank Dr. Kiran Kori, Faculty Banking Law, HNLU
for allotting me this challenging topic to work on. She has been very kind in providing inputs for
this work, by way of suggestions and by giving her very precious time for some discussion and
providing me resource of her vast knowledge of the subject which helped me to look at the topic
in its very broad sense also to look at some of the very narrow concepts by expertise view.
Therefore, she proved to be a database in making this project. Hence I would like to thank her for
all her cooperation and support.

I would also like to thank my dear colleagues and friends in the University, who have helped me
with ideas about this work and also a source for constant motivation and hence they were a
guiding force to me in making of this project. Last, but not the least I thank the University
Administration for equipping the University with such good library and IT lab.

My special thanks to library staff and IT staff for equipping me with the necessary books and
data from the website.

I would also like to thank the hostel staff for providing me a healthy and clean environment that
provided me a great concentration level.

Tigmika Srivastava

Roll No. - 166

Semester-IX (B.A.L.L.B. HONS.)

2
Table of Contents
Acknowledgement...........................................................................................................................2
Research Methodology....................................................................................................................4
Introduction......................................................................................................................................5
Definition of Bank.......................................................................................................................5
Scheduled Bank............................................................................................................................6
Banking Company........................................................................................................................6
Historical Perspective of Indian Banking........................................................................................7
Evolution of Public Sector Banks....................................................................................................9
Public vs Private Ownership of Banks..........................................................................................10
Banking Development during Post-Independence Era..................................................................11
Banking development during Post-Nationalisation Era................................................................12
Classification of Banks..................................................................................................................15
Banking System.............................................................................................................................16
Structure of Banking Sector in India.............................................................................................19
Conclusion.....................................................................................................................................22
Bibliography..................................................................................................................................23

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Research Methodology
The method adopted for this work was analytical in nature based on empirical and non-empirical
sources.

Constitutional provisions, Legislative enactments, books, reports, journals, news and other
reference have been primarily helpful in giving this work a firm structure. Websites, dictionaries
and web articles have also been referred.

Footnotes have been provided wherever needed, either to acknowledge the source or to point to a
particular provision of law. Uniform Bluebook (19th ed.) citation format has been followed for
footnoting.

Sources of Data

The method adopted for this work was analytical in nature based on empirical and non-empirical
sources.

Legislative enactments, books, reports, journals, news and other reference have been primarily
helpful in giving this work a firm structure. Websites, dictionaries and web articles have also
been referred.

Research Questions

The work deals with the following research questions:-

1) What is the historical background of the banking system in India?

2) How has the Indian Banking System evolved?
3) What is the structure of the Indian Banking System?
4) What is the interaction between public and private banks in India?

4
Introduction
The existing banking structure in India, evolved over several decades, is elaborate and has been
serving the credit and banking services needs of the economy. There are multiple layers in
today's banking structure to cater to the specific and varied requirements of different customers
and borrowers. The banking structure played a major role in the mobilisation of savings and
promoting economic development. In the post financial sector reforms (1991) phase, the
performance and strength of the banking structure improved perceptibly. Financial soundness of
the Indian commercial banking system compares favourably with most of the advanced and
emerging countries.

India cannot have a healthy economy without a sound and effective banking system. The
banking system should be hassle free and able to meet the new challenges posed by technology
and other factors, both internal and external.

In the past three decades, India's banking system has earned several outstanding achievements to
its credit. The most striking is its extensive reach. It is no longer confined to metropolises or
cities in India. In fact, Indian banking system has reached even to the remote corners of the
country. This is one of the main aspects of India's growth story. The government's regulation
policy for banks has paid rich dividends with the nationalization of 14 major private banks in
1969. Banking today has become convenient and instant, with the account holder not having to
wait for hours at the bank counter for getting a draft or for withdrawing money from his account.

Definition of Bank
Section 5(b) defines bank as accepting for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, and
order or otherwise. Section 49A of the Act prohibits any institution other than a banking
company to accept deposit money from public withdrawal by cheque. Students may note that the
essence of banking business is the function of accepting deposits from public with the facility of
withdrawal of money by cheque. In other words, the combination of the functions of acceptance
of public deposits and withdrawal of the money by cheques by any institution cannot be
performed without the approval of Reserve Bank.

A bank is an institution which deals in money and credit. Thus, bank is an intermediary which
handles other people's money both for their advantage and to its own profit. But bank is not
merely a trader in money but also an important manufacturer of money. In other words, a bank is
a factory of credit.

Let us see the definitions of bank and banking, given by various authorities. Crowther defines a
bank as, "one that collects money from those who have it to spare or who are saving it out of
their income and lends the money so collected to those who require it".

5
Dr. L. Hart, says that the bankers are "one who in the ordinary course of business; honours
cheques drawn upon him by persons from and for whom he receives money on current
accounts".

Sir Jhon Paget says that, "no person or body corporate otherwise can be a banker who does not,
(i) take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collect
cheques, for his customers".

Sir Kinley, "A bank is an establishment which makes to individuals such advances of money as
may be required and to which individuals entrust money when not required by them for use".

Prof. Sayers says that "Banks are not merely purveyors of money but also in an important sense,
manufacturers of money". Although the above definitions have described the meaning of bank,
none of them precisely defined, 'Banking' incorporating its entire functions.

However, an attempt has been made in Section 5(1) (b&c) of the Banking Regulation Act, 1949
to define 'Banking' and 'Banking Company'. According to Section 5 (1) (b), "Banking means
accepting for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawal by cheques, draft, order or otherwise".
Section 5(1) (c) defines banking company as, "any company which transacts the business of
banking in India".

Scheduled Bank
Scheduled Banks are those banks which are listed in the Second Schedule to the Reserve Bank of
India Act, 1934. The Banks satisfying the following conditions are only included in the Second
Schedule.

(a) That the Bank’s paid up capital plus free reserves are not less than Rs. 5.00 lakh, and

(b) That the affairs of the Bank are not conducted to the detrimental interest of the depositors.

The Reserve Bank also has powers to deschedule a bank, when the abovementioned conditions
are not satisfied. It may be noted presently, the RBI has prescribed a minimum capital of Rs. 100
crores for starting a new commercial bank.

Banking Company
The Banking Regulation Act, 1949 defines a banking company as a company which transacts the
business of banking in India [Section 5(c)]. The development of 'Banking' is evolutionary in
nature. There is no single answer to the question of what is banking, because a bank performs a
multitude of functions and services which cannot be comprehended into a single definition. For a
common man, a bank means a storehouse of money, for a businessman it is an institution of
finance and for a worker it may be a depository for his savings. It may be explained in brief as
"Banking is what a bank does."

6
But it is not clear enough to understand the subject in full. The Oxford Dictionary defines a bank
as "an establishment for the custody of money which it pays out on a customer's order ". But this
definition is also not enough, because it considers the deposit accepting and repayment functions
only. The meaning of the bank can be understood only by its functions just as a tree-is, known by
its fruits. As any other subjects, it has its own origin, growth and development.

Historical Perspective of Indian Banking

The existence of money lending activity in India is as old as about 2000 to 1500 B.C. evident
from the literature of Vedic times1. There is however no confirmation available for professional
pursuance of this activity except in the case of a community around 500 B.C The Buddhist
literature also contains evidences of the existence of the bankers called sreshthis who were
present in all the important trade centres having a far-reaching influence on the life of the
community. Their chief activity was to lend money to the traders, to merchant adventurers who
went to foreign countries, to explorers who marched through forests to discover valuable
materials and to kings who were in financial difficulties due to war or other reasons, against the
pledge of movable or immovable property or personal surety 2. “Usury was practiced but was
held in contempt. From the laws of Manu, it appears that money lending and allied problems had
assumed considerable importance, and that deposit banking in some form had come into
existence by the second or third century of the Christian era” 3. The evidence of banking activities
is also found in the works of some Muslim historians and European travelers as well. Further the
Ain-e-Akbri and the state records of that time indicate that bankers played an important role a nd
money lending was important in Mughal era. The earliest moneychangers in India were “Seths”
or “Sahukars” or “Sowcars” who dealt with this business in various parts of the country. They
were mostly “Banias” belonging to the trading community and dealt with “hundies” i.e.
indigenous bills of exchange and functioned simultaneously as moneylenders. They catered to
the needs of agriculturists and businessmen in a similar way. They formed a significant links
between the producers and middlemen. Further they advanced loans to the consumers as well.

The modern concept of “Banking” has its roots in the European Continent. According to one
galaxy of economists, the word ‘Bank’ has been derived from the German word “BANK” which
means “joint stock of firm”. Another opinion of economists indicates that it has been derived
from the Italian word ‘BANCO’ meaning “a heap or mound”. As a matter of fact, the Germans
were highly influential at the time of establishment of the Bank of Venice in 1157, this most
probably was the reason behind the use the word “BANCO” by the Italians to denote the
accumulation of securities with joint stock firm which later on with the passage of time came to
be known as Bank. A concise description of this development is essential to get a fair historical
background because the East India Company is the precursor of modern banking in India. Being
1
Macdonnell, Arthur Anthony and Keith Arthur Berriedale (1912), Vedic Index of Names and Subjects, Vol. I,
Murray Publisher, London
2
Panandikar, S.G. (1966), Banking in India, Orient Longmans, Delhi, p. 1.
3
Id.

7
European entity, it brought the concept of commercial banking from Europe. East India
Company (EIC) was granted Royal Charter for the purpose of trading in 1600 A.D., the nature
and volume of trade necessitated establishment of banking system to facilitate inward and
outward remittances; collection and negotiation of bills, cheques, notes etc. and provision of
credit.

Modern banking in India which is the form of joint stock companies may be dated back to 1786,
with the establishment of the General Bank of India. In 1806, the East India Company
established the first Presidency Bank in Kolkata with the name “The Bank of Calcutta Limited”.
It received Royal Charter in 1809 and was renamed as the “Bank of Bengal”. In the same
manner, two more banks were established in 1840 and 1843 named “Bank of Bombay” and
“Bank of Madras”, respectively. The Royal Charter governed the three Presidency banks, which
was revised from time to time. There were no legally recognised commercial banks with special
right within India other than the Presidency banks.

The East India Company’s government reserved the right to regulate the monetary and credit
system to itself. The Paper Currency Act of 1861 abolished the right to issue currency notes
bestowed upon the Presidency banks. The only authority now empowered to perform this
function was the Government. January 1868 marked the establishment of the New Bank of
Bombay on the collapse of Bank of Bombay. Further in 1876 the Presidency Bank Act came into
existence, which brought the three Presidency banks under the common statute and restriction on
business. In terms of Act XI of 1876, the Government of India decided on strict enforcement of
the charter and the periodic inspection of the books of these banks. Up to the year 1919, these
banks had 70 branches as (26+18+26 respectively), and they were mostly established in the port
towns. Under the Imperial Bank of India Act, 1920, these three banks were directed to merge
together. In 1921, the three Presidency banks and their branches were amalgamated to form one
strong bank i.e., the Imperial Bank of India. A directive was issued to this bank to open 100
branches in 5 years at potential mandi (trade) towns for the improvement of trade. Imperial Bank
of India was formed with the objective to develop it into a Central Bank of the country.

However, the Hilton-Young Commission recommended that a separate bank be created to

function as the Central Bank of the country which was proposed to be named as the ‘Reserve
Bank of India’. Before the establishment of such central entity, the Imperial Bank of India was
allowed to discharge all the functions of the central Bank such as, currency and credit, public
debt, government receipts and disbursements, management and issue of securities and bonds,
banker’s bank, facilitator for remittances to public and banks at rates prescribed and controlled
by the government, also to function as sole banker to the government etc.. The Allahabad Bank
and the Punjab National Bank were established in 1865 and 1894 respectively. Some other large
banks of today, namely, the Bank of India, the Central Bank of India, the Bank of Baroda, the
Canara bank, the Indian Bank, and the Bank of Mysore were established in between 1906 to
1913.

8
The period of 1913 to 1948 was marked by a very slow growth as well as frequent bank failures.
The Banking Crisis of 1913 revealed the weaknesses of the banking system such as the
maintenance of an unduly low proportion of cash and other liquid assets, the grant of large
unsecured advances to the directors of banks and to the companies in which the directors were
interested. After hectic and uncontrolled expansion, there followed the inevitable crash. The
issue of failures of banks was investigated in details by the Indian Central Banking Enquiry
Committee (1929-31), with emphasis being laid on “the regulation of banking with a view to
protecting the interest of the public”. As per the suggestions of the Report of this Committee the
need for enacting a special Bank Act, covering the organisation, management, and audit
liquidation of banks was felt. These authoritative recommendations of the Committee have been
an important landmark in the history of banking reforms in India.4

On the strong recommendations of Committee for the establishment of a supreme body from the
point of view of the development of banking facilities in India, Reserve Bank of India (RBI)
came into formation on April 1, 1935 with the enactment of the Reserve Bank of India Act,
1934. The objective of establishing the Reserve Bank, as stated in the preamble to the RBI Act,
was to “regulate the issue of bank notes and the keeping of reserves with a view of securing
monetary stability in India and generally to operate the currency and credit system of the country
to its advantage” Year 1936 stands as a landmark in the Indian banking history as the first
attempt at banking legislation in India was made in this year in the form of the Indian Companies
(Amendment) Act, for incorporating a separate chapter on provisions relating to banking
companies. The new legislature gave a working definition of ‘banking’ and segregate banking
from other commercial operations and special status of scheduled banks was recognised. In the
mid-1938, public got scared due to the failure of the Travancore National and Quilon Bank
(TNQ Bank). The crisis of 1938 was largely localised in South India. At this instance, RBI
observed that the majority of the non-scheduled banks were working without any control as they
were not willing to submit their operations to the Reserve Bank’s regulation. Between 1939 and
1949, as many as 588 banks had failed in various states. In October 1939, RBI submitted a report
on the non-scheduled banks to the Central Board, exposing that a number of non-scheduled
banks had poor cash reserves, low investment ratio, over extension of the advances portfolio and
a large proportion of bad and doubtful debts. There had been an extensive growth of banks
whose financial position was suspected but the presentation of their financial health was on the
basis of dressed-up balance sheets, which did not disclose many of the more unsatisfactory
features.

Evolution of Public Sector Banks

Public sector in the banking industry emerged with the nationalization of Imperial Bank of India
(1921) and creating the State Bank of India (1955) as a part of integrated scheme of rural credit

4
Uppal, R.K and Kaur R. (2006), Banking Sector Reforms in India: A Review of Post-1991 Developments, New
Century Publication, New Delhi.

9
proposed by the All India Rural Credit Survey Committee (1951). The Bank is unique in several
respects and it enjoys a position of preeminence as the agent of RBI wherever RBI has no
branches. It is the single largest bank in the country with large international presence, with a
network of 48 overseas offices spread over 28 countries covering all the time zones. One of the
objectives of establishing the SBI was to provide extensive banking facilities in rural areas by
opening as a first step 400 branches within a period of 5 years from July 1, 1955. In 1959, eight
banking companies functioning in formerly princely states were acquired by the SBI, which later
came to be known as Associate Banks. Later, two of the subsidiary banks', viz., the State Bank of
Bikaner and Jaipur were merged to form the State Bank of Bikaner and Jaipur, thus form eight
banks in the SBI group then making banks in the state bank group.

The Public sector in the Indian banking got widened with two rounds of nationalization-first in
July 1969 of 14 major private sector banks each with deposits of Rs. 50 crore or more, and
thereafter in April 1980, 6 more banks with deposits of not less than Rs. 2 Crore each. It resulted
in the creation of public sector banking with a market share of 76.87 per cent in deposits and
72.92 per cent of assets in the banking industry at the end of March 2003. With the merger of
'New Bank of India' with 'Punjab National Bank' in 1993, the number of nationalized banks
became 19 and the number of public sector banks 27. The number of branches of public sector
banks, which was 6,669 in June 1969, increased to 41874 by Mach 1990 and again to 46,752 by
March 30, 2003. The public sector banks thus came to occupy a predominant position in the
Indian banking scene. It is however, important to note that there has been a steady decline in the
share of PSB's in the total assets of SCB's during the latter - half of 1990s. While their share was
84.5 per cent at the end of March 1996, it declined to 81.7 per cent in 1998 and further to 81 per
cent in 1999.5

Public vs Private Ownership of Banks

• Abstracting from ideology, from a pragmatic perspective, both public and private banks have
respective advantages and disadvantages. Private ownership brings competition, professionalism
and operational efficiency. Public ownership makes it easier to pursue social objectives such as
mass banking, financial inclusion etc.

• Private banks have comparatively greater freedom in terms of recruitment, salary and
compensation. On the other hand, PSBs are perceived to offer more job security, and
consequently, employee turnover is lower.

• PSBs dominate the banking sector in India and will continue to be dominant in the foreseeable
future. However, these banks require substantial capital to support growth.

• The critical question is whether the Government, given its limited fiscal space, can meet the
enhanced capital needs of public sector banks under the Basel III capital regulations.
5
Bhasin, Niti (2006), Banking Development in India 1947 to 2007 Growth, Reforms and Outlook, New Century
Publications, New Delhi.

10
• Reserve Bank has made an estimate of the additional capital requirements of domestic banks
for full Basel III implementation till March 2018. These estimates are based on two broad
assumptions: (i) increase in the risk weighted assets of 20% p.a.; (ii) internal accrual of the order
of 1% of risk weighted assets.

• The estimates suggest that the Indian banks will require an additional capital (on top of internal
accruals) to the tune of `4.95 trillion; of this, non-equity capital will be of the order of over `3.30
trillion, while equity capital will be of the order of `1.65 trillion.

• Specific to public sector banks, the estimates suggest that public sector banks would require an
additional capital to the tune of `4.15 trillion; of which equity capital will be of the order of `1.43
trillion, while non-equity capital will be of the order of `2.72 trillion. The Government’s
contribution to the equity capital of PSBs would be of the order of `900 billion at the existing
level of shareholding of the Government. The Government’s contribution will come down to
approximately `660 billion if its shareholding comes down to 51%. 3.76.

Banking Development during Post-Independence Era

After Independence, in 1948 the long debated regulation of overall banking system by the RBI
took a shape in the form of The Banking Regulation Act which provided with the legal
framework and came into effect on February 17, 1949. At the time of Independence, the banking
system was deficient in many respects. The banks were mainly urban oriented and were beyond
the reach of rural population. A large section of the rural population still had to look upon the
moneylenders as their resort for credit. Rural infiltration of banks was inadequate, as agriculture
was not considered as an economic proposition of banks in those days. In 1951, the First Five
Year Plan was launched, the development of rural India was accorded the highest priority (GoI,
1951)[4] . At that time RBI constituted a working group to undertake survey of rural areas in
order to find out the state of agrarian economy and provide data on rural indebtedness, savings,
investments, asset-ownership etc. so that planning could be done on long term basis for
betterment of rural poor, development of agriculture, improvement in the package of support
system & ultimate removal of rural poverty, and as a whole to make India selfsufficient in food
production. It was named as All India Rural Credit Survey Committee (1954), the
recommendations of this survey incorporated nationalisation of Imperial Bank of India so that a
directional change could be given to its lending policy for rural development. Accordingly,
Imperial Bank of India (IBI) was taken over by the Government of India under the State Bank of
India Act, 1955. State Bank of India (SBI) came into effect from July 1, 1955.

Later, in 1959, the State Bank of India (Subsidiary Banks) Act was passed which made SBI to
take over eight state-owned or sponsored banks as its subsidiaries. These are now called as

6
Stiglitz, J., (1993), “The Role of the State in Financial Markets,” World Bank Economic Review, Proceedings of
the Annual Conference on Development Economics, p. 19-52.

11
Associate Banks of SBI. With amalgamation of two of them i.e., State Bank of Jaipur and State
Bank of Bikaner, the number of these Associate Banks reduced to seven.

Banking development during Post-Nationalisation Era:

Indian banking, however, made considerable advancement both functionally and geographical
coverage, but there were still many rural and semi-urban areas that were not served by banks.
Large industries, big and established business houses tended to enjoy a major portion of the
credit facilities. Vital sectors, like agriculture, small scale industries and exports did not receive
the attention they deserved. Therefore, the Government in 1968 imposed social control over
banks by amending banking laws. This social control was exercised with effect from February 1,
1969 with the main objective to achieve a wider disbursal of bank’s credit, preventing its misuse,
directing its flow to priority areas and making it more effective instrument of economic
development. The outcome of implementation of social control over banks was visible in the
form of two major changes, firstly; the system of credit planning became an integral part of
formulation of credit policy, and secondly; the introduction of the Lead Bank Scheme to make
the banking system function as an instrument of development.7

Under social control, the banking system including smaller banks started gaining strength as
evidenced by the absence of voluntary or compulsory mergers of banks. Apart from this the
Banking Commission was appointed on January 22, 1969 to recommend changes in structure,
procedures and policy for the Indian banking system. However, the Commission did not have
much time to complete its task as it was overtaken by swift politico-economic developments,
which culminated in the nationalization, on July 19, 1969, of the 14 major Indian scheduled
commercial banks, in the private sector. On April, 1980, six more private sector banks were
nationalised, thus extending further the area of public control over the Indian banking system.
Nationalisation was the landmark in the growth of banking system in India as it was a major step
to ensure adequate credit flow into genuine productive areas in the conformity with plan
priorities. The main objectives of nationalisation of banks were, lending to priority sector;
helping weaker sections of society by granting need based credit for asset generation at cheaper
rates; extension of banking facilities to unbanked and underbanked areas; and removal of control
over banks by a few etc.. Although banks penetrated in rural areas, but amount of credit extended
to the weaker sections of the society was not satisfactory. 8 In 1974, the Narasimham Committee
went into these problems and recommended the establishment of Regional Rural Banks (RRBs)
under the Regional Rural Banks Act, 1975. Banking in collaboration with central and state
governments, set up RRBs in selected regions where the co-operative system was weak and
commercial banks were not very active.9
7
Verma, M.S. (1998), “Commercial Banking in the Next Millennium”, The Journal of the Indian Institute of
Bankers, Vol. 69. No. 4 Oct.-Dec.
8
Stiglitz, J. and Weiss, A. (1981), “Credit Rationing in Market with Imperfect Information”, American Economic
Review, Vol. 71, No. 3, p. 393-410.
9
Government of India (1991), Report of the Committee on Financial System, (Chairman, M. Narasimham), Ministry
of Finance, New Delhi.

12
The primary objective of bank nationalisation was balance sheet growth or an increase in
deposits and loans driven primarily by an expansion of branches. The Indian banking system
delivered admirably on these objectives. All the major development indicators such as number of
branches, deposit mobilisation credit disbursed, per capita deposits and per capita credit marked
a significant expansion during 1969-1991. Evident from Table-1, during this period, there was
almost four fold expansion in the number of commercial banks as from 73 to 272 and a seven
fold in the number of branches from 8,262 to 60,570 during the same period. The growing
number indicates the banking system in India as one of the vast branch network in the world.
Population per bank office also decreased from 64000 in 1969 to 14000 in 1991. This banking
expansion also led to a rapid growth in the volume of transaction in relating to gross domestic
product (GDP) while in 1969 deposits amounted to 13.7 percent, it increased to 42.4 percent in
1991.

The spread to banking to the masses is evident from Table-2 in the form of increase in the share
of rural offices from 17.6 percent in 1969 to 55.7 percent by 1989. The share of rural areas in the
total deposits rose from 3.1 percent to 15 percent during the same period. The rise in the share of
credit was larger than the deposits as, from 1.5 per cent in 1969 to 16.3 percent in 1989. In the
case of bank credit the gains of the rural areas is entirely explained by the loss of the
metropolitan areas. Overall, the two decades since nationalisation of commercial banking in
India saw banking being taken from its urban confines to the vast rural stretches. Expansion of
banking into the rural areas meant a phenomenal expansion in terms of number of deposit and
loan accounts. Table-3 explains the sector wise expansion. The total number of loan accounts
showed a rapid increase from 4.34 million in 1972 to over 65 million by 1992. The share of
agriculture in this total increased sharply to over 50 percent by 1982 itself. Transport operators
and trade also showed significant increase. In addition to all there improvements, totally
neglected segments, such as artisans and craftsmen and small-scale industries also gained an
important place. Its share improved from 0.68 percent to 5.41 percent.

The focus of the nationalisation was to break the nexus and improved flow of credit to
agriculture and small-scale industries. Table-4 shows the shift taken place in the composition of
the bank credit flow as an effect of nationalisation. Till the nationalisation of banks in 1969,
industry hatched over 60 percent of the total bank credit and agriculture could get hardly 9
percent and small-scale industries about 8 per cent. By the early 1980s, the share of agriculture
had risen to 17.15 percent and transport operators 5.15 percent, and small-scale industries 11.95
percent. With the diversification of portfolio, industry’s share came down from 61.16 percent in
early 1970s to 47.35 percent by the early 1980s and to 47.70 percent by 1992.

Thus, the two decades since nationalisation have seen progress with respect to its various
objectives in the form of:

i) Massive branch expansion particularly in rural areas,

13
ii) Expansion in volume of deposits, which constituted two fifth of the financial sector of the
household sector in 1991,

iii) Rural deposits as a proportion of total deposits increased,

iv) Deployment of increasing proportion of bank credit to priority sectors,

v) Increase in deposits accounts and borrowable accounts, and

vi) Enormous contributions by commercial banks, particularly public sector banks, to the
development programmes under five year plans. “Despite these commendable progresses serious
problems have emerged and reflected in a decline in productivity and efficiency and erosion of
the profitability of the banking sector” (GoI, 1991)[5]. In this period, the viability of the banking
system has come under question. This period of 1985-91 may be regarded as period of
consolidation for banking system. The consolidation involved action on several fronts. Individual
banks restores to Enterprise Resource Planning System (ERPS) related to action plans covering
organisational structure, housekeeping, training, customer service, credit management, recovery
of loans productivity and profitability. Although progress made by banking system in terms of
geographical and functional coverage, resources mobilised and credit deployed was tremendous,
but it was still an unexplained characteristics of repressed financial system.10

Features of Banking From the views of above authorities, we can derive the following basic
characteristics of Banking:

(i) Dealing in money: The banks accept deposits from the public and advancing them as loans to
the needy people. The deposits may be of different types – current, fixed, saving etc. accounts.
The deposits are accepted on various terms and conditions.

(ii) Deposits must be withdraw able: The deposits (other than fixed deposits) made by the public
can be withdraw able by cheques, draft on otherwise, i.e. the bank issue and pay cheques. The
deposits are usually withdrawable on demand.

(iii) Dealing with credit: The banks are the institutions that can create i.e., creation of additional
money for lending. Thus, “creation of credit” is the unique feature of banking.

(iv) Commercial in nature: Since all the banking functions are carried on with the aim of making
profit, it is regarded as commercial institutions.

(v) Nature of agent: Besides the basic functions of accepting deposits and lending money as
loans, banks possess the character of an agent because of its various agency services.

10
Panandikar, S.G. (1966), Banking in India, Orient Longmans, Delhi, p. 1.

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Classification of Banks
Today is the age of specialization and we can find specialization in all fields including banking.
The banks have specialized in a particular line of finance. Various types of banks have developed
to suit the economic development and requirements of the country.

The principal banking institutions of a country may be classified into following types:

(1) Central Banks

(2) Commercial Banks

(3) Industrial Or Development Banks

(4) Exchange Banks (authorized dealers in foreign exchange)

(5) Co-operative Banks

(6) Land-mortgage Banks

(7) Indigenous Banks

(8) Savings Banks

(9) Supranational Banks

(10) International Banks

Central Banks: Central Bank is the bank of a country – a nation. Its main function is to issue
currency known as ‘Bank Notes’. This bank acts as the leader of the banking system and money
market of the country by regulating money and credit. These banks are the bankers to the
government; they are banker’s banks and the ultimate custodian of a nation’s foreign exchange
reserves. The aim of the Central Bank is not to earn profit, but to maintain price stability and to
strive for economic development with all round growth of the country.

Commercial Banks: A bank, which undertakes all kinds of ordinary banking business, is called a
commercial bank. Industrial Banks or Financial Institutions: An Industrial Bank is one which
specializes by providing loans and fixed capital to industrial concerns by subscribing to share
and debenture issued by public companies.

Exchange Banks (Authorised Dealers in Foreign Exchange): These types of banks are primarily
engaged in transactions involving foreign exchange. They deal in foreign bills of exchange
import and export of bullion and otherwise participate in the financing of foreign trade.

Co-operative Banks: They are organized on co-operative principles of mutual help and
assistance. They grant short-term loans to the agriculturists for purchase of seeds, harvesting and

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for other cultivation expenses. They accept money on deposit from and make loans to their
members at a low rate of interest.

Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks):They are
agriculture development banks. The Land-mortgage banks supply long-term loans for a period
up to 15 years for development of land to improve agricultural yields. They grant loan for
permanent improvements in agricultural lands. The National Bank for Agriculture and Rural
Development (NABARD) was constituted by the Government to promote rural development.

Indigenous Banks: The Central Banking Enquiry Commission defined an indigenous banker as
an individual or film accepting deposits and dealing in indigenous lending of money to the
needy. They form unorganized part of the banking structure, i.e., these are unrecognized
operators in receiving deposits and lending money.

Savings Banks: These are institutions which collect the periodical savings of the general public.
Their main object is to promote thrift and saving habits among the middle and lower income
sections of the society.

Supranational Banks: Special Banks have been created to deal with certain international financial
matters. World Bank is otherwise known as International Bank for Reconstruction and
Development (IBRD) which gives long-term loans to developing countries for their economic
and agricultural development. Asian Development Bank (ADB) is another Supranational Bank
which provides finance for the economic development of poor Asian countries.

International Banks: International Banks are those which are operating in different countries.
While, the registered office/head office is situated in one country, they operate through their
branches in other countries. They specialize in Banking business pertaining to foreign trade like
opening of letters of credit, providing short-term finance in foreign currency, issue of
performance guarantee, arranging foreign currency credits, etc. They are the main traders in
International Currencies like US 'dollars', Japanese 'Yen', the new-born European Currency
'Euro', etc.

Banking System
The structure of banking system differs from country to country depending upon their economic
conditions, political structure and financial system. Banks can be classified on the basis of
volume of operations, business pattern and areas of operations. They are termed as system of
banking. The commonly identified systems are,

1. Unit banking

2. Branch Banking

3. Correspondent Banking System

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4. Group Banking

5. Chain Banking

6. Pure Banking

7. Mixed Banking

8. Relationship banking

9. Narrow Banking

10. Universal Banking

11. Retail Banking

12. Wholesale Banking

13. Private Banking:

Unit banking: Unit banking is originated and developed in U.S.A. In this system, small
independent banks are functioning in a limited area or in a single town i.e., the business of each
bank is confined to a single office, which has no branch at all. It has its own board of directors
and stockholders. It is also called as "localized Banking".

Branch Banking: The Banking system of England originally offered an example of the branch
banking system, where each commercial bank has a network of branches spread throughout the
country.

Correspondent Banking: Correspondent banking system is developed to remove the difficulties

in unit banking system. It is the system under which unit banks are linked with bigger banks. The
big correspondent banks are linked with still bigger banks in the financial centers. The smaller
banks deposit their cash reserve with bigger banks. The bigger banks with whom such deposits
are so made are called correspondent banks. Therefore, correspondent banks are intermediaries
through which all unit banks are linked with bigger banks in financial centers. Through
correspondent banking, a bank can carry-out business transactions in another place where it does
not have a branch.

Group Banking: Group Banking is the system in which two or more independently incorporated
banks are brought under the control of a holding company. The holding company may or may
not be a banking company. Under group banking, the individual banks may be unit banks, or
banks operating branches or a combination of the two.

Chain Banking: Chain banking is a system of banking under which a number of separately
incorporated banks are brought under the common control by a device other than holding
company. This may be:

17
(a) Through some group of persons owning and controlling a number of independent banks. (b)
Each bank retains its separate identity. (c) Each one carries out its operations without the
intervention of any central organization. Pure Banking and Mixed Banking: On the basis of
lending operations of the bank, banking is classified into:

(a) Pure Banking (b) Mixed Banking

(a) Pure Banking: Under pure Banking, the commercial banks give only short term loans to
industry, trade and commerce. They specialize in short term finance only. This type of banking is
popular in U.K.

(b) Mixed Banking: Mixed banking is that system of banking under which the commercial ban s
perform the dual function of commercial banking and investment banking, i.e., it combines
deposit and lending activity with investment banking. Commercial banks usually offer both
short-term as well as medium term loans. The German banking system is the best example of
mixed Banking.

Relationship banking: Relationship banking refers to the efforts of a bank to promote personal
contacts and to keep continuous touch with customers who are very valuable to the bank. In
order to retain such profitable accounts with the bank or to attract new accounts, it is necessary
for the bank to serve their needs by maintaining a close relationship with such customers.
Narrow Banking: A bank may be concentrating only on collection of deposits and lend or invest
the money within a particular region or certain chosen activity like investing the funds only in
Government Securities. This type of restricted minimum banking activity is referred to 'Narrow
Banking’.

Universal Banking: As Narrow Banking refers to restricted and limited banking activity
Universal Banking refers to broad-based and comprehensive banking activities. Under this type
of banking, a bank will deal with working capital requirements as well as term loans for
developmental activities. They will be dealing with individual customers as well as big corporate
customers. They will have expanded lines of business activity combining the functions of
traditional deposit taking, modern financial services, selling long-term saving products,
insurance cover, investment banking, etc.

Regional banking: In order to provide adequate and timely credits to small borrowers in rural and
semi-urban areas, Central Government set up Regional Banks, known as Regional Rural Banks
all over India jointly with State Governments and some Commercial Banks. As they are
permitted to operate in particular region, it may help develop the regional economy.

Local Area Banks: With a view to bring about a competitive environment and to overcome the
deficiencies of Regional Banks, Government has permitted establishment of a one type of
regional banks in rural and semi-urban centers under private sector known as “Local Area
Banks”.

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Wholesale Banking: Wholesale or corporate banking refers to dealing with limited large-sized
customers. Instead of maintaining thousands of small accounts and incurring huge transaction
costs, under wholesale banking, the banks deal with large customers and keep only large
accounts. These are mainly corporate customer.

Private Banking: Private or Personal Banking is banking with people — rich individuals instead
of banking with corporate clients. Private or Personal Banking attends to the need of individual
customers, their preferences and the products or services needed by them. This may include all
round personal services like maintaining accounts, loans, foreign currency requirements,
investment guidance, etc.

Retail Banking: Retail banking is a major form of commercial banking but mainly targeted to
consumers rather than corporate clients. It is the method of banks' approach to the customers for
sale of their products. The products are consumer-oriented like offering a car loan, home loan
facility, financial assistance for purchase of consumer durables, etc. Retail banking therefore has
large customer-base and hence, large number of transactions with small values. It may therefore
be cost ineffective in a highly competitive environment. Most of the Rural and semi-urban
branches of banks, in fact, do retail banking. In the present day situation when lending to
corporate clients lead to credit risk and market risk, retail banking may eliminate market risk. It
is one of the reasons why many a wholesale bankers like foreign banks also prefer to go for
consumer financing albeit for marginally higher net worth individual.

Structure of Banking Sector in India:

The Indian banking system has emerged as a sluggish business institution to a highly proactive
and dynamic entity. It is highly fragmented with 30 banking units contributing to almost 50
percent of deposits and 60 percent of advances. India’s banking system mainly consists of “non-
scheduled” banks and “scheduled banks”. Scheduled banks refer to those that are included in the
Second Schedule of the Banking Regulation Act of 1965 and satisfy the twin conditions that a
bank must have paid-up capital and reserves of not less than Rs. 500,000 and secondly satisfy the
Reserve Bank of India (RBI) as its affairs are not conducted in a manner detrimental to the
interests of its depositors. Scheduled banks consist of scheduled commercial banks and
scheduled cooperative banks. The former are divided into four categories: (i) public sector banks
(which are further classified as nationalised banks and State Bank of India [SBI] banks); (ii)
private sector banks (which are further classified as old private sector banks and new private
sector banks that emerged after 1991); (iii) foreign banks in India; and, (iv) regional rural banks
(which operate exclusively in rural areas to provide credit and other facilities to small and
marginal farmers, agricultural workers, artisans, and small entrepreneurs). 11 Non-scheduled
banks are those banks which does not come under the Schedule of the Banking Regulation Act of
1965 and, thus, do not satisfy the conditions laid down by that schedule. Nonscheduled banks are
further divided into two classifications non-scheduled cooperative banks and non-scheduled
11
Government of India, (1951), “First Five Year Plan”, Vol. I, Planning Commission, New Delhi.

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commercial banks. The scheduled commercial banks with the exception of foreign banks are
registered in India under the Companies Act. The SBI banks consist of eight independently
capitalised banks: seven associate banks, and SBI itself.12

The SBI is the largest commercial bank in India in terms of assets, deposits, branches, and
employees and has 13 head offices governed each by a board of directors under the supervision
of a central board. It was originally established in 1806 when the Bank of Calcutta (latter called
the Bank of Bengal) was established, and then amalgamated as the Imperial Bank of India after
merger with the Bank of Madras and the Bank of Bombay. The shares of Imperial Bank of India
were sold to the RBI in 1955. Nationalised banks refer to private sector banks that were
nationalised (14 banks in 1969 and six in 1980) by the Central Government. Unlike SBI,
nationalised banks are centrally governed by their respective head offices. Thus, there is only one
board for each bank and meetings are less frequent. In 1993, Punjab National Bank merged with
another nationalized bank, New Bank of India, so the number of nationalized banks fell from 20
to 19. Regional rural banks account for only 4 percent of total assets of scheduled commercial
banks. Scheduled cooperative banks are further divided into scheduled urban cooperative banks
and scheduled state cooperative banks. As at the end of March 2010, the number of scheduled
banks is as follows: 19 nationalized banks, eight SBI banks, 23 old private sector banks, 8 new
private sector banks, 38 foreign banks, 82 regional rural banks, 53 urban cooperative banks, and
31 state cooperative banks.

Reserve Bank of India (RBI) the RBI is India’s central bank. The RBI was established on April
1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. RBI acts as a
banker to the Government and Banks. The Central Bank maintains record of Government
revenue and expenditure under various heads. It maintains deposit accounts of all other banks
and advances money to other banks, when needed. Another important function of the Central
Bank is the issuance of currency notes, regulating their circulation in the country by different
methods. Banks in the country are broadly classified as scheduled banks and non-scheduled
banks.

Scheduled Banks

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are
scheduled banks. These banks comprise Scheduled Commercial Banks and Scheduled
Cooperative Banks. These banks are eligible for certain facilities such as financial
accommodation from RBI and are required to fulfill certain statutory obligation. The RBI is
empowered to exclude any bank from the schedule whose: (1) Aggregate value of paid up capital
and reserves fall below Rs 5 lakh (2) Affairs are conducted in a manner detrimental to the
interests of depositors (3) Goes into liquidation and ceases to transact banking business

Commercial Banks

12
RBI (1985), Report of the Chakravarty Committee to Review the Working of Money Market, Mumbai, p. 88.

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Commercial banks may be defined as, any banking organization that deals with the deposits and
loans of business organizations. Commercial banks issue bank checks and drafts, as well as
accept money on term deposits. Commercial banks also act as moneylenders, by way of
installment loans and overdrafts. Commercial banks also allow for a variety of deposit. These
institutions are run to make a profit and owned by a group of individuals.

Public Sector Banks

These are banks where majority stake is held by the Government of India. Foreign Banks These
banks are registered and have their headquarters in a foreign country but operate their branches
in our country.

Private Sector Banks

These are banks majority of share capital of the bank is held by private individuals. These banks
are registered as companies with limited liability.

Regional Rural Banks

Regional Rural Banks were established under the provisions of an Ordinance promulgated on the
26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional
credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area
as notified by Government of India covering one or more districts in the state. RRBs are jointly
owned by Government of India, the concerned State Government and Sponsor Banks (27
Scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is
shared by the owners in the proportion of 50%, 15% and 35% respectively. Prathama bank is the
first Regional Rural Bank is India located in the city Moradabad in Uttar Pradesh.

Cooperative Banks

A cooperative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. Cooperative banks are often created by persons
belonging to the same local or professional community or sharing a common interest. Co
operative banks generally provide their members with a wide range of banking and financial
services (loans, deposits, banking and accounts, etc.). They provide limited banking products and
are specialists in agriculture-related products. Cooperative banks are the primary financiars of
agricultural activities, some small-scale industries and self employed workers. Cooperative banks
function on the basis of “noprofit no-loss”. Anyonya Co-operative Bank Limited (ACBL) is the
co-operative bank in India located in the city of Vadodara in Gujarat.

The Co-operative Credit system consists of

a. Short-term agricultural credit institutions

b. Long-term agricultural credit institutions

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c. Non-agricultural credit institutions

Export-Import Bank of India (EXIM BANK) Export-Import Bank of India is the premier export
finance institution of the country, established in 1982 under the Export-Import Bank of India
Act, 1981.

Industrial Development Bank of India (IDBI)

The Export-Import Bank of India (IDBI) was established on 1 July 1964 under an Act fo
Parliament as wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the
ownership of IDBI was transferred to the Government of of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting
and developing industry in the country.

National Bank for Agriculture and Rural Development (NABARD)

NABARD is an apex development bank in India having headquarters based in Mumbai

(Maharashtra)and other branches are all over the country. It was established on 12 July 1982 on
the recommendations of Shivaram Committee, by an act of parliament on 12 July 1982 to
implement the National Bank for Agriculture and Rural Development Act 1981.

Conclusion
Indian banking system consists of “non scheduled banks” and “scheduled banks”. Non scheduled
banks refer to those that are not included in the second schedule of the Banking Regulation Act
of 1965 and thus do not satisfy the conditions laid down by that schedule. Schedule banks refer
to those that are included in the Second Schedule of Banking Regulation Act of 1965 and thus
satisfy the following conditions: a bank must (1) have paid up capital and reserve of not less than
Rs. 5 lakh and (2) satisfy the Reserve Bank of India (RBI) that its affairs are not conducted in a
manner detrimental to the interest of its deposits. Scheduled banks consists of “scheduled
commercial banks” and scheduled cooperative banks. The former are further divided into four
categories: (1) public sector banks (that are further classified as “Nationalized Banks and the
“State Bank of India (SBI) banks”); (2) private sector banks (that are further classified as “Old
Private Sector Banks” and “New Private Sector Banks” that emerged after 1991); (3) foreign
banks in India, and (4) regional rural banks (that operate exclusively in rural areas to provide
credit and other facilities to small and marginal farmers, agricultural workers and small
entrepreneurs). These scheduled commercial banks except foreign banks are registered in India
under the Companies Act.

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