banking and its evolution

8/2/2019 Banking and Its Evolution

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Banking and its EvolutionBanking and its Evolution

By Prof. Anita Sahoo


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BANK:BANK:

A bank is a financial institution whose

primary activity is to act as a payment

agent for customers & to borrow and

lend money and to take care of

financial affairs

Here the trading item is itself money


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Bank Vs. BankingBank Vs. Banking

y Its an organisation

y Its a nouny Its a building

y Its a tangible object

y It refers to the physicalresources like building,

staffs, furniture, etc

y The activities carriedout by a bank is knownas banking

y Its a verb

y Its a financialtransaction

y Its a servicey It is the

output(financialservices) of the bankby utilising thoseresources


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Definition: Banking Regulation Act,1949Definition: Banking Regulation Act,1949

According to the Banking Regulation Act, 1949

Banking has been defined as accepting of the

deposits of the public for the purpose of lending or

investing, repayable on demand and withdrawable

through cheques or otherwise.

Why the post office saving organisations are not treated

as banks ?


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Origin of BankingOrigin of Banking

y The word Bank is said to have derived from

the French word Bancus which means a

bench.

y It is believed that the early jews in Lombardly

transacted their banking business by sitting onbenches on the market place.

y Another common-held view is that the word

bank originated from the German word

Back which means ajoint stock fund.

y Finally the word Back anglicised in to Bank.


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y The banking (modern) system started

with the establishment of Bank of

England in 1694 with the advent of the

English traders in the 17thy century, theEast India Company encouraged setting

up of trading houses which were

performing dual activities of trading andbanking operation


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Banking in IndiaBanking in India


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ObjectivesObjectives

y To make an account of evolution of

present day banking in India

y To evaluate the interventions of state in

banking sector over years and

y To appraise the entry of foreign banks


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Evolutionary PhasesEvolutionary Phases

y Indigenous Reign

y Direct Intervention

of the State

y Liberalization

y Transition

y Entry of Foreign

Banks


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Phase I: Indigenous banksPhase I: Indigenous banks

y Vedas and the Manusmriti:

y Kautalyas Arthashastra:Suggested Maximum andMinimum Interest rate

y Kautalya recommended 15per cent interest perannum on capital.

y British rule almost wipedout these tribes by bringingEuropean Banks fromurban e.g.Alexander & Co.and Fergusson & Co.

y They moved to villages.They survive even today.


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How did Sahukar lend?How did Sahukar lend?

y Borrower is known

y Very little documentation

y Sahukar usually a bad guy

y Exorbitant rates of

interestsy Compounded Shorter

Intervals

y Records Tampered

y Mostly Mortgaged lendingon Land, Properties, Jewels

etcy Most cases poor

borrowers surrenderedtheir properties.


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Phase II:Direct InterventionPhase II:Direct Intervention

y Government Interventionsbegan in 1930s

y The Reserve Bank which isthe Central Bank was createdin 1935 by passing RBI Act1934.

y The RBI is the sole authorityfor issuing bank notes and

the supervisory body forbanking operations in India .

Supervising exchange control

and banking regulations, and administers the government's

monetary policy.

granting licenses for new bankbranches.


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Intervention: NationalizationIntervention: Nationalization

y In the wake of the SwadeshiMovement, a number of bankswith Indian management wereestablished in the countrynamely, Punjab National Bank Ltd, Bank of

India Ltd, Canara Bank Ltd, IndianBank Ltd, the Bank of Baroda Ltd,the Central Bank of India Ltd.

y In 1955, Govt. nationalizedImperial Bankof India withextensive banking facilities on alarge scale especially in rural andsemi-urban areas.

y It formed State Bank of Indiato act as the principal agent ofRBI and to handle bankingtransactions


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Intervention: NationalizationIntervention: Nationalization

y On July 19, 1969, 14 majorbanks nationalized and

y in 15th April 1980 sixmore commercial

y 80% of the bankingsegment in India underGovernment ownership in1990.

y the branches of the publicsector bank India rose toapproximately 800% indeposits and advancestook a huge jump by11,000%.


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Effect of NationalizationEffect of Nationalization

y the focus of lending

y priority sectors wereagriculture, small-scaleindustry, retail trade,

small business and smalltransport operators

y poverty alleviation andemployment generationprograms.

y the success of greenrevolution and theincrease of aggregatefood grain production


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Other sides of NationalizationOther sides of Nationalization

y Borrowings and lending restricted, not onbusiness line

y Deterioration of Banker-customers relationshipy Poor Services

y Employees Strikesy No Healthy competition among banks

y Mounting hidden NPAs


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Phase IIIPhase III -- LiberalizationLiberalization

y Constitution of Narasimham

committee and its report on Banking

reforms in 1991.

y It covered the areas of interest rate

deregulation & directed credit rules,

y

Statutory preemptions and entryderegulation for both domestic and

foreign banks.

y Lowering of the CRR and SLR

y Interest rate liberalization

y Do away with Entry barriers. By

March 2004, the new private sectorbanks and the foreign banks share

shared almost 20% of total assets

y Prudential Norms act against NPAs


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Phase IV: TransitionPhase IV: Transition

y Most Indian banks lagging behindthe areas of customer fundstransfer and clearing systems.

y Over-staffed and not able tocompete with new generationprivate banks

y While these new banks andforeign banks still facerestrictions in their activities.

y New banks are well-capitalized,

y Use modern equipment and

y Attract high-caliber employees.Indian banks were given time to

y Indian Banks to strengthen theirbalance sheets, consolidate andoverall become more robust, sothat they could compete.


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Phase V: Entry of Foreign BanksPhase V: Entry of Foreign Banks

y Two of domestic banks in Indiahave turned like Foreign Banks.About 74 per cent of holdings ofICICI and HDFC bank are in thehands of foreigners.

y Phase II of roadmap foreign banksmay be permitted to have overall

investment of 74 per cent in theprivate banks of India in April2009

y New banks to be in India Royal Bank of Scotland

Switzerland's UBS

US-based GE Capital

Credit Suisse Group Industrial and Commercial Bank of

China

y Areas of Concentration are RiskManagement, customizing theproducts and Value creation.


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INDIAN BANKING SYSTEM

RBI

COMMERC

IAL BANKIDBI NABARD EXIM

INVESTMENT

INSTITUTIONNHB

FOREIGN

BANK

INDIAN

COMMERCIAL

BANK

LIC GIC UTI

(HUDCO) (SHB)

SCHEDULED

COMMERCIAL

BANK

PRIVATE

SECTOR

PUBLIC

SECTOR


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Reserve Bank of IndiaReserve Bank of India

y Monopoly of note issue

y As a Banker, an Advisor, an Agent to the

Government

y Bankers Bank and lender of the last resort

y Controller of money supply and credit

- Quantitative

- Bank Rate-Variation in CRR and SLR

- Open market operation


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y - Qualitative

- Fixation of margin requirements

on secured loans

- Moralsuation


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Commercial BankCommercial Banky Acceptance ofDeposits

- Current account Deposits

- Fixed account Deposits

- Saving account Deposits

y Advancing Loans

- Cash Credit

- Term Loans

- Overdraftsy Discounting Bills of Exchange

y Investment of funds


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Agency Function

- Transfer of funds

- Collection of funds

- Purchase and sale of shares on behalf of the

customer

- Collection of dividends and interests- Payment of bills and insurance premiums

Miscellaneous Functions

- Sale & purchase of foreign exchange- Issuing travelers cheque and gift cheque

- Providing locker facility


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Role of Commercial Banks in the EconomicRole of Commercial Banks in the Economic

Development of a countryDevelopment of a country

y Banks promote Capital Formation

y Investment in new enterprises

y Promotion of Trade & Industry

y Development of Agriculture

y Balanced development of different regions

y Influencing economic activity

y Implementation of Monetary policy

y Monetization of the economy

y Export promotion cells


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THANKYOU

THANKYOU

banking and its evolution

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