HISTORY AND SCOPE OF CENTRAL BANKING 2019

HISTORY OF BANKING

Banking is nearly as old as civilization. The history of banking could be said to have started with the
appearance of money. The first record of minted metal coins was in Mesopotamia in about 2500B.C. the first
European banknotes, which was handwritten appeared in1661, in Sweden. cheque and printed paper money
appeared in the 1700’s and 1800’s, with many banks created to deal with increasing trade.

The history of banking in each country runs in lines with the development of trade and industry, and with the
level of political confidence and stability. The ancient Romans developed an advanced banking system to
serve their vast trade network, which extended throughout Europe, Asia and Africa.

Modern banking began in Venice. The word bank comes from the Italian word “ban co”, meaning bench,
because moneylenders worked on benches in market places. The bank of Venice was established in 1171 to
help the government raise finance for a war.

At the same time, in England merchant started to ask goldsmiths to hold gold and silver in their safes in
return for a fee. Receipts given to the Merchant were sometimes used to buy or sell, with the metal itself
staying under lock and key. The goldsmith realized that they could lend out some of the gold and silver that
they had and charge interest, as not all of the merchants would ask for the gold and silver back at the same
time. Eventually, instead of charging the merchants, the goldsmiths paid them to deposit their gold and
silver.

The bank of England was formed in 1694 to borrow money from the public for the government to finance
the war of Augsburg against France. By 1709, goldsmith were using bank of England notes of their own
receipts.

New technology transformed the banking industry in the 1900’s round the world, banks merged into larger
and fewer groups and expanded into other country.

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is
the State Bank of India, a government-owned that is the largest commercial bank in the country. Central
banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these
responsibilities from then Imperial Bank of India, relegating it to commercial banking functions. After
India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969, the
government nationalized the 14 largest commercial banks; the government nationalized the six next largest
in 1980.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

BANKING STRUCTURE IN INDIA

In today’s dynamic world banks are inevitable for the development of a country. Banks play a pivotal role in
enhancing each and every sector. They have helped bring a draw of development on the world’s horizon and
developing country like India is no exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for moving finance
from those who have surplus money to (however temporarily) those who have deficit. In everyday branch
terms the banks channel funds from depositors whose accounts are in credit to borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would have to contact each
other directly. This can and does happen of course. This is what has lead to the very foundation of financial
institution like banks.

Before few decades there existed some influential people who used to land money. But a substantially high
rate of interest was charged which made borrowing of money out of the reach of the majority of the people
so there arose a need for a financial intermediate.

The Bank have developed their roles to such an extent that a direct contact between the depositors and
borrowers in now known as disintermediation.

Banking industry has always revolved around the traditional function of taking deposits, money transfer and
making advances. Those three are closely related to each other, the objective being to lend money, which is
the profitable activity of the three. Taking deposits generates funds for lending and money transfer services
are necessary for the attention of deposits. The Bank have introduced progressively more sophisticated
versions of these services and have diversified introduction in numerable areas of activity not directly
relating to this traditional trinity

INDIAN BANKING SYSTEM

 HISTORY AND SCOPE OF CENTRAL BANKING 2019

Reserve Bank of India

Schedule Banks
Non-Schedule Banks

Central co-op
State co-op Commercial Banks Commercial Banks
Banks and Primary
Banks
Cr. Societies

Indian Foreign

Public Sector
Private Sector Banks HDFC,
Banks
ICICI etc.

State Bank of India Other Nationalized Banks Regional Rural

and its Subsidiaries Banks
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

INDIAN BANKING INDUSTRY ANALYSIS

The banking scenario in India has been changing at fast pace from being just the borrowers and lenders
traditionally, the focus has shifted to more differentiated and customized product/service provider from
regulation to liberalization in the year 1991, from planned economy to market.

Economy, from licensing to integration with Global Economics, the changes have been swift. All most all
the sector operating in the economy was affected and banking sector is no exception to this. Thus the whole
of the banking system in the country has undergone a radical change. Let us see how banking has evolved in
the past 57 years of independence.

After independence in 1947 and proclamation in 1950 the country set about drawing its road map for the
future public ownership of banks was seen inevitable and SBI was created in 1955 to spearhead the
expansion of banking into rural India and speed up the process of magnetization.

Political compulsion’s brought about nationalization of bank in 1969 and lobbying by bank employees and
their unions added to the list of nationalized banks a few years later.

Slowly the unions grew in strength, while bank management stagnated. The casualty was to the customer
service declined, complaints increased and bank management was unable to item the rot.

In the meantime, technology was becoming a global phenomenon lacking a vision of the future and the
banks erred badly in opposing the technology up gradation of banks. They mistakenly believed the
technology would lead to retrenchment and eventually the marginalization of unions.

The problem faced by the banking industry soon surfaced in their balance sheets. But the prevailing
accounting practices unable banks to dodge the issue.

The rules of the game under which banks operated changed in 1993. Norms or income Recognition, Assets
classification and loan loss provisioning were put in place and capital adequacy ratio become mandatory.
The cumulative impact of all these changes has been on the concept of state ownership in banks. It is
increasingly becoming clear that the state ownership in bank is no longer sustainable.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

The amendment of banking regulation act in 1993 saw the entry of new private sector banks and foreign
banks.

MAJOR PLAYER IN INDIA

1. CENTRAL BANK OF INDIA

2. STATE BANK OF INDIA LTD
3. PUNJAB NATOINAL BANK LTD
4. BANK OF BARODA LTD
5. FEDERAL BANK LTD
6. AXIS BANK LTD
7. HDFC BANK LTD
8. IDBI BANK LTD
9. UNION BANK OF INDIA
10. BANK OF INDIA
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

CHAPTER-1

1.INTRODUCATION

A central bank is a financial institution given privileged control over the production and distribution of
money and credit for a nation or a group of nations. In modern economies, the central bank is usually
responsible for the formulation of monetary policy and the regulation of member banks.

Central banks are inherently non-market-based or even anticompetitive institutions. Although some are
nationalized, many central banks are not government agencies, and so are often touted as being politically
independent. However, even if a central bank is not legally owned by the government, its privileges are
established and protected by law.

The critical feature of a central bank—distinguishing it from other banks—is its legal monopoly status,
which gives it the privilege to issue bank notes and cash. Private commercial banks are only permitted to
issue demand liabilities, such as checking deposits.

Central Bank of India, a government-owned bank, is one of the oldest and largest commercial banks in
India. It is based in Mumbai which is the financial capital of india and capital city of state of Maharashtra.
The bank has 4700 branches, 5000 ATM's and 4 extension counters across 28 Indian states and three Union
Territories. At present, Central Bank of India has overseas office at Nairobi, Hong Kong and a joint venture
with Bank of India, Bank of Baroda, and the Zambian government. The Zambian government holds 40 per
cent stake and each of the banks has 20 per cent. Recently it has also opened a representative office at
Nairobi in Kenya.

Central Bank of India has approached the Reserve Bank of India (RBI) for permission to open representative
offices in five more locations - Singapore, Dubai, Doha and London As on 31 March 2015, the bank's
reserves and surplus stood at ₹ 68688 million. Its total business at the end of the last fiscal amounted to ₹
2,22,124 (approx) million.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

Snapshot

Company Background

Industry Finance - Banks - Private Sector.

Business Group CENTRAL BANK OF INDIA

Incorporation Date 21/12/1911

Public Issue Date 31/12/1995

Face Value 10.0000

Slogan Build a Better life around us

Company/Business Registration No INE040A01018

Key Officials CEO Rajeev Rishi

1.2 CORPORATE MISSION

♦ To transform the customer banking experience into a fruitful and enjoyable one.

♦ To leverage technology for efficient and effective delivery of all banking services.

♦ To have bouquet of product and services tailor-made to meet customers aspirations.

♦ The pan-India spread of branches across all the state of the country will be utilized to further the socio
economic objective of the Government of India with emphasis on Financial Inclusion.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

1.3VISION STATEMENT OF CENTRAL BANK OF INDIA

The Central bank of India is committed to emerge as a strong, vibrant and pro-active Bank/Financial Super
Market and to positively contribute to the emerging needs of the economy through consistent harmonization
of human, financial and technological resources and effective risk control systems.

The objective of the Central bank of India is to provide its target market customers a full range of financial
products and banking services, giving the customer a one-step window for all his/her requirements. The
Central bank of India plus and the investment advisory services programs have been designed keeping in
mind needs of customers who seeks distinct financial solutions, information and advice on various
investment avenues.

1.4 BUSINESS STRATEGY

I. Increasing market share in India’s expanding banking

II. Delivering high quality customer service
III. Maintaining current high standards for asset quality through disciplined credit risk management
IV. Develop innovative products and services that attract targeted customers and address inefficiencies
in the Indian financial sector.

BOARD OF DIRECTORS/TOP MANAGEMENT

PERSON DESIGNATION

Mr. Rajeev Rishi Chairman & Managing Director

Mr. Raj Kumar Goyal Executive Director

Mr.B.K.Divakar Executive Director

Mr. R.C.Lodha Executive Director

Dr. Saurabh Garg GOI Nominee Director

Mr. Shekhar Bhatnagar RBI Nominee Director

 HISTORY AND SCOPE OF CENTRAL BANKING 2019

Mr. M.P.Shorawala Director

Mrs. Krishan Sethi Director

Mr. S.B.Rode Officer Employee Director

Mr. Gurbax Kumar Joshi Workmen Employee Director

Mrs. N.S.Rathnaprabha Director

Mr Ketul Ramubhai Patel Shareholder DIrector

Mr Supratim Bandyopadyay shareholder director

1.5 ACHIEVEMENTS/AWARDS

2012

-Central Bank of India has won the prestigious ‘GOLDEN PEACOCK HR EXCELLENCE AWARD’

-Central Bank of India provided water storage tanks to the villages of Satara district

-Central Bank of India launched Go Green Campaign for customers.

- Central Bank of India in Association with Angel Broking Launch CENT-e-TRADE The Three-in-One
Online Share Trading Facility.

-Central Bank of India - Cent Sanskriti extends helping hand to disabled persons.

2013

-Board recommended a Final Dividend of Rs. 25%.

 HISTORY AND SCOPE OF CENTRAL BANKING 2019

2014

-CBI received Rajbhasha shield from NARAKAS

-CBI & Tata Motors Ltd signs MOU for commercial Vehicle finance

-CBI Received National Award for Excellence in MSME Lending

1.6 BUSINESS SEGMENT

CENTRAL BANK OF INDIA offers a wide range of commercial and transactional banking services
and treasury products to wholesale and retail customers. The bank has three key business segments:

1.6.1Wholesale Banking Services:

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to
small & mid-sized corporate and agri-based businesses. For these customers, the Bank provides a wide range
of commercial and transactional banking services, including working capital finance, trade services,
transactional services, cash management, etc. The bank is also a leading provider of structured solutions,
which combine cash management services with vendor and distributor finance for facilitating superior
supply chain management for its corporate customers. Based on its superior product delivery / service levels
and strong customer orientation, the Bank has made significant inroads into the banking consortia of a
number of leading Indian corporate including multinationals, companies from the domestic business houses
and prime public sector companies. It is recognized as a leading provider of cash management and
transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

1.6.2 Retail Banking Services :

The objective of the Retail Bank is to provide its target market customers a full range of financial
products and banking services, giving the customer a one-stop window for all his/her banking requirements.
The products are backed by world-class service and delivered to the customers through the growing branch
network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and
Mobile Banking.

The CENTRAL BANK OF INDIA Preferred program for high net worth individuals, the
CENTRAL BANK OF INDIA Plus and the Investment Advisory Services programs have been designed
keeping in mind needs of customers who seek distinct financial solutions, information and advice on various
investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans
against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of
Depository Participant (DP) services for retail customers, providing customers the facility to hold their
investments in electronic form.

CENTRAL BANK OF INDIA Bank was the first bank in India to launch an International Debit Card
in association with VISA (VISA Electron) and issues the Master card Maestro debit card as well. The Bank
launched its credit card business in late 2001. By September 30, 2005, the bank had a total card base (debit
and credit cards) of 5.2 million cards. The Bank is also one of the leading players in the "merchant
acquiring" business with over 50,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at
merchant establishments.

1.6.3 Treasury:

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives,
Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the financial
markets in India, corporate need more sophisticated risk management information, advice and product
structures. These and fine pricing on various treasury products are provided through the bank's Treasury
team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in
government securities. The Treasury business is responsible for managing the returns and market risk on this
investment portfolio.

Although their responsibilities range widely, depending on their country, central banks' duties (and the
justification for their existence) usually fall into three areas.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

First, central banks control and manipulate the national money supply: issuing currency and setting interest
rates on loans and bonds. Typically, central banks raise interest rates to slow growth and avoid inflation;
they lower them to spur growth, industrial activity, and consumer spending. In this way, they manage
monetary policy to guide the country's economy and achieve economic goals, such as full employment.

Second, they regulate member banks through capital requirements, reserve requirements (which dictate how
much banks can lend to customers, and how much cash they must keep on hand), and deposit guarantees,
among other tools. They also provide loans and services for a nation’s banks and its government and
manage foreign exchange reserves.

22.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

CHAPTER -2

HISTORY AND FORMATION OF CENTRAL BANKING

2.1 Beginnings
The story of central banking goes back at least to the seventeenth century, to the founding of the first
institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it
was chartered to lend the government funds and to act as a clearing house for commerce. A few decades
later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint stock
company to purchase government debt. Other central banks were set up later in Europe for similar purposes,
though some were established to deal with monetary disarray. For example, the Banque de France was
established by Napoleon in 1800 to stabilize the currency after the hyperinflation of paper money during the
French Revolution, as well as to aid in government finance. Early central banks issued private notes which
served as currency, and they often had a monopoly over such note issue.

While these early central banks helped fund the government’s debt, they were also private entities that
engaged in banking activities. Because they held the deposits of other banks, they came to serve as banks for
bankers, facilitating transactions between banks or providing other banking services. They became the
repository for most banks in the banking system because of their large reserves and extensive networks of
correspondent banks. These factors allowed them to become the lender of last resort in the face of a financial
crisis. In other words, they became willing to provide emergency cash to their correspondents in times of
financial distress.

2.2 Transition
The Federal Reserve System belongs to a later wave of central banks, which emerged at the turn of the
twentieth century. These banks were created primarily to consolidate the various instruments that people
were using for currency and to provide financial stability. Many also were created to manage the gold
standard, to which most countries adhered.

The gold standard, which prevailed until 1914, meant that each country defined its currency in terms of a
fixed weight of gold. Central banks held large gold reserves to ensure that their notes could be converted into
gold, as was required by their charters. When their reserves declined because of a balance of payments
deficit or adverse domestic circumstances, they would raise their discount rates (the interest rates at which
they would lend money to the other banks). Doing so would raise interest rates more generally, which in turn
attracted foreign investment, thereby bringing more gold into the country.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

Central banks adhered to the gold standard’s rule of maintaining gold convertibility above all other
considerations. Gold convertibility served as the economy’s nominal anchor. That is, the amount of money
banks could supply was constrained by the value of the gold they held in reserve, and this in turn determined
the prevailing price level. And because the price level was tied to a known commodity whose long-run value
was determined by market forces, expectations about the future price level were tied to it as well. In a sense,
early central banks were strongly committed to price stability. They did not worry too much about one of the
modern goals of central banking—the stability of the real economy—because they were constrained by their
obligation to adhere to the gold standard.

Central banks of this era also learned to act as lenders of last resort in times of financial stress—when events
like bad harvests, defaults by railroads, or wars precipitated a scramble for liquidity (in which depositors ran
to their banks and tried to convert their deposits into cash). The lesson began early in the nineteenth century
as a consequence of the Bank of England’s routine response to such panics. At the time, the Bank (and other
European central banks) would often protect their own gold reserves first, turning away their correspondents
in need. Doing so precipitated major panics in 1825, 1837, 1847, and 1857, and led to severe criticism of the
Bank. In response, the Bank adopted the “responsibility doctrine,” proposed by the economic writer Walter
Bagehot, which required the Bank to subsume its private interest to the public interest of the banking system
as a whole. The Bank began to follow Bagehot’s rule, which was to lend freely on the basis of any sound
collateral offered—but at a penalty rate (that is, above market rates) to prevent moral hazard. The bank
learned its lesson well. No financial crises occurred in England for nearly 150 years after 1866. It wasn’t
until August 2007 that the country experienced its next crisis.

The U.S. experience was most interesting. It had two central banks in the early nineteenth century, the Bank
of the United States (1791–1811) and a second Bank of the United States (1816–1836). Both were set up on
the model of the Bank of England, but unlike the British, Americans bore a deep-seated distrust of any
concentration of financial power in general, and of central banks in particular, so that in each case, the
charters were not renewed.

There followed an 80-year period characterized by considerable financial instability. Between 1836 and the
onset of the Civil War—a period known as the Free Banking Era—states allowed virtual free entry into
banking with minimal regulation. Throughout the period, banks failed frequently, and several banking panics
occurred. The payments system was notoriously inefficient, with thousands of dissimilar-looking state bank
notes and counterfeits in circulation. In response, the government created the national banking system during
the Civil War. While the system improved the efficiency of the payments system by providing a uniform
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

currency based on national bank notes, it still provided no lender of last resort, and the era was rife with
severe banking panics.

The crisis of 1907 was the straw that broke the camel’s back. It led to the creation of the Federal Reserve in
1913, which was given the mandate of providing a uniform and elastic currency (that is, one which would
accommodate the seasonal, cyclical, and secular movements in the economy) and to serve as a lender of last
resort.

2.3 The Genesis of Modern Central Banking Goals

Before 1914, central banks didn’t attach great weight to the goal of maintaining the domestic economy’s
stability. This changed after World War I, when they began to be concerned about employment, real activity,
and the price level. The shift reflected a change in the political economy of many countries—suffrage was
expanding, labor movements were rising, and restrictions on migration were being set. In the 1920s, the Fed
began focusing on both external stability (which meant keeping an eye on gold reserves, because the U.S.
was still on the gold standard) and internal stability (which meant keeping an eye on prices, output, and
employment). But as long as the gold standard prevailed, external goals dominated.

Unfortunately, the Fed’s monetary policy led to serious problems in the 1920s and 1930s. When it came to
managing the nation’s quantity of money, the Fed followed a principle called the real bills doctrine. The
doctrine argued that the quantity of money needed in the economy would naturally be supplied so long as
Reserve Banks lent funds only when banks presented eligible self-liquidating commercial paper for
collateral. One corollary of the real bills doctrine was that the Fed should not permit bank lending to finance
stock market speculation, which explains why it followed a tight policy in 1928 to offset the Wall Street
boom. The policy led to the beginning of recession in August 1929 and the crash in October. Then, in the
face of a series of banking panics between 1930 and 1933, the Fed failed to act as a lender of last resort. As a
result, the money supply collapsed, and massive deflation and depression followed. The Fed erred because
the real bills doctrine led it to interpret the prevailing low short-term nominal interest rates as a sign of
monetary ease, and they believed no banks needed funds because very few member banks came to the
discount window.

After the Great Depression, the Federal Reserve System was reorganized. The Banking Acts of 1933 and
1935 shifted power definitively from the Reserve Banks to the Board of Governors. In addition, the Fed was
made subservient to the Treasury.
The Fed regained its independence from the Treasury in 1951, whereupon it began following a deliberate
countercyclical policy under the directorship of William McChesney Martin. During the 1950s this policy
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

was quite successful in ameliorating several recessions and in maintaining low inflation. At the time, the
United States and the other advanced countries were part of the Bretton Woods System, under which the
U.S. pegged the dollar to gold at $35 per ounce and the other countries pegged to the dollar. The link to gold
may have carried over some of the credibility of a nominal anchor and helped to keep inflation low.

The picture changed dramatically in the 1960s when the Fed began following a more activist stabilization
policy. In this decade it shifted its priorities from low inflation toward high employment. Possible reasons
include the adoption of Keynesian ideas and the belief in the Phillips curve trade-off between inflation and
unemployment. The consequence of the shift in policy was the buildup of inflationary pressures from the late
1960s until the end of the 1970s. The causes of the Great Inflation are still being debated, but the era is
renowned as one of the low points in Fed history. The restraining influence of the nominal anchor
disappeared, and for the next two decades, inflation expectations took off.

The inflation ended with Paul Volcker’s shock therapy from 1979 to 1982, which involved monetary
tightening and the raising of policy interest rates to double digits. The Volcker shock led to a sharp
recession, but it was successful in breaking the back of high inflation expectations. In the following decades,
inflation declined significantly and has stayed low ever since. Since the early 1990s the Fed has followed a
policy of implicit inflation targeting, using the federal funds rate as its policy instrument. In many respects,
the policy regime currently followed echoes the convertibility principle of the gold standard, in the sense that
the public has come to believe in the credibility of the Fed’s commitment to low inflation.

A key force in the history of central banking has been central bank independence. The original central banks
were private and independent. They depended on the government to maintain their charters but were
otherwise free to choose their own tools and policies. Their goals were constrained by gold convertibility. In
the twentieth century, most of these central banks were nationalized and completely lost their independence.
Their policies were dictated by the fiscal authorities. The Fed regained its independence after 1951, but its
independence is not absolute. It must report to Congress, which ultimately has the power to change the
Federal Reserve Act. Other central banks had to wait until the 1990s to regain their independence.

2.4 Financial Stability

An increasingly important role for central banks is financial stability. The evolution of this responsibility has
been similar across the advanced countries. In the gold standard era, central banks developed a lender-of-
last-resort function, following Bagehot’s rule. But financial systems became unstable between the world
wars, as widespread banking crises plagued the early 1920s and the 1930s. The experience of the Fed was
the worst. The response to banking crises in Europe at the time was generally to bail out the troubled banks
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

with public funds. This approach was later adopted by the United States with the Reconstruction Finance
Corporation, but on a limited scale. After the Depression, every country established a financial safety net,
comprising deposit insurance and heavy regulation that included interest rate ceilings and firewalls between
financial and commercial institutions. As a result, there were no banking crises from the late 1930s until the
mid-1970s anywhere in the advanced world.

This changed dramatically in the 1970s. The Great Inflation undermined interest rate ceilings and inspired
financial innovations designed to circumvent the ceilings and other restrictions. These innovations led to
deregulation and increased competition. Banking instability reemerged in the United States and abroad, with
such examples of large-scale financial disturbances as the failures of Franklin National in 1974 and
Continental Illinois in 1984 and the savings and loan crisis in the 1980s. The reaction to these disturbances
was to bail out banks considered too big to fail, a reaction which likely increased the possibility of moral
hazard. Many of these issues were resolved by the Depository Institutions Deregulation and Monetary
Control Act of 1980 and the Basel I Accords, which emphasized the holding of bank capital as a way to
encourage prudent behavior.

Another problem that has reemerged in modern times is that of asset booms and busts. Stock market and
housing booms are often associated with the business cycle boom phase, and busts often trigger economic
downturns. Orthodox central bank policy is to not defuse booms before they turn to busts for fear of
triggering a recession but to react after the bust occurs and to supply ample liquidity to protect the payments
and banking systems. This was the policy followed by Alan Greenspan after the stock market crash of 1987.
It was also the policy followed later in the incipient financial crises of the 1990s and 2000s. Ideally, the
policies should remove the excess liquidity once the threat of crisis has passed.

2.5 Challenges for the Future

The key challenge I see facing central banks in the future will be to balance their three policy goals. The
primary goal of the central bank is to provide price stability (currently viewed as low inflation over a long-
run period). This goal requires credibility to work. In other words, people need to believe that the central
bank will tighten its policy if inflation threatens. This belief needs to be backed by actions. Such was the
case in the mid-1990s when the Fed tightened in response to an inflation scare. Such a strategy can be
greatly enhanced by good communication.

The second policy goal is stability and growth of the real economy. Considerable evidence suggests that low
inflation is associated with better growth and overall macroeconomic performance. Nevertheless, big shocks
still occur, threatening to derail the economy from its growth path. When such situations threaten, research
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

also suggests that the central bank should temporarily depart from its long-run inflation goal and ease
monetary policy to offset recessionary forces. Moreover, if market agents believe in the long-run credibility
of the central bank’s commitment to low inflation, the cut in policy interest rates will not engender high
inflation expectations. Once the recession is avoided or has played its course, the central bank needs to raise
rates and return to its low-inflation goal.

The third policy goal is financial stability. Research has shown that it also will be improved in an
environment of low inflation, although some economists argue that asset price booms are spawned in such
an environment. In the case of an incipient financial crisis such as that just witnessed in August 2007, the
current view is that the course of policy should be to provide whatever liquidity is required to allay the fears
of the money market. An open discount window and the acceptance of whatever sound collateral is offered
are seen as the correct prescription. Moreover, funds should be offered at a penalty rate. The Fed followed
these rules in September 2007, although it is unclear whether the funds were provided at a penalty rate. Once
the crisis is over, which generally is in a matter of days or weeks, the central bank must remove the excess
liquidity and return to its inflation objective.

The Federal Reserve followed this strategy after Y2K. When no financial crisis occurred, it promptly
withdrew the massive infusion of liquidity it had provided. By contrast, after providing funds following the
attacks of 9/11 and the technology bust of 2001, it permitted the additional funds to remain in the money
market once the threat of crisis was over. If the markets had not been infused with so much liquidity for so
long, interest rates would not have been as low in recent years as they have been, and the housing boom
might not have as expanded as much as it did.

A second challenge related to the first is for the central bank to keep abreast of financial innovations, which
can derail financial stability. Innovations in the financial markets are a challenge to deal with, as they
represent attempts to circumvent regulation as well as to reduce transactions costs and enhance leverage. The
recent subprime crisis exemplifies the danger, as many problems were caused by derivatives created to
package mortgages of dubious quality with sounder ones so the instruments could be unloaded off the
balance sheets of commercial and investment banks. This strategy, designed to dissipate risk, may have
backfired because of the opacity of the new instruments.

A third challenge facing the Federal Reserve in particular is whether to adopt an explicit inflation targeting
objective like the Bank of England, the Bank of Canada, and other central banks. The advantages of doing so
are that it simplifies policy and makes it more transparent, which eases communication with the public and
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

enhances credibility. However, it might be difficult to combine an explicit target with the Fed’s dual
mandate of price stability and high employment.

A fourth challenge for all central banks is to account for globalization and other supply-side developments,
such as political instability and oil price and other shocks, which are outside of their control but which may
affect global and domestic prices.

The final challenge I wish to mention concerns whether implicit or explicit inflation targeting should be
replaced with price-level targeting, whereby inflation would be kept at zero percent. Research has shown
that a price level may be the superior target, because it avoids the problem of base drift (where inflation is
allowed to cumulate), and it also has less long-run price uncertainty. The disadvantage is that recessionary
shocks might cause a deflation, where the price level declines. This possibility should not be a problem if the
nominal anchor is credible, because the public would realize that inflationary and deflationary episodes are
transitory and prices will always revert to their mean, that is, toward stability.

Such a strategy is not likely to be adopted in the near future because central banks are concerned that
deflation might get out of control or be associated with recession on account of nominal rigidities. In
addition, the transition would involve reducing inflation expectations from the present plateau of about 2
percent, which would likely involve deliberately engineering a recession—a policy not likely to ever be
popular.

2.5 Central Bank of India

Central Bank of India, a government-owned bank, is one of the oldest and largest commercial banks in
India. It is based in Mumbai which is the financial capital of India and capital city of state of Maharashtra.

It is one of eighteen public sector banks in India to get recapitalised in 2009.

Central Bank of India has approached the Reserve Bank of India (RBI) for permission to open representative
offices in five more locations – Singapore, Dubai, Doha and London.

As on 30 September 2019, the bank has a network of 4,681 branches, 3,477 ATMs, ten satellite offices and
one extension counter. It has a pan-India presence covering all 28 states, seven out of nine union territories
and NCT Delhi, 574 district headquarters and 626 districts out of 707 districts in the country.

Central Bank of India is one of the oldest commercial banks of India, and reportedly is the first truly Indian
bank which was totally owned and established by Indian without any foreign help.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

The Central Bank of India was established on 21 December 1911 by Sir Sorabji Pochkhanawala with Sir
Pherozeshah Mehta as Chairman,and claims to have been the first commercial Indian bank completely
owned and managed by Indians.

A 2010 stamp dedicated to Sorabji Pochkhanawala and the 100th anniversary of the
Central Bank of India.

2.5.1 Early-20th century

By 1918 it had established a branch in Hyderabad. A branch in nearby Secunderabad followed in 1925.

In 1923, it acquired the Tata Industrial Bank in the wake of the failure of the Alliance Bank of Simla. The
Tata bank, established in 1917, had opened a branch in Madras in 1920 that became the Central Bank of
India, Madras.

Central Bank of India was instrumental in the creation of the first Indian exchange bank, the Central
Exchange Bank of India, which opened in London in 1936. However, Barclays Bank acquired Central
Exchange Bank of India in 1938.

Also before World War II, Central Bank of India established a branch in Rangoon. The branch's operations
concentrated on business between Burma and India, and especially money transmission via telegraphic
transfer. Profits derived primarily from foreign exchange and margins. The bank also lent against land,
produce, and other assets, mostly to Indian businesses
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

2.5.2 Post-World War II

In 1963, the revolutionary government in Burma nationalized Central Bank of India's operations there,
which became People's Bank No.1.

In 1969, the Indian Government nationalized the bank on 19 July, together with 13 others.

Central Bank of India, Shankar Sheth Road Branch, Pune

In the 1980s the managers of the London branches of Central Bank of India, Punjab National Bank,
and Union Bank of India were caught up in a fraud in which they made dubious loans to the Bangladeshi
jute trader Rajender Singh Sethia. The regulatory authorities in England and India forced all three Indian
banks to close their London branches.

Central Bank of India was one of the first banks in India to issue credit cards in the year 1980 in
collaboration with On its 108th Foundation day Central Bank of India launched its first step towards robotic
banking, a robot named "MEDHA".

Sir Sorabji Pockhanawala was the founder of the bank, who had always dreamt of establishing a thoroughly
Indian bank, who was so happy and excited about the project that he reportedly termed the Central Bank of
India as “property of the nation and the country’s asset”. The first Chairman of the bank was Sir Pherozesha
Mehta, a yet another Indian enthusiast. In the year 1969 the bank was nationalized by the Government of
India.

2.5.3Key Attributes
Central Bank of India claims to be the first bank to be conferred with the National Award for Excellence in
Micro and Small Enterprises (MSE) Lending for the year 2007-08.

The bank entered a partnership with Kotak Mahindra Assets Management Company in December 2008,
under which all the Kotak Mutual Fund products will be made available through Central Bank of India
branches.
 HISTORY AND SCOPE OF CENTRAL BANKING 2019

2.5.4 Products and Services

Central Bank of India offers a host of banking services to its customers including Regular Banking Services
such as Deposits and Loans, International Banking Services, and other services including Central card
Electronic Cards, Debit Cards, No-Frills Savings Deposit Account under the name Cent Bachat Khata, and
Finance options for domestic and international tours under the name Cent Safar.

2.5.5 Presence in India

Central Bank of India has a strong presence in the country with over 3000 branches and more than 250
extension counters nationwide as of April 2009. The headquarters of the bank are located in Mumbai, the
financial capital of India, along with 16 other zonal offices established in different cities of the nation,
including Agra, Ahmadabad, Bhopal, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata, Lucknow,
Mumbai Metro Zonal Office, Muzaffarpur, Nagpur, New Delhi, Patna, Pune and Raipur.
HISTORY AND SCOPE OF CENTRAL BANKING 2019