Table of Contents:-
- Overview of Structure of Indian banking system
- Meaning of Banking
- Definition of Banking
- Features of Banking
- Structure of Indian Banking System
- Scheduled Banks
- Commercial Banks
- Scheduled Banks
Overview of Structure of Indian banking system
The modern structure of Indian banking system began with the establishment of the General Bank of India in 1786. In the mid-nineteenth century, the East India Company established the Bank of Bengal in 1809, the Bank of Bombay in 1840, and the Bank of Madras in 1843. Initially, these were independent units referred to as the Presidency banks. Subsequently, these three banks were combined and became known as the Imperial Bank of India.
After independence, the Imperial Bank of India, which had functioned as a private bank until then, was nationalized under the State Bank of India Act of 1955 and became known as the State Bank of India. Nationalization was a significant theme after independence due to the socialist philosophy adopted by the first Prime Minister, Jawaharlal Nehru.
1969 Prime Minister Indira Gandhi continued this process by nationalizing 14 central banks. Indian banks are unique in many respects. Before 1991, all banks were state-owned. In 1991, when the government opened banking to private banks (e.g., ICICI Bank and Bank of America), the public sector dropped by 20%.
However, state-owned banks still control approximately 80% of the country’s banking assets. The key chronological events of banks in India are shown in the table below:
Table: Chronology of Banks in India: Key Events in the Period 1950-2003
|The Reserve Bank of India (RBI) is nationalized and made a central bank by an act of parliament.
|Nationalization continues. All Life Insurance Companies are now nationalized.
|Nationalization completed. Fourteen major banks were nationalized by Mrs. Indira Gandhi. Now all banks are state-owned.
|Nationalization of six banks.
|A dual exchange rate system is instituted under a liberalized regime. The exchange rate transitions from a managed floating regime to a market-determined one. This move is expected to provide a boost to the export industry.
|RBI introduces the Risk-Assets-Ratio for banks as a capital adequacy measure.
|Guidelines for setting up private sector banks are issued.
|The process of convertibility is started and the rupee is made convertible to the current account. Expected to provide a stimulus to business and hence should provide an impetus to banks as well.
|UTI becomes the first private bank to start operation.
|RBI issued guidelines on prudential norms. Banks should achieve a minimum capital adequacy ratio set at 6% on their risk-weighted assets and off-balance-sheet exposures; to be maintained by March 31, 1995.
|Amendment to Banking Companies Act. Enabled all state-owned banks to tap the capital market. The nationalized banks can now strengthen their capital base by issuing stock.
|Full convertibility is taken by making the rupee convertible on the current account.
|Oriental Bank of Commerce becomes the first state-owned bank to raise a significant amount of money by issuing stock in the stock market (2387.2 crore)
|A new law enacted by parliament enables banks to sue customers who default on payments to obtain payment. As a result, stock prices of state-owned banks surge, and the capitalization of state-owned banks now exceeds that of InfoTech companies.
The Indian government has a tradition of using state-owned banks to rescue failing institutions or to funnel money to favoured projects which have little chance of paying off the loan. Further, a study by McKinsey and Co., consultants finds that the productivity of Indian banks is only one-tenth of the productivity of the US, banks. In general, India’s banking system is so dysfunctional that it is slowing the economy.
Meaning of Banking
The word “bank” originates from German, meaning “to collect.” The primary function of banks is the collection of funds as deposits. Over time, banks have expanded their roles by lending money and taking on other functions. They now hold an essential place in the economic structure of the country. After independence, banks were nationalized to fulfil the social objectives of the country.
Definition of Banking
A bank is a financial institution whose primary activity is to act as a customer payment agent and borrow and lend money. It serves as an institution for receiving, storing and lending money to the needy with the expectation of repayment.
According to R.S. Meyers, “Banks are institutions whose debts are referred to as ‘bank deposits’ and are commonly accepted in final settlement of other people’s debts”.
Section 5(1) (b) of the Banking Regulation Act, 1949 defines banking as, “The accepting for the purpose of lending or investment, of deposits from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise”.
According to Justice Homes, “The real business of a banker is to obtain deposits of money which he may use for his own profit by lending it out again”.
Section 5(1) (c) defines a banking company as, “Any company which transacts the business of banking in India”.
Features of Banking – Structure of Indian banking system
The features of banking include:
1) The buying and selling of bullion and specie.
2) The borrowing, raising, or acquisition of money.
3) The buying and selling of foreign exchange, including banknotes.
4) The advancing or lending of money either with or without security.
5) The granting and issuing of letters of credit, traveller’s checks, and circular notes.
6) Purchasing and selling bonds, scripts, or other securities for constituents or others and negotiating loans and advances.
7) The acquisition, holding, issuing on commission, underwriting, and dealing in stocks, funds, shares, debentures, bonds, obligations, securities, and investments.
8) The drawing, making, accepting, discounting, buying, selling, collecting, and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts, and other instruments and securities, whether negotiable or transferable.
Structure of Indian Banking System
The present banking system in India has evolved to meet the financial needs of trade and industry and also to satisfy the institutions of the country. The constituents of the present banking system in India are of varying origins and sizes. At the apex is the Reserve Bank of India, the country’s Central Bank. It is a banker’s bank and lender of the last resort. Besides, it acts as the fiscal agent of the government, manages the currency, and controls the credit in the national interest.
The Reserve Bank of India is followed by the State Bank of India which was created in July 1955 by nationalizing the Imperial Bank of India, the State Bank of India’s subsidiaries, 20 major nationalized scheduled banks; other joint-stock banks that came into existence from the 1960s and onward; foreign exchange banks formed in India in the later half of the 19th century, cooperative banks which had their first existence in 1904 in the garb of cooperative credit societies, Nidhi and chit funds, which have been in existence since the last quarter of the 18th century. Besides, some indigenous banks and bankers are centuries old. Recently Regional Rural Banks (RRBs) were formed to assist particularly rural folk. Thus, the banking sector in India comprises commercial banks, cooperative banks and regional rural banks.
1) The bank concerned must be engaged in banking in India.
2) It must satisfy the Reserve Bank of India that its affairs are not conducted in a manner detrimental to the interests of its depositors.
3) It must have paid-up capital and reserves with an aggregate real or exchangeable value of not less than five lakh rupees.
4) It must be either a company defined in Section 3 of the Indian Companies Act, 1956, a corporation or company incorporated by or under any law in force in any place outside India, or an institution notified by the Central Government for this purpose.
Scheduled banks fall under the purview of various credit control measures of the Reserve Bank of India. They must maintain a certain minimum balance in their accounts with the RBI and fulfil certain legal obligations. Scheduled banks are entitled to borrowings and rediscounting facilities from the RBI.
Scheduled banks are further classified into:
- Commercial Banks, and
- Cooperative Banks.
Commercial banks perform various banking functions, such as accepting deposits, advancing loans, creating credit, and carrying out agency functions. They are also called joint-stock banks because they are organized similarly to joint-stock companies. Typically, they provide short-term loans to customers.
However, they have now begun to offer medium and long-term loans. In India, 20 central commercial banks have been nationalized, whereas in developed countries, they operate as joint stock companies in the private sector. Some of the commercial banks in India include Andhra Bank, Canara Bank, Indian Bank, Punjab National Bank, etc.
According to Crowther, “A bank collects money from those who have it to spare or who are saving it out of their incomes, and it lends this money to those who require it”.
Indian Companies Act, of 1949, has defined the bank, as “The accepting for lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, and order or otherwise”.
According to Prof. Sayers, “An institution whose debts (bank deposits) are widely accepted in settlement of other people’s debts to each other”.
According to Prof. Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use”.
Commercial banks typically offer short-term loans to business people and traders. Because their deposits are short, they cannot lend money for extended periods. Generally, these banks provide loans for 3 to 6 months. Due to the short-term nature of their deposits, they cannot offer long-term loans to industries.
Nature of Commercial Banks
Banks serve as creators and distributors of money, making them pivotal economic players. Their nature can be outlined under the following categories:
1) Provision of Finance to Underprivileged Communities and Neglected Segments: Commercial and cooperative banks in India play a significant role by providing loans at concessional rates to scheduled castes/scheduled tribes and other weaker sections of society, following government guidelines.
2) Facilitation of Commerce and Trade: Finance is essential for trade and commerce, and banks provide funds to facilitate these economic activities.
3) Development of Agriculture and other Priority Sectors: Banks prioritize lending to specific sectors such as agriculture, small-scale industries (SSIs), retail trade, small borrowers, self-employed individuals, etc., to foster their growth and create productive employment opportunities. Banks also support the export sector through various means.
4) Mobilization of Savings: Economic development relies on available savings and investments. Banks gather deposits from the public, which are then lent for investment purposes, thus aiding in economic growth.
5) Balanced Regional Development: Aligning with government policies for balanced economic development, banks promote lending and investment in less-developed regions or areas of the country, thereby supporting social objectives.