Commercial banking in India

Prof.b.p.mishra
XIMB

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 Banking Sector in India
The first bank in India was established in 1770. From
1770 till today, the journey of Indian Banking System
can be segregated into three distinct phases.
Early phase from 1770 to 1969 of Indian
Banks..Phase I
Nationalisation of Indian Banks in 1969 and up to
1991 prior to Indian banking sector Reforms....Phase
II
New phase of Indian Banking System with the advent
of Indian Financial & Banking Sector Reforms after
1991....Phase III
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 Banking Sector Reforms in India
Bank of Hindustan was the first bank to be established in
India, in 1770.
The General Bank of India was set up in the year 1786.
The East India Company established Bank of Bengal (1806),
Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three
banks were amalgamated in 1921 and Imperial Bank of India
was established which started as private shareholders banks,
mostly Europeans shareholders.
Which in turn became the State Bank of India
in 1955.

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 Banking Sector Reforms in India
In 1865 Allahabad Bank was established and first
time exclusively by Indians
Punjab National Bank Ltd. was set up in 1894 with
headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank, Indian Bank,
and Bank of Mysore were set up.

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 RBI Act 1934
RBI Act 1934. Reserve Bank of India came in
1935. Main function as per statute usually
known as traditional functions of a central
bank .. issue of currency, banker / debt
manager to the government , banker to the
banks.

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 The Reserve Bank of India Act 1934
The Second Schedule of RBI Act 1934 contains a list
of Scheduled Banks.
They have to maintain CRR (Sec 42) and SLR (Sec 24).
This Schedule contains Commercial Banks, Certain
Categories of Cooperative Banks and Regional Rural
Banks
It is the discretion of RBI to select Banks in this
schedule.
The scheduled banks are more regulated as against
the non scheduled banks.

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 Banking Sector Reforms in India
Reserve Bank of India was vested with
extensive powers for the supervision of
banking in India as the Central Banking
Authority.
Government of India came up with The
Banking Companies Act, 1949 which was later
changed to Banking Regulation Act 1949 as
per amending Act of 1965 (Act No. 23 of
1965).

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 Indian Law.The Banking Regulation (BR) Act, 1949

Banking is defined as
the accepting, for the purpose of
lending or investment, of deposits of
money from the public, repayable on
demand

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 Definition of banking
as per provisions of BR ACT,1949
The Banking Regulation Act 1949 defines 'Banking as
accepting for the purpose of lending or investment of
deposits of money from the public, repayable on
demand or otherwise and withdrawal by cheque , draft
order or otherwise (Section 5b) and says that any
company which transacts the business of banking is a
'Banking Company' (Section 5c). It further stipulates that
a company which carries the business of banking in India
must use the words, 'Bank, Banker, Banking or Banking
Company' as a part of its name.
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 BR ACT,1949
The subscribed capital of the company should not be less
than one half of the authorized capital, the paid up capital
should not be less than one half of the subscribed capital.
Voting Rights of any shareholder not to exceed 10 % of the
total voting rights.
Empowers RBI to issue license to a company to carry on
banking business in India.RBI can also cancel such license.
Without obtaining prior permission from RBI no banking
company shall open a new place of business in India or
change (otherwise than within the same city, town ,
village)the location of an existing place of business situated in
India. 10
 Banking Sector Reforms in India
1949 : Enactment of Banking Regulation Act.
1955 : State Bank of India (Earlier Imperial Bank Of
India)was given legal recognition in terms off an Act of
the Parliament of India,
1959 : Nationalisation of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with deposits over
200 crore.
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 Banking Sector Reforms in India

This phase has introduced many more

products and facilities in the banking sector in
its reforms measure.
In 1991, under the chairmanship of M
Narasimham, a committee was set up by his
name which worked for the liberalisation of
banking practices.

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 Banking Sector Reforms in India

Narasimham Committee I (1991).

Narasimham Committee II (1998).
1.Competition Enhancing Measures
2.Measures enhancing role of market forces

3.Prudential measures

4. Institutional and legal measures

5. Supervisory Measures
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 Types of reform measures for the
banking sector
1.Competition Enhancing Measures
Allowing operational autonomy and reduction of public
ownership in public sector banks by raising capital from
equity market up to 49 percent of paid up capital.
Transparent norms for entry of Indian private sector banks,
foreign banks and joint venture banks.
Permission for foreign investment in the financial sector
through foreign direct investment (FDI) as well as portfolio
investment.

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 Contd.
The banks are allowed to diversify product
portfolio and business activities.
Roadmap for foreign banks and guidelines for
mergers and amalgamation of private sector
banks with other banks and NBFCs.
Instructions and guidelines on ownership and
governance in private sector banks.

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 2.Measures enhancing role of market
forces
Reduction in pre-emption through reserve requirement,
market determined pricing for Govt. securities, disbanding
of administered interest rates and enhanced transparency
and disclosure norms to facilitate market discipline.

Introduction of auction-based repos and reverse repos for

short term liquidity management, facilitation of improved
payments and settlement mechanism.

Significant advancement in dematerialization and markets

for securitized assets are being developed.
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 3.Prudential measures

Introduction of international best practices

norms on capital to risk asset ratio (CRAR)
requirement, accounting, income
recognition, provisioning and exposure.

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 3.Prudential measures
Measures to strengthen risk management though
recognition of different component of risk,
assignment of risk weights to various asset
classes, norms of connected lending, risk
concentration, application of marked to market
principle for investment portfolio limits on
deployment of fund in sensitive activities.

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 3.Prudential measures
Introduction of capital charge for market risk,
higher graded provisioning for NPAs, guidelines for
ownership and governance, securitization and debt
restructuring mechanism norms, etc.

Introduction and roadmap for implementation of

Basel II by 31 March 2007.

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4. Institutional and legal measures
Setting up of debt recovery tribunals, asset
reconstruction companies, settlement advisory
committees, corporate debt reconstructing
mechanism, Lok-Adalat (peoples court), etc. for
quick recovery of debts.
Promulgation of Securitization and Reconstruction of
Financial Assets and Enforcement of Securities
Interest (SARFAESI) Act, 2002 and its subsequent
amendment to ensure creditor rights.
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 Setting up of Clearing Corporation of India Limited
(CCIL) to act as a counter party for facilitating
payment and settlement system relating to fixed
income securities and money market instruments.
Setting up of Credit Information Bureau of India
Limited (CIBIL) for information sharing on defaulters
as also other borrowers.

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 5.Supervisory measures
Establishment of Board of Financial Supervision as
the apex supervisory authority for commercial banks,
financial institutions and non-banking financial
companies.
Move towards risk based supervision, consolidated
supervision of conglomerates, strengthening of off-
site surveillance through control returns.Annual
Financial Inspection

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 Recasting of the role of statutory auditors,
increased internal control through
strengthening of internal audit.
Strengthening corporate governance,
enhance due diligence on important
shareholders, fit and proper test for directors.

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 NARASIMHAN COMMITTEE

ENTRY OF PRIVATE BANKS- 92-93

PROGRESIVE REDUCTION OF CRR /SLR
MARKET RELATED GOVT BORROWING
FIXATION OF CAPITAL ADEQUACY NORMS-
8% (92-93) /9% 98-99 )
ACCOUNTING INTL LEVEL
ASSET CLASSIFICATION & INCOME RECOGNITION
SPECIAL DEBT RECOVERY TERMINAL
REORGANISATION OF BANKING INDUSTRY

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 Commercial Banking System..India

Scheduled Banks

Scheduled Commercial
Banks(157) Scheduled Co-operative
Banks(53)

Public Urban State

Private Sector Foreign Regional
Sector Bank Bank Rural Bank Co-operative Co-operative
Bank Bank Bank
24(16+8) 26 43 64
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TRENDS IN BANKING in India since 1991

DEREGULATION

DIVERSIFICATION

TECHNOLOGY APPLICATION

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 DEREGULATION:
INTEREST RATE

NO DISTINCTION BETWEEN Commercial Banks

& OTHER FINANCIAL INTERMEDIARIES

LOWERING ENTRY BARRIERS

(300 cr/2002, 25USD MILLION )

TOWARDS UNIVERSAL BANKING

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EFFECTS ON BANKS
RAISE CAPITAL

TRADITIONAL INCOME DECLINED

MORE RISK TAKING BUSINESS

CUT COST

ENTER NEW BUSINESS AREA

MERGER OF BANKS TO RAISE SCALE ECONOMIES

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 DIVERSIFICATION

BANCASSURANCE- CORPORATE AGENT

SECURITIES TRADING
MUTUAL FUND
SECURITISATION
VENTURE FUNDING
PE FUNDING

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 SPREAD OF SYSTEMIC RISK

RISK OF MULTIPLE
GEARING

NEW RISK ADDED TO EXISTING RISK

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BASEL COMMITTEE ON BANKING SUPERVISION
INTERNATIONAL ORGANIZATION OF SECURITIES
COMMISSION
INTERNATIONAL ASSOCIATION FOR INSURANCE
SUPERVISORS

JOINT FORUM REPORT (1999)

SUPERVISION OF FINANCIAL CONGLOMERATES

GUIDELINES FOR REGULATORS TO DETECT MULTIPLE GEARING &

INFORMATION SHARING

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FATF- FINANCIAL ACTION TASK FORCE-G 10- 1989
MONEY LAUNDERING
(G-10 CENTRAL BANKS)

ISSUE OF e-MONEY & PAYMENT SECURITY RELATED TO

MONEY LAUNDERING.

COMMITTEE ON PAYMENT & SETTLEMENT SYSTEM

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 TECHNOLOGY

A.PRODUCTS OFFERED
B.DELIVERY CHANNELS
C.CHANGE IN MARKET STRUCTURE
D.ELECTRONIC TRADING SYSTEM

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CUSTOMER IMPERATIVES

KEEP YOUR CUSTOMERS HAPPY & SURVIVE

Channel improvement
Service accessibility
Customer Serviceability
Data privacy and security
Simplified Banking

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 Financial Inclusion
Segmented banking:
Please refer to RBI press release of NOV.27,15
for both.
Small Finance banks-10
(https://rbi.org.in/scripts/BS_PressReleaseDispla
y.aspx?prid=32614)
Payments banks-11
(https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32615)

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 On-tap Banking license
Promoting private banks but Cautiously:
RBI proposes granting on- tap banking licences to Individuals,
Groups or entities and corporates.

For a business house to apply for a Universal Bank Licence,

its 60% income should come from financial services.

A corporate entity should also have a minimum asset size of

Rs 5000 cr and a successful track record of at least 10 years.

A corporate has to float the bank through a

non-operative financial holding company(NOFHC).

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 On-tap Banking license
NBFCs having a track record of at least 10 years can
either convert themselves in to a bank or promote a
new bank.
If found fit and proper for the licence, the minimum
capital required to float a bank is Rs500 crore .
The lender needs to maintain a minimum net worth
of Rs 500 crore at all times.
Foreign holding not to exceed 49%

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 NOFHC
The holding company can carry out other commercial, industrial,
and financial activities but none of them should overlap each
others activities i.e. separate activities can be carried under one
umbrella but must not encroach upon the functions of one
another
NOFHC will have to follow a separate set of Corporate
Governance Rules and registered with RBI
Let us not forget that some of the developed countries in the
world like Canada, UK, Australia, and Germany have allowed the
conversion of industrial houses into banks under close
observance of strict regulations and have attained successes
whereas such a practice has not given fruitful results in countries
like Brazil and many others. The Guidelines have taken extra care

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 Indradhanush-I
Bank Appointments:
MDs & Non-Executive Chairman can be Outsiders
Banks Board Bureau-
BBB begins functioning from April,1, 2016 with
Ex Cag Vinod Rai as Chairman
To come up with mechanism for resolution of NPA in Banks
Capitalization:
Rs25,000 crores allocated to PSBs in fy16.
Additional rs25,000 crore to be infused in Fy17,
followed by Rs 10,000 crore in fy18,fy19.
FM has promised additional capital allocation, if needed.
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DE-STRESSING PSBs:

Imposed anti-dumping duty and minimum import

price on steel
Launched UDAY to bailout power Discoms
Action on textiles and further action on steel
being planned
CONSOLIDATION
SBI is to merge with itself 5 Associates and BMB

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 Indradhanush-II
FOCUS AREAS:

o Moving from just recgnizing NPAs to setting up

resolution mechanism-S4A
(Scheme for Sustainable Structuring of Stressed Assets )
o Risk analysis strategies and Risk management practices
o Financial Inclusion and expansion of Digital banking
o Credit Growth & use of Modern Technology
o Further push to restructuring as well as M&As
o Creating Bank Investment company(BIC)
o A holding company for PSBs
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 Banking Code and Standards Board of
India(BCSBI)

BCSBI is an independent and autonomous institution

to monitor and ensure that the Banking Codes and
Standards adopted by the banks are adhered to in true
spirit while delivering their services.

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 The Charter of Customer Rights
The Charter of Customer Rights outlines overarching
principles of customer rights based on global best
practices. The five rights for bank customers according
to this Charter are:

Right to Fair Treatment

Right to Transparency, Fair and Honest Dealing
Right to Suitability
Right to Privacy
Right to Grievances Redressal and Compensation

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thanks

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