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Evolution of BankingEvolution of Banking
UNIT IUNIT I
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Evolution of Banking in the WestEvolution of Banking in the West
Period of Ancient BankingPeriod of Ancient Banking
Period of Modern BankingPeriod of Modern Banking
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Period of Ancient BankingPeriod of Ancient Banking
The banking business came into existence only afterThe banking business came into existence only after
money was inventedmoney was invented
In ancient Greece, around 2000 B.C. the famousIn ancient Greece, around 2000 B.C. the famous
temples of Delphi, Olympia etc. were used astemples of Delphi, Olympia etc. were used asdepositoriesdepositories
The business of money exchange began in theseThe business of money exchange began in these
templestemples
They also started providing loans at interest andThey also started providing loans at interest and
interest on depositsinterest on deposits
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Period of Ancient BankingPeriod of Ancient Banking
During the Middle Age money lending activities wereDuring the Middle Age money lending activities werelargely in the hands of Jews and the financers oflargely in the hands of Jews and the financers ofLombardy.Lombardy.
Christians were forbidden by Canon lawChristians were forbidden by Canon law The Medieval Church regarded money lending as anThe Medieval Church regarded money lending as an
unpardonable sin.unpardonable sin. Therefore there was monopoly of Jews in the field ofTherefore there was monopoly of Jews in the field of
Banking.Banking. Jews dominated the business of banking in manyJews dominated the business of banking in many
European countriesEuropean countries
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Period of Modern BankingPeriod of Modern Banking
In 13In 13thth century the hold of the church on the laymancentury the hold of the church on the layman
weakened.weakened.
Christians entered into profitable business of moneyChristians entered into profitable business of money
lendinglending This resulted in competition to Jews who enjoyedThis resulted in competition to Jews who enjoyed
monopolymonopoly
In 14In 14thth
centurycentury- negotiable bill of exchange came into existence &- negotiable bill of exchange came into existence &
- overdraft facility was given to customers- overdraft facility was given to customers
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Period of Modern BankingPeriod of Modern Banking
Important Public Banking institutions:Important Public Banking institutions:
Year of establishmentYear of establishment Name of the BankName of the Bank
11571157 Bank of VeniceBank of Venice
14011401 Bank of BarcelonaBank of Barcelona
14071407 Bank of GenoaBank of Genoa
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Period of Modern BankingPeriod of Modern Banking
Features :Features : In the initial period banks issued currency notesIn the initial period banks issued currency notes
The concept of central bank was in its infant stageThe concept of central bank was in its infant stage
Expansion of trading and commercial activity in northernExpansion of trading and commercial activity in northern
Europe led to establishment of various Private and PublicEurope led to establishment of various Private and Public
banking housesbanking houses
The bank of Amsterdam was established in 1609The bank of Amsterdam was established in 1609
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Period of Modern BankingPeriod of Modern Banking
(United Kingdom)(United Kingdom)
Regime of Queen Elizabeth I banking by money lendersRegime of Queen Elizabeth I banking by money lenders
and Goldsmiths.and Goldsmiths.
Regime of King Charles took possession of gold kept byRegime of King Charles took possession of gold kept by
merchants in Tower of London.merchants in Tower of London.
Therefore merchants deposited valuables with goldsmithsTherefore merchants deposited valuables with goldsmiths
at a commission.at a commission.
Goldsmiths realised better opportunity to earn by lendingGoldsmiths realised better opportunity to earn by lendingthe merchants deposits.the merchants deposits.
Receipts were issued to acknowledge deposits.Receipts were issued to acknowledge deposits.
Surplus deposits kept were with national treasury.Surplus deposits kept were with national treasury.
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Government refused to pay back deposits due to whichGovernment refused to pay back deposits due to whichgoldsmiths business was ruined.goldsmiths business was ruined.
This led to growth of private sector banking -This led to growth of private sector banking -
establishment of Bank of England in 1694.establishment of Bank of England in 1694. Passage of Banking Act, 1933 permitted establishment ofPassage of Banking Act, 1933 permitted establishment of
Joint Stock Banks with unlimited liability.Joint Stock Banks with unlimited liability. Expansion of international trade led to JSBs openingExpansion of international trade led to JSBs opening
branches & many partnership firms started operating asbranches & many partnership firms started operating asbranches of JSBs.branches of JSBs.
After 1960 due to mergers, the number of banks reducedAfter 1960 due to mergers, the number of banks reducedfrom 13 to 5.from 13 to 5.
Period of Modern BankingPeriod of Modern Banking
(United Kingdom)(United Kingdom)
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Period of Modern BankingPeriod of Modern Banking
(United States of America)(United States of America)
Prior toPrior to 17821782 banking at preliminary level. banking at preliminary level. 17821782 First Modern Bank was established in Philadelphia, First Modern Bank was established in Philadelphia,
issuing convertible paper money.issuing convertible paper money. ByBy 18001800 - Additional 30 banks set up.- Additional 30 banks set up. 17911791 - First Bank of US set up- First Bank of US set up 18161816 - Second Bank of US set up. Federal Govt. owned- Second Bank of US set up. Federal Govt. owned
1/51/5thth of Stock of this bank.of Stock of this bank. ByBy 18371837 - 700 banks were in existence to provide finance- 700 banks were in existence to provide finance
towards infrastructure.towards infrastructure.
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Several unincorporated banks failed.Several unincorporated banks failed. 1829 - New York State passed Safety Fund Act to1829 - New York State passed Safety Fund Act to
avoid loss due to failure.avoid loss due to failure.
1883 - Free Banking Act passed in Michigan.1883 - Free Banking Act passed in Michigan. The Act permitted anyone to establish banks. This ledThe Act permitted anyone to establish banks. This led
to confusion about genuine notes.to confusion about genuine notes.
Around 10,000 different currency notes; henceAround 10,000 different currency notes; hencelegislation passed for maintaining cash reserve.legislation passed for maintaining cash reserve.
1862 Act passed permitting establishment of JSBs1862 Act passed permitting establishment of JSBs
with limited liability.with limited liability.
1913 - Central Bank Federal Reserve Bank set up.1913 - Central Bank Federal Reserve Bank set up.
Period of Modern BankingPeriod of Modern Banking(United States of America)(United States of America)
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US Banking classification Unit banking, chain bankingUS Banking classification Unit banking, chain banking& branch banking.& branch banking.
US banks create deposits while giving loans.US banks create deposits while giving loans.
Obligatory to keep certain amount of deposit.Obligatory to keep certain amount of deposit.
The agreement entered into decided when, how much andThe agreement entered into decided when, how much and
why money was withdrawn.why money was withdrawn.
Extreme importance to documentation of procedures;Extreme importance to documentation of procedures;
hence not flexible.hence not flexible.
Supervision of American Banks By Federal ReserveSupervision of American Banks By Federal Reserve
Bank (estb. 1913) and Federal Deposit InsuranceBank (estb. 1913) and Federal Deposit Insurance
Corporation (estb. 1933).Corporation (estb. 1933).
Period of Modern BankingPeriod of Modern Banking(United States of America)(United States of America)
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Period of Modern BankingPeriod of Modern Banking
(France)(France)
1716 Bank General established. It accepted deposits1716 Bank General established. It accepted depositsbut was prohibited from giving loans.but was prohibited from giving loans.
1720 Bank General failed.1720 Bank General failed.
1776 Bank by the name Caisse d Escomple was1776 Bank by the name Caisse d Escomple wasestablished to issue notes.established to issue notes.
1793 - Failed due to govt. loan non-repayment.1793 - Failed due to govt. loan non-repayment. 1800 Banque de France was set up.1800 Banque de France was set up. 1860 Credit Mobilier (a new generation bank) was1860 Credit Mobilier (a new generation bank) was
established to provide term funds to industry &established to provide term funds to industry &infrastructure.infrastructure.
It failed due to lack of liquidity.It failed due to lack of liquidity.
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1880 New banking system established having two types1880 New banking system established having two types
of banks;of banks;
(i)(i) Deposit banks to collect savings & lend short term funds toDeposit banks to collect savings & lend short term funds toindustry and commerce, andindustry and commerce, and
(ii)(ii) Banks to provide resources for capital market operations viz.Banks to provide resources for capital market operations viz.
foreign govt. loans and public utilities.foreign govt. loans and public utilities.
22ndnd half of 19half of 19thth Century Establishment of JSBs; whichCentury Establishment of JSBs; which
started using cheques.started using cheques.
Classification of banks in FranceClassification of banks in France
a.a. Nationalised banksNationalised banks
b.b. Large Regional Private BanksLarge Regional Private Banksc.c. Deposit Banks in ParisDeposit Banks in Paris
Last of 19Last of 19thth Century Establishment of co-operativeCentury Establishment of co-operative
banks for provision of agricultural loans.banks for provision of agricultural loans.
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Period of Modern BankingPeriod of Modern Banking
(Germany)(Germany)
1834 11834 1stst bank set up to issue notes.bank set up to issue notes. After 1848 Set up of large JSBs.After 1848 Set up of large JSBs. Germany conducted investment banking; shiftingGermany conducted investment banking; shifting
lending from railways to industry.lending from railways to industry. Provided current account and overdraft facility.Provided current account and overdraft facility.
1870 banking business and industry progressed.1870 banking business and industry progressed. 1875 the number of large JSBs was 33.1875 the number of large JSBs was 33.
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Industry had to depend on banks due to infancy ofIndustry had to depend on banks due to infancy ofshare market.share market.
After 1After 1stst
World War banking system collapsed dueWorld War banking system collapsed dueto small capital base.to small capital base. Reich bank unprepared to be lender of last resort.Reich bank unprepared to be lender of last resort. Bank system rebuilt with state intervention.Bank system rebuilt with state intervention. After 2After 2ndnd World War Germany was divided in twoWorld War Germany was divided in two
parts; East Germany and West Germany.parts; East Germany and West Germany. This adversely impacted banking business.This adversely impacted banking business.
Period of Modern BankingPeriod of Modern Banking
(Germany)(Germany)
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Period of Modern BankingPeriod of Modern Banking
(Russia)(Russia) Communist revolution impacted banking.Communist revolution impacted banking. 1414thth December 1917 Nationalisation of all banks.December 1917 Nationalisation of all banks. 1924 Separate banks established to finance different1924 Separate banks established to finance different
sectors of the economy.sectors of the economy. 1932-36 banks merged to shape up to banking system.1932-36 banks merged to shape up to banking system. Important banks in Russia:Important banks in Russia:
BANKBANK YEAR OF ESTLMT.YEAR OF ESTLMT.
GOS BankGOS Bank 19211921
Stroi BankStroi Bank 19221922
VhanestorgVhanestorg 19241924
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Evolution of Banking in IndiaStage Period Features
I From Vedic period to1769
No formal bank
II 1770-1900 Slow development of
BankingIII 1901-1947 Emergence of many banks
IV 1948-1968 Restrictions on banksV 1969-1990 Restrictions on banks
strengthened
VI 1991-onwards Era of liberal banking
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Stage I : ( From Vedic period to 1769 )
Indigenous bankers and money lenders have been in
existence since Vedic period Deposit banking came into existence in the 2nd and 3rd
century
Kautilayas Arthashastra - Maximum rates of interest on advances 15% - 60% p.a
In case of high risk Maximum of 240% rate of interest
Discounting of Hundies by Indigenous bankers
Evolution of Banking in India
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Stage I : ( From Vedic period to 1769 ) Moghul period
Indigenous bankers played a very important role in
money lending, financing internal and external tradeand giving financial assistance to kings
Several Kings issued metallic money
Indigenous bankers were appointed as revenue
collectors and bankers to the King
Evolution of Banking in India
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Stage I : ( From Vedic period to 1769 ) Moghul period
Aurangzeb in his reign conferred the title of Seth on
the most eminent banker of his time Manakchand.
Emperor Farrukshiyer confered on Fatehchand, the
title of Jagat seth (banker of the world)
The Indian Banking system received a certain amount
of setback during the reign of emperor Aurangzeb
Evolution of Banking in India
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East India Company was established in 1600 It was established to carry on trade between India and U.K
Several Europeans came to India
Indigenous bankers satisfied banking needs of the East India
Company, its employees and others
But due to the increase in the volume of international trade, it
became difficult for the indigenous bankers.
Few agency houses were established to provide banking facilities.
Agency houses started accepting deposits at a high rate of interest
The money was used for speculative activities which was harmful.
This resulted in the establishment of the first modern bank in India
Evolution of Banking in India
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Stage II : ( 1770 - 1900 ) Decline of Shroff
Nawab of Oudh and Peshwas, sought the
assistance of these bankers
The principal occupation of these bankers was
that of Shroffs and money changers
Unification of currency under the East India
Company took away the most profitable business
of money changing
Evolution of Banking in India
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Stage II : ( 1770 - 1900 ) Since the money collected by Agency Houses was not
being utilised properly, so few Agency Houses in Calcutta
established the first bank in 1770- Bank of Hindustan. After this bank several banks were established and in
order to regulate its activities the General Bank in Bengal
and Bihar was established in 1773.
In order to provide banking facilities to the governmentPresidency banks were established
Evolution of Banking in India
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Evolution of Banking in India
Stage II : ( 1770 - 1900 )
Year of establishment Name of the Bank
1806 Presidency Bank of Bengal
1840 Presidency Bank of Bombay
1843 Presidency Bank of Madras
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Evolution of Banking in India
Stage II : ( 1770 - 1900 )
In 1813 the British Government passed the legislation
removing all restrictions on British coming to India
This led to the establishment of several insurance
companies and banks (unlimited liability)
Since the principle of unlimited liability was not proper for
the growth of the business activities, in 1860 the principle
of limited liability was introduced.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage III 1901 to 1947)(Stage III 1901 to 1947)
Swadeshi Movement started in 1906.Swadeshi Movement started in 1906. 1906-1913 Several banks were set up. Eg; BOI, BOB,1906-1913 Several banks were set up. Eg; BOI, BOB,
Indian bank, etc.Indian bank, etc. 11stst world war (1914-1918) 87 banks closed.world war (1914-1918) 87 banks closed. 1921 to bring uniformity in policies of Presidency1921 to bring uniformity in policies of Presidency
Banks, they were amalgamated into Imperial Bank ofBanks, they were amalgamated into Imperial Bank ofIndia.India.
Till 1935 - It operated partly as central and partlyTill 1935 - It operated partly as central and partlycommercial bank. It was the largest commercial bank. Itcommercial bank. It was the largest commercial bank. It
performed all central banking functions except note issue.performed all central banking functions except note issue.
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Depression (1929-1933) badly impacted banking.Depression (1929-1933) badly impacted banking. 1935 to regulate banking system, RBI was set up in the1935 to regulate banking system, RBI was set up in the
private sector.private sector. 22ndnd world war (1939-1945) badly impacted industry.world war (1939-1945) badly impacted industry. Special efforts to finance for reconstruction.Special efforts to finance for reconstruction. 1947 Partition of Pakistan from India resulted in1947 Partition of Pakistan from India resulted in
financial losses of few banks.financial losses of few banks. Evolution of co-operative credit to solve ruralEvolution of co-operative credit to solve rural
indebtedness.indebtedness.
1904 Official launch of co-operative movement by1904 Official launch of co-operative movement byenacting Co-op Societies Act.enacting Co-op Societies Act. RBI played a key role in promotion of co-op banks.RBI played a key role in promotion of co-op banks. Co-op banks satisfy banking needs of urban poor too.Co-op banks satisfy banking needs of urban poor too.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage IV 1948 to 1968)(Stage IV 1948 to 1968)
EVENTEVENT YEARYEAR
Nationalisation of RBINationalisation of RBI 19491949
Banking Regulation ActBanking Regulation Act 19491949Establishment of SBIEstablishment of SBI 19551955
Subsidiaries of SBISubsidiaries of SBI 19591959
Deposit Insurance and Credit GuaranteeDeposit Insurance and Credit Guarantee
CorporationCorporation19621962
Social ControlSocial Control 19681968
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To ensure monetary discipline & economic development,To ensure monetary discipline & economic development,RBI was nationalised.RBI was nationalised.
1949 legislation was passed to regulate banking business.1949 legislation was passed to regulate banking business.Initially called the Banking Companies Act, theInitially called the Banking Companies Act, theamendment of 1966 changed its name to Bankingamendment of 1966 changed its name to Banking
Regulation Act.Regulation Act.
1955 Imperial Bank was nationalised and converted into1955 Imperial Bank was nationalised and converted intoSBI, the largest commercial bank.SBI, the largest commercial bank.
1959 SBI Subsidiary Banks Act was passed and1959 SBI Subsidiary Banks Act was passed and EIGHTEIGHTstate associated banks became subsidiary banks of SBI.state associated banks became subsidiary banks of SBI.
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STATE BANK SUBSIDIARY BANKSSTATE BANK SUBSIDIARY BANKS
1. State bank of Bikaner and Jaipur1. State bank of Bikaner and Jaipur
2. State bank of Saurashtra2. State bank of Saurashtra
3. State bank of Hyderabad3. State bank of Hyderabad
4. State bank of Indore4. State bank of Indore
5. State bank of Mysore5. State bank of Mysore
6. State bank of Patiala6. State bank of Patiala
7. State bank of Travancore7. State bank of Travancore
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1962 DIC was established as a wholly owned
subsidiary of RBI to insure depositors.
Deposit insurance cover currently is Rs. 1,00,000 for each
depositor.
This reduces risk & builds confidence among deposits,
thereby increasing deposits.
1968 A bill was passed to have social control over
banks.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
EVENTEVENT YEARYEAR
Social controls came into forceSocial controls came into force Feb. 1969Feb. 1969
Nationalisation of 14 banksNationalisation of 14 banks July, 1969July, 1969
Credit guarantee corporation of IndiaCredit guarantee corporation of India Jan, 1971Jan, 1971
Regional Rural banksRegional Rural banks Oct , 1975Oct , 1975
Nationalisation of 6 banksNationalisation of 6 banks April, 1980April, 1980
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
To derive the benefits of nationalization without nationalizing
banks, Social Control scheme was implemented with the
following objectives:
To prevent banks from lending to concerns in which directors wereinvolvedTo provide sufficient credit to priority sectors and neglected
sectors.To prevent banks from lending for unproductive activities.To prevent concentration of economic power in a few hands.To check the growth of monopolistic trends in industrial sectors.To achieve the optimum rate of economic growth
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
Nationalisation of banks
Reasons :
Expansion of bank credit to priority and neglected sectors.
Prevention of concentration of economic power in fewhands
Branch expansion programmes in unbanked and
underbanked areas
Removal of bankers indifferent attitude towardseconomic development
Provision of training facilities to banking personnel.
Removal of deficiencies of Social Control Scheme.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
Credit Guarantee Corporation of India Ltd. 1971:
Established to provide guarantee for loans provided by
banks.Participation in the guarantee scheme was optional for
banks.
1978 takeover of CGCI by Deposit Insurance
Corporation of India.At present it is known as Deposit Insurance and Credit
Guarantee Corporation of India
Provides Insurance facility to reduce risks in banking
business.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
Regional Rural Banks, 1975
The GOI appointed a working group to study banking
facility in the rural areas and suggest measures forimprovement.
The working group suggested the establishment of an
institution having professional approach and access to all
parts of the financial market.As a result, RRBs were established in 1975. The RRB Act
was passed in 1976.
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage V 1969 to 1990)(Stage V 1969 to 1990)
Nationalisation of 6 banks:
On 15th April, 1980 six more banks having deposits of Rs.
200 crore were nationalized.
They were:
Andhra Bank
Oriental bank of Commerce
Corporation Bank
New Bank of IndiaThe Punjab and Sind Bank
Vijaya Bank
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage VI 1991 onwards)(Stage VI 1991 onwards)
Introduction of LPG model
Formation of Narsimhan committee
Important developments after 1991
liberal licensing for Indian bank
Liberal licensing for foreign banks
Liberal branch licensing policy
Liberal personnel policy
Use of advanced technology
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Evolution of Banking in IndiaEvolution of Banking in India
(Stage VI 1991 onwards)(Stage VI 1991 onwards)
Freedom to decide the rates of interest
Diversification of business
Increasing capital by banks
New schemes of deposits and loans
Reduction in CRR and SLR
Identification of NPAs and reduction in NPAs.