Banking in India
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 defunct.
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 know 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 1990s by new private
commercial banks and a number of foreign banks.
Banking in India was generally
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.
History
In ancient India there is
evidence of loans from the Vedic period (beginning 1750 BC). Later during the Maurya
dynasty (321 to 185 BC), an instrument called “adesha” was in use, which was an
order on a banker desiring him to pay the money of the note to a third person,
which corresponds to the definition of a bill of exchange as we understand it
today. During the Buddhist period, there was considerable use of these
instruments. Merchants in large towns gave letters of credit to one another.
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 Comptoir d'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.
The first entirely Indian joint
stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It
failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in
India.
Around the turn of the 20th
Century, the Indian economy was passing through a relative period of stability.
Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious communities.
The presidency banks dominated
banking in India but there were also some exchange banks and a number of Indian
joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on
financing foreign trade. Indian joint stock banks were generally under
capitalised and lacked the experience and maturity to compete with the
presidency and exchange banks. This segmentation let Lord Curzon to observe, "In
respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and
cumbersome compartments."
The period between 1906 and 1911,
saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi
movement inspired local businessmen and political figures to found banks of and
for the Indian community. A number of banks established then have survived to
the present such as Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement
lead to establishing of many private banks in Dakshina Kannada and Udupi
district which were unified earlier and known by the name South Canara (
South Kanara ) district. Four nationalised banks started in this district and
also a leading private sector bank. Hence undivided Dakshina Kannada district
is known as "Cradle of Indian Banking".
During the First World War
(1914–1918) through the end of the Second World War (1939–1945), and two years
thereafter until the independence of India were challenging for Indian banking.
The years of the First World War were turbulent, and it took its toll with
banks simply collapsing despite the Indian economy gaining indirect boost due
to war-related economic activities. At least 94 banks in India failed between
1913 and 1918 as indicated in the following table:
Years
|
Number of banks
that failed
|
Authorised
capital
(Rs. Lakhs)
|
Paid-up Capital
(Rs. Lakhs)
|
1913
|
12
|
274
|
35
|
1914
|
42
|
710
|
109
|
1915
|
11
|
56
|
5
|
1916
|
13
|
231
|
4
|
1917
|
9
|
76
|
25
|
1918
|
7
|
209
|
1
|
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".
The Banking Regulation Act also provided that
no new bank or branch of an existing bank could be opened without a
license from the RBI, and no two banks could have common directors.
Nationalisation in the 1960s
Despite the provisions, control
and regulations of Reserve Bank of India, banks in India except the State Bank
of India or 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 nationalisation 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
Nationalisation" 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. 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
Liberalisation in the 1990s
In the early 1990s, the then
government embarked on a policy of liberalisation, 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 4–6–4
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 not just demanded more
from their banks but also received more.
Current period
By 2010, banking in India was
generally fairly mature in terms of supply, product range and reach-even though
reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to
other banks in comparable economies in its region. The Reserve Bank of India is
an autonomous body, with minimal pressure from the government. The stated
policy of the Bank on the Indian Rupee is to manage volatility but without any
fixed exchange rate-and this has mostly been true.
With the growth in the Indian
economy expected to be strong for quite some time-especially in its services
sector-the demand for banking services, especially retail banking, mortgages
and investment services are expected to be strong. One may also expect
M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank
of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a
private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI announced
norms in 2005 that any stake exceeding 5% in the private sector banks would
need to be vetted by them.
In recent years critics have
charged that the non-government owned banks are too aggressive in their loan
recovery efforts in connexion with housing, vehicle and personal loans. There
are press reports that the banks' loan recovery efforts have driven defaulting
borrowers to suicide.
Adoption of banking technology
The IT revolution had a great
impact in the Indian banking system. The use of computers had led to
introduction of online banking in India. The use of the modern innovation and
computerisation of the banking sector of 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. The Indian banks were finding it difficult to
compete with the international banks in terms of the customer service without
the use of the information technology and computers.
Number of
branches of scheduled banks of India as of March 2005
The RBI set up a number of
committees to define and co-ordinate banking technology. These have included:
In 1984 formed the Committee on Mechanisation
in the Banking Industry (1984) whose chairman was Dr C Rangarajan, Deputy
Governor, Reserve Bank of India. The major recommendations of this committee
was introducing MICR technology in all the banks in the metropolis in
India. This provided use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on
Computerisation in Banks (1988) headed by Dr. C.R. Rangarajan which
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
among branches through computers. It also suggested modalities for
implementing on-line banking. The committee submitted its reports in 1989
and computerisation began from 1993 with the settlement between IBA and bank
employees' association.
In 1994, Committee on Technology Issues
relating to Payment systems, Cheque Clearing and Securities Settlement in
the Banking Industry (1994) was set up under chairman Shri WS 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 banks with more than 100 branches.
In 1995, Committee for proposing Legislation
on Electronic Funds Transfer and other Electronic Payments (1995) again
emphasized EFT system.
Number of ATMs of
different Scheduled Commercial Banks of India as on end March 2005
Total numbers of ATMs installed
in India by various banks as on end June 2012 is 99,218. The New Private Sector
Banks in India is having the largest numbers of ATMs which is followed by
off-site ATMs belonging to SBI and its subsidiaries and then it is followed by
New Private Banks, Nationalised banks and Foreign banks. While on site is
highest for the Nationalised banks of India.
Branches and ATMs
of Scheduled Commercial Banks as on end March 2005
|
Bank type
|
Number of
branches
|
On-site ATMs
|
Off-site ATMs
|
Total ATMs
|
Nationalised banks
|
33627
|
3205
|
1567
|
4772
|
States bank of India
|
13661
|
1548
|
3672
|
5220
|
Old private sector banks
|
4511
|
800
|
441
|
1241
|
New private sector banks
|
1685
|
1883
|
3729
|
5612
|
Foreign banks
|
242
|
218
|
582
|
800
|
