INDIAN BANKING SYSTEM Nature, History and Structure

Introduction
Banks are a subset of a variety of Deposit Taking Institutions (DTI) with the special property that their liabilities are included in the definition of the money supply of a country. The primary purpose of banks is lending, deposit holding and providing a payment mechanism, but banks today provide a variety of other financial services.

Origins
Commercial Banking evolved from Goldsmiths. Liabilities (promises to pay) of such institutions gradually got included in the money supply due to: Relative ease of handling compared to gold or silver (or cows for that matter ) leading to reduction in transactions cost. Undoubted reputation of repayment. This is now backed by legal procedures. In effect, only a fraction of the deposits held with the institution are withdrawn by depositors at any given time.

Fractional Reserve Banking

Banks only keep a legally determined minimum reserve ratio: fractional reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves

Fractional reserve banking leads to multiplication of the currency supply in the form of new deposits: new money Money Supply multiplier=1/reserve ratio(%)

Role of Banks
Maturity Transformation: Borrow Short and Lend long (the maturity is the date the borrower must pay back the money he or she borrowed
through the issue of a bond)

Size Transformation: Average size of deposits much smaller than average size of loan Risk Reduction: Drastically reduce the risk faced by any one depositor

Role of Banks
Search and Transaction Cost reduction: Search
costs reduced by acting as a known center for financial transactions of borrowers and lenders. Transaction costs are reduced by standardized contracts.

Monitoring: Better dispersal of information, hire analysts

for risk analysis

Providing a Payments Mechanism: Liabilities of

Banks form a part of the money supply of the country

History

Origin in the last decades of 18th century

Bank of Hindustan (1770) The General Bank of India (1786) Both now defunct

The East India Company established three banks as independent units and called them Presidency Banks: Bank of Bengal (2nd June 1806)

Bank of Bombay ( 15th April 1840)

Bank of Madras (1st July 1843)

Presidency Banks were amalgamated on 17th January 1921 and Imperial Bank of India was established to perform three fold role: Commercial Bank Bankers Bank Banker to the Government

Reserve Bank of India

Established in 1935 Wholly owned by the Government of India Central banking functions of the Imperial Bank transferred to RBI Acted as regulator Commercial Banks and supervisor of

State Bank of India

Created on 1st July 1955 as a successor to Imperial Bank by an Act of Parliament The State Bank of India (Subsidiary Banks) Act, 1959, enabled the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates) on 10th September 1959

Subsidiaries
State Bank of Bikaner State Bank of Jaipur These two banks are merged and State Bank of Bikaner and Jaipur is formed. State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra (later merged into SBI) State Bank of Travancore

Establishment of Other Indian Banks

Bank of Allahabad The Oldest Joint Stock Bank of the Country Founded on April 24, 1865
Punjab National Bank Ltd. - set up in 1894 Headquarters at Lahore First Indian Bank established exclusively by Indians

 Between 1906 and 1913 Bank of India Central Bank of India Bank of Baroda Canara Bank Indian Bank Bank of Mysore Set up as the Swadeshi Movement gained momentum.

Evolution of Banking Legislation

Presidency banks were ruled and governed by the Royal Charter, East India Company and Government of India of that time

Indian Companies Act, 1913 contained few provisions applicable to banks

Evolution of Banking Legislation

The Banking Regulation Act was passed as the Banking Companies Act, 1949 Subsequently it was changed to Banking Regulation Act 1949 w.e.f. 1st March 1966.

Structure

Banking Structure in India

Scheduled Commercial Banks

According to the the RBI definition, commercial banks which conduct the business of banking in India and which
(a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than five lakhs of rupees and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors

are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act, 1934, and when included are known as Scheduled Commercial Banks.

Categories of SCB
SCBs in India are categorized in five different groups according to their ownership and/or nature of operation
State Bank of India and its associates Nationalised Banks Regional Rural Banks Foreign Banks and Other Indian Scheduled Commercial Banks

 By the end of 2010 India had 81 scheduled commercial banks (excluding RRBs) of which
26 are public sector banks 21 are private sector banks and 34 are foreign banks

List of Banks in Public Sector

Banks nationalized in 1969
Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India Banks nationalized in 1980 Andhra Bank New Bank Of India (later merged into PNB) Oriental Bank of Commerce Corporation Bank Punjab & Sindh Bank Vijaya Bank

State Bank of India Group: 1. State Bank of India 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 5. State Bank of Mysore 6. State Bank of Patiala 7. State Bank of Travancore

Public Sector Banks Nationalized Banks + State Bank of India Group

List of Banks in Private Sector

Old Private Sector Banks
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. City Union Bank Ltd. ING Vysya Bank Ltd. SBI Commercial & International Bank Ltd. Tamilnad Mecantile Bank Ltd. The Catholic Syrian Bank Ltd. The Dhanalakshmi Bank Ltd. The Federal Bank Ltd. The Jammu & Kashmir Bank Ltd. The Karnataka Bank Ltd. The Karur Vysya Bank Ltd. The Lakshmi Vilas Bank Ltd. Nainital Bank Ltd. The Ratnakar Bank Ltd. The South Indian Bank Ltd.

1.

New Private Sector Banks

1. 2. 3. 4. 5. 6. 7. Axis Bank Ltd. Development Credit Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. IndusInd Bank Ltd. Kotak Mahindra Bank Ltd. YES Bank

Private Sector Banks Old Private Sector Banks + New Private Sector Banks

Banks in Foreign Bank Category

18. Mashreqbank psc 1. Abu Dhabi Commercial Bank Ltd. 19. 2. American Express Banking Corporation MIZUHO Corporate Bank Ltd. 20. Oman International Bank S.A.O.G. 3. Antwerp Diamond Bank N.V. 21. Shinhan Bank 4. Arab Bangladesh Bank Ltd. 22. Societe Generale 5. Bank Internasional Indonesia 23. Sonali Bank 6. Bank of America NA 7. Bank of Bahrain and Kuwait B.S.C. 24. Standard Chartered Bank 25. State Bank of Mauritius Ltd. 8. Bank of Ceylon 26. The Bank of Nova Scotia 9. Barclays Bank PLC 27. The Bank of Tokyo-Mitsubishi UFJ Ltd. 10. BNP Paribas 28. The Development Bank of Singapore Ltd 11. Chinatrust Commercial Bank 29. The Hongkong and Shanghai Banking 12. Citibank N.A. Corporation Ltd. 13. Credit Agricole Corporate & Investment 30. The Royal Bank of Scotland NV 14. Deutsche Bank AG 31. UBS AG 15. JPMorgan Chase Bank 32. FirstRand Bank Ltd. 16. JSC VTB Bank 33. Commonwealth Bank of Australia 17. Krung Thai Bank Public Company Ltd. 34. United Overseas Bank Ltd.

Regional Rural Banks

Regionally oriented rural banks' to address the problems and requirements of the rural people with local feel, yet with the same level of professionalism as of commercial banks RRBs are under the control of NABARD
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India having headquarters based in Mumbai (Maharashtra)[3] and other branches are all over the country.

 Initially, five RRBs were set up on October 2, 1975 at Moradabad and Gorkhpur in Uttar Pradesh; Bhiwani in Haryana; Jaipur in Rajasthan and Malda in West Bengal As on March 2010, total number was 82

Co-operative Banks
The Co-operative Banks in INDIA have a history of almost 100 years Important constituent of the Indian Financial System Co operative Banks in India are registered under the Co-operative Societies Act Do not pursue the goal of profit maximization

Co-operative Banks Types

Co-operative banking structure in India is divided into five main categories : 1. Primary Urban Co-operative Banks. 2. Primary Agricultural Credit Societies. 3. District Central Co-operative Banks. 4. State Co-operative Banks. 5. Land Development Banks.

Reserve Bank of India

(Central Bank)

 The Reserve Bank is wholly owned by the Government of India. The Central Board of Directors is the primary authority that oversees the Reserve Banks business. It delegates specific functions to its committees and sub-committees.

Structure of Central Board

Official Directors 1 Governor 4 Deputy Governors, at a maximum Non-Official Directors 4 directorsnominated by the Central Government to represent each local board 10 directors nominated by the Central Government with expertise in various segments of the economy 1 representative of the Central Government 6 meetingsat a minimumeach year 1 meetingat a minimumeach quarter

RBI is made up of :
26 Departments focusing on policy issues in the RBIs functional areas and internal operations. 26 Regional Offices and Branches: These are the Reserve Banks operational arms and customer interfaces, headed by Regional Directors. Smaller branches / sub-offices are headed by a General Manager / Deputy General Manager.

 Training centres: Reserve Bank Staff College at Chennai College of Agricultural Banking at Pune The Zonal Training Centres
Research institutes: National Institute of Bank Management (NIBM), Pune Indira Gandhi Institute of Development Research (IGIDR), Mumbai Institute for Development and Research in Banking Technology (IDRBT),Hyderabad

 Subsidiaries: National Housing Bank (NHB) Deposit Insurance and Credit Guarantee Corporation (DICGC) Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) The Reserve Bank also has a majority stake in the National Bank for Agriculture and Rural Development (NABARD)

Functions of RBI
Monetary Authority Issuer of Currency Banker to the Government Banker to Banks Regulator of the Banking System Manager of Foreign Exchange Regulator and Supervisor of the Payment and Settlement Systems Developmental Role

Monetary Authority
Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The main objectives of monetary policy in India are: Maintaining price stability Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth Financial stability This is achieved through direct and indirect instruments

Direct Instruments
Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank. Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold.

Refinance facilities: Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect Instruments
Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral. Bank rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy Open Market Operations (OMO): Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

Issuer of Currency
The Reserve Bank is the nations sole note issuing authority (except Re 1 notes) Four printing presses actively print notes: Dewas in Madhya Pradesh, Nasik in Maharashtra, Mysore in Karnataka, and Salboni in West Bengal

Coins are minted by the Government of India. RBI is the agent of the Government for distribution, issue and handling of coins

Banker to the Government

Undertakes banking transactions for the central and state governments to facilitate receipts and payments and maintaining their accounts. Manages the governments domestic debt with the objective of raising the required amount of public debt in a cost-effective and timely manner. Develops the market for government securities to enable the government to raise debt at a reasonable cost, provide benchmarks for raising resources by other entities and facilitate transmission of monetary policy actions.

Banker to Banks
Non-interest earning current accounts Deposit Account Department Remittance facilities Loans and advances

Regulator of the Banking System

Department of Banking Development (DBOD)

Operations

and

regulations for commercial banks

Department of Banking Supervision (DBS)

supervision of commercial banks

Department of Non-Banking Supervision

regulates and supervises the Financial Companies (NBFCs) Non-Banking
43

 Urban Banks Department (UBD)

regulates and supervises the Urban Cooperative Banks (UCBs)

Rural Planning and Credit Department (RPCD)

regulates the Regional Rural Banks (RRBs) and the Rural Cooperative Banks supervision has been entrusted to NABARD
44

Manager of Foreign Exchange

Facilitates the development of the foreign exchange market Ensures smooth conduct and orderly conditions in the domestic foreign exchange market

Manages the foreign currency assets and gold reserves of the country

Regulator and Supervisor of the Payment and Settlement Systems

The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and

supervision, for the payment and settlement

systems in the country.

Developmental Role
Directed credit for lending to priority sector and weaker sections Lead Bank Scheme Sector specific refinance Strengthening and supporting small local banks Financial inclusion