Commercial Banking in India

Dr G D SharmaUSMS

GGSIP University, New Delhi

History of Banking in India•There were three oldest Banks

• Bank of Bengal• Bank of Bombay• Bank of Madras

•These banks were called Presidency Banks.•They merged in 1925 to form the Imperial Bank of India, which after independence became State Bank of India.•Reserve Bank of India came into existence in 1935 which took the responsibility of regulating Banking sector as Central Bank in India.

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Banking Scenario after independence

• In 1948, the Reserve Bank of India 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."

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Nationalization of Banks• On July 19, 1969, 14 major banks were nationalized.• On April 15, 1980 another 6 banks were nationalized.• With the nationalization, the banking in India shifted from

‘Class’ banking to ‘Mass’ Banking

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Banking Services• Deposit Products: Savings Account, Current Account, Term

Deposit schemes, Recurring Deposit Schemes etc.

• Loan Facilities: Personal loans, Housing loans, Vehicle loans, Consumer loans, Farm Credit, Corporate loans, CC/OD etc.

• Remittance facilities: Cheques, Drafts, RTGS/NEFT etc.

• Other facilities: Bank Guarantees, letter of credit etc.

• Bill Discounting and Merchant Banking05/03/23GDS 5

Breakthroughs in Banking sector• Innovation in Product Development• Internet Banking• Credit Cards• Electronic Banking• Debit Cards

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Internet Banking• The Nottingham Building Society launched the first Internet

banking service in United Kingdom in 1983.• Nottingham Building Society derived from a system known as

Prestel that is deployed by the postal service department of United Kingdom.• The first online banking service in United States was

introduced in October 1994 by Stanford Federal Credit Union.• Further improvised to Online BillPay , account aggregation and

mobile banking and Passmark authentication system in 2005.

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Credit Cards• Use of credit cards originated in the United States during the

1920s offered by oil companies and hotel chains• The first bank issued credit card was invented by John Biggins

of the Flatbush National Bank of Brooklyn in New York.• In 1946, Biggins invented the "Charge-It" program between

bank customers and local merchants.• Merchants could deposit sales slips into the bank and the

bank billed the customer who used the card.• American Express issued their first credit card in 1958. Bank

of America issued the BankAmericard (now Visa) bank credit card later in 1958.

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E-banking• During 1950s, researchers at the Stanford Research

Institute invented "ERMA”• ERMA is a project for the Bank of America to computerize

the banking industry. • ERMA computerized the manual processing of checks and

account management and automatically updated and posted checking accounts.

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Debit Cards• First National Bank of Seattle offered to Business

Executives in 1978• Customers required a large savings account be kept at the

bank to cover the funds• Landmark created the first nationwide debit system in

1984• This allowed the smaller banking systems within states to

connect with banks systems outside of states

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Front End Distribution

Front End Distribution

Back End Distribution

Back End Distribution

Banking legislations in India• Reserve Bank of India Act, 1934, governs the RBI functions• Banking Regulation Act, 1949• The Companies Act, 1956• State Bank of India Act, 1959• Banking Companies (Acquisition and Transfer of

Undertaking) Acts of 1970 and 1980• FEMA Act , 1999• Prevention of money laundering Act, 2002

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Licensing of Banks in IndiaLicensing - License from the Reserve Bank is required Opening of new branches by banks and change in the

location of existing branches are also regulatedLicense not required where population is below 50,00 If the company is incorporated outside India- RBI has to

inspect the books of the company or be satisfied with the functioning of the company

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RBI guidelines• CRR/SLR - Maintain a certain Cash Reserve Ratio and Statutory

Liquidity Ratio • The Reserve Bank also monitors compliance with these requirements• Interest rates – RBI regulates interest rates on savings account and

NRI deposits• Capital Adequacy - Banks to maintain adequate capital on a

continuous basis. • Banks are required to maintain adequate capital for market risk,

operational risk and other risks.• Loans - Reserve Bank requires banks to classify their loan assets as

performing and non-performing assets05/03/23GDS 17

RBI guidelines (contd)

• Disclosure norms - Disclosures in their annual report about capital adequacy, assets, liquidity, earnings

• Know Your Customer Norms - To prevent money laundering through the banking system, RBI has issued ‘Know Your Customer’

• KYC - Establish identity and report suspicious transactions to authorities.

• Para-banking - The Reserve Bank has permitted banks to undertake diversified activities like asset management, mutual funds, insurance, merchant banking, venture capital

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Basel Norms• Basel Norms- Bureau of International Settlement (BIS), which

fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.

Basel I -1988 - credit riskBasel II -2004 - Capital Adequacy RequirementsBasel III -2010 Basel III-The guidelines aim to promote a more resilient banking

system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

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gagan.is.sharma@gmail.com

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