Professional Documents
Culture Documents
Commercial Banks in India
Commercial Banks in India
Commercial Banks in India
in India
Functions of Commercial Banks
1. Primary functions
2. Secondary functions
Functions of Commercial Banks
Primary functions include
a. Accepting Deposits
One of the basic objective of banking is to procure
the surplus funds from those who have excess and
distribute it to the sectors where it is necessary.
There are various types of accounts which a
depositor can select as per the convenience. Each
type of account will have different types of interest
rates depending upon the tenure of accounts.
Functions of Commercial Banks
B. Granting loans and advances
Loans and advances are part of banking
functions.
A large number of small banks with low capital levels were formed
and failed in the absence of adequate regulation.
Types and Roles of Banks
– Commercial banks serving the needs of industry and commerce:
– Joint stock banks and the Imperial Bank of India (which later
became the State Bank of India), exchange banks, and foreign
banks (e.g., HSBC).
– Co-operative banks serving the needs of those who did not
have access to commercial banks.
– Other types of banks including indigenous bankers and loan
companies.
Banking in the Early Days (~1947)
Major Developments
1850 The Companies Act (the first legislation regulating
banks).
1934 The Reserve Bank of India (“RBI”) Act.
1935 The Reserve Bank of India was established as the
central bank of India. Under the RBI Act, the RBI was
empowered to regulate issuance of bank notes and cash
reserves and act as the lender-of-last-resort.
Nationalization: “Social Control” (1947~1991)
• Major Developments
• 1949 The Banking Companies Act provided the RBI with
extensive power to regulate and supervise the banking
sector.
• 1955 The State Bank of India (“SBI”) was established.
• 1959 Eight state banks were established (SBI’s associate
banks).
• 1961 The Deposit Insurance Corporation Act was
enacted.
• 1969 The Nationalization Act was enacted (14 banks
were nationalized).
• 1980 Six additional banks were nationalized.
Liberalize, But Not So Fast! (1991~Present)
Current: SLR 24%, CRR 6%, Bank rate 6%, Repo Rate 5.75%, reverse repo
4.5%
Liberalize, But Not So Fast! (1991~Present)
Deregulating Interest Rates: Previously, the RBI set the lending and deposit
rates. By gradually liberalizing interest rates, the government provided
banks with more flexibility to set their deposit and lending rates.
Lowering Entry Barriers to Increase Competition:
Allowing new banks to enter the market: Since 1969, the RBI had not
allowed any new private sector banks to enter the market. In 1993,
however, the RBI introduced new, less restrictive guidelines for creating
a new private sector bank.
Branch authorization policy: In order to provide banks with more
autonomy in opening and closing branches, the RBI changed its branch
authorization policy. For example, banks are free to open branches if
they meet three conditions (i.e., capital adequacy ratio of 9 percent, a
net profit for 3 consecutive years, and less than15 percent of non-
performing assets (“NPA”)).
Liberalize, But Not So Fast! (1991~Present)
In 1991-92 and 1992-93, the government injected nearly Rs 40 billion, and then
Rs 120 billion between1993 and 1999. To reduce the high level of NPAs by
accelerating debt recovery procedures, the Government enacted laws such as
the Recovery of Debt Act under which the Debt Recovery Tribunals were
established.
Gross NPA
Net NPA
Current Banking System:
Still Dominated by Government
Banks
Scheduled Banks
Sche du le d Sche du le d
C ommer cial B an ks (1 66 ) C oo p er ative Banks
Banks (86) Scheduled Urban Cooperative Banks (53) Scheduled State Cooperative Banks (16,)
Current Banking System:
Still Dominated by Government
Banks
Scheduled banks The Scheduled Commercial Banks have been listed
under the Second Schedule of the Reserve Bank of India Act, 1934
by satisfying the two conditions of section 42(6)(a) of the RBI Act of
1934.
Prudential Norms
Prudential norms relate to income recognition, asset classification, provisioning of
NPAs and capital adequacy ratios( capital to risk weighted asset ratio, CRAR)
• Corporate Governance
A single entity or a group cannot own more than 10 percent of
the paid-up capital of a bank in the private sector. A bank must
not own more than 5 percent of shares of another bank in India.
The RBI provides “fit and proper” criteria which a bank must use
to decide whether a person is suitable to be appointed to the
bank’s board of directors.
• Electronic Banking
Only licensed and supervised banks having a physical presence
in India are allowed to provide internet banking to resident
account holders in India (only in local currencies).
Main Areas of Regulation of Commercial Banks