MAHATMA EDUCATION SOCITY’S

PILLAI’S COLLEGE OF
ARTS, COMMERCE & SCIENCE

Environment of Financial System

Subject

INDIAN BANKING SYSTEM

Topic

Prepared BY

F.Y.F.M

Semester-II
 GROUP MEMBER

NAME ROLL. NO

NIMISH PATANKAR 35

SACHIN PADOL 34

SHASHIKANT KAMBLE 18

SURAJ SHINDE 46
 INTRODUCTION OF A BANK

The Banking Companies Act of 1949, define

Banking Company as a company which transacts the business of

banking in India. It defines banking as, accepting for the purpose of
lending or investment of deposit money from the public, repayable on
demand or otherwise and withdraw able by cheque draft , order or
otherwise
A bank as an institution dealing in money and credit. It safeguard of
the savings of the public and gives loans and advances.
 Origin of Banking
The word of “Bank” is said to be of Germanic origin , cognate with the French word“Banque” and the
Italian word “Banca” , both meaning “bench”.

Banking is as old as the authentic history and origins of modern Commercial banking tare traceable to
ancient times. The New Testament mention about activities of the money changers in the temple of
Jerusalem. In ancient Greece around 2000 B.C . The famous temples of Ephesus, Delphi and Olympia
were used as depositories for peoples surplus funds and these temples were the centers of Money
lending transaction.

In, India the ancient Hindu scriptures refer to money lending activities in the Vedic period. In India
The Ramayana and Mahabharata eras, banking had become a full fledged activity and during the
Smriti period which followed the Vedic period and Epic age the business of banking was carried on
by the members of the Vaish community.
 Pre Independence banking system of India
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, both of
which are now defunct. The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which almost immediately
became the Bank of Bengal . This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established
under charters from the British East India Company.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in
1865 and still functioning today, is the oldest Joint Stock bank in India.

The presidency banks dominated banking in India but there were also some exchange
banks and a number of Indian joint stock banks. All these banks operated in different
segments of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were generally under
capitalized and lacked the experience and maturity to compete with the presidency and
exchange banks.The first entirely Indian joint stock bank was the Oudh Commercial
Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab
National Bank, established in Lahore in 1895, which has survived to the present and is
now one of the largest banks in India.
 Post Independence Banking system of India
In the post-independence period, India observed the emergence of large number of institutions
for providing finance to different sectors of the economy.

There were two nationalizations of banks in India, one in 1969 and the other in 1980. The entry
activities of private sector and foreign banks were restricted through branch licensing and
regulation norms.

The over regulated and over administered polices eroded the capital base of most of the public
Sector banks and recapitalization of 19 nationalized banks was made by government through of
budgetary provision Nevertheless, acute problem arises in productivity, efficiency and profitability
front of the commercial banks. The policy of directed investment in the form high SLR and CRR,
directed credit programs, extra administrative interference in credit decision making, high
operating costs, regulated interest rates, non-transparent accounting system coupled Non existence
of operational flexibility, internal autonomy and absence of competition contaminated the health of
the commercial banks and threatened their future survival.
Liberal policies facilitate to increase market competition among banks to augment efficiency and
by productivity by the management to choose independent decisions about input-output and their prices
individual banks. The Committee on Financial Systems (GOI, 1998) suggested the road map for second
-generation reform to keep pace with liberalization of financial sector in other parts of the world.

The other remarkable developments to enhance competition in banking sector reforms

1) It abolished administered interest rate regime by allowing banks to determine lending and
deposit rates.
2) Competition has infused by allowing the operation of new private sector banks and more
liberal entry of foreign banks.
3) Measures to broaden the ownership base of PSBs have also taken.
4) The system has also observed greater levels of transparency and standards of disclosure.
5) It introduced ratification of the legal structure to strengthen banks position in the areas of loan and
default loan.
 Nationalization of Indian banking system
Indian marched towards the establishment of public sector banking through The progressive nationalisation
of commercial banks. There were three phases of bank nationalisation:

• Nationalistion of Imperial Bank of India in1955 and its seven associate banks in 1959-60.
• Nationlisation of the 14 major commercial banks in 1969.
• Nationlisation of 6 more commercial banks in 1980.

On July 1, 1955 the government of India nationlised the Imperial Bank of India and converted it into the
State Bank of India. The establishment of the State Bank of India was a pioneering attempt in public
introducing sector banking in the country. Later on in 1959-60, seven subsidiary State Banks were also
nationalised to form the SBI Group.

For a short period during December 1967 to June 1969, the Government of India pursued the banking of
policy control of banks, aiming at an equitable and purposeful distribution of credit towards developmenta
-l needs.

A such over 90 percent of the banking activity in the country is brought under into the public sector.

In short, nationalization of banks implied a bold and major economic step in the process of banking
reforms in the country. It has resulted in the evolution of public sector banking.
 Types of Banks
1) Central Bank
A bank which is entrusted with the functions of guiding and regulating the

banking system of a country is known as its Central bank.

2) Commercial Banks
Commercial banks are of three types

(i) Public Sector Banks

(ii) Private Sectors Banks

(iii) Foreign Banks

 3) Development Banks
Business often requires medium and long-term capital for purchase of machinery
and equipment, for using latest technology, or for expansion and
modernization.
Such financial assistance is provided by Development banks.

4) Co-operative Banks
There are three types of co-operative banks operating in our country.
(i) Primary Credit Societies

(ii) Central Co-operative Banks

(iii) State Co-operative Banks

5) Specialised Banks

There are some banks, which cater to the requirements and provide overall
support for setting are examples of such banks. They engage themselves in
some specific area or activity and thus, are called Specialised banks. Let us
know about them.

(i) Export Import Bank of India (EXIM Bank)

(ii) Small Industries Development Bank of India (SIDBI)

(iii) National Bank for Agricultural and Rural Development

(NABARD)
 Policies of Indian Banking System during 1991

Recommendations of Narasimhan committee:

1) Establishment of 4 tier hierarchy for the banking structure with 3 to 4 large banks at the top and rural
banks at bottom mainly engaged in agriculture and allied activities.

2) The supervisory functions over banks and financial institutions can be assigned to aquasi autonomous
body sponsored by RBI.

3) Phased achievement of 8 % capital adequacy ratio. Abolition of branch licensing policy. Phased
reduction in Statutory Liquidity Ratio. Deregulation of interest rates which are related to the bank
rateCompetition among financial institutions on a syndicating or participating approach .

4) Delegation of direct lending activity of the IDBI to a separate corporatebody . Proper classification of
assets and full disclosure and transparency of of accounts of banks and other financial institutions.

5) Setting up Asset Reconstruction Fund to make over a portion of the loan portfolio of banks whose
recovery has become difficulty
Globalization Of Indian Banking System

Banking sector in India is expanding at an incredibly faster pace, with more and more banks reliazing the
benefits offered by globalization. Publicly owned banks handle more than 80% of the banking business in
India and the rest is in the hands of private sector banks. However, banking in both the government and
private sector is being revolutionized by this latest phenomenon called “globalization ”.

As per the latest market research report named, “Indian Banking Sector Analysis (2006-
2007)”,published,
by RNCOS“The banking sector in India is heading towards consolidation. There are about 90 players in
.the banking sector in India, with 30competitors from each of the public, private and foreign sectors With
so many players present in the banking sector in India, a few of them will emerge as global competitors
in the near future”.

The report highlights:

1) An overview of the current trends in banking sector in India to enable the clients Profiles of 5
prominent players, from each of the public, private and foreign segment, in the banking sector.
2) Discussion of the opportunities and challenges faced by the banking sector in India.
3) Future forecast of the banking industry in India till the year 2010.
 Bank of India
• Bank of India, founded on 7th September in the year 1906 was nationalised along with 13 other
banks in July 1969. Then its paid-up capital was Rs.50 lakh with only 50 employees and the only
office in Mumbai
• The promoters incorporated the Bank of India on 7 September, 1906 under Act VI of 1882 with an
authorized capital of Rs. 1 crore divided into 100,000 shares each of Rs. 100. The promoters placed
55,000 shares privately, and issued 45,000 to the public by way of IPO on 3 October, 1906; the bank
commenced operations on 1 November, 1906.
• Today Bank of India has been spread with 2594 branches including 93 specialised branches
controlled by 48 Zonal Offices.
• Bank of India came up with its maiden public issue in the year 1997 and the total number of
shareholders stands to 3,17,890 as on 30/06/2004.