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Class 12 Banking : Notes Unit -1 Commercial Banking in India TOPIC

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Class 12 Banking : Notes Unit -1 Commercial Banking in India TOPIC Class 12 Banking : Notes Unit -1 Commercial Banking in India TOPIC – 1 : ORIGIN AND GROWTH OF BANKS IN INDIA Banking sector in India has got a long history and has traversed a long path to reach at the modern stage. The growth of banking industry and banking practices had not been easy. It involved many hurdles and impediments which appeared as obstacles in the path of its growth. Growth of Banking Pre-Independence Post-Independence Vedic Period Pre-Economic Reform Period Moghul Period Post- Economic Reform Period British Period • Between 2000 to 1400 B.C., during the Vedic era, records of saving money as deposits were found. • Manu, the Hindu Law giver, in ‘Manusmriti’ mentioned about rules of giving interest on savings and suggested for keeping money under the safe custody of a person with another who has - - good conduct/character - good family background - knowledge of the Law - many relatives - riches and wealth - honour & respect in society • In the ‘Artha-Shastra’ written by Chanakya or Kautilya also mentioned about rules and need of saving money and earn income on it. • During the period of Mahabharata, there was practices of using Hundis. • Indigenous bankers were lending money and financing trade activities. • Hundis were used as trade instruments. • ‘The House of Jagat Seth’, was a famous indigenous banker during Moghul period.. • Indigenous bankers gradually lost their importance. • With East India Company’s growth in business, the requirement of bank was felt. • Agency Houses emerged as organizations supporting East India Company’s business as well as providing the basic banking services to the British and the company. • Agency Houses combined banking with other trade-supporting activities, and it was a difficulty due to which these couldn’t sustain longer. Growth of Pre- British Era Banking Independence Agency Houses during the colonial regime: Year 1900 • M/s Alexander & Co. • M/s Fergussan & Co. • First bank started in India unedr British rule was ‘Bank of Hindostan’ in Year 2014 1770. • This bank was closed/liquidated in 1832. • After the closure of Bank of Hindostan, the British Govt. established 3 PRESIDENCY BANKS in India: Bank of Calcutta which later was renamed as Bank of Bengal (1906), Bank of Bombay (1840), Bank of Madras (1843) • Principle of Limited Liability was introduced in 1860. This resulted in the emergence of many banks. • Banks started operating as Joint Stock Banks. • SWADESHI MOVEMENT further prompted many Indians to start their own banking activities by establishing small banks to finance their own requirements and avoid taking services of the banks established by the British. • Bank of Baroda, Central Bank of India, Indian Bank, Bank of India etc. were set up at that time. • British Government felt the need of a central bank. • On 27th January, 1921, The Imperial Bank of India was established by merging the 3 presidency banks. • Backed by a strong demand and requirement for a separate central bank of the country, the British Government set up the Central Banking Enquiry Commission in 1931. • This commission made a bill giving details about the process, need of establishing and operating a central bank in the country. • This Bill was passed and approved in the Legislative Assembly by the majority of the members and then was approved by the then Governor General of India, and it became the RBI Act, 1934. • Based on this Act, the central bank of the country Reserve Bank of India was established in 1935. • All responsibilities of central bank were taken over by RBI from the Imperial Bank of India post 1935. • RBI Nationalisation – January, 1, 1949, and RBI became a Government organization henceforth. • Banking Regulation Act was passed – 1949 to regulate and control banking operations in India. • Nationalization of the Imperial Bank – July, 1, 1955. • Imperial Bank was renamed as • SBI became the largest commercial bank of the country. • In 1959, SBI took over 8 state-owned banks as subsidiaries. Presently there are 5 of them operating as the subsidiaries. • Deposit Insurance Scheme – January, 1, 1962 • Establishment of Deposit Insurance Corporation of India. • Social Control Scheme – To exercise Government’s (social) regulation and control over the workings of the banks to ensure proper implementation of Government policies for the development of the country. • Failure of the scheme of Social Control Bank nationalisation. • Bank Nationalisation – Government took over the ownership of private banks through nationalisation. • 1969 – 14 banks nationalised (1st Phase of Bank nationalisation) • 1980 – 6 banks nationalised (2nd Phase of Bank nationalisation) Growth of Post- Pre-Economic Banking Independence reform period • Lead Bank Scheme – December, 1969 • Introduction of Lead Bank Scheme : In the year 1969 Indian Government launched the Lead Bank Scheme where each district was allotted with a particular bank to work as the lead bank. The prime role of the lead bank was to act as a leader and coordinator of all the other banking institutions operating in that district and help RBI to pursue its role easier. • Establishment of Deposit Insurance Corporation of India. • Deposit Insurance Corporation got merged with Credit Guarantee Corporation and DICGC was formed. • Regional Rural Banks– To develop the rural areas to facilitate these with the access of banking services, RRBs were established in 1975 followed by passing of the RRB Act (1976). • Setting up of Development banks like IDBI, IFCI, SFC, NABARD etc. ECONOMIC REFORM POLICY & INDIAN BANKING: In the year 1990-91, Indian Government under the leadership of then Prime Minister P.V. Narsimha Rao and Finance Minister Dr. Manmohan Singh took a major step to refine the structure of Indian economy by introducing the new industrial policy which is also known as the Economic Reform Policy. The three prime features and dimensions of the policy were L (liberalization), P (Privatization) and G (Globalization). Hence, this policy is also known as the LPG Policy. This policy brought many changes in the system of the economy and the way of operations in many industries, including the banking industry. Liberalization policy removed the trade barriers in between the countries and welcomed FDI into the sector. Few foreign banks invested in India and set up their branches across the country. Eg: Citi Bank, Standard Chartered Bank, HSBC India, Deutsche Bank, DBS Bank, Barclays Bank, Bank of America etc. to name a few. Growth of E-Banking: The present phase of growth of banking reflects modernized way of banking through adoption of e-banking services into banking practices. Electronic banking has many names like e banking, virtual banking, online banking, or internet banking. It is simply the use of electronic and telecommunications network for delivering various banking products and services. Through e- banking, a customer can access his account and conduct many transactions using his computer or mobile phone. In India, since 1997, when the ICICI Bank first offered internet banking services, today, most new- generation banks offer the same to their customers. In fact, all major banks provide e-banking services to their customers. Importance of e-banking for banks, individual customers, and businesses : Banks 1. Lesser transaction costs – electronic transactions are the cheapest modes of transaction 2. A reduced margin for human error – since the information is relayed electronically, there is no room for human error 3. Lesser paperwork – digital records reduce paperwork and make the process easier to handle. Also, it is environment-friendly. 4. Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost. 5. More loyal customers – since e-banking services are customer-friendly, banks experience higher loyalty from its customers. Customers 1. Convenience – a customer can access his account and transact from anywhere 24x7x365. 2. Lower cost per transaction – since the customer does not have to visit the branch for every transaction, it saves him both time and money. 3. No geographical barriers – In traditional banking systems, geographical distances could hamper certain banking transactions. However, with e-banking, geographical barriers are reduced. Businesses 1. Account reviews – Business owners and designated staff members can access the accounts quickly using an online banking interface. This allows them to review the account activity and also ensure the smooth functioning of the account. 2. Better productivity – Electronic banking improves productivity. It allows the automation of regular monthly payments and a host of other features to enhance business-productivity . 3. Lower costs – Usually, costs in banking relationships are based on the resources utilized. If a certain business requires more assistance with wire transfers, deposits, etc., then the bank charges it higher fees. With online banking, these expenses are minimized. 4. Lesser errors – Electronic banking helps reduce errors in regular banking transactions. Bad handwriting, mistaken information, etc. can cause errors which can prove costly. Also, easy review of the account activity enhances the accuracy of financial transactions. 5. Reduced fraud – Electronic banking provides a digital footprint for all employees who have the right to modify banking activities. Therefore, the business has better visibility into its transactions making it difficult for any fraudsters to play mischief. Popular services under e-banking in India • ATMs (Automated Teller Machines) •
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