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202 History of Banking in India Ratings: (0)|Views: 45,988|Likes: 238 Published by accesstariq More info: Categories:Business/Law, Finance Published by: accesstariq on Dec 25, 2009 Copyright:Attribution Non-commercial Availability: Read on Scribd mobile: iPhone, iPad and Android. download as PDF, TXT or read online from Scribd Flag for inappropriate content|Add to collection See less

Economic Liberalization in India The second major turning point in this phase was E c o n o m i c L i b e r a l i z a t i o n i n I n d i a . AfterIndependence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj".The Government of India headed by Narasimha Rao decided to usher in several reforms that arecollectively termed as liberalization in the Indian media with Manmohan Singh whom he appointedFinance Minister.Dr. Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms.New research suggests that the scope and pattern of these reforms in India's foreign investment andexternal trade sectors followed the Chinese experience with external economic reforms. Reasons for the Reforms A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms wereforced upon India.That low point was the catalyst required to transform the economy through badly needed reforms tounshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sectorenterprise and competition were encouraged and globalisation was slowly embraced.

Impact of Economic Liberalization on Finance & Banking Post nationalization now Indian banking sector was unshackled, and along with the government banks a thick layer of private and foreign banks was taking shape. The first of such new generation banks to be set up was Global Trust Bank, which later amalgamated with Oriental Bank of Commerce,ICICI Bank, HDFC Bank and Axis Bank.This move, along with the rapid growth in the economy of India, revitalized the banking sector inIndia.The next stage for the Indian banking has been setup with the proposed relaxation in the norms forForeign Direct Investment, where all Foreign Investors in banks may be given voting rights, whichcould exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but alsoreceived more. Banking Sector Reforms since 1992 The first type of reforms mainly based on Narasimhan Committee recommendations and theprincipals of new liberalized Indian economy.

Out of the 27 public sector banks (PSBs), 26 PSBs achieved the minimum capital to risk assetsratio (CRAR) of 9 per cent by March 2000. To enable the PSBs to operate in a morecompetitive manner, the Government adopted a policy of providing autonomous status tothese banks, subject to certain benchmarks.

The Reserve Bank advised banks in February 1999 to put in place an ALM system, effective April 1, 1999 and set up internal asset liability management committees (ALCOs) at the topmanagement level to oversee its implementation. Banks were expected to cover at least 60 percent of their liabilities and assets in the interim and 100 per cent of their business by April 1,2000.

Interest rate deregulation has been an important component of the reform process. Theinterest rates in the banking system have been largely deregulated except for certain specificclasses; these are savings deposit accounts, non-resident Indian (NRI) deposits, small loans upto Rs.2 lakh and export credit.

In 1994, a Board for Financial Supervision (BFS) was constituted comprising select membersof the RBI Board with a variety of professional expertise to exercise 'undivided attention tosupervision'. The BFS, which generally meets once a month, provides direction on acontinuing basis on regulatory policies including governance issues and supervisory practices.It also provides direction on supervisory actions in specific cases.

The share of the public sector banks in the aggregate assets of the banking sector has comedown from 90 per cent in 1991 to around 75 per cent in 2004. The share of wholly Government-owned public sector banks has declined from about 90 per cent to 10 per cent of aggregate assets of all scheduled commercial banks during the same period. Diversification of ownership has led to greater market accountability and improved efficiency. Current market value of the share capital of the Government in public sector banks has increased manifoldand as such, what was perceived to be a bailout of public sector banks by Government seems to be turning out to be a profitable investment for the Government.

A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation and supervision of alltypes of payment and settlement systems, set standards for existing and future systems,authorize the payment

and settlement systems and determine criteria for membership to thesesystems. Both the Houses of the Parliament have passed the Credit Information Companies(Regulation) Bill, 2004.

Consolidation in the banking sector has been another feature of the reform process. This alsoencompassed the Development Financial Institutions (DFIs), which have been providers of longterm finance.Since 1993, twelve new private sector banks have been set up. As already mentioned, an element of private shareholding in public sector banks has been injected by enabling a reduction in theGovernment shareholding in public sector banks to 51 per cent. As a major step towards enhancingcompetition in the banking sector, foreign direct investment in the private sector banks is now allowed up to 74 per cent, subject to conformity with the guidelines issued from time to time.Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Interms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong andtransparent balance sheets relative to other banks in comparable economies in its region.Reserve Bank of India in March 2006 allowed Warburg Pincusto increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed tohold more than 5% in a private sector bank.

Current Banking Structure Banks in India can be categorized into Scheduled and Non-scheduled Banks Scheduled Banks Scheduled Banks in India constitute those banks, which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule whichsatisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30 th June 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates(8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks andregional rural banks Non-Schedule Banks Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of theBanking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".Banks in India can also be classified in a different way.

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks (RRBs)The above mentioned classification overlaps with the previous one. Public Sector, Private Sector andForeign Banks fall the category of scheduled banks.Currently, India has 88 scheduled commercial banks (SCBs) 2 7 p u b l i c s e c t o r banks (that is withthe Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and

3 8 f o r e i g n b a n k s . They have a combined network of over 5 3 , 0 0 0 b r a n c h e s a n d 1 7 , 0 0 0 A T M s . According to areport by ICRA Limited, a rating agency, the p u b l i c s e c t o r b a n k s h o l d o v e r 7 5 % of total assets of the banking industry, with the p r i v a t e a n d f o r e i g n b a n k s h o l d i n g 1 8 . 2 % a n d 6 . 5 % r e s p e c t i v e l y .