Evolution and progress of Indian banking

Money lending developed as an occupation in

India from 500 B.C.
First modem bank was set up in 1688 in
Madras. 'Agency Houses' started by the
British in India were first joint stock banks in
India.
Bank of Hindustan was established in 1770 in
Calcutta. General Bank of India was
established in 1786.
 Three presidency banks viz., Bank of Calcutta
(1806), Bank of Bombay (1840), Bank of
Madras (1843) were established.
These three banks subsequently merged
together to form the Imperial Bank of India in
1921 which was nationalised in 1955 and
named as the State Bank of India.
Allahabad Bank (1865), Punjab National Bank
(1894), Bank of India (1906), Indian Bank
(1907), Bank of Baroda (1909), Central Bank
of India (1911) came into existence.
 Reserve Bank of India was established in
1935 to regulate and control the banking
system in India as a consequence to bank
failures after world war I. The RBI was
nationalized on 1.1.1949
In 1955 the Imperial Bank of India was
partially nationalized to form the State Bank
of India and in1959 the key subsidiaries of
the SBI were established including State Bank
of Bikaner & Jaipur, State Bank of Hyderabad,
State Bank of Indore, State Bank of Mysore,
State Bank of Patiala, State Bank of Saurashtra
and State Bank of Travancore.
 Nationalization of 14 major banks on 19th
July 1969 and six more banks In 1980
Reasons
Lack of importance to agriculture sector,
small industry, export sector, weaker sections
of the society.
Agriculture sector - 2.1% of the total credit in
March, 1967 as against 64.3% for industry
and 19.4% for commerce.
Monopolistic trends, concentration of
economic power and misuse of economic
resources.
 STRUCTURE OF BANKING IN INDIA

As at the end of March 2016: 21 nationalized banks, 6 SBI banks, 13 old private
sector banks, 7 new private sector banks, 43 foreign banks, 56 regional rural
banks.
 In the beginning of 1990, the social banking goals
set for the banking industry made most of the
public sector banks unprofitable.

Reasons for poor performance of banks

(1) high cash reserve ratios and statutory liquidity
requirements
(2) low yields on government bonds (as compared
with
those on commercial advances);
(3) directed and concessional lending;
(4) administered interest rates; and
(5) lack of competition.
 First, the CRR declined from 15% in 1991 to 5.0% in
2006. The SLR also declined, from 38.5% in 1991
to 25% in 1997, remaining at this level until today .

Decline in the CRR and SLR increased banks

flexibility in allocating credit and improved their
profitability.

Second, interest rates became flexible as to almost

all term deposits rates and lending rates on
advances in excess of Rs200,000.

Interest rate deregulations have encouraged banks

to improve their cost efficiency and diversify their
business into non-traditional areas.
 Third, reform in priority sector lending mainly
through the expansion of coverage and
interest rate decontrols on advances in
excess of Rs200,000 helped banks to
mitigate the negative impact arising from
such policy loans.

Fourth, entry barriers were reduced for

private sector and foreign banks. The entry of
new banks has increased competition. Public
sector banks were allowed to rationalize
some branches, while branch licensing was
removed.
 Fifth, various prudential norms and more
appropriate accounting standards were
introduced.
Better accounting standards have revealed
some of the true status of NPA problems of
public sector banks.
This enabled the Government to impose
appropriate policies to deal with NPA
problems.
Sixth, the Government recapitalized
nationalized banks and public sector banks
have been partially privatized.
 Distribution of Scheduled Commercial Banks by CRAR

Year Bank SBG NB OPB NPB FB SCB

Group
1995- <4 - 5 3 - - 8
1996 4-8 - 3 3 - 3 9
8-10 6 7 7 1 12 33
>10 2 4 12 8 16 42
2011- <4
12
4-8
8-10
>10 6 20 13 7 40 86
Distribution of Investments of SCBs
Per Office Deposits and Credit of SCBs
Number of Branches
Income Composition
Interest Income Composition
Expenditure Composition
Wages as Percentage of Operating Expenses