unit 1.1.pptx Banking introduction and structure
- 1. Unit 1 Banking System and Structure
- 2. Origin of Indian Banking The banking system in India dates back to earlier times of civilisation. Banking is a traditional ancient business in India, and its references can be found in the Manu writings. Bankers also played a vital role during the Moghul era. However, the banking activities came into effect after the first decade of the 20th century. During the early days of the East India Company, the agency houses majorly took up banking services. It was only in the 1700s that modern banking in the form of joint-stock companies operated.
- 3. Pre-Independence Phase The History of Modern Banking in India began with the birthing of the Bank of Hindustan in 1770 in Calcutta. Unfortunately, its longevity was cut short when it got liquidated in 1832. In an attempt to follow its footsteps; 2 Banks were formed but both were not successful either. They were The General Bank of India (1786-1791) and the first commercial bank of India; Oudh Commercial Bank (1881-1958). However, there were other banks who followed the footsteps and still function to this day. They include The Bank of Baroda (est. 1908) and the Allahabad Bank (est. 1865 now branch of Indian Bank). Also, Punjab National Bank (est. 1894), Bank of India (est. 1906) and The Central Bank of India (est. 1911). Some banks had even merged. The Bank of Bombay, The Bank of Bengal and the Bank of Madras merged and formed a single entity called The Imperial Bank (currently known as State Bank of India) in 1921. In April of 1935, The Reserve Bank of India (RBI) was formed based on the recommendation of the Hilton Young Commission.
- 5. Post-Independence Phase (1947-1991 Phase) This was the Second Phase of the Banking Evolution. It set the stage for the Banking Sector to grow exponentially. The most significant development in this phase was the Nationalization of the Banks. The need for Nationalization of Banks was of utmost importance. Money Lenders had become too exploitative and poor people could not afford to take Bank Loans due to Lack of Collateral .The Banks themselves were selectively catering to Large Industries and Businesses. The slowing growth of the Agricultural Sector, Small-Scale Industries and Exports showed its ill-effects. The First Instance of Nationalization of Banks was in 1949 wherein the Reserve Bank of India (RBI) was nationalized. The Second Instance and perhaps the more crucial one was with the Nationalization of 14 Commercial Banks in 1969 and 6 more 1980. The Third Instance was with the setting up of Regional Rural Banks (RRB) in 1975 under the Narasimham Committee. These Banks were set up with the aim of serving the Rural Populace and to promote Financial Inclusion. The Fourth Instance was a very important one which guides Economic Growth to this day. It involved the setting up of various Ape Banks for a few specific sectors. In 1982, The National Bank for Agriculture and Rural Development (NABARD) was set up. The Export Import Bank (EXIM) was set up in 1982. The National Housing Bank (NHB) was set up 1988 and the Small Industries Development Bank of India (SIDBI) was set up in 1990. The Impact of the Nationalization Policies really made a difference. There was improved efficiency in the Banking System owing to the boost in Public Confidence and sectors relating to Agriculture, Small and Medium Industries received more funds. This led to Economic Growth and Rural Branching.
- 7. What is the nationalisation of banks? Nationalization of banks refers to the process by which a government takes control and ownership of privately owned banks, transforming them into state-owned institutions. This usually involves the transfer of ownership, management, and control of banks from private entities to the government. Nationalization can be partial or complete, depending on the extent of control assumed by the government. Prior to 1969, all the banks in India, except the State Bank of India (nationalised in 1955), was owned by the private players. SBI was nationalised during the time when many of the private banks were facing bankruptcy By the 1960s, the Indian banking industry had become an important tool to enable the development of the Indian economy. In 1969 under the Indira Gandhi Government, 14 banks were nationalised. These banks, during that time, held 80% of the bank deposits in the country.
- 8. The factors that led to the nationalization of banks Nationalization was in accordance with the national policy of adopting the socialistic pattern of society. Political and Economic Reasons- • There were two wars (with China in 1962 and Pakistan in 1965) that put immense pressure on public finances. • Two successive years of drought had not only led to food shortages but also compromised national security because of the dependence on American food shipments (PL 480 program). • Subsequently, a three-year plan holiday affected aggregate demand as public investment was reduced. • The decade of 1960-70s was the lost decade for India as the economic growth barely outpaced population growth and average incomes stagnated. • Industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of total credit.
- 9. Agriculture needed a capital infusion, with the initiation of the Green Revolution in India that aimed to make the country self-sufficient in food security. • Other reasons responsible for the nationalization of banks were- • Social welfare • Controlling private monopolies • Expansion of banking to rural areas • Reducing regional imbalance to curb the urban-rural divide • Priority Sector Lending: In India, the agriculture sector and its allied activities were the largest contributors to the national income. • Mobilization of savings: Nationalization aimed at mobilizing the savings of the people to the largest possible extent and to utilize them for productive purposes.
- 10. Merits of nationalization 1.Prevention of Monopoly Before the government nationalized banks, corporate families controlled banking systems in India. It effectively ensured a monopoly over capital. Bank nationalization helped make the economy more equitable and opened bank credit to even people without connections. 2. Reducing Regional Imbalance Bank nationalization helped in more equitable regional growth since banking system was concentrated in urban centers and that too largely in the West and the North. 3. Improvement in working conditions As per RBI records, there were 1833 banks in rural areas in the country in 1969, which increased to 33,004 by 1995 and continued to grow over the next decade. Government banking improved working conditions of the employees also in the banking sector. The state ensured higher wages, security of services and other fringe benefits. 4. Protection of Public Interest Unhealthy competition among industrialists injured the interest of the public which was measured and mitigated by state ownership. 5. Centralised Management Centralised management made possible due to coordination in nationalized banks helped provide uniform services throughout the country. It thus enabled the state to solve the problems of organization, capital, labour operation and marketing.
- 11. 6. Use of Surplus Profit Under state ownership the profit earned by banking enterprises could be utilised for greater public good and help in supporting the Government’s economic policies. 7. Uniformity and Stability in Services Nationalization ensured uniform banking services and reached banking services to different corners of the country. Banking services were placed within reach of people in rural areas and reduced their dependence on moneylenders 8. Core Sector Lending Private banks were averse to lend to Agriculturists and to the core sector of steel and coal, which required huge investment. Nationalization made funds available to these sectors. 9. Increase in Standard of Living It enabled rapid increase in the number of banking offices in rural and semi-urban areas and helped considerably in deposit mobilization with the added benefit of the expansion of personal loans giving a fillip to consumption. 10. Developing banking habits RBI records show that per capita deposits increased from Rs. 88 in 1969 to Rs. 4242 by 1995 and have further increased with time.
- 12. Demerits of Nationalization Political purpose rather than productive purpose. Beginning of state capitalism. Scope for inefficiency. Less attractive customers’ services. Burden of compensation
- 13. Post-reform Phase (1991 and Beyond) The Third Phase of the Banking Evolution saw tremendous growth owing to the Liberalization of the Economy in 1991. Despite Liberalization and policy changes, a large part of the population still needed to have the privilege of Financial Inclusion. With this fact in mind, the Narasimham Committee allowed the Entry of Private Sector Banks into the Banking Sector. Initially, 10 Banks got Licenses to start. Only 5 survived the Market Conditions. They were ICICI, IndusInd Bank, Axis Bank, DCB and HDFC. After a few years, Kotak Mahindra Bank and Yes Bank were let in. In 2013-14, the third round of bank licensing took place, and in 2015, IDFC Bank and Bandhan Bank merged. In order to promote Financial Inclusion, the RBI proposed to set up two new kinds of banks namely Small Banks and Payment Banks. Then, in 2015, 11 entities got licenses to set up Payment Banks. In-principle approval was given to 10 applicants to set up Small Finance Banks. In August 2019, the Government merged ten public sector banks into 4. This brought down the amount of state-owned lenders from 21 to 12. This was to help the better management of capital. The Merger came into effect on April 1st, 2020.