CHAPTER - 5 MILESTONE OF INDIAN BANKING INDUSTRY 5.1 Background: Bank provides financial services, which is important for economic, social, political and cultural progress of the society. Different stratum has created in society and social class has emerged with various religion and faith in god among mankind. Homes were not safe for valuables during ancient times. The places of religion and worship have become the financial centers, which was looks after by the priest and temple devotees to help the rich class and the kings to keep their valuables safe. Hence, such places were looted. They issue a receipt against safeguard of valuables. It was the cradle of ancient form of banking. The paper money has resolved the problem of storage and mobility of metallic form of money. Money in its various forms stores value and promised to pay off the bearer. Money in circulation found to be little lag behind, which has given rise to an “Organized System of Banking”. Table No. 5.1: Indian Coinage - The Journey from Coin to Paper Money Forms of Money Use or Purpose Coins made from Gold, Silver, Bronze, Tin, Lead To carry on day to day transactions and Iron Sanskrit term Rupya Properly Shaped, Stamped and well Denominated Coin Sanskrit term Rupa Means Silver Coins Adesha An order made on banker to pay third person Letter of Credit Used by Merchants for trade transactions Trade Guilds Used to accept money for lending Acts as a professional money lenders and bankers. Sethi or Chief or Capo People started their personal funds for lending, has given rise to Indigenous Banking Bills of Exchange For trade transactions and lending purpose Table No. 5.2: Evolutionary Phase of Banking The Origin of Country of In its Actual Act or Use Word Origin Banck German Heap or Mound or Joint Stock Fund Banco Italian Heap of Money Bancus or Banque French Bench or Chest to keep Valuables An institution that accepts money as Deposits for Bank English Lending 58 In 1937, very first time, the banking concept was introduced in Medieval Florence. A popular merchant family Medici had a multiple shops, which allow patrons’ to deposit money in their personal account, which was withdrawable in another city from the Medici’s representative shops. This has promoted families and church to keep their money safe and allow people to travel without money and risk of robbery. During the regime of Sher Shah in 1542, the Standardized Money, the Rupee was in use. Thereafter the earliest form of bank currency in the form of note was issued in Sweden by Stock Holms Banco in July, 1661. Table No. 5.3: Indian Bank and Banking Scenario during Pre-Independence Establishment of the Three Presidency Bank Year Process of Establishment June, 1806 The Bank of Calcutta 1809 The Bank of Calcutta, renamed as The Bank of Bengal 1840 The Bank of Bombay The Bank of Madras was established through amalgamation of The July, 1843 Madras Bank, The Carnatic Bank, The Bank of Madras and The Asiatic Bank Emergence of The Alliance Bank of Shimla, The Oudh Bank and The 1860 Punjab National Bank The Hong Kong and Shanghai Banking Corporation was the Foreign 1869 Bank in India 03 - The Presidency Bank, 09 - The Joint Stock Banks and End of 1900's 08 - Foreign Banks or Exchange Banks Table No. 5.4: The Swadeshi Movement - Reason for Establishment of Indigenous Joint Stock Banks Year Process of Establishment 1911 The Central Bank of India Merger of The Three Presidency Bank leads to an Establishment of 1921 The Emperial Bank of India Acquisition of The Tata Industrial Bank by The Central Bank of 1923 India 1934 The Reserve Bank of India Act, 1934 Part II of 1934 1st April, 1935 The Reserve Bank of India 59 Table No. 5.5: Indian Banks and Banking Scenario during Post-Independence Year Changes in Banking Sector 1st January, Nationalization of The Reserve Bank of India, under The Reserve 1949 Bank of India Transfer to Public Ownership Act, 1948 The Imperial Bank of India renamed and passed an Act in July, 1955 Parliament to establish The State Bank of India Nationalization of 14 Largest Commercial Bank with an Aggregate 19th July, 1969 Deposits of Rs. 50 Crore Nationalized 14 banks were; The Allahabad Bank, The Bank of Baroda, The United Bank of India, The Bank of Maharashtra, The Canara Bank, The Central Bank of India, The Syndicate Bank, The UCO Bank, The Union Bank, The Punjab National Bank, The Indian Overseas Bank, The Indian Bank, The Dena Bank and The Bank of India. The Regional Rural Bank by RRB's Act 1976 with the share of 1976 50% by The Central Government, 15% by The State Government and 35% by The Sponsoring Commercial Banks Nationalization of 06 more Commercial Banks with an Aggregate 1986 Deposits of Rs. 200 Crore Nationalized 06 banks were; The Andhra Bank, The Corporation Bank, The Punjab & Sind Bank, The Vijaya Bank, The Oriental Bank of India and The New Bank of India (Later on Merged with The Punjab National Bank). Table No. 5.6: The Banking Sector Reforms in August, 1991 - Its Recommendation and Government Measures Banking Sector Reforms Recommendations of Narsimhan Committee In 1991 1991 - Government Measures Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at Lowering SLR And CRR top and at bottom rural banks engaged in agricultural activities. The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous Prudential Norms body sponsored by RBI. Capital Adequacy Norms Phased reduction in Statutory Liquidity Ratio (SLR). (CAN) Deregulation Of Interest Phased achievement of 8% capital adequacy ratio. Rates Abolition of branch licensing policy. Recovery Of Debts Proper classification of assets and full disclosure of Competition From New accounts of banks and financial institutions. Private Sector Banks Phasing Out Of Directed Deregulation of Interest rates. Credit Delegation of direct lending activity of IDBI to a Access to Capital Market separate corporate body. Competition among financial institutions on Freedom of Operation participating approach. 60 Table No. 5.7: The Banking Sector Reforms in August, 1998 - Its Recommendation and Government Measures Banking Sector Reforms Recommendations of Narsimhan Committee In 1998 1998 - Government Measures Committee suggested a strong banking system especially in the Context of Capital Account Convertibility (CAC). The committee cautioned the Risk Management merger of strong banks with weak ones as this may have negative effect on stronger banks. It suggested that 2 or 3 large banks should be given Strengthening Technology international orientation and global character. There should be 8 to10 national banks and large Increase Inflow of Credit number of local banks. It suggested new and higher norms for capital Increase in FDI Limit adequacy. To take over the bad debts of banks committee Universal banking suggested setting up of Asset Reconstruction Fund. A Board for Financial Regulation and supervision (BFRS) can be set up to supervise the activities of Adoption of Global Standards banks and financial institutions. There is urgent need to review and amend the provisions of RBI Act, Banking Regulation Act, etc. Information Technology to bring them in line with current needs of industry. Net Non-performing Assets for all banks was to be Management of NPA brought down to 3% by 2002. Rationalization of bank branches and staff was emphasized. Licensing policy for new private banks Mergers and Amalgamation can be continued. Foreign banks may be allowed to set up subsidiaries Guidelines for Anti-Money and joint ventures. Laundering Managerial Autonomy 61 5.2 Present Banking Sector in India: Figure No. 5.1: Present Banking Structure in India Reserve Bank of India Banks Development Financial Institution Scheduled Commercial Unscheduled Banks Banks (Local Area Banks) Commercial Banks Co-operative Banks State Co-operative Urban Co-operative Banks Banks Public Sector Private Sector Foreign banks Regional Rural Banks Banks Banks Old Private New Private Sector Banks Sector Banks RRBs SBI & its Nationalized Associates Banks Coastal LAB Capital LAB Krishna Bhima Samrudhi Subhadra LAB Limited Limited LAB Limited Limited Term Lending Refinancing Sector-Specific Investment Institutions Institutions Institutions Institutions 62 5.2.1 Scheduled Banks in India: The banks which are established according to The Reserve Bank of India Act, 1934 and are included in the second schedule of the same are scheduled banks in India. These banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks in India are categorized into five different groups according to their ownership and nature of their operations. These bank groups are State Bank of India and its Associates, Nationalised Banks called as Public Sector Banks, Private Sector Banks, Foreign Banks and Regional Rural Banks. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks. 5.2.1.1 Public Sector Banks: Public Sector Banks (PSBs) are banks in which majority stake i.e. more than 50% stake is held by the government. The shares of these banks are listed on stock exchanges. As on 31st March, 2016, there are total 27 Public Sector Banks in India; of which 19 are Nationalised Banks, State Bank of India and its 5 associates and two Other Public Sector Banks. Table No. 5.8: List of Nationalized Banks, SBI and its Associates Sr. No. Nationalized Bank 15. Syndicate Bank 1. Allahabad Bank 16. UCO Bank 2. Andhra Bank 17. Union Bank of India 3 Bank of Baroda 18. United Bank of India 4. Bank of India 19. Vijaya Bank 5. Bank of Maharashtra Sr. No. SBI and its Associates 6. Canara Bank 1. State Bank of India (SBI) 7.