Saturday, April 28, 2012

Commercial Banking in INDIA

At the time of Independence, India banking system was not sound. There were hundreds of private banks under unscrupulous management. Hence, in 1949 two major actions were taken very important from the point of view of structural reforms in the banking sector.

  1. The Banking Regulation Act was passed. It gave extensive regulatory powers to RBI over the Commercial banks.
  2. The nationalization of the RBI – The establishment of the State Bank of India in 1055 and the creation of the State Bank group by nationalizing eight regional banks in 1960 allowed scope for a new experiment in the Indian banking.

Nationalization of Banks

In a free enterprise economy, commercial banks operate like any other business and are mainly concerned with the maximization of their private gains.

On July 19, 1969 fourteen commercial banks with deposits worth Rs.50 crores or more were nationalized.

Banking structure in India

As at end June 2009, Scheduled Commercial banks in India comprised 27 public sector banks (State bank of India and its six Associate Banks, 19 Nationalized and IDBI Ltd.) 7 new private banks, 15 old private sector banks and 32 foreign banks. In terms of business the public banks now have a dominant position.

The SBI and Its Associate Banks

On the recommendation of Rural Credit Survey Committee the Imperial Bank of India was converted into the State Bank of India on July 1, 1955.

In 1959 the State Bank of India (Associate Banks) Act was passed and this paved the way for creting the State Bank Group. Now State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Patiala, and State bank of Tranvancore constitute the State Bank group.

In 1993 the SBI Act was amended to enable it to have access to the capital market.

Other Nationalized Banks

A second category of public sector banks is of nineteen commercial banks, of which fourteen were nationalized on July 19, 1969. Each one of these fourteen banks had deposits of Rs. 50 crores or more.

After nationalization of 14 banks, there was rapid expansion of branch network. On April 15, 1980 six more private owned commercial banks were nationalized. In 1993, New Bank of India merged with Punjab National bank. As a result, the number of public sector banks other than the State Bank of India and its associates declined to nineteen.

Regional Rural Banks

The nationalization of major fourteen banks though successful in many respects could not do much to solve the problem of rural indebtedness. The grip of moneylenders remained tight in the countryside and rural indebtedness was widespread. Therefore, a new type of banking institution called Regional Rural Banks was conceived. The Working Group on Rural Banks (Chairman: M narasimham) recommended the setting up of these banks as part of a multi-agency approach to rural credit. These banks known as regional rural banks have been set up under an Act of 1976.

Private Sector Commercial Banks

Now relatively small scheduled commercial banks and seven newly established private banks with a network of 8,964 branches are operating in the private sector. In terms of branches and also the business done by them, most of the old private sector banks are much smaller than both nationalized banks and foreign banks and thus their role in the financial system of the country is just marginal.

Foreign Banks

At end June 2009 the country had 32 foreign banks with 295 branches located mainly in big cities. Except a few which have opened their offices in India recently majority of these banks have been operating in this country for a long time.

‘Lead Bank’ Scheme and Branch Expansion: The area approach in respect of bank financing proposed by the Gadgil Study Group towards the end of 1969, culminated in the Lead Bank Scheme. It had the backing of Nariman Committee also.

The Reserve Bank accepted the recommendations of the Nariman Committee and prepared the ‘Lead Bank’ Scheme. Under the ‘Lead Bank’ Scheme districts were allotted to the State bank Group, 14 nationalized banks and 3 private Indian banks.

The Lead Bank was assigned a major development responsibility in the district allotted to it. It was expected to familiarize itself with the socio-economic conditions prevailing in the district.

Banking Sector Reforms :

Some recommendations were made by the Chakraverty Committee in 1985 for improving the performance of the banking sector. However, the government lacking initiative did not carry out reform measures earnestly. In 1991, the country was caught into a deep economic crisis. The government appointed a Committee on the Financial System under the chairmanship of M. Narasimham in August 1991, the country was caught into a deep economic crisis. The government appointed a Committee on the Financial System under the chairmanship of M. Narasimham in August 1991 on Banking Sector Reforms.

  1. Prudential Regulation and Supervision
  2. Rehabilitation of Public Sector Bank
  3. Reduction in SLR and the CRR
  4. Deregulation of Interest Rates
  5. Phasing out of Direct Credit
  6. Promoting Competition


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