Banking in India- history

Banking in India in the modern sense originated in the last decades of the 18th
century. The largest bank, and the oldest still in existence, is the State Bank of
India, which originated in the Bank of Calcutta in June 1806, which almost
immediately became the Bank of Bengal. This was one of the three presidency
banks, the other two being the Bank of Bombay and the Bank of Madras, all three
of which were established under charters from the British East India Company. The
three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India in 1955. For many years the
presidency banks acted as quasi-central banks, as did their successors, until the
Reserve Bank of India was established in 1935.

In 1969 the Indian government nationalized all the major banks that it did not
already own and these have remained under government ownership. They are run
under a structure known as 'profit-making public sector undertaking' (PSU) and are
allowed to compete and operate as commercial banks. The Indian banking sector is
made up of four types of banks, as well as the PSUs and the state banks, they have
been joined since the 1990s by new private commercial banks and a number of
foreign banks.
Generally banking in India was fairly mature in terms of supply, product range and
reach-even though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this through the State Bank of
India expanding its branch network and through the National Bank for Agriculture
and Rural Development with things like microfinance.

Colonial era
During the period of British rule merchants established the Union Bank of Calcutta
in 1829, first as a private joint stock association, then partnership. Its proprietors
were the owners of the earlier Commercial Bank and the Calcutta Bank, who by
mutual consent created Union Bank to replace these two banks. In 1840 it
established an agency at Singapore, and closed the one at Mirzapore that it had
opened in the previous year. Also in 1840 the Bank revealed that it had been the
subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845
but failed in 1848, having been insolvent for some time and having used new
money from depositors to pay its dividends.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest
Joint Stock bank in India, it was not the first though. That honour belongs to the
Bank of Upper India, which was established in 1863, and which survived until
1913, when it failed, with some of its assets and liabilities being transferred to the
Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The
Comptoird'Escompte de Paris opened a branch in Calcutta in 1860, and another in
Bombay in 1862; branches in Madras and Pondicherry, then a French possession,
followed. HSBC established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire, and so became
a banking centre.

Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and
West Bengal, paralysing banking activities for months. India's independence
marked the end of a regime of the Laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in

1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The
major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was
established in April 1935, but was nationalised on 1 January 1949 under the
terms of the Reserve Bank of India (Transfer to Public Ownership) Act,
1948 (RBI, 2005b).
In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in
India".
Nationalization in the 1960s
Despite the provisions, control and regulations of the Reserve Bank of India, banks
in India except the State Bank of India (SBI), continued to be owned and operated
by private persons. By the 1960s, the Indian banking industry had become an
important tool to facilitate the development of the Indian economy. At the same
time, it had emerged as a large employer, and a debate had ensued about the
nationalization of the banking industry. Indira Gandhi, the then Prime Minister of
India, expressed the intention of the Government of India in the annual conference
of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization.The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance, 1969') and nationalised the 14 largest commercial banks with effect
from the midnight of 19 July 1969. These banks contained 85 percent of bank
deposits in the country. Jayaprakash Narayan, a national leader of India, described
the step as a "masterstroke of political sagacity." Within two weeks of the issue of
the ordinance, the Parliament passed the Banking Companies (Acquisition and
Transfer of Undertaking) Bill, and it received the presidential approval on 9 August
1969.

A second dose of nationalisation of 6 more commercial banks followed in 1980.

The stated reason for the nationalisation was to give the government more control
of credit delivery. With the second dose of nationalisation, the Government of India
controlled around 91% of the banking business of India. Later on, in the year 1993,
the government merged New Bank of India with Punjab National Bank.[8] It was
the only merger between nationalised banks and resulted in the reduction of the
number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth rate
of the Indian economy.

Liberalization in the 1990s

In the early 1990s, the then government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such
new generation banks to be set up), which later amalgamated with Oriental Bank
of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC
Bank. This move, along with the rapid growth in the economy of India, revitalised
the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation
in the norms for foreign direct investment, where all foreign investors in banks
may be given voting rights which could exceed the present cap of 10% at present.
It has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 464 method (borrow at 4%; lend at 6%; go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods
of working for traditional banks. All this led to the retail boom in India. People
demanded more from their banks and received more.

Current period
All banks which are included in the Second Schedule to the Reserve Bank of India
Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial
Banks and Scheduled Co-operative Banks. Scheduled Commercial Banks in India
are categorised into five different groups according to their ownership and/or
nature of operation. These bank groups are:
State Bank of India and its Associates
Nationalised Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks.
In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalised
Banks. Scheduled Co-operative Banks consist of Scheduled State Co-operative
Banks and Scheduled Urban Cooperative Banks.
Adoption of banking technology
The evolution has had a great impact on the Indian banking system. The use of
computers has led to the introduction of online banking in India. The use of
computers in the banking sector in India has increased many fold after the
economic liberalisation of 1991 as the country's banking sector has been exposed
to the world's market. Indian banks were finding it difficult to compete with the
international banks in terms of customer service, without the use of information
technology.
The RBI set up a number of committees to define and co-ordinate banking
technology. These have included:

 In 1984 was formed the Committee on Mechanisation in the Banking

Industry (1984)[13] whose chairman was Dr. C Rangarajan, Deputy Governor,
Reserve Bank of India. The major recommendations of this committee were
introducing MICR technology in all the banks in the metropolises in India.[14]
This provided for the use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988)
[15]
headed by Dr. C Rangarajan. It emphasized that settlement operation
must be computerized in the clearing houses of RBI in Bhubaneshwar,
Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there
should be National Clearing of inter-city cheques at Kolkata, Mumbai,
Delhi, Chennai and MICR should be made operational. It also focused on
computerisation of branches and increasing connectivity [16]
In 1994, the Committee on Technology Issues relating to Payment systems,
Cheque Clearing and Securities Settlement in the Banking Industry (1994)[17]
was set up under Chairman W S Saraf. It emphasized Electronic Funds
Transfer (EFT) system, with the BANKNET communications network as its
carrier. It also said that MICR clearing should be set up in all branches of all
those banks with more than 100 branches.
In 1995, the Committee for proposing Legislation on Electronic Funds
Transfer and other Electronic Payments (1995)[18] again emphasized EFT
system.[16]

 Types of Banks in India:

Savings banks
The savings banks are especially for those who belong to the low income groups or
those who are salaried. The savings banks function with the intention to help
people culminate the saving habits, which is especially for those who belong to the
lower income groups or those who are salaried. The post office is also in a way a
saving bank, where people can open recurring accounts to save money.

Commercial Banks

The main function of these types of banks is to give financial services to the
entrepreneurs and businesses. It gives financial to the businessmen like providing
them with debit cards, banks accounts, short term deposits, etc. with the money
deposited by people in such banks. The commercial banks also lend money to these
businessmen in the form of secured loans, unsecured loans, credit cards, overdrafts
and mortgage loans. It got the tag of a nationalized bank in the year 1969 and
hence the various policies regarding the loans, rates of interest, etc are controlled
by
the
Reserve
Banks
of
India.
The further classifications of the commercial banks are private sector banks, public
sector banks, regional banks and foreign banks.

Private Sector Banks

These banks are owned and operated by the private institutes and are controlled by
the market forces. The greater share of the private sector banks is held by private
players and not the government. Some good example of Private sector banks are
Kotak Mahindra bank, ICICI Bank, HDFC Bank, Axis Bank, etc.

Public Sector Banks

These type of banks are operated by the Government. Their main focus is to serve
the people rather earn profits. State bank of India, Punjab National bank, State
bank of Patiala, Allahabad Bank, etc. are the some of the important examples of
Public sector bank.
Regional Banks
The regional banks are those banks which can only operate in the areas specified
by government of India. These banks are owned by sponsor bank and Sate
Government. They came into operation with the objective of providing credit to the
agricultural and rural regions and were brought into effect in 1975 by the Reserve
Bank of India (RRB) Act .Prathama Bank located in Moradabad, UP is one such
example of regional rural bank.

Co-operative Banks

The co-operative sector is very much useful for rural people and provide finance to
farmers, salaried people, small scale industries, etc. These banks are controlled,
owned, managed and operated by the cooperative societies and came into existence
under
Cooperative
Societies
Act
in
1912.
The co-operative banking sector is divided into the following categories.

1. State co-operative Banks

2. Central co-operative banks
3. Primary Agriculture Credit Societies

Investment Banks:
Investment banks are financial institutions which provide financial assistance to its
customers. Their clients include government organizations, individuals or
businesses. When there is an acquisition or merger, these customers are provided
with necessary support like foreign exchange, foreign trading, marketing, sale of
equities, fixed income instruments, etc. These banks, apart from capital raising,
also render valuable financial advise to their various kinds of businesses and
customers. Banks like the Bank of America, Deutsche Bank, Citi Bank, etc. are
some examples of Investment Bank.
Specialized Banks:
The main function of specialized banks is to provide unique services to their
customers. Some example of specialized banks are foreign exchange banks,
industrial banks, development banks, export import banks, etc. Specialized banks
also provide financial support to various kinds of projects and businesses who have
to
export
or
import
their
services
or
goods.

Central Bank:

It is called the banker's bank in our country. The Reserve Bank of India is the
central Bank that is fully owned by the Government. It is governed by a central
board (headed by a Governor) appointed by the Central Government. It issues
guidelines for the functioning of all banks operating within the country. The
monetary control is the primary function of a central bank and is also considered as
the lender to various commercial banks.

 What is RTGS System?

The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined
as the continuous real-time settlement of funds transfers individually on an order
by order basis . 'Real Time' means the processing of instructions at the time they
are received rather than at some later time; 'Gross Settlement' means the settlement
of funds transfer instructions occurs individually . Considering that the funds
settlement takes place in the books of the Reserve Bank of India, the payments are
final and irrevocable.

How RTGS is different from National Electronics Funds Transfer System

(NEFT)?
NEFT is an electronic fund transfer system that operates on a Deferred Net
Settlement (DNS) basis which settles transactions in batches. In DNS, the
settlement takes place with all transactions received till the particular cut-off time.
These transactions are netted (payable and receivables) in NEFT whereas in RTGS
the transactions are settled individually Any transaction initiated after a designated
settlement time would have to wait till the next designated settlement time
Contrary to this, in the RTGS transactions are processed continuously throughout
the RTGS business hours.

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) NEFT is electronic funds transfer
system, which facilitates transfer of funds to other bank accounts in over 63000
bank branches across the country. This is a simple, secure, safe, fastest and cost
effective way to transfer funds especially for Retail remittances.

FEATURES & BENEFITS

Customers can remit any amount using NEFT Customer intending to remit money
through NEFT has to furnish the following particulars:
IFSC (Indian Financial System Code) of the beneficiary Bank/Branch
Full account number of the beneficiary
Name of the beneficiary.
The facility is also available through online mode for all internet banking and
mobile banking customers.
For corporate customers, bulk upload facility is also available at branches.

TIMINGS
Customers can use this facility between 8 AM and 7 PM on all weekdays and
between 8 AM and 1 PM on Saturday. There are twelve hourly settlements between
8 AM and 7 PM on all weekdays and six hourly settlements between 8 AM and 1
PM on Saturdays.

The money will be credited to the beneficiarys account on the same day or at the
most next day in case the message is sent during the last batch of settlement. Union
Bank offers NEFT facility to its customers through all its branches.

The role of the Investment Bank:

Investment banks provide four primary types of services: raising capital, advising
in mergers and acquisitions, executing securities sales and trading, and performing
general advisory services. Most of the major Wall Street firms are active in each of
these categories. Smaller investment banks may specialize in two or three of these
categories.

Raising Capital:
An investment bank can assist a firm in raising funds to achieve a variety of
objectives, such as to acquire another company, reduce its debt load, expand
existing operations, or for specific project financing. Capital can include some
combination of debt, common equity, preferred equity, and hybrid securities such
as convertible debt or debt with warrants. Although many people associate raising
capital with public stock offerings, a great deal of capital is actually raised through

private placements with institutions, specialized investment funds, and private

individuals. The investment bank will work with the client to structure the
transaction to meet specific objectives while being attractive to investors.

Mergers and Acquisitions:

Investment banks often represent firms in mergers, acquisitions, and divestitures.
Example projects include the acquisition of a specific firm, the sale of a company
or a subsidiary of the company, and assistance in identifying, structuring, and
executing a merger or joint venture. In each case, the investment bank should
provide a thorough analysis of the entity bought or sold, as well as a valuation
range and recommended structure.

Sales and Trading:

These services are primarily relevant only to publicly traded firms, or firms which
plan to go public in the near future. Specific functions include making a market in
a stock, placing new offerings, and publishing research reports.

General Advisory Services:

Advisory services include assignments such as strategic planning, business
valuations, assisting in financial restructurings, and providing an opinion as to the
fairness of a proposed transaction.

Different Services offered under Investment Banking :

Investment banking is a service business, and the client should expect top-notch
service from the investment banking firm. Generally only large client firms will get
this type of service from the major Wall Street investment banks; companies with
less than about $100 million in revenues are better served by smaller investment
banks. Some criteria to consider include:
Services Offered
For all functions except sales and trading, the services should go well beyond
simply making introductions, or "brokering" a transaction. For example, most
projects will include detailed industry and financial analysis, preparation of
relevant documentation such as an offering memorandum or presentation to the
Board of Directors, assistance with due diligence, negotiating the terms of the
transaction, coordinating legal, accounting, and other advisors, and generally
assisting in all phases of the project to ensure successful completion.
Experience :
It extremely important to make sure that experienced, senior members of the
investment banking firm will be active in the project on a day-to-day basis.
Depending on the type of transaction, it may be preferable to work with an
investment bank that has some background in your specific industry segment. The
investment bank should have a wide network of relevant contacts, such as potential
investors or companies that could be approached for acquisition.
Record of Success :
Although no reputable investment bank will guarantee success, the firm must have
a demonstrated record of closing transactions.
Ability to Work Quickly :

Often, investment banking projects have very specific deadlines, for example when
bidding on a company that is for sale. The investment bank must be willing and
able to put the right people on the project and work diligently to meet critical
deadlines.
Fee Structure:
Generally, an investment bank will charge an initial retainer fee, which may be
one-time or monthly, with the majority of the fee contingent upon successful
completion of the transaction. It is important to utilize a fee structure that aligns the
investment bank's incentive with your own.

Ongoing Support:
Having worked on a transaction for your company, the investment bank will be
intimately familiar with your business. After the transaction, a good investment
bank should become a trusted business advisor that can be called upon informally
for advice and support on an ongoing basis.
Because investment banks are intermediaries, and generally not providers of
capital, some executives elect to execute transactions without an investment bank
in order to avoid the fees. However, an experienced, quality investment bank adds
significant cant value to a transaction and can pay for its fee many times over.
The investment banker has a vested interest in making sure the transaction closes,
that the project is completed in an efficient time frame, and with terms that provide
maximum value to the client. At the same time, the client is able to focus on
running the business, rather than on the day-to-day details of the transaction,
knowing that the transaction is being handled by individuals with experience in
executing similar projects.

 Corporate Banking and the services provided under it :

Corporate banking typically refers to financial services offered to large clients
('wholesale clients').Although many wholesale clients are large corporations, they
may also include other institutions like pension funds, governments and other
(semi-) public entities. Corporate banking is a very profitable division for banks,
far more profitable than retail banking, which is aimed towards households and
small and medium enterprises (SME's)

The Services provided:

The services offered by corporate divisions of banks include (a) general activities,
and (b) services particularly tailored to large clients such as multinational
companies.
(a): Commercial banking activities include traditional banking services like deposit
taking, lending, lines of credit, and facilitation of various kinds of financial
transactions (e-banking, credit cards, etc.). Households and small and medium
enterprises (SME's) also rely on this range of services for their financial needs. (b):
For wholesale clients, however, many additional financial services are available,
such as:
International Transactions :
International banking services include trade financing and foreign exchange
transactions. Banks also offer services to protect firms against currency and price
fluctuations. For large infrastructure and other projects, banks offer specific loans
which are repaid based on the revenue generated by that project. For some large
and potentially risky projects, the bank can arrange a banking syndicate, wherein a
group of banks each lend a client a portion of a large loan. Project finance can also
include the sale of project-specific bonds.


Insurance:
Banks may also sell insurance products, although insurance is traditionally not a
banking activity. Again, consolidation in the financial services industry has brought
together many different financial services. These services allow corporate clients to
access many different services within a single financial institution. While banks
may also offer retail insurance products to individuals, corporate insurance may
cover company activities, staff and management.
Advisory services:
Wholesale banking activities also include financial advising for all kinds of
corporate and financial activities, such as mergers and acquisitions, asset
management, and taxation (e.g. the use of tax havens).

Types of Instruments in Investment Banking:

Certificates of Deposit
Most commercial banks offer certificates of deposit that pay a fixed amount
of money for six months, one year or another designated time period. You
earn interest on the CDs and your investment is protected. According to the
U.S. Securities and Exchange Commission, CDs have federal deposit
insurance up to $250,000, but that amount is subject to change. The
advantage of CDs is that you are guaranteed an income in almost all cases.
One of the disadvantages it that if you withdraw early you might have to pay
a penalty. Also, the returns on CDs tend to lag well below other types of
investments.
Treasury Securities

 Treasury securities issued by the U.S. government are debt instruments that
pay varying levels of interest, over varying time periods. The types of
securities that the government issues include floating rate notes, Treasury
bills and Treasury bonds. Each type of security has its own characteristics,
making it easier for you to find an instrument that matches your return
requirements. For instance, Treasury bonds can have lengthy maturity
periods such as 30 years, while other securities have maturities of five years
or less. The advantage of Treasury securities is that they are usually easy to
sell on the secondary market, but they typically pay a low rate of interest
relative to other financial instruments.

Bonds
Public and private entities issue bonds, which are either secured by collateral
or unsecured and pay varying amounts of interest. For instance, timeshare
companies often issue bonds secured by timeshare mortgages. These are
known as asset-backed securities. Bonds typically sell for a premium or a
discount, impacting the effective interest that you earn. Bonds also come
with a rating that differs by the agency rating the bonds. Investing in
corporate bonds always comes with risk, but bonds with low ratings and
high interest rates tend to be the riskiest. Bonds are advantageous because
they typically pay higher rates of interest relative to treasury securities. But
there is also a higher risk of default, which is a distinct disadvantage.
Equity Securities
If youre looking to invest in equity securities, you can buy common shares
or preferred shares of a companys stock. When you buy shares, youre
buying an ownership stake in a company. Some common shares pay a
dividend, while others do not. Preferred shares typically pay a fixed amount
to shareholders, making them more like a debt instrument as opposed to an
equity security. Both publicly traded and privately held corporations issue
stock, but only a publicly traded company's shares are available to the public
on a regular basis. The price of a stock is subject to varying levels of

volatility, due to factors ranging from economic stability to the

competitiveness of a company in the marketplace. Newly list companies
with short track records and stiff competition tend to experience high price
volatility.