The Banking Sector Introduction The evolution of the modern commercial banking industry in India can be traced to 1786,

with the establishment of the Bank of Bengal in Calcutta. Three presidency banks were set up in Calcutta, Bombay and Madras. In 1860, the limited liability concept was introduced in banking, resulting in the establishment of joint stock banks. In 1921, the three presidency banks were amalgamated to form the Imperial Bank of India, which took on the role of a commercial bank, a bankers bank and a banker to the Government. The establishment of RBI as the central bank of the country in 1935 ended the quasicentral banking role of the Imperial Bank of India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state-associate banks. Accordingly, the State Bank of India was constituted in 1955. Subsequently in 1959, the State Bank of India took over eight former state-associate banks as its subsidiaries. In 1969, 14 private banks were nationalised followed by six private banks in 1980. Since 1991, many financial reforms have been introduced substantially transforming the banking sector in India. The RBI, the central banking and monetary authority of India, is the central regulatory and supervisory authority for the Indian financial system. A variety of financial intermediaries in the public and private sectors participate in Indias financial sector, including the following: commercial banks; non-bank finance companies, including housing finance companies; long-term lending institutions; micro finance institutions; insurance companies; and mutual funds Until the early 1990s, the Indian financial system was strictly controlled. Interest rates were administered, formal and informal parameters governed asset allocation and strict controls limited entry into and expansion within the Indian financial sector. The Governments economic reform programme, which began in 1991, encompassed the financial sector. Reserve Bank of India The RBI, established in 1935, is the central banking and monetary authority in India. The RBI manages the countrys money supply and foreign exchange and also serves as a bank for the Government and for the countrys commercial banks.

The RBI issues guidelines on exposure limits, income recognition, asset classification, provisioning for nonperforming and restructured assets, investment valuation and capital adequacy for commercial banks, long- term lending institutions and non-bank finance companies. The RBI requires these institutions to furnish information relating to their businesses to it on a regular basis. Commercial Banks As of June 30, 2009, there were 171 scheduled commercial banks in the country, with a network of 79,933 branches serving approximately Rs. 39,65,322 crore in deposit accounts and Rs. 27,88,351 crore in loan accounts. Scheduled commercial banks are banks listed in the Second Schedule of the Reserve Bank of India Act, 1934, (RBI Act). These banks should have a paid-up equity capital and reserves as specified by the Act. These days, to start a scheduled commercial bank, RBI prescribes a minimum capital of Rs 100 crore. These banks are also required to maintain a Cash Reserve Ratio (CRR). Scheduled commercial banks have a presence throughout India, with approximately 63.5% of bank branches located in rural or semi-urban areas of the country. A large number of these branches belong to the public sector banks. These are further categorised as public sector banks, private sector banks and foreign banks. Public Sector Banks Public sector banks make up the largest category in the Indian banking system. They include the State Bank of India and its six associate banks, 19 nationalised banks and the IDBI Bank Limited and 86 regional rural banks. The public sector banks large network of branches enables them to fund themselves out of low cost deposits. The State Bank of India is the largest public sector bank in India. As of June 30, 2009, the State Bank of India and its associate banks had 16,242 branches. Private Sector Banks In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, the RBI permitted entry of the private sector into the banking system. This resulted in the introduction of nine private sector banks. These banks are collectively known as the new private sector banks. As of June 30, 2009, there were 22 private sector banks, of which 7 were new private sector banks and 15 were private sector banks existing prior to July 1993. New private sector banks have seen significant growth in both the assets and infrastructure during the last decade. The entry of new private sector banks has increased the industry competitiveness, enhanced customer service orientation, product innovation and technological advancement. As of June 30, 2009, private sector banks had a network of 8,894 branches, accounting for 11.1% of the total branch network of scheduled commercial banks in

the country. A large part of this branch network is attributable to new private sector banks. HDFC was one of the first companies to have received an in-principal approval to set up a bank in India.

Foreign Banks As of June 30, 2009, there were 3 1 foreign banks with 279 branches operating in India. While the primary activity of most foreign banks in India has traditionally been in the corporate segment, some of the larger foreign banks have increasingly made consumer financing a larger part of their portfolios offering an array of products such as automobile finance, home loans, credit cards and household consumer finance. Foreign banks have brought the latest technology and banking practices in India and have helped a great deal in making the banking sector state-of-the-art and more efficient. Foreign banks are allowed to set up wholly-owned subsidiary in India. Co-operative Banks These are those banks which dont have to meet much stringent RBI regulations applicable to commercial public and private sector banks. However, if they are in the list of scheduled banks they too have to maintain a paid-up capital and have a CRR. They are usually floated by a group or a community or a trust to help its members enjoy banking services. These banks are usually targeted towards small entrepreneurs, middle income groups living in a large common community, farmers, cottage industries and small scale women entrepreneurs. Besides these, there are: Non-banking finance Companies Long term lending institutions Micro Finance Institutions Insurance Companies Mutual Funds