1.

INDIAN BANK AS PARADIGMS

INTRODUCTION

Commercial banks are institution , which deal with money and credit
primarily for earning profit . These banks occupy a dominant place in the
modern banking structure . They are financial intermediaries , which
perform the dual function of mobilization of deposits and deployment of
surplus funds to the various sectors of the economy . A well developed
commercial banking system is a precondition for the economic development
of the nations.

Commercial banks play a vital role in giving a direction to early the

economy’s development over time by financing the requirements of
agriculture , business and industry . The operations of commercial banks
record the monetary pulse of the economy .

Commercial banks in India consist of 28 state owned banks, 28 private

banks and 29 foreign banks totaling of 85 banks. Apart from these, there are
133 regional banks also. The size, niches and vintages vary from one
another.

The banking business in its oldest form originated in Italy where the early
bankers were called Moneychangers. They used to conduct their money
changing business in streets seated on benches. The word bank originated
from the Italian word ‘banca’ banca means bench. The origin of modern
banker can be traced back to the merchant bankers, moneylenders and
London goldsmith.

The merchants accepted deposits from their clients to carry on their trade;
the moneylenders lend their surplus money to goldsmith , who accepted the
money and other valuables for safe custody. They possessed special facilities
to keep under safe lock and key valuables of many kinds .

A modern commercial banker performs these three functions namely accept

deposits, lend money and safe custody of valuables of customers .
HISTORY OF COMMERCIAL BANKING IN INDIA

The history of commercial banking in India dates back to the establishment

of ‘Bank of Hindoostan’, in 1770, which was a mere appendage of the
former, and it was under the directions of the Europeans. However, this
bank could not survive for long because the failure of the parent firm in
1832. The sholapur bank ltd, started by trading houses also went into the
liquidation in 1818 due to the unwise combinations of banking business with
trading operations by them . Faulty speculations and greedy profit motive by
ignoring the principles of safety of banking operations was the reason for the
failure of the agency houses that also led to collapse of their banking
department .

PRESIDENCY BANKS

“ THE BANK OF CALCUTTA” began its banking business in the year

June 1806. The Government of India did not realize the need for banks till
1809 and in that year , a royal charter re-designated the “ The bank of
Calcutta” as the “ The bank of Bengal” . It was the first joint stock bank of
british India sponsored by the government of Bengal . It was established
with a capital of Rs. 50 lakh, one-fifth of which was contributed by the
government, which shared the privilege of voting and directions. However,
the power to issue currency notes was not given to the bank till 1823. In
1939, the bank was given the power to open branches and to deal in inland
exchange .

GROWTH OF JOINT STOCK COMMERCIAL BANKS

During 1922-48 while the number of joint stock banks increased further and
on there was a simultaneous failure of many banks. Andhra bank ltd (1923) ,
Karnataka bank ltd (1924) , Syndicate bank ltd (1925) , The Federal bank ltd
(1930) , Vijaya bank ltd (1931) , Dhan lakshmi bank ltd (1935) , Bank of
Maharashtra ltd (1936) , Indian overseas bank ltd (1937) , Dena bank ltd
(1938) , Lord Krishna bank ltd (1940) , Oriental bank of commerce ltd
(1943) etc, were established during this period .
FIRST PHASE OF BANKING REFORMS

The primary objective of financial sector reforms was to ensure financial

stability and maintain confidence in the financial system by enhancing its
soundness and efficiency. First phase of financial sector reforms commenced
in the early 1990s, was aimed at creating efficient , productive and profitable
service industries especially the banking sector. Prudential norms and
supervisory strengthening were introduced in the first phase of reform cycle,
followed by interest rate deregulation and gradually lowering of statutory
preemptions .

The prudential norms relating to income recognition, asset classification and

100 % provisioning for all NPA’S was a turning point in the reform process.
The prudential norms introduced during 1992-93 were continuously
monitored and refined to bring them on par with international best standards.
The major objective of banking sector reforms was to enhance efficiency and
productivity through increased competition. Consolidation of banking sector
was another important development of reform process.

Narashimhan committee recommended new private sector banks in order to

enhance the efficiency, productivity and competition in the banking sector .
RBI decided to set up new banks in the private sector in order to enhance the
efficiency, productivity and competition in the banking sector. RBI decided to
set up new banks in the private sector and necessary guidelines were issued in
this connection on January 1993.since 1993,11 new private sector banks and
one public sector banks were set up.

A significant development in the process of banking sector reforms was the

setting up of board for financial supervision in 1994 it consisted of select
members of the RBI board with variety of professional experts to give
direction on a continuing basis on regulatory polices and supervisory
practices.
SECOND PHASE OF BANKING FIRMS

The second phase of reforms, beginning from the second half of 1990s, was
aimed at strengthening of the financial system and introduction of structural
improvements . an important milestone in the process of banking sector
reforms in India was the deregulation of interest rates. The interest on
deposits and advances was deregulated barring certain specific classes such
as saving deposits account, non-resident Indian deposits. Commercial banks
have now the commercial banks have now the freedom to set interest rates
on their deposits subject to minimum floor rates and maximum ceiling rates .

The reforms process also envisaged major changes in the banking sector by
way of reduction in cash reserve ratio and statutory liquidity ratio
requirements, abolition of mass recruitment by banking service recruitment
board (BSRB) and implementation of voluntary retirement scheme (VRS).

The second phase include SLR/ CRR, INTEREST INCOME & EXPENSES,
PRIVATE SECTOR ADVANCES,CAPTAL ADEQUACY various changes
in the banking industry.

• CAPITAL ADEQUACY

The concept of capital adequacy acquired further importance in the

light of the massive defaults faced by the US, French and Italian
bankers from their borrowers. Thus in 1988, the committee decided
to introduce a capital measurement system known as the BASEL
Capital accord. Minimum capital adequacy standard gained wide
acceptance internationally and the countries are now moving
towards the adoption of the new capital accord.

• SLR (Statutory liquidity ratio ) :

The SLR has been maintained by the banks to impose secondary

reserve requirements. The objective of statutory reserve is to
restrict the expansion of bank credit, to encourage the banks to
invest in government securities and to ensure solvency of banks.
 • CRR (Cash reserve ratio ) :

The banks have to keep a fraction of their deposit liabilities in the

form of liquid cash. The authorities used to change this fraction
mainly for the purpose of ensuring the safety and liquidity of
deposits .

AGENDA FOR THIRD PHASE REFORMS

The reforms measures had a profound impact on the financial landscape in

,recent years. The changes staring in the face of bankers relate to the