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Ch-4 - COMMERCIAL BANKING-I PDF
Ch-4 - COMMERCIAL BANKING-I PDF
Ch-4 - COMMERCIAL BANKING-I PDF
COMMERCIAL BANKING
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The first bank called the ‘Bank of Venice’ was established in Venice, Italy
in 1157 to finance the monarch in this wars.
The bankers of Lombardy were famous in England, but modern banking
began with the English Goldsmiths only after 1640.
The First Bank in India was Bank of Hindustan started in 1770 by Alexender
and Co.
But the first bank in modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.
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Meaning of Bank
A Bank is an institution which accepts deposits
from the public and in turn advances loans by
creating credit. It is different from other financial
institutions in that they cannot create credit
though they may be accepting deposits and
making advances.
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Two
Essential
Functions
Functions of Commercial Banks Borrowing &
Lending
Accepting Deposits (Savings, Current and Fixed Dep.)
Advancing Loans (1.Cash Credit – bank advances loans
to businessmen against certain specified securities. The amount
of loan is credited to the current account of the borrower, and the
borrower can withdraw money through cheques., 2.Call loans –
These are very short term loans advanced to the bill brokers for
not more than 15 days. They are advanced against first class bill
or securities. Such loans can be recalled in very short notice.
3.Overdraft – A bank often permits a business man to draw
cheques for a sum greater than the balance lying in his current
account. 4. Discounting BOE – If a creditor holding a BOE wants
money immediately, the bank provides him the money by
discounting the BOE…)
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Commercial Banking
in India
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Evolution Phase
Enactment of the RBI Act in 1935 gave birth to a new category of
banks called Scheduled Banks in India but some of these banks
were already been in existence since 1881.
Prominent Scheduled banks were: Allahabad bank 1865 , Oudh
Comercial bank 1881, Ajodhya Bank 1884, PNB 1894,
Nedungaddi bank 1899
During 1901-1914 12 more banks were established, prominent
among them were BOB 1906, Canara Bank 1906, Indian Bank in
1907, BOI in 1908, Central Bank of India 1911
During the war period not much of a development took place,
there was a heavy rush on banks and the banks faced serious
crisis… many succumbed to the pressure and perished.
But after the wars and the independence as many as 20
scheduled banks came into existence. UBI was formed in 1950 by
the merger of 4 existing commercial banks,
In a span of 5-7 years the figure rose to 81 but by 1968 23 were
either liquidated or amalgamated into new banks leaving 58
scheduled banks in operation.
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Foundation Phase
The focus was on class banking and security
rather than on purpose.
The emphasis of the banking system during this
period was on laying the foundation for a sound
banking system in the country
Consequently the phase witnessed the
development of necessary legislative framework
and as a result the BANKING REGULATION ACT
was passed in 1949 to conduct and control
operations of the commercial banks in India.
During the period number of Commercial banks
declined remarkably.. From 566 banks in 1951 to
281 in 1961.
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Expansion Phase
This phase witnessed socialisation of banking in 1968.
Commercial banks were viewed as agents of change and
social control on banks
Since inadequacy was felt in this front, 14 banks were
nationalised in 1969 and another 6 in 1980.
This period also witnessed the birth of RRBs in 1975 and
NABARD in 1982 which had priority sector as their focus of
activity.
Although number of commercial banks declined from 281
in 1968 to 268 in 1984, no. of scheduled banks shot up
from 71 to 264.
As many as 50,000 bank branches were set up of which
3/4th were in rural and semi urban areas.
In fact so rapid was the growth in these areas that the
banking industry had hardly any time to consider other
issues and consequently with growth came inefficiency and
loss of control. As a result profitability came under strain.
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Backdrop: In the early decades the banking system in India came to suffer from the following
weaknesses:
◦ The banking system was localised in a few metropolitan and urban cities, neglecting the vast
and potential rural areas as unbanked
◦ The banking system remained confined to industry and trade, ignoring the vital interests of the
priority and neglected sectors, including agriculture and small scale industries and artisans.
◦ Enormous concentration of economic power existed in the banking sector. A few business
houses were in effective control of powerful banks. Thus commercial banks contributed to the
enormous growth of big business houses, leading to emergence of industrial monopolies.
◦ In view of the above weaknesses it was necessary to align bank credit flows into broader
areas.
◦ Priority Sector Lending became the principle focus.
◦ The other focus was to make the banks vibrant and potent instrument of development and
making them a mass institution.
◦ Thus the scheme of social control was introduced in 1968 with the main objectives of achieving
a wider spread of bank credit, rectifying sectoral and regional imbalances, and directing credit
flows to priority sector.
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Consolidation Phase
This was a phase of realisation and consolidation
of losses.
The phase began in 1985 when a series of policy
initiatives were taken with the objectives of
consolidating the gains of branch expansion
undertaken by the banks and the relaxation of
the tight regulation.
Although number of scheduled banks increased
from 264 in 1984 to 276 in 1980 branch
expansion of the banks slowed down. Hardly
7000 branches were set up during this period.
For the first time serious attention was paid to
improving housekeeping, customer services,
credit management, staff productivity and
profitability.
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Reformatory Phase
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Recommendations of Narsimham
Committee – 1 Report
In the light of the above mentioned shortcomings
and deterioration in the financial health of the
banking system, quick and comprehensive
remedial measures became an immediate
necessity. Accordingly the GOI constituted in
August 1991 a high powered committee under
the chairmanship of Shri.N.Narsimham, the then
Governor or RBI to examine all aspects relating
to the structure, organisation, function and
problems relating to the Banking System.
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Major
Recommendations:
Phased reduction in statutory preemptions
Interest rates on CRR balances
Phasing out of directed credit programme
Interest rate deregulation
Capital adequacy norms (should attain a CAR of 8% by 98)
Income recognition
Asset Classification
Transparency
Tax treatment of Provisions
Loan recovery
Tackling doubtful debts
There should be no further nationalisation of banks
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Major Recommendations
Merger of Strong PSBs & Recapitalisation scheme for weak banks
Government should have a lesser role & greater autonomy should be
allowed
Functions of boards and managements need to be reviewed
Moving away from excessive concentration on asset mgt. to ALM with a
view to modifying their liability in consonance with their desired asset
structure.
Thee is a need to review minimum prescription for Capital Adequacy. In
this regard the committee recommended that minimum CAR be raised to
10% by 2002. By now most of the banks have a CAR of 11% or higher.
The committee also felt the need to lay down prudential and disclosure
norms and sound procedures for the purpose of supervision and
disclosure.
There should be greater specialisation by banks in various niche areas like
Retail, agriculture, SSI, Industry etc.
Banks should place greater reliance on non fund based business such as
advisory and consultancy services, guarantee and custody services
There is a need for PSBs to speed up computerisation and focus on
relationship banking.
Need for professionalising and depoliticising of bank boards
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