INTRODUCTION

 Banking in India in the modern sense

originated in the last decades of the
18th century. The first banks were Bank
of Hindustan (1770-1829) and The
General Bank of India, established 1786
and since non-operational.
 The Imperial Bank of India, which
became the State Bank of India after
independence, came into existence on
January 27, 1921.

 The history of modern banking in India

can be traced back to 1806 when the
Bank of Calcutta was established. In
1809 it was re-named Bank of Bengal.
Then in the 1840s the Bank of Bombay
and Bank of Madras came up.
 The three Presidency Banks were at
the controls of Indian banking till
their amalgamation in 1921 into the
Imperial Bank of India, which
combined the role of a commercial
bank and a central bank. 

 However, with the establishment of

the Reserve Bank of India in 1935,
the Imperial Bank ceased to have a
central banking function.
 On July 1, 1955, as per the State Bank of India
Act 1955, the State Bank of India (SBI) was
constituted and it took over the business and
undertaking of the Imperial Bank. In the same
year the State Bank of India (Subsidiary Bank)
Act was passed, with the State Bank of
Hyderabad becoming the first subsidiary of the
SBI.
 In the next five years, the State Bank of
Bikaner, State Bank of Jaipur, State Bank of
Travancore, State Bank of Mysore, State Bank
of Indore, State Bank of Saurashtra and State
Bank of Patiala became subsidiaries of the SBI.
 By the end of 2013, the SBI had over 14,800
branches in India and 2.3 lakh employees. In the
financial year 2012-13, its revenue was Rs
200,560 crore, with domestic operations
contributing to 95% of the revenue. In 2013
Arundhati Bhattacharya became the first woman
chairman of the SBI.
 State Bank of India has the following five
Associate Banks (ABs) with controlling
interest ranging from 75.07% to 100%. As on
November, 2014
 State Bank of Bikaner and Jaipur (SBBJ)
 State Bank of Hyderabad (SBH)
 State Bank of Mysore (SBM)
 State Bank of Patiala (SBP)
 State Bank of Travancore (SBT)
 INRODUCTION

 In India, commercial banks are the

oldest, largest and fastest growing
financial intermediaries. They have
been playing a very important role
in the process of development. In
1949 RBI was nationalized followed
by nationalization of Imperal Bank
Of India (New State Bank Of India) in
1995.
 In July 1969, 14 major commercial banks
were nationalized and in April 1980, 6 more
were nationalized. Reforms in banking sector
have led to the setting up of new private
sector banks as well as entry of more foreign
banks.  
 STRUCTURE OF BANKING IN INDIA

 Banking system in India is classified in to

scheduled and Non-scheduled banks.
Scheduled banks consist of State co-
operative banks and Commercial banks and
the other in Non-scheduled.
STRUCTURE OF BANKING IN INDIA
 STRUCTURE OF BANKING IN INDIA
1. Scheduled Banks :-
 Under RBI Act of 1934, banks were classified as
scheduled and non-scheduled banks. The
scheduled banks are those which are entered in
second schedule of RBI Act of 1934. They are
eligible for certain facilities. All commercial
banks (India and foreign, regional rural banks)
and state co-operatives are scheduled banks.
 A scheduled must have a paid up capital and
reserves of not less than Rs. 5 lakhs. It must also
satisfy RBI that it affairs are not conducted in a
manner detrimental to the interest of its
depositors.
 STRUCTURE OF BANKING IN INDIA
2. Non-Scheduled Banks :-
 Non-scheduled Banks are those which have not
been included in the second Schedule of RBI Act.
The number of non-scheduled banks is declining
as many of them are attaining the status of
scheduled banks in 2008.
 The purpose of the Narasimham-I Committee
was to study all aspects relating to the
structure, organisation, functions and
procedures of the financial systems and to
recommend improvements in their efficiency
and productivity. The Committee submitted its
report to the Finance Minister in November 1991
which was tabled in Parliament on 17 December
1991.
 BANKING SECTOR REFORMS
 Since nationalisation of banks in 1969, the banking
sector had been dominated by the public sector.
There was financial repression (domination), role of
technology was limited, no risk management etc.

 This resulted in low profitability and poor asset

quality. The country was caught in deep economic
crises. The Government decided to introduce
comprehensive economic reforms.

 Banking sector reforms were part of this package. In

august 1991, the Government appointed a committee
on financial system under the chairmanship of M.
Narasimham.
FIRST PHASE OF BANKING SECTOR REFORMS /
NARASIMHAN COMMITTEE REPORT – 1991
 To promote healthy development of financial sector, the
Narasimhan committee made recommendations.

1.Establishment of 4 tier hierarchy for banking structure

with 3 to 4 large banks (including SBI) at top and at
bottom rural banks engaged in agricultural activities.

2. The dual control over the banking system of the Finance

Ministry and Reserve Banks should be ended. The Reserve
Bank should establish a separate quasi- autonomous body
(non-governmental organisation, it is an organisation to
which a government has devolved power) to take over to
supervisory function over the banks
3. Phased reduction in statutory liquidity ratio.

4. Phased achievement of 8% capital adequacy

ratio.

5. Abolition of branch licensing policy.

6. Proper classification of assets and full disclosure

of accounts of banks and financial institutions.

7. Deregulation of Interest rates.

8. Competition among financial institutions on
participating approach.

9. Setting up asset Reconstruction fund to

take over a portion of loan portfolio of
banks whose recovery has become
difficult.

10. Foreign Banking system

11. More Freedom to Banks

12. Financial Institutions

 DEFINITION OF 'CAPITAL ADEQUACY RATIO - CAR'
 A measure of a bank's capital. It is expressed as a
percentage of a bank's risk weighted credit
exposures.

 Also known as "Capital to Risk Weighted Assets Ratio

(CRAR).“
 This ratio is used to protect depositors and promote
the stability and efficiency of financial systems
around the world.
 Two types of capital are measured: tier one capital,
which can absorb losses without a bank being
required to cease trading, and tier two capital, which
can absorb losses in the event of a winding-up and so
provides a lesser degree of protection to depositors.
 BANKING REFORM MEASURES OF GOVERNMENT
 On the recommendations of Narasimham
Committee, following measures were
undertaken by government since 1991 :

 Lowering SLR And CRR:

o The high SLR and CRR reduced the profits
of the banks. The SLR has been reduced
from 38.5% in 1991 to 25% in 1997. This has
left more funds with banks for allocation to
agriculture, industry, trade etc.

Statutory 22.00%(w.e.f. Decreased from 22.50% which

Liquidity Ratio 09/08/2014)(announced was continuing since
(SLR) on 05/08/2014) 14/06/2014
  The Cash Reserve Ratio (CRR) is the cash ratio
of a banks total deposits to be maintained with
RBI. The CRR has been brought down from 15%
in 1991 to 4.1% in June 2003. The purpose is to
release the funds locked up with RBI.

Decreased from 4.25% which

Cash Reserve Ratio 4.00% (wef   09/02/2013) -
was continuing since
(CRR) announced on 29/01/2013
30/10/2012
 Improvements in Accounting Systems of the
Banks:

 The committee recommended for the adoption

of uniform accounting practices particularly in
regard to income recognition and provisioning
against doubtful debts. It also recommended
imparting for transparency to bank balance
sheets and making full disclosures in them.
 Prudential Norms :
    Prudential norms have been started by RBI in
order to impart professionalism in commercial
banks.

 The purpose of prudential norms include proper

disclosure of income, classification of assets and
provision for Bad debts so as to ensure that the
books of commercial banks reflect the accurate
and correct picture of financial position.

 Prudential norms required banks to make 100%

provision for all Non-performing Assets (NPAs).
Funding for this purpose was placed at Rs. 10,000
crores phased over 2 years.
 NPA Account: If interest and installments
and other bank dues are not paid in any loan
account within a specified time lime, it is
being treated as non-performing assets of a
bank.
 Capital Adequacy Norms (CAN):

 Capital Adequacy ratio is the ratio of minimum

capital to risk asset ratio. In April 1992 RBI
fixed CAN at 8%. By March 1996, all public
sector banks had attained the ratio of 8%. It
was also attained by foreign banks.
 Deregulation Of Interest Rates :-

 The Narasimhan Committee advocated

that interest rates should be allowed to
be determined by market forces. Since
1992, interest rates has become much
simpler and freer.

a) Scheduled Commercial banks have now

 

the freedom to set interest rates on their

deposits subject to minimum floor rates
and maximum ceiling rates.
b) Interest rate on domestic term deposits has
been decontrolled.

c)The prime lending rate of SBI and other banks

on general advances of over Rs. 2 lakhs has
been reduced.

d) Rate of Interest on bank loans above Rs. 2

lakhs has been fully decontrolled.

e)The interest rates on deposits and advances of

all Co-operative banks have been deregulated
subject to a minimum lending rate of 13%.
  Recovery Of Debts :-

 The Government of India passed the

“Recovery of debts due to Banks and
Financial Institutions Act 1993” in
order to facilitate and speed up the
recovery of debts due to banks and
financial institutions. Six Special
Recovery Tribunals have been set up.
An Appellate Tribunal has also been set
up in Mumbai.
 Competition From
New Private Sector Banks :-

 Now banking is open to private sector.

New private sector banks have already
started functioning. These new private
sector banks are allowed to raise capital
contribution from foreign institutional
investors up to 20% and from NRIs up to
40%. This has led to increased
competition.
 Establishment of Special Tribunals:

 The special tribunals should be set up to

speed up the process of the recovery of
loans. An Assets Reconstruction Fund (ARF)
should be established to take over from
banks and financial institutions a portion of
their bad and doubtful debts at a discount.
 Phasing Out Of Directed Credit :-

 The committee suggested phasing out

of the directed credit programme. It
suggested that credit target for
priority sector should be reduced to
10% from 40%.

 The priority sector should be

redefined.
 Access To Capital Market :-

 The Banking Companies (Acquisation and

Transfer of Undertakings) Act was
amended to enable the banks to raise
capital through public issues. This is
subject to provision that the holding of
Central Government would not fall below
51% of paid-up-capital. SBI has already
raised substantial amount of funds through
equity and bonds.
 Freedom Of Operation :-

 Scheduled Commercial Banks are

given freedom to open new branches
and upgrade extension counters,
after attaining capital adequacy
ratio and prudental accounting
norms. The banks are also permitted
to close non-viable branches other
than in rural areas. Which known as
“Abolition of Branch Licensing”
 Local Area banks (LABs) :-

 In 1996, RBI issued guidelines for

setting up of Local Area Banks and
it gave Its approval for setting up
of 7 LABs in private sector. LABs
will help in mobilizing rural
savings and in channeling them in
to investment in local areas.
 Supervision Of Commercial Banks :-

 The RBI has set up a Board of financial

Supervision with an advisory Council to
strengthen the supervision of banks and
financial institutions. In 1993, RBI
established a new department known as
Department of Supervision as an
independent unit for supervision of
commercial banks.
 Mr. M Narasimham Ex-Governor of Reserve Bank
of India.
 He later served as Executive Director for India at
the World Bank and thereafter at the IMF after
which he served in the Ministry of Finance as
Secretary.
 was chairperson of the Committee on the
Financial System, 1991 and the Committee of
Banking Sector Reforms, 1998 also.
 Narasimham-II Committee was tasked with the
progress review of the implementation of the
banking reforms since 1992 with the aim of
further strengthening the financial institutions
of India. 

 It focussed on issues like size of banks

and capital adequacy ratio among other
things. M. Narasimham, Chairman, submitted
the report of the Committee on Banking Sector
Reforms (Committee-II) to the Finance
Minister Yashwant Sinha in April 1998.
 Following are the recommendations of
Narasimhan Committee :-
 1. Committee suggested a strong banking system
especially in the context of capital Account
Convertibility (CAC). The committee cautioned
the merger of strong banks with weak ones as
this may have negative effect on stronger banks.
 2) It suggested that 2 or 3 large banks should be
given international orientation and global
character.
 3) There should be 8 to10 national banks and
large number of local banks.
 4)It suggested new and higher norms for capital
adequacy.
  5)    To take over the baddebts of banks
committee suggested setting up of Asset
Reconstruction Fund.
 6)    A board for Financial Regulation and
supervision (BFRS) can be set up to supervise
the activities of banks and financial
institutions.
 7)    There is urgent need to review and amend
the provisions of RBI Act, Banking Regulation
Act, etc. to bring them in line with current
needs of industry.
 8)    Net Non-performing Assets for all
banks was to be brought down to 3% by
2002.
 9)    Rationalization of bank branches and
staff was emphasized. Licensing policy for
new private banks can be continued.
 10) Foreign banks may be allowed to set
up subsidiaries and joint ventures.
 On the recommendations of committee following
reforms have been taken  :-
1)    New Areas :- New areas for bank financing have
been opened up, such as :- Insurance, credit cards,
asset management, leasing, gold banking,
investment banking etc.

2)    New Instruments :-

 For greater flexibility and better risk management

new instruments have been introduced such as :-
Interest rate swaps, cross currency forward
contracts, forward rate agreements, liquidity
adjustment facility for meeting day-to-day liquidity
mismatch.
3)    Risk Management :-
 Banks have started specialized committees to
measure and monitor various risks. They are
regularly upgrading their skills and systems.

4)    Strengthening Technology :-
 For payment and settlement system technology
infrastructure has been strengthened with
electronic funds transfer, centralized fund
management system, etc.

5)    Increase Inflow Of Credit :-

 Measures are taken to increase the flow of
credit to priority sector through focus on Micro
Credit and Self Help Groups.
6)    Increase in FDI Limit :-
 In private banks the limit for FDI has been
increased from 49% to 74%

7)    Universal banking :-
 Universal banking refers to combination of
commercial banking and investment banking. For
evolution of universal banking guidelines have
been given.

8)    Adoption Of Global Standards :-

 RBI has introduced Risk Based Supervision of
banks. Best international practices in accounting
systems, corporate governance, payment and
settlement systems etc. are being adopted.
9)    Information Technology :-   
 Banks have introduced online banking, E-
banking, internet banking, telephone banking
etc. Measures have been taken facilitate
delivery of banking services through
electronic channels.

10) Management Of NPAs:-
 RBI and central government have taken
measures for management of non-performing
assets (NPAs), such as Corporate Debt
Restructuring (CDR), Debt Recovery Tribunals
(DRTs) and Lok Adalts.
11) Mergers And Amalgamation :-

 In May 2005, RBI has issued guidelines for

merger and Amalgamation of private sector
banks. (Recent Example: Kotak & IngVysya)

12) Guidelines For Anti-Money Laundering :

 In recent times, prevention of money

laundering has been given importance in
international financial relationships. In 2004,
RBI revised the guidelines on know your
customer (KYC) principles.
 Money Laundering refers to the conversion of money
which has been illegally obtained, in such a way that it
appears to have originated from a legitimate source.

 A classic example of money laundering is the case of

M/s Chinubhai Patel & Co. Intelligence received by the
Directorate of Revenue Intelligence (DRI) indicated
that the South Indian Bank Ltd., Nariman Point Branch,
Mumbai (erstwhile Bombay) was involved in a massive
money laundering operation.

One of the accounts was in the name of M/s Chinubhai

Patel & Co. with the South Indian Bank Ltd., Nariman
Point Branch, Bombay. Enquiries conducted revealed
that the account was opened in February 1994 and the
party was introduced by the Bank Manager Mr Kasturi
Rangan.
 The Bank Manager did not follow the instructions of
the Reserve Bank of India (RBI), and the account was
opened without obtaining the photograph of the
account holder.

 Verification of the address revealed that the firm M/s

Chinubhai Patel & Co., did not exist at that address.

This account was utilised for remittance of $12 million to

Hong Kong in favour of M/s R.P. Imports and Exports,
Hong Kong. The remittances were made on the basis of
fraudulent documents.

It was further discovered that four more fictitious

accounts were created with the same bank. Through
these accounts a total amount of US $80 million, was
transferred from India to Hong Kong.
13) Managerial Autonomy :-
 In February. 2005, the Government of India
has issued a managerial autonomy package
for public sector banks to provide them a
level playing field with private sector banks
in India.

14) Customer Service:-
 In recent years, to improve customer service,
RBI has taken many steps such as :- Credit
Card Facilities, banking ombudsman,
settlement off claims of deceased depositors
etc.
15) Base Rate System Of Interest Rates:-
 In 2003 the system of Benchmark Prime
Lending Rate (BPLR) was introduced to serve
as a benchmark rate for banks pricing of their
loan products so as to ensure that it truly
reflected the actual cost.

 However the BPLR system tell short of its

objective. RBI introduced the system of Base
Rate since 1st July, 2010. The base rate is the
minimum rate for all loans. For banking system
as a whole, the base rates were in the range
of 5.50% - 9.00% as on 13th October, 2010.
 CONCLUSION :- 

 Measures to taken to satisfy the growing

demands from customers for high quality
service, commercial banks will have to find
out new ways and method to face new
challenges as per the development.
 IMPORTANT
NEW
TECHNOLOGIES
INTRODUCED IN
BANKING IN
INDIA.
 NEW TECHNOLOGY IN BANKING :-
 The IT (Information Technology) has changed
the Indian structure of Indian Banking.
Technology has been identified by banks as
an important element in their strategy to
improve productivity and render sufficient
customer service.
 In banking, computerization has taken place
all over the world. The purpose is to bring
technology to the counter and to enable
Employees to have information at their
fingertips. The New technologies that are
being used in banks are :-
ELECTRONIC FUND TRANSFER (EFT)
 It is easy transfer of funds from one place to
another. It enables the beneficiary to receive
money on same day or next day. The
customer can transfer money instantly from
one bank to another, from one bank account
to another or from one branch to other or a
different bank not only within the country
but also anywhere else in t5hre world
through electronic message.
  
CREDIT CARD
 Credit Card (post Card) is a convenient
medium of exchange. With the help of credit
card a customer can purchase goods and
services from authorized outlets without
making immediate cash payments but, within
the prescribed limit.
DEBIT CARD :-

 Debit Card is a prepaid card and it allows

customers anytime anywhere access to his
saving or current account. For using debit card
a PIN (Personal Identification Number) is issued
to customers. Any transaction taking place is
directly debited to the customers bank
account.
PHONE BANKING

 In phone banking a customer can do entire non-

cash related banking services on telephone,
anywhere at any time. He can talk to a phone
banking officer for transacting a banking
business.
TELEBANKING

 Telebanking is a 24 hour
banking facility based on
the voice processing facility
available on bank
computers. Here banking
services or products are
rendered through telephone
to its customers.
 INTERNET BANKING :-
 Internet banking is on-line banking. It is a
product of E–commerce. Internet banking
enables customers to open accounts,
paybills, know account balances, view and
print copies of cheques, stop payments etc.
 MOBILE BANKING :-
 Everybody with a mobile
phone can access banking
services, irrespective of
their location. It is an
extension of Internet
banking. It provides
services like account
balance, mobile alerts
about credit card or debit
card transactions, mini
account statement etc.
POINT OF SALE (POS) :-
 In an online environment the POS
terminal is a machine that facilities
transactions through swipe of a
card.
 ATM:
 .  ATMs:-
 ATMs are emerging as the
most useful tool to ensure
‘any time banking’ and
‘anywhere banking’ or
‘anytime money’. ATMs are
self service vendor machines
that help the banks to provide
round the clock banking
services to their customers at
convenient places without
visiting bank premises. The
customers are provided with
ATM card.
ELECTRONIC CLEARING
SERVICES (ECS) :-
 It is non – paper based movement of funds. It
consists of Electronic Credit Clearing and
Electronic Debit Clearing.
 .  Virtual Banking:-
 It means rendering banking and its related
services through use of IT. Some of the most
important types of virtual banking are :-ATMs,
electronic fund transfer phone – banking, credit
card, debit card, internet banking etc.

 A financial institution that handles all

transactions via the Web, e-mail, mobile check
deposit and ATM machines. By not having the
overhead of physical branches, people expect
a virtual bank to offer higher interest rates on
their accounts.