1.

Overview of
Banking System
 1. Indian Banking System - Evolution
• Indian Banking System for the last two centuries has
seen many developments. An indigenous banking
system was being carried out by the businessmen
called Sharoffs, Seths, Sahukars, Mahajans, Chettis
,etc. since ancient time.
• They performed the usual functions of lending
moneys to traders and crafts men and sometimes
placed funds at the disposal of kings for financing
wars. The indigenous bankers could not, however,
develop to any considerable extent the system of
obtaining deposits from the public, which today is
an important function of a bank.
• Modern banking in India originated in the last
decades of the 18th century. The first banks were
The General Bank of India which started in 1786,
and the Bank of Hindustan.
• Thereafter, three presidency banks namely the Bank
of Bengal (this bank was originally started in the
year 1806 as Bank of Calcutta and then in the year
1809 became the Bank of Bengal) , the Bank of
Bombay and the Bank of Madras, were set up.
• For many years the Presidency banks acted as
quasi-central banks. The three banks merged in
1925 to form the Imperial Bank of India.
• Indian merchants in Calcutta established the Union
Bank in 1839, but it failed in 1848 as a consequence of
the economic crisis of 1848-49. Bank of Upper India
was established in 1863 but failed in 1913.
• The Allahabad Bank, established in 1865 , is the oldest
survived Joint Stock bank in India . Oudh Commercial
Bank, established in 1881 in Faizabad, failed in 1958.
• The next was Punjab National Bank, established in
Lahore in 1895, which is now one of largest banks in
India.
• The Swadeshi movement inspired local businessmen
and political figures to found banks of and for the
Indian community during 1906 to 1911.
• A number of banks established then have survived
to the present such as Bank of India, Corporation
Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.
• A major landmark in Indian banking history took
place in 1934 when a decision was taken to
establish ‘Reserve Bank of India’ which started
functioning in 1935.
• Since then, RBI, as a central bank of the country, has
been regulating banking system.
 Reserve Bank of India as a Central
Bank of the Country
• Reserve Bank, as central bank of country, started
their operations as the private shareholder’s bank
• RBI replaced the Imperial Bank of India and started
issuing the currency notes and acting as the banker
to the government. Imperial Bank of India was
allowed to act as the agent of the RBI. RBI covered
all over the undivided India.
• In order to have close integration between policies
of the Reserve Bank and those of the Government,
It was decided to nationalize the Reserve Bank
immediately after the independence of the country.
• From 1st January 1949, the Reserve Bank began
functioning as a State-owned and State-controlled
Central Bank.
• To streamline the functioning of commercial banks,
the Government of India enacted the Banking
CompaniesAct,1949 which was later changed as the
Banking Regulation Act 1949.
• RBI acts as a regulator of banks, banker to the
Government and banker’s bank. It controls financial
system in the country through various measures.
 State Bank of India and its Associate
(Subsidiaries) Banks – A New Channel
of Rural Credit
• 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 by
taking over the Imperial Bank of India, and
integrating with it, the former state – owned or
state associate banks. An act was accordingly
passed in Parliament in May1955 and the State
Bank of India was constituted on 1 July1955.
• Later, the State Bank of India (Subsidiary Banks)Act
was passed in 1959, enabling the State Bank of
India to take over eight former State-associated
banks as its subsidiaries (later named Associates).
• The State Bank of India was thus born with a new
sense of social purpose.
 Nationalization of Banks for
implementing Govt. policies
• Indian Banking System witnessed a major revolution
in the year 1969 when 14 major commercial banks in
the private sector were nationalized on 19th
July,1969. Most of these banks having deposits of
above Rs. 50 Crores were promoted in the past by the
industrialists. These banks were:
• Allahabad Bank, Bank of Baroda, Bank of India, Bank
of Maharashtra, Canara Bank, Central Bank of India,
Dena Bank, Indian Bank, Indian Overseas Bank,
Punjab National Bank, Syndicate Bank, Union Bank of
India, United Bank of India, United Commercial
Bank(now known as UCO bank)
• The purpose of nationalization was:
(a) to increase presence of banks across the nation.
(b) to provide banking services to different
segments of the Society.
(c) to change the concept of class banking into mass
banking, and
(d) to support priority sector lending and growth.
• In 1980, another six more commercial banks with
deposits of above` 200 crores were nationalized :
Andhra Bank, Corporation Bank, New Bank of India,
Punjab and Sind Bank, Oriental Bank of Commerce
and Vijaya Bank. (Later on the New Bank of India
was merged with Punjab Nationalized Bank.)
 Regional Rural Banks
• In 1975, new set of banks called the Regional Rural
Banks, were setup based on recommendations of a
working group headed by Shri Narasimham, to
serve the rural population in addition to the
banking services offered by the co-operative banks
and commercial banks in rural areas.
• Inception of regional rural banks (RRBs) can be seen
as a unique experiment as well as experience in
improving the efficacy of rural credit delivery
mechanism in India.
• With joint shareholding by Central Government, the
concerned State Government and the sponsoring
bank, an effort was made to integrate commercial
banking within the broad policy thrust towards social
banking keeping in view local peculiarities.
• RRBs were expected to play a vital role in mobilizing
savings of the small and marginal farmers, artisans,
agricultural labourers & small entrepreneurs and
inculcate banking habit among the rural people.
• These institutions were also expected to plug the gap
created in extending the credit to rural areas by
largely urban-oriented commercial banks and the
rural cooperatives, which have close contact with
rural areas but fall short in terms of funds.
 Local area banks
• Local Area Banks with operations in two or three
contiguous districts were conceived in the 1996 Union
budget to mobilise rural savings and make them
available for investments in local areas. They are
expected to bridge the gaps in credit availability and
enhance the institutional credit framework in rural and
semi-urban areas.
• Although the geographical area of operation of such
banks is limited, they are allowed to perform all
functions of a scheduled commercial bank. The
Raghuram Rajan Committee had envisaged these local
area banks as private, well - governed, deposit-taking
small-finance banks.
• They were to have higher capital adequacy norms, a
strict prohibition on related party transactions, and
lower concentration norms to offset chances of
higher risk from being geographically constrained.
• Six entities were given licenses to operate LABs by
RBI but only four are functioning. Of these four
banks, Capital Local Area Bank accounted for more
than 70 percent of total assets of all four LABs taken
together as on 31st March, 2012.
 New Private Sector Banks
• In1991, the Narasimham committee recommended
that banks should increase operational efficiency,
strengthen the supervisory control over banks and
the new players should be allowed to create a
competitive environment.
• Based on the recommendations, new private banks
were allowed to start functioning.
 STRUCTURE OF BANKS IN INDIA
• Banks can be classified into scheduled and non-
scheduled banks based on certain factors
(a) Scheduled Banks:
• Scheduled Banks in India are the banks which are
listed in the Second Schedule of the Reserve Bank
of India Act1934. The scheduled banks enjoy several
privileges as compared to non-scheduled banks.
Scheduled banks are entitled to receive refinance
facilities from the Reserve Bank of India. They are
also entitled for currency chest facilities. They are
entitled to become members of the Clearing House.
• No. of branches of Scheduled Commercial Banks as
on 31stMarch, 2013
 (b) Non-scheduled banks:
• These are those banks which are not included in the
Second Schedule of the Reserve Bank of India.
Usually those banks which do not conform to the
norms of the Reserve Bank of India within the
meaning of the RBI Act or according to specific
functions etc. or according to the judgment of the
Reserve Bank, are not capable of serving and
protecting the interest of depositors are classified
as non-scheduled banks.
Different types of Banks in India
 Constituents of the Indian Banking
System
• The constituents of the Indian Banking System can be
broadly listed as under :
(a)Commercial Banks:
Public Sector Banks, Private Sector Banks and Foreign Banks
(b)Cooperative Banks:
Short term agricultural institutions, Long term agricultural
credit institutions and Non-agricultural credit institutions
(c)Development Banks:
National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of
India(SIDBI), EXIM Bank and National Housing Bank.
 COMMERCIAL BANKS
1. Public Sector Banks
• The term ‘public sector banks’ by itself connotes a
situation where the major/full stake in the banks
are held by the Government. Till July,1969, there
were only 8 Public Sector Banks (SBI & its 7
associate banks).
• When 14 commercial banks (total 20 banks) were
nationalized in 1969, 100% ownership of these
banks were held by the Government of India.
Subsequently, six more private banks were
nationalized in 1980.
• However, with the changing in time and
environment, these banks were allowed to raise
capital through IPOs and there by the share holding
pattern has changed. By default the minimum 51%
shares would be kept by the Government of India,
and the management control of these nationalized
banks is only with Central Government.
• Since all these banks have ownership of Central
Government, they can be classified as public sector
banks. Apart from the nationalized banks, State
Bank of India, and its associate banks, IDBI Bank and
Regional Rural Banks are also included in the
category of Public Sector banks.
 2. Private Sector Banks
• The major stakeholders in the private sector banks
are individuals and corporate. When banks were
nationalized under two tranches (in 1969 and in
1980), all banks were not included.
• Those non nationalized banks which continue
operations even today are classified as Old
Generation Private Sector Banks.. like The Jammu &
Kashmir Bank Ltd, The Federal Bank, The Laxmi Vilas
Bank etc.
• In July 1993 on account of banking sector reforms
the Reserve Bank of India allowed many new banks
to start banking operations.
• Some of the leading banks which were given licenses
are: UTI bank (presently called Axis Bank) ICICI Bank,
HDFC Bank, Kotak Mahindra Bank, Yes Bank etc.,
These banks are recognized as New Generation
Private Sector Banks.
• Ten banks were licensed on the basis of guidelines
issued in January 1993. The guidelines were revised in
January 2001 based on the experience gained from
the functioning of these banks, and fresh applications
were invited.
• These banks were having competitive advantages
over their counterparts (of the existing old private
banks, public sector banks)in their IT support system,
innovative products, and pricing of their products.
• Private sector banks have been rapidly increasing
their presence in the recent times and offering a
variety of newer services to the customers and
posing a stiff competition to the group of public
sector banks.
 3. Foreign Banks
• The other important segment of the commercial
banking is that of foreign banks. Foreign banks have
their registered offices outside India, and through
their branches they operate in India. Foreign banks
are allowed on reciprocal basis.
• They are allowed to operate through branches or
wholly owned subsidiaries. These foreign banks are
very active in Treasury (forex) and Trade Finance
and Corporate Banking activities.
• These banks assist their clients in raising External
Commercial Borrowings through their branches
outside India or foreign correspondents.
• They are active in loan syndication as well. Foreign
banks have to adhere to all local laws as well as
guidelines and directives of Indian Regulators such
as Reserve Bank of India, Insurance and Regulatory
Development Authority, Securities Exchange Board
of India.
• The foreign banks have to comply with requirement
of the Reserve Bank of India in respect to Priority
Sector lending, and Capital Adequacy ratio and
other norms.
 CO-OPERATIVE BANKING SYSTEM
• Cooperative banks play an important role in the Indian
Financial System, especially at the village level. The
growth of Cooperative Movement commenced with
the passing of the Act of 1904.
• A cooperative bank is cooperative society registered or
deemed to have been registered under any State or
Central Act.
• These cooperative banks cater to the needs of
agriculture, retail trade, small and medium industry and
self-employed businessmen usually in urban, semi
urban and rural areas. In case of co-operative banks,
the shareholders should be members of the co-
operative banks.
• The share linkage to borrowing is a distinctive
feature of a co-operative bank. Rural cooperative
sector in India plays a vital role in fulfilling the credit
requirements of rural agricultural sector of India.
• At recent times, the rural credit flow through rural
cooperative sector has risen substantially in order
to keep pace with the growing demand for credit in
the rural parts of India.
• The Cooperative rural Credit Structure in our
country are of following types:
 1. Short Term Agricultural Credit institutions
• The short term credit structure consists of the
Primary Agricultural Credit Societies (PACS) at the
base level, which are affiliated at the district level
into the District Central Cooperative bank (DCCB)
and further into the State Cooperative Bank (SCB) at
the State level.
• Being federal structures, the membership of the
DCCB comprises all the affiliated PACS and other
functional societies and for the SCB, the members
are the affiliated DCCBs.
 2. Long Term Agricultural Credit Institutions
• The long term cooperative credit structure consists
of the State Cooperative Agriculture & Rural
Development Banks (SCARDBs) and Primary
Cooperative Agriculture & Rural Development
Banks (PCARDBs) which are affiliated to the
SCARDBs.
• Loans are given to members on the mortgages of
their land usually up to 50% of their value in some
states or up to 30 times the land revenue payable in
other states, duly taking into account their need
and repayment capacity.
 3. Urban Cooperative Banks
• The term Urban Cooperative Banks(UCBs), although
not formally defined, refers to the primary
cooperative banks located in urban and semi-urban
areas. These banks, until 1996, were allowed to lend
money only to non-agricultural purposes.
• This distinction remains today. These banks have
traditionally been around communities, localities
working out in essence, loans to small borrowers and
businesses.
• Today their scope of operation has expanded
considerably. The urban co-operative banks can
spread operations to other States and such banks are
called as multi state cooperative banks.
 DEVELOPMENT BANKS
• History of development Banking in India can be
traced to the establishment of the Industrial
Finance Corporation of India in 1948.
• With the introduction of financial sector reforms,
many changes have been witnessed in the domain
of development banking.
• Subsequently, with the passing of State Financial
Corporation Act,1951, several SFCs came into being.
There are more than 60 Development Banking
Institutions at both Central and State level.
• The major four development banks which assist in
extending long term lending and re-finance facilities
to different areas of economy for the economic
development pertaining to Small Scale and Medium
industries, Agricultural Sector and Housing Sector.
• These financial institutions plays crucial role in
assisting different segments including the rural
economic development.
 1) National Bank for Agriculture and Rural
Development (NABARD)
• National Bank for Agriculture and Rural Development
(NABARD) was established in July 1982 by an Act of
Parliament based on the recommendations of
CRAFICARD.
• It is the apex institution concerned with the policy,
planning and operations in the field of agriculture and
other rural economic activities.
• NABARD has evolved several refinance and
promotional schemes over the years and has been
making constant efforts to liberalize, broad base and
refine/ rationalize the schemes in response to the
field level needs.4
• The refinance provided by NABARD has two basic
objectives:
(i) Supplementing the resources of the cooperatives
banks and RRBs for meeting the credit needs of its
clientele, and
(ii) Ensuring simultaneously the build up of a sound,
efficient, effective and viable cooperative credit
structure and RRBs for purveying credit.
• NABARD undertakes a number of inter-related
activities/services which fall under three broad
categories: -
- Credit Dispensation (Discipline)
- Developmental & Promotional
- Supervisory Activities
2) Small Industries Development Bank of India-SIDBI
• Small Industries Development Bank of India (SIDBI)
was established in October 1989 and commenced
its operation from April 1990 with its Head Office at
Lucknow as a development bank.
• It is the principal and exclusive financial institution
for the promotion, financing and development of
the Micro, Small and Medium Enterprise (MSME)
sector and for co-ordination of the functions of the
institutions engaged in similar activities.
• It is a central government undertaking. The prime
aim of SIDBI is to support MSMEs by providing them
the valuable factor of production finance.
• Many institutions and commercial banks supply
finance, both long-term and short-term to small
entrepreneurs. SIDBI coordinate work of all of them
• The important functions of SIDBI are as follows: -
(i) Initiates steps for technology adoption
(ii) SIDBI participates in the equity type of loans on
soft terms, term loan, working capital, etc…
(iii) SIDBI facilitates timely flow of credit for both term
loans and working capital
(iv) SIDBI enlarges marketing capabilities of product
of MSMEs in both domestic & international markets
(v) SIDBI directly discounts and rediscounts bills with
a view to encourage bills.
 3) National Housing Bank (NHB)
• National Housing Bank was set up in July, 1988 as
the apex financing institution for the housing sector
with the mandate to promote efficient, viable and
sound Housing Finance Companies (HFCs).
• Its functions aim at to augment the flow of
institutional credit for the housing sector and
regulate HFCs. NHB mobilizes resources and
channelizes them to various schemes of housing
infrastructure development.
• It provides refinance for direct housing loans given
by commercial banks and non – banking financial
institutions.
• The NHB also provides refinance to Housing
Finance Institutions for direct lending for
construction/purchase of new housing/dwelling
units, public agencies for land development and
shelter projects, primary cooperative housing
societies, property developers.
• At present, it is a wholly owned subsidiary of
Reserve Bank of India which contributed the entire
paid-up capital.
 4) Export Import Bank of India (EXIM
Bank)
• Export-Import Bank of India was set up in 1982 by
an Act of Parliament for the purpose of financing,
facilitating and promoting India’s foreign trade.
• It is the principal financial institution in the country
for coordinating the working of institutions engaged
in financing exports and imports.
• Exim Bank lays special emphasis on extension of
Lines of Credit (LOCs) to overseas entities, national
governments, regional financial institutions and
commercial banks.
• Exim Bank also extends Buyer’s credit and Supplier’s
credit to finance and promote country’s exports.
• The Bank also provides financial assistance to export-
oriented Indian companies by way of term loans in
Indian rupees or foreign currencies for setting up new
production facility, expansion/ modernization or up
gradation of existing facilities and for acquisition of
production equipment or technology.
• Exim Bank helps Indian companies in their globalization
efforts through a wide range of products and services
offered at all stages of the business cycle, starting from
import of technology and export product development
to export production, export marketing, pre-shipment
and post-shipment and overseas investment.
 FUNCTIONS OF COMMERCIAL BANKS
• Sections 5 & 6 of Banking Regulation Act, 1949 contain
functions which commercial banks can transact. These
functions can be divided into 2 parts
(a) Major functions
(b) Other functions/ancillary services
• (a) Major functions:
(i) Accepting Deposits (ii) Granting Advances
• (b)Other functions:
(i) Discounting of bills and cheques (ii) Collection of bills
and cheques (iii) Remittances (iv) Safe custody of
articles (v) Safe Deposit Lockers (vi) Issue of Letter of
Credit (vii) Issue of Guarantees
• Besides the above functions, Banks now-a-days
associate themselves in the following activities also
either by opening separate departments or through
separately floated independent subsidiaries:
(i) Investment Counseling
(ii) Investment Banking
(iii) Mutual Fund
(iv) Project Appraisal
(v) Merchant Banking Services
(vi) Taxation Advisory Services
(vii) Credit Card Services
(viii) Forex Consultancy
(xi) Factoring