Economic & Technological Reforms in Indian Banking System

7/29/2019 Economic & Technological Reforms in Indian Banking System

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Economic & Technological Reforms in Indian Banking System

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CHAPTER I

INTRODUCTION AND RESEARCH

METHODOLOGY


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1.1 GENERAL INTRODUCTION OF THE PROJECT

INDIAN BANKING SECTOR

Banking in India originated in the last decades of the 18th century. The first banks

were The General Bank of India, which started in 1786, and Bank of Hindustan, which

started in 1790; both are now defunct. The oldest bank in existence in India is theState

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. For many years

the Presidency banks acted as quasi-central banks, as did their successors. 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.

History

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848

as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in

1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock

Bank: A company that issues stock and requires shareholders to be held liable for the

company's debt) It was not the first though. That honor 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.

When the American Civil War stopped the supply of cotton to Lancashire from

the Confederate States, promoters opened banks to finance trading in Indian cotton.

With large exposure to speculative ventures, most of the banks opened in India during

that period fey and lost interest in keeping deposits with banks. Subsequently, banking

in India remained the exclusive domain of Europeans for next several decades until the

beginning of the 20th century.


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Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire

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 colony,

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 center.

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 Lahorein 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

undercapitalized 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.
http://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1http://en.wikipedia.org/wiki/Faizabadhttp://en.wikipedia.org/wiki/Lahorehttp://en.wikipedia.org/wiki/Swadeshihttp://en.wikipedia.org/wiki/Swadeshihttp://en.wikipedia.org/wiki/Lahorehttp://en.wikipedia.org/wiki/Faizabadhttp://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Comptoire_d%27Escompte_de_Paris&action=edit&redlink=1


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The fervor 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 nationalized banks started in this

district and also a leading private sector bank. Hence undivided Dakshina Kannadadistrict is known as "Cradle of Indian Banking".

During the First World War (19141918) through the end of the Second World

War (19391945), 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:

YearsNumber 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
http://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Indian_independence_movement


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Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West

Bengal, paralyzing 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 inApril 1934, but was nationalized on January 1, 1949 under the terms of the Reserve

Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference

www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the ReserveBank 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 anexisting bank could be opened without a license from the RBI, and no two banks

could have common directors.
http://en.wikipedia.org/w/index.php?title=Indian_independence_goverment&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Indian_independence_goverment&action=edit&redlink=1


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NATIONALIZATION

Despite the provisions, control and regulationsofReserve 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 nationalization of the banking industry. Indira Gandhi, 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

Nationalization." The meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an

ordinance and nationalized the 14 largest commercial banks with effect from the

midnight of July 19, 1969. 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 nationalization of 6 more commercial banks followed in 1980. The

stated reason for the nationalization was to give the government more control of credit

delivery. With the second dose of nationalization, 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 nationalized banks and resulted in the reduction of the number of

nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks

grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Indian_economyhttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Nationalisationhttp://en.wikipedia.org/wiki/Jayaprakash_Narayanhttp://en.wikipedia.org/w/index.php?title=New_Bank_of_India&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=New_Bank_of_India&action=edit&redlink=1http://en.wikipedia.org/wiki/Jayaprakash_Narayanhttp://en.wikipedia.org/wiki/Nationalisationhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Indian_economyhttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_India


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LIBERALIZATION

In the early 1990s, the then Narasimha Rao government embarked on a policy

of liberalization, licensing a small number of private banks. These came to be known

asNew 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, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,

along with the rapid growth in the economy of India, revitalized 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) offunctioning. 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.

Currently (2010), banking in India is 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.


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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 connection 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 computerization

of the banking sector of India has

increased many fold after the economic

liberalization 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.
http://en.wikipedia.org/wiki/File:NUMBER_OF_BRANCHES.png


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The RBI in 1984 formed Committee on Mechanization in the Banking Industry

(1984) whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of

India. The major recommendations of this committee were 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 Committee on Computerization 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 computerization 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 computerization began

form 1993 with the settlement between IBA and bank employees' association. IN 1994,

Committee on Technology Issues relating to Payments System, Cheque Clearing and

Securities Settlement in the Banking Industry (1994) was set up with chairman Shri WS

Saraf, Executive Director, Reserve Bank of India. It emphasized on 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. Committee for proposing Legislation on Electronic Funds Transfer

and other Electronic Payments (1995) emphasized on EFT system. Electronic banking

refers to DOING BANKING by using technologies like computers, internet and

networking, MICR, EFT so as to increase efficiency, quick service, productivity and

transparency in the transaction.


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Apart from the above mentioned innovations the banks have been selling the third party

products like Mutual Funds, insurances to its clients. Total numbers of ATMs installed

in India by various banks as on end March 2005 is 17,642.The New Private Sector

Banks in India is having the largest numbers of ATMs which is followed by SBI Group,

Nationalized banks, Old private banks and foreign banks. This total off site ATM is

highest for the SBI and its subsidiaries and then it is followed by New Private Banks,

Nationalized banks and foreign banks. While on site is highest for the nationalized

banks of India.

BANK GROUPNUMBER OF

BRANCHES

ON SITE

ATM

OFF SITE

ATM

TOTAL

ATM

NATIONALISED BANKS 33627 3205 1567 4772

STATE BANK OF INDIA 13661 1548 3672 5220

OLD PRIVATE SECTOR

BANKS4511 800 441 1241

NEW PRIVATE SECTOR

BANKS1685 1883 3729 5612

FOREIGN BANKS 242 218 579 797


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1.5 RESEARCH METHODOLOGY:

1.5.1 Formation of Problem:

Studying the Economic and technological reforms and its impact on Indian Banking

system

1.5.2 Collection of data:

For the purpose of data collection, Secondary data used- (journals, newspapers, RBI

website, SBI website etc.), Primary data used-customer survey.

1.5.3 Research Instrument:

The research instrument used is-Study available information and Surveys and

questionnaires.

The questionnaire is available in the annexure

1.5.4 Research limitations:

The limitation of this study is that, the data collected is majorly from secondary source.

Therefore there are chances of coming across ambiguous data.


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CHAPTER II

REVIEW OF LITERATURE


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REVIEW OF LITERATURE

ABSTRACT NO.1

Using the Indian banking industry as a case study, this paper proposes and tests

hypotheses regarding the possibility of a relationship between three elements of the

Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private

investment liberalization - and bank efficiency in developing countries. Bank efficiency

is measured using data envelopment analysis (DEA); the relationship between themeasured efficiency and various bank-specific characteristics and environmental factors

associated with the ERs is examined using the OLS and the GMM estimations. Our

results show an improvement in the efficiency of banks, especially that of foreign

banks, after the ERs. We find a positive relationship between the level of

competition and bank efficiency. However, a negative relationship between the presence

of foreign banks and bank efficiency is found, which we attribute to a short-run increase

in costs due to the introduction of new banking technology by foreign banks.

Furthermore, we find that fiscal deficits negatively influence bank sufficiency.

URL-http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1026106

Date posted: November 02, 2007

Hang Le

Nottingham Trent University - Division of Economics

Ali Ataullah

Loughborough University - Business School
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=366917http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=366917http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=117871http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=117871http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=117871http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=117871http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=117871http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=366917http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=366917


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ABSTRACT NO. 2

The Indian banking system has undergone significant transformation following financial

sector reforms. It is adopting international best practices with a vision to strengthen the

banking sector. Several prudential and provisioning norms have been introduced, and

these are pressurizing banks to improve efficiency and trim down NPAs to improve the

financial health in the banking system. In the background of these developments, this

study strives to examine the state of affair of the Non-performing Assets (NPAs) of the

public sector banks and private sector banks in India with special reference to weakersections. The study is based on the secondary data retrieved from Report on Trend and

Progress of Banking in India. The scope of the study is limited to the analysis of NPAs

of the public sector banks and private sector banks NPAs pertaining to only weaker

sections for the period seven (7) years i.e. from 2004-2010. It examines trend of NPAs

in weaker sections in both public sector and private sector banks .The data has been

analyzed by statistical tools such as percentages and Compound Annual Growth Rate

(CAGR). The study observed that the public sector banks have achieved a greater

penetration compared to the private sector banks vis-a-vis the weaker sections.

URL- http://ideas.repec.org/a/aes/ijeptp/v1y2011i2p77-87.html

PachaMalyadri

([email protected]) (Principal, Government Degree College, Osmania University,

Andhra Pradesh, India)

S. Sirisha

([email protected]) (Institute of Technology and Management, Warangal, Andhra

Pradesh, India)


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ABSTRACT NO. 3

This paper discusses the technological change and financial innovation that commercial

banking has experienced during the past twenty-five years. This article indicates the role

of financial system in economics and how technological change and financial

innovation can improve social welfare. The literature review is relating to several

financial innovations, which focuses the new products or services, production processes

or organizational forms. In this article to find out the past quarter century has been a

period of substantial change in terms of banking products, services, and production

technologies. Moreover, while much effort has been devoted to understanding the

characteristics of users and adopters of financial innovations and the attendant welfare

implications, and to know little about how and why financial innovations are initially

developed.

URL- http://www.indianmba.com/Faculty_Column/FC1165/fc1165.html

Mr. BirenjanDigal

Faculty

Department of Management Studies

Al-Ameen Institute of Management Studies

Bangalore

ABSTRACT NO. 4

Using the Indian banking industry as a case study, this paper proposes and tests

hypotheses regarding the possibility of a relationship between three elements of the

Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private

investment liberalization - and bank efficiency in developing countries. Bank efficiency

is measured using data envelopment analysis (DEA); the relationship between the


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measured efficiency and various bank-specific characteristics and environmental factors

associated with the ERs is examined using the OLS and the GMM estimations. Our

results show an improvement in the efficiency of banks, especially that of foreign

banks, after the ERs. We find a positive relationship between the level of competition

and bank efficiency. However, a negative relationship between the presence of foreign

banks and bank efficiency is found, which we attribute to a short-run increase in costs

due to the introduction of new banking technology by foreign banks. Furthermore, we

find that fiscal deficits negatively influence bank efficiency.

Amit Kumar Dwivedi

D. Kumara Charyulu

http://eprints.icrisat.ac.in/3010/1/Efficiencyof_Indian_Banking_IIM2011.pdf

ABSTRACT NO. 5

India's financial sector reforms, introduced in 1992, may have influenced the

performance of commercial banks through a variety of channels. The present study is an

attempt to examine the efficiency levels of Indian banks for the period 19852004. We

employ stochastic frontier analysis to estimate bank-specific cost, profit and advance

efficiencies. Our results show that while loan advance efficiency has not shown much

improvement after deregulation, cost and profit efficiencies show varying trends for

different bank groups. Public sector banks rank first in two of the three efficiency

measures, indicating that, as opposed to the general perception, these banks do not lag

behind their private counterparts in efficiency. Our results also show that competition

has a significant impact on the efficiency levels of commercial banks across all three

efficiency measures. The impact of various factors captured in the study is clearly based

on performance in a given setting, and the rapid changes in the financial sector that are

underway will keep influencing the performance of the banking industry.

H.P. Mahesh
http://mar.sagepub.com/search?author1=H.P.+Mahesh&sortspec=date&submit=Submithttp://mar.sagepub.com/search?author1=H.P.+Mahesh&sortspec=date&submit=Submit


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1. H.P. Mahesh is Ph. D. Fellow at the Institute for Social and Economic Change,Nagarbhavi, Bangalore 560072; e-mail: [email protected]

ShashankaBhide

1. ShashankaBhide is Senior Research Counsellor, National Council of AppliedEconomic Research, ParisalaBhavan, New Delhi 110 002; e-mail:

[email protected]

URL- http://mar.sagepub.com/content/2/4/415.abstract

ABSTRACT NO. 6

The banking industry in India is undergoing a transformation since the beginning of

liberalization. Interest rates have declined considerably but there is evidence of under

lending by the banks. The social objectives of banking measured in terms of rural

credit are, expectedly, taking a back seat. The performance of the banks has improved

slightly over time with the public sector banks doing the worst among all banks. The

banking sector as a whole and particularly the public sector banks still suffer from

considerable NPAs, but the situation has improved over time. New legal developments

like the SARFAESI Act provide new options to banks in their struggle against NPAs.

The adoption of Basel-II norms however implies new challenges for Indian banks as

well as regulators. Over time, the Indian banking industry has become more competitive

and less concentrated. The new private sector banks have been the most efficient though

the recent collapse of Global Trust bank has raised issues about efficiency and

regulatory effectiveness.

Rajesh Chakrabarti

College of Management, Georgia Tech

800 West Peachtree Street,

Atlanta GA 30332, USA

Tel: 404-894-5109
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URL- http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan025796.pdf

ABSTRACT NO. 7

The purpose of this paper is to analyze the impact of IFRS on the Indian banking

industry after the implementation on and after 01st April. 2011. This paper is based

upon the critical analysis of financial statements of the Indian banking industry, such as

business per employee, Capital and reserve, Investments and advances, Net NPA

Ratios, and the impact thereon of relevant provisions of IFRS. The limitation of this

paper is that it covers only the Indian banking industry and excludes all other industries

in India. This paper shows the areas in which Indian banking industry is required to

focus before and after the implementation of IFRS and their consequences on the

financial statements of the Bank.

AUTHOR- CA. Mohammad Firoz (Corresponding author)

Cambridge University Press

New Delhi, India

Tel: 919-910-612-165 E-mail: [email protected]

Prof. A. Aziz Ansari

Department of Commerce & Business Studies

JamiaMilliaIslamia, New Delhi, India

E-mail:[email protected]

KahkashanAkhtar

Department of Commerce & Business Studies

JamiaMilliaIslamia, New Delhi, India

Tel: 919-899-313-271 E-mail:[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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ABSTRACT NO. 8

Reforms of the financial sector constitute the most important component of India's

programme towards economic liberalization. The recent economic liberalization

measures have opened the door to foreign competitors to enter into our domestic

market. Deregulation in the form of elimination of exchange controls and interest

rate ceilings have made the market more competitive. Innovation has become a must

for survival.

Many of the providers and users of capital have changed their roles all over the

world. Financial intermediaries have come out of their traditional approach and they are

ready to assume more credit risks. As a consequence, many innovations have taken

place in the global financial sector which has its own impact on the domestic sector

also. The emergences of various financial institutions and regulatory bodies have

transformed the financial services sector from being a conservative industry to a very

dynamic one. In this process this sector is facing a number of challenges.

In this changed context, the financial services industry in India has to play a very

positive and dynamic role in the years to come by offering many innovative products to

suit the varied requirements of the millions of prospective investors spread throughout

the country.

URL- http://www.articlesbase.com/finance-articles/impact-of-globalization-on-indian-

financial-services-industry-737929.html

Dr.V.V.S.K.PRASAD., M.Com.,M.B.A.,Ph.D.,

Professor and Head

E-Mail: [email protected]

ABSTRACT NO. 9
http://www.articlesbase.com/finance-articles/impact-of-globalization-on-indian-financial-services-industry-737929.htmlhttp://www.articlesbase.com/finance-articles/impact-of-globalization-on-indian-financial-services-industry-737929.htmlmailto:[email protected]:[email protected]://www.articlesbase.com/finance-articles/impact-of-globalization-on-indian-financial-services-industry-737929.htmlhttp://www.articlesbase.com/finance-articles/impact-of-globalization-on-indian-financial-services-industry-737929.html


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The paper investigates the performance of Indian commercial banking sector during the

post reform period 1992-2004. The results indicate high levels of efficiency in costs and

lower levels in profits, reflecting the importance of inefficiencies on the revenue side of

banking activity. The decomposition of profit efficiency shows that a large portion of

outlay lost is due to allocate inefficiency. The proximate determinants of profit

efficiency appear to suggest that big state-owned banks performed reasonably well and

are more likely to operate at higher levels of profit efficiency. A close relationship is

observed between efficiency and soundness as determined by banks capital adequacy

ratio. The empirical results also show that the profit efficient banks are those that have,

on an average, less non-performing loans.

Financial Deregulation and Profit Efficiency: A Non-parametric Analysis of Indian

Banks

Ghosh, Saibal (2009): Financial Deregulation and Profit Efficiency: A Non-parametric

Analysis of Indian Banks. Published in: Journal of Economics and Business, Vol. 61,

No. 6 (November 2009): pp. 509-528.

URL- http://mpra.ub.uni-muenchen.de/24292/

ABSTRACT NO. 10

Information technology Services is considered as the key driver for the changes taking

place around the world. Internet banking (IB) is the latest and most innovative service

and is the new trend among the consumers. The shift from the formal banking to e-

banking has been a 'leap' change. This study determines the factors influencing the

consumers adoption of internet banking in India and hence investigates the influence of

perceived usefulness, perceived ease of use and perceived risk on use of IB. It is an

essential part of a banks strategy formulation process in an emerging economy like

India. Survey based questionnaire design with empirical test was carried out. The results

have supported the hypothesis.


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CHAPTER III

STRUCTURE OF BANKING SECTOR IN INDIA


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The Indian banking industry has its foundations in the 18th century, and has had a

varied evolutionary experience since then. The initial banks in India were primarily

traders banks engaged only in financing activities. Banking industry in the pre -

independence era developed with the Presidency Banks, which were transformed into

the Imperial Bank of India and subsequently into the State Bank of India. The initial

days of the industry saw a majority private ownership and a highly volatile work


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environment. Major strides towards public ownership and accountability were made

with nationalization in 1969 and 1980 which transformed the face of banking in India.

The industry in recent times has recognized the importance of private and foreign

players in a competitive scenario and has moved towards greater liberalization.

In the evolution of this strategic industry spanning over two centuries, immense

developments have been made in terms of the regulations governing it, the ownership

structure, products and services offered and the technology deployed. The entire

evolution can be classified into four distinct phases.

Phase I- Pre-Nationalization Phase (prior to 1955) Phase II- Era of Nationalization and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms and

Partial Liberalization (1990-2004)

Phase IV- Period of Increased Liberalization (2004 onwards)

I. CURRENT STRUCTURECurrently the Indian banking industry has a diverse structure. The present structure of

the Indian banking industry has been analyzed on the basis of its organized status,

business as well as product segmentation.

II. ORGANIZATIONAL STRUCTUREThe entire organized banking system comprises of scheduled and non-scheduled banks.

Largely, this segment comprises of the scheduled banks, with the unscheduled ones

forming a very small component. Banking needs of the financially excluded population

is catered to by other unorganized entities distinct from banks, such as, moneylenders,

pawnbrokers and indigenous bankers.

1. SCHEDULED BANKS


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A scheduled bank is a bank that is listed under the second schedule of the RBI Act,

1934. In order to be included under this schedule of the RBI Act, banks have to fulfill

certain conditions such as having a paid up capital and reserves of at least 0.5 million

and satisfying the Reserve Bank that its affairs are not being conducted in a manner

prejudicial to the interests of its depositors. Scheduled banks are further classified into

commercial and cooperative banks. The basic difference between scheduled commercial

banks and scheduled cooperative banks is in their holding pattern. Scheduled

cooperative banks are cooperative credit institutions that are registered under the

Cooperative Societies Act. These banks work according to the cooperative principles of

mutual assistance.

2. SCHEDULED COMMERCIAL BANKS (SCBS):Scheduled commercial banks (SCBs) account for a major proportion of the business of

the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs

in India are categorized into the five groups based on their ownership and/or their nature

of operations. State Bank of India and its six associates (excluding State Bank of

Saurashtra, which has been merged with the SBI with effect from August 13, 2008) are

recognized as a separate category of SCBs, because of the distinct statutes (SBI Act,

1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalized banks (10)

and SBI and associates (7), together form the public sector banks group and control

around 70% of the total credit and deposits businesses in India. IDBI ltd. has been

included in the nationalized banks group since December 2004. Private sector banks

include the old private sector banks and the new generation private sector banks- which

were incorporated according to the revised guidelines issued by the RBI regarding the

entry of private sector banks in 1993. As at end-March 2009, there were 15 old and 7

new generation private sector banks operating in India.

3. FOREIGN BANKSForeign banks are present in the country either through complete branch/subsidiary

route presence or through their representative offices. At end-June 2009, 32 foreign


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banks were operating in India with 293 branches. Besides, 43 foreign banks were also

operating in India through representative offices.

4. REGIONAL RURAL BANKS (RRBS)Regional Rural Banks were set up in September 1975 in order to develop the rural

economy by providing banking services in such areas by combining the cooperative

specialty of local orientation and the sound resource base which is the characteristic of

commercial banks. RRBs have a unique structure, in the sense that their equity holding

is jointly held by the central government, the concerned state government and the

sponsor bank (in the ratio 50:15:35), which is responsible for assisting the RRB by

providing financial, managerial and training aid and also subscribing to its share capital.

Between 1975 and 1987, 196 RRBs were established. RRBs have grown in

geographical coverage, reaching out to increasing number of rural clientele. At the end

of June 2008, they covered 585 out of the 622 districts of the country. Despite growing

in geographical coverage, the number of RRBs operational in the country has been

declining over the past five years due to rapid consolidation among them. As a result of

state wise amalgamation of RRBs sponsored by the same sponsor bank, the number ofRRBs fell to 86 by end March 2009.

5. SCHEDULED COOPERATIVE BANKS:Scheduled cooperative banks in India can be broadly classified into urban credit

cooperative institutions and rural cooperative credit institutions. Rural cooperative

banks undertake long term as well as short term lending. Credit cooperatives in most

states have a three tier structure (primary, district and state level).

6. NON-SCHEDULED BANKS:Non-scheduled banks also function in the Indian banking space, in the form of Local

Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India.


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Local area banks are banks that are set up under the scheme announced by the

government of India in 1996, for the establishment of new private banks of a local

nature; with jurisdiction over a maximum of three contiguous districts. LABs aid in the

mobilization of funds of rural and semi urban districts. Six LABs were originally

licensed, but the license of one of them was cancelled due to irregularities in operations,

and the other was amalgamated with Bank of Baroda in 2004 due to its weak financial

position.

III. BUSINESS SEGMENTATIONThe entire range of banking operations are segmented into four broad heads- retail

banking businesses, wholesale banking businesses, treasury operations and otherbanking activities. Banks have dedicated business units and branches for retail banking,

wholesale banking (divided again into large corporate, mid corporate) etc.

1. RETAIL BANKINGIt includes exposures to individuals or small businesses. Retail banking activities are

identified based on four criteria of orientation, granularity, product criterion and low

value of individual exposures. In essence, these qualifiers imply that retail exposures

should be to individuals or small businesses (whose annual turnover is limited to Rs.

0.50 billion) and could take any form of credit like cash credit, overdrafts etc. Retail

banking exposures to one entity is limited to the extent of 0.2% of the total retail

portfolio of the bank or the absolute limit of Rs. 50 million. Retail banking products on

the liability side includes all types of deposit accounts and mortgages and loans

(personal, housing, educational etc) on the assets side of banks. It also includes other

ancillary products and services like credit cards, demat accounts etc.

The retail portfolio of banks accounted for around 21.3% of the total loans and advances

of SCBs as at end-March 2009. The major component of the retail portfolio of banks is

housing loans, followed by auto loans. Retail banking segment is a well-diversified

business segment. Most banks have a significant portion of their business contributed by


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retail banking activities. The largest players in retail banking in India are ICICI Bank,

SBI, PNB, BOI, HDFC and Canara Bank.

Among the large banks, ICICI bank is a major player in the retail banking space which

has had definitive strategies in place to boost its retail portfolio. It has a strong focus on

movement towards cheaper channels of distribution, which is vital for the transaction

intensive retail business. SBIs retail business is also fast growing and a strategic

business unit for the bank. Among the smaller banks, many have a visible presence

especially in the auto loans business. Among these banks the reliance on their respective

retail portfolio is high, as many of these banks have advance portfolios that are

concentrated in certain usages, such as auto or consumer durables. Foreign banks have

had a somewhat restricted retail portfolio till recently. However, they are fast expanding

in this business segment. The retail banking industry is likely to see a high competition

scenario in the near future.

2. WHOLESALE BANKINGWholesale banking includes high ticket exposures primarily to corporates. Internal

processes of most banks classify wholesale banking into mid corporates and large

corporates according to the size of exposure to the clients. A large portion of wholesale

banking clients also account for off balance sheet businesses. Hedging solutions form a

significant portion of exposures coming from corporates. Hence, wholesale banking

clients are strategic for the banks with the view to gain other business from them.

Various forms of financing, like project finance, leasing finance, finance for working

capital, term finance etc form part of wholesale banking transactions. Syndication

services and merchant banking services are also provided to wholesale clients in

addition to the variety of products and services offered.


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Wholesale banking is also a well-diversified banking vertical. Most banks have a

presence in wholesale banking. But this vertical is largely dominated by large Indian

banks. While a large portion of the business of foreign banks comes from wholesale

banking, their market share is still smaller than that of the larger Indian banks. A

number of large private players among Indian banks are also very active in this

segment. Among the players with the largest footprint in the wholesale banking space

are SBI, ICICI Bank, IDBI Bank, Canara Bank, Bank of India, Punjab National Bank

and Central Bank of India. Bank of Baroda has also been exhibiting quite robust results

from its wholesale banking operations.

3. TREASURY OPERATIONSTreasury operations include investments in debt market (sovereign and corporate),

equity market, mutual funds, derivatives, and trading and forex operations. These

functions can be proprietary activities, or can be undertaken on customers account.

Treasury operations are important for managing the funding of the bank. Apart from

core banking activities, which comprises primarily of lending, deposit taking functions

and services; treasury income is a significant component of the earnings of banks.

Treasury deals with the entire investment portfolio of banks (categories of HTM, AFS

and HFT) and provides a range of products and services that deal primarily with foreign

exchange, derivatives and securities. Treasury involves the front office (dealing room),

mid office (risk management including independent reporting to the asset liability

committee) and back office (settlement of deals executed, statutory funds management

etc.).

4. OTHER BANKING BUSINESSESThis is considered as a residual category which includes all those businesses of banks

that do not fall under any of the aforesaid categories. This category includes para

banking activities like hire purchase activities, leasing business, merchant banking,

factoring activities etc.


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IV. PRODUCTS OF THE BANKING INDUSTRYThe products of the banking industry broadly include deposit products, credit products

and customized banking services. Most banks offer the same kind of products with

minor variations. The basic differentiation is attained through quality of service and the

delivery channels that are adopted. Apart from the generic products like deposits

(demand depositscurrent, savings and term deposits), loans and advances (short term

and long term loans) and services, there have been innovations in terms and products

such as the flexible term deposit, convertible savings deposit (wherein idle cash in

savings account can be transferred to a fixed deposit), etc. Innovations have been

increasingly directed towards the delivery channels used, with the focus shifting

towards ATM transactions, phone and internet banking. Product differentiating services

have been attached to most products, such as debit/ATM cards, credit cards, and

nomination and Demat services.

Other banking products include fee-based services that provide non-interest income to

the banks. Corporate fee-based services offered by banks include treasury products;

cash management services; letter of credit and bank guarantee; bill discounting;

factoring and forfeiting services; foreign exchange services; merchant banking; leasing;

credit rating; underwriting and custodial services. Retail fee-based services include

remittances and payment facilities, wealth management, trading facilities and other

value added services.


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CHAPTER IV

EVOLUTION OF INDIAN BANKING


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EVOLUTION OF INDIAN BANKING

The Beginnings - 1926 to 1935

Date Event

1926

Royal Commission on Indian Currency (Hilton Young

Commission) recommends the establishment of a central

bank to be called the 'Reserve Bank of India'.

1931

Indian Central Banking Enquiry Committee revives the issue

of the establishment of the Reserve Bank of India as the

Central Bank for India.

5 March

1934

Reserve Bank of India Act, 1934, (II of 1934) constitutes the

statutory basis on which the Bank is established.

The Early Years - 1935 to 1949

Date Event

1 Apr

1935

Reserve Bank of India commences operations. Sir Osborne

Smith the first Governor of the Bank. The Bank was

constituted as a shareholders' bank.

5 Jul

1935

Scheduled banks required to maintain the Cash Reserve

Ratio, i.e., hold cash balances with the RBI equivalent to 5%

of their Demand Liabilities and 2% of their Time Liabilities.


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Oct

1935

London Office of the Reserve Bank set up. This was closed

on September 30, 1963.

1 Nov

1936

Resignation of the first Governor, Sir Osborne Smith, wef

July 1, 1937.

15 Jan

1937

Indian Companies (Amendment) Act, 1936 devotes a

separate chapter exclusively to Banks.

1 July

1937Sir James Braid Taylor assumes office as Governor.

1937RBI acts as banker to the Government of Burma and also

responsible for note issue in Burma.

Jan 1938 First Reserve Bank notes issued.

21 Jun

1938

The Failure of the Travancore National and Quilon Bank, the

largest bank in the Travancore region, underlined the need

for comprehensive banking reform and legislation.

3 Sep

1939

Introduction of Exchange Controls in India under Defense of

India Rules.

11 Mar

1940RBI Accounting Year changed from Jan-Dec to July-June.

1940

The silver rupee replaced by the quaternary alloy rupee. One

Rupee note reintroduced. This note had the status of a rupee

coin and represented the introduction of official fiat money

in India.


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11 Aug

1943Sir C. D. Deshmukh assumes office of Governor.

1944

The security thread on notes introduced for the first time in

India as a security feature.

1944

Laws relating to Government securities and to the

management of Public Debt by the Reserve Bank of India

consolidated on the basis of the Public Debt Act, 1944.

26 May

1945

Speculative activity in the financial and bullion markets.

Defense of India Rules invoked to authorize the ReserveBank to collect information from banks in respect of

advances. This was to check advances against bullion for

speculation.

9 Jun

1945

Reserve Bank of India entrusted with the Currency &

Coinage of the British Military Administration of Burma as

well as Banker to BMA.

12 Jan

1946

High Denomination Bank Notes of Rs 500, Rs 1000 and Rs

10,000 Demonetized to curb unaccounted money.

1946

Interim arrangements for Bank Supervision were put in place

by ordinances which were later replaced by the Banking

Companies Act, 1949. These Ordinances empowered the

Reserve Bank to inspect banks, as well as authorise thelicensing of bank branches.

30 Jun

1948

RBI ceased to function as the Central Bank of Pakistan. State

Bank of Pakistan commenced operations wef July 1, 1949.


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1 Jan

1949Reserve Bank of India nationalized.

16 Mar

1949

Coming into force of the Banking Companies Act, 1949.

This formed the statutory basis of bank supervision and

regulation in India. The Statutory Liquidity Ratio (SLR)

requiring banks to maintain liquid assets was introduced for

the first time. The Banking Companies Act was later

renamed the Banking Regulation Act.

1 Jul

1949

Sir Benegal Rama Rau assumes office as Governor

19 Sep

1949

Rupee devalued by 30.5 % as a defensive measure

consequent to the devaluation by other 'sterling area'

countries.

Republic India: Towards a Planned Economy - 1950 to 1960

Date Event

Oct

1950

Department of Banking Development created together with

the new post of Executive Director.

1951

Reserve Bank of India (Amendment) Act, 1951 enabled the

Bank to become Banker to Part B states after executing

agreements with them.

First Five Year Plan launched.


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1 Jan

1952

Bill Market Scheme introduced to enable banks to obtain

advances from the Reserve Bank against self-liquidating

bills. It was aimed at allowing currency to expand to meet

seasonal requirements.

1 Aug

1952

State Financial Corporations Act, 1951 came into effect. It

Enabled state governments to establish Financial

corporations for meeting the credit needs of medium and

small scale industries. Banks Holdings of the capital of

SFCs taken over by the IDBI in 1976.

Aug1954

All-India Rural Credit Survey Committee Report submitted.

Its recommendations led to bringing rural credit onto thecentre stage of central bank activism. Led to the formation of

the State Bank of India.

14 Sep

1954

Bankers Training College to provide training to banking

personnel established at Bombay (Mumbai) inaugurated.

1 Apr

1955

HaliSicca Rupees which had a circulation of about OS 48

crores ceased to be legal tender in the erstwhile Hyderabad

State. These were replaced by Indian Rupees.

1 Jul

1955

Imperial Bank of India converted to a state owned

institution, State Bank of India on July 1, 1955. One of the

immediate objectives was to establish additional branches

particularly at district headquarters. It was also expected to

provide remittance and other facilities to co-operative and

other banks and attempt to mobilize rural savings.

Second Five Year Plan commences

17 May

1956

Selective Credit Controls were deployed for first time.


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6 Oct

1956

System of Note Issue changed from Proportional Reserve

System requiring the Reserve Bank to maintain 40% gold

and Forex reserves against note issue to a minimum reserve

system. This was to enable the expanding currency

requirements of the economy to be met.

14 Jan

1957Resignation of Governor, Sir Benegal Rama Rau.

14 Jan

1957K.G. Ambegaonkar appointed governor till February 28th.

1 Mar

1957HVR Iengar appointed governor

31 Oct

1957Minimum reserves against note issue relaxed further.

1959

State Bank of India (Subsidiary Banks) Act, 1959 made the

banks of the erstwhile Princely Sates of India the subsidiaries

of the State Bank of India. These were The Bank of Bikaner,

The Bank of Jaipur, The Bank of Indore. The Bank of

Mysore, The Bank of Patiala, The Bank of Hyderabad, The

Bank of Saurashtra and The Bank of Travancore were made

subsidiaries of The State Bank of India. The Bank of Bikaner

and The Bank of Jaipur were amalgamated in 1963 to form

the State Bank of Bikaner and Jaipur.


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Institution Building - 1960 to 1971

Date Event

May 1960The failure of Laxmi Bank and the subsequent failure of the Palai

Central Bank catalyzed the introduction of deposit insurance in India.

1960

Policy of reconstruction / compulsory amalgamation of banks

introduced to consolidate the Banking sector. Powers to do so acquire

by RBI Act amendment.

Between 1960 and 1982, over 200 banks were merged or liquidated.

1961 Third Five Year Plan commences.

7 Dec

1961

Deposit Insurance introduced in India as a depositor protection measure.

It was intended to increase the confidence of the depositors in the

banking system, to facilitate the mobilization of deposits and promote

greater stability and growth of the banking system.

15 May

1962

The Reserve Bank of India Act, 1934, the Indian Coinage Act, 1906 and

the Currency Ordinance, 1940 extended to Goa, Daman and Diu

consequent to their liberation.

1 Mar

1962P.C. Bhattacharyya appointed Governor.

May 1962 New Bank Branch Licensing policy laid stress on opening of offices inunbanked and underdeveloped areas.

16 Sep

1962

Cash Reserve Ratio of banks was fixed uniformly at 3 % of their

Demand and Time Liabilities with the flexibility to vary it between 3


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and 15%.

1962

Chapter IIIA incorporated in RBI Act empowered the Bank to collect

information in regard to credit facilities granted by individual banks and

notified financial institutions to their constituents. 1974 the scope of the

term credit information was enlarged to cover the means antecedents,

history of financial transactions and the creditworthiness of any

borrower or class of borrowers.

1962

The Banking Regulation Act amended. Scheduled Banks to maintain

minimum liquid assets (SLR) of not less than 25% of the Demand and

Time Liabilities.

1 Jul 1962

Agricultural Refinance Corporation (ARC) set up to provide Refinance

to central land mortgage banks, state coop banks, scheduled commercial

banks who were shareholders.

26 Aug

1963

Staff Training College established at Madras started a pilot course

representing one of the early HRD endeavors in the services sector.

1 Feb

1964

RBI empowered to regulate the deposit acceptance activities of non-

banking institutions. New chapter IIIB inserted in RBI Act.

Feb 1964

Unit Trust of India established to extend facilities for an equity type

investment to small investors and also mobilize resources and channel

them into investments so as to facilitate the growth of the economy.

Commenced operations in July 1964.

1 Jul 1964

IDBI established as a subsidiary of the Reserve Bank of India with the

purpose of providing long term industrial finance. Took over business of

Refinance Corporation for Industry in September, 1964.


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20 Nov

1965

Credit Regulation introduced to align the growth of bank credit with

Plan requirements. Later evolved into the Credit Authorization Scheme .

1 Mar

1966

Operations of co-operative banking system brought under the regulatory

ambit of the RBI. Banking Laws.

Mar 1966A new Department of Non-Banking Companies established at RBI

Calcutta.

6 Jun 1966

Rupee devalued by 36.5 %

The US Dollar which earlier was equivalent to Rs 4.75 now rose to Rs

7.50.

2 Jul 1966 12 State Cooperative Banks included in Second Schedule of RBI Act.

17 Apr

1967Size of Bank notes reduced.

Social Controls, the Nationalization of Banks and the era of bank expansion - 1968

to 1985

Date Event

Dec 1967Introduction of Social Controls over banks with a view to securing a better

alignment of the banking system to the needs of economic policy.

22 Dec

1967

National Credit Council set up to provide a forum to discuss and assess

credit priorities on an all India basis. Council was to assist RBI and

government to allocate credit.

01 Apr Quaternary Alloy Rupee Coins demonetized.


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1968

01 Sep

1968

Gold (Control) Act passed to bring the administration of the control on a

permanent statutory footing.

(see: 1966 Gold Control Rules)

1968

Export Credit (Interest Subsidy) Scheme, 1968 introduced to promote

exports. Pre-shipment Credit Scheme introduced wef Jan 1969 as an

export promotion measure. This allowed banks to get refinance from the

Reserve Bank.

29 Jan

1969

Setting up of the Banking Commission by GOI to report on (i) Banking

costs; ( ii) legislations affecting banking; (iii) indigenous banking; (iv)

bank procedures; (v) non-banking financial intermediaries.

01 Feb

1969

Gold Holdings of RBI revalued at the current official IMF rate of

0.118489 grams of fine gold per rupee (to take into account the

devaluation of the Rupee by 36.5 % in June 1966) The profit on

revaluation transferred to the reserve fund.

19 Jul

1969

14 major Indian Scheduled Commercial Banks with deposits of over Rs 50

crores nationalized ' to serve better the needs of development of the

economy in conformity with national policy objectives'.

On February 10, 1970 the Supreme Court held the Act void mainly on the

grounds that it was discriminatory against the 14 banks and that the

compensation proposed to be paid by Govt. was not fair compensation.

A fresh Ordinance was issued on February 14 which was later replaced by

the Banking Companies (Acquisition and Transfer of Undertakings) Act,

1970.

(5 of 1970).

24 Sep National Institute of Bank Management (NIBM) established at Bombay


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1969 (Mumbai). Shifted to its Pune campus in the mid-1980s.

29 Sep

1969

Cooperative Bankers Training College (CBTC) established at Poona

(Pune) to provide training to the cooperative sector. Later renamed College

of Agricultural Banking (CAB) in 1974.

Dec 1969Lead Bank Scheme introduced which envisaged an area approach to

banking to meet the credit gaps in the economy.

01 Jan

1970

Special Drawing Rights (SDR) created by the IMF to enhance

international liquidity.

Jan 1970RBI prescribed for the first time the minimum interest rate to be charged

by banks on advances against sensitive commodities.

Feb 1970The Agricultural Credit Board set up with Governor as Chairman to

formulate and review policies in the sphere of rural credit.

03 Apr

1970

The Managing Agency system abolished by the Companies Amendment

Act, 1969.

04 May

1970B.N. Adarkar appointed Governor till June 15

16 Jun

1970S. Jagannathan appointed Governor.

Between

Feb &

Aug 1970

Inflationary trends led to concern and strong measures including

increasing bank rate and raising SLR from 25 to 28%.

01 NovNew Bills Rediscounting Scheme introduced was expected to impart

flexibility to the Money Market, even out liquidity within the banking


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1970 system and enable the Reserve Bank to exercise more effective control

over the money market.

14 Jan1971

Credit Guarantee Corporation of India Ltd. established. To facilitate bank

lending to the priority sectors. It guaranteed credit extended by scheduled

commercial banks to small borrowers and for other priority purposes.

12 Apr

1971

Concerns related to Industrial sickness led to the establishment of the

Industrial Reconstruction Corporation of India Ltd.

01 Jul

1971Deposit Insurance cover extended to cooperative banks.

15 Aug

1971

Convertibility of USD suspended. This brought to an end the system of

fixed exchange rates embodied in the Bretton Woods System. After an

interim arrangement which lasted up to 1973, the world shifted to a

floating exchange rate regime.

Oct 1971State Level Bankers Committees set up to consider problems requiring

inter-bank coordination.

Hindi Version of RBI Annual Report and Trend and Progress of Banking

in India for the year ended 30 June, 1971.

25 Mar

1972

Differential Interest Rate Scheme Introduced which envisaged

concessional interest rates on advances made by Public Sector Banks to

selected low income groups.

03 Apr

1972

Import Policy for 72-73 stressed the importance of achieving self reliance

reflecting the views of the times.

03 Nov Special payment arrangements with the erstwhile COMECON group of


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1972 countries where payments were settled in rupees through bilateral trade

which was a type of barter arrangement.

1973

"Oil Shock" when oil prices quadrupled. This led to double digit inflation

as well as global recession.

As a response the Bank deployed a series of restricted measures to contain

/ moderate the expansion of bank credit.

Call money rate rose to an all-time high of 30% prompting the Indian

Banks' Association to intervene and fix a ceiling of 15%.

01 Sep

1973

Miscellaneous Non-Banking Companies (Reserve Bank) Direction, 1973

sought to regulate the acceptance of deposits by companies conductingprize chits, lucky draws savings schemes, etc.

08 Sep

1973

Quantitative credit ceiling on non-food bank credit prescribed for the first

time for the busy season of 1973-74.

Nov 1973Restrictions on SBI and its subsidiaries removed to bring them on par with

other commercial banks.

01 Jan

1974

Foreign Exchange Regulation Act, 1973 came into force to conserve

foreign exchange. Its administration was entrusted to the Reserve Bank.

09 Dec

1974

Asian Clearing Union (ACU) established to facilitate payments for current

international transactions on a multilateral basis. Clearing operations were

to be denominated in members currency or AMU which would be

equivalent to 1 SDR. Clearing operations commenced November, 1975.

13 Dec

1974

Reserve Bank of India (Amendment) Act, 1974 widened the powers of the

Bank.

19 May N. C. Sengupta appointed governor up to August 19.


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1975

09 Aug1975

Tandon Committee Report emphasized need to correlate bank credit to the

business/ production plans and own resources of borrowers. Entailed a

shift from security based to need based approach to bank credit.

The new norms formed the basis of bank lending for working capital

requirements.

20 Aug

1975K.R. Puri appointed governor

25 Sep

1975

Exchange value of Rupee linked to movements in a basket of selected

foreign currencies (major trading partners)

26 Sep

1975

Regional Rural Banks were set up as alternative agencies to provide credit

to rural people in the context of the 20 Point Programme. These were

expected to "combine the rural touch and local feel, with the modern

business organization.

01 Nov

1975

Foreign Currency (Non Resident) Account Scheme introduced in USD and

GBP To encourage private remittance from abroad.

16 Nov

1975

Agricultural Refinance Corporation (ARC) renamed Agricultural

Refinance and Development Corporation (ARDC) and its activities

widened.

1975 20 point economic programme introduced.

01 Feb

1976

Duty Draw back credit scheme introduced as an export promotion

measure.

1976 Village Adoption Scheme for banks introduced.


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Apr 1977

A new series of Money supply introduced the concepts of M1, M2, M3

etc. Money supply with the public consisted of

(a) currency with the public,

(b) demand deposits of all commercial banks, of state, central and urban

cooperative banks and of salary earners societies, and

(c) Other deposits with Reserve Bank of India.

02 May

1977M. Narasimham appointed Governor up to November 30.

1977Integrated Rural Development Programme (IRDP) initiated as a poverty

alleviation measure.

01 Dec

1977I.G. Patel appointed Governor.

16 Jan

1978

Notes of Rs 1,000/-, Rs 5,000/- and Rs 10,000/- denominations

demonetized to curb the illicit transfer of money for financing

transactions which are harmful to the national economy.

03 May

1978

RBI commenced gold auctions on behalf of Government of India out of

government stock at fortnightly intervals.

27 May

1978

The Deposit Insurance Corporation (DIC) took over the undertaking of the

Credit Guarantee Corporation of India Ltd. (CGCI) to form the Deposit

Insurance and Credit Guarantee Corporation (DICGC) wef July 15, 1978.

03 June

1978

RBI Act amended. The amendments were made mainly to enable the more

effective utilization of foreign exchange reserves.

12 Dec

1978

Prize Chit and Money Circulation Schemes (Banning) Act, 1978 came into

force wef 12 December, 1978.


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1978

Annual Appraisal of Banks introduced in the nature of management audit

introduced. Emphasis mainly on the examination of the organizational set-

up, manpower planning , machinery for supervision and control over

branches, systems & procedures in key areas, funds management and

management of credit.

30 Mar

1979

Penalty for non-compliance of CRR & SLR introduced to give the Reserve

Bank teeth to implement Monetary Policy measures more effectively.

1979

Rural Planning and Credit Cell set up in the Reserve Bank of India to

ensure proper implementation of the multi-agency approach to credit in

rural areas.

Aug 1979

Credit Information Review started being published every month To

disseminate in simple language and without delay the credit and banking

policy decisions of the Reserve Bank.

17 Jan

1980International gold prices soar to all-time highs.

Mar 1980Banks are required to provide financial support to implementation of 20

point programme to improve lot of weaker sections.

Sixth Five Year Plan.

15 Apr

1980

Six private sector banks nationalized in order further control the

heights of the economy, to meet progressively, and serve better, the needs

of the development of the economy and to promote the welfare of the

people in conformity with the policy of the State

Dec 1980Recommendations of Chore Committee related to the cash credit system,

adopted. Emphasis on increasing contribution for working capital


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requirements by borrowers out of internal resources.

01 Jan

1981Neighbourhood Travel Scheme (NTS) introduced.

15 Jan

1981

GOI announced special bearer bond To mop up unaccounted money and

channelize it to productive purposes.

Apr 1981Major Organizational internal restructuring in the Reserve Bank. New

Departments set up.

1981

Buildup of inflationary pressures and adverse movement in foreign trade

following the hike in oil prices. Bank rate raised to 10%, CRR raised to

7.5%, SLR to 35%.

11 July

1981

Ordinance prohibiting companies (including Banking Companies)

cooperative societies, firms, to repay any person any deposit otherwise

than by an account payee cheque / bank draft when such repayment

amounted to Rs. 10,000 or more.

01 Jan

1982

Export Import Bank of India established with the objective of providing

comprehensive package of financial and allied services to exporters and

importers.

01 Jan

1982New 20 point programme announced by the PM.

12 July

1982

National Bank for Agriculture and Rural Development (NABARD)

established on the basis of the National Bank for Agriculture and Rural

Development Act, 1981. For providing credit for the promotion of

agriculture, small scale industries, cottage and village industries,

handicrafts, and other rural crafts for promoting integrated rural


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development and securing rural prosperity.

16 Sep

1982Manmohan Singh appointed Governor.

1983C D Deshmukh Memorial Lecture introduced as an annual event in

Governor Deshmukh'shonour

Nov 1983National Clearing Cell (NCC) set up by the bank to introduce mechanized

cheque processing and the national clearing of cheques.

12 Jan

1984

Banking Laws (Amendment) Act, 1983 widened the activities that banks

could undertake (such as leasing), provided nomination facilities to

account holders, strengthened the powers of the Reserve Bank, streamlined

returns and prohibited unincorporated bodies from accepting deposits from

the public except to a specified extent amongst others.

01 Feb

1984

Urban Banks Department formed to supervise the affairs of Urban

Cooperative Banks.

01 May

1984

Authorized capital of the Deposit Insurance and Credit Guarantee

Corporation raised to Rs 50 crores.

15 Jan

1985A Ghosh appointed Governor up to February 4

04 Feb

1985RN Malhotra appointed


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Developing the Markets : Seeds of Liberalization - 1985 to 1991

Date Event

10 Apr

1985

S. Chakravarty Committee was set up to review the working

of monetary system. Its recommendations had far reaching

consequences.

1985

By mid-1985, the statutory preemption on banks' resources

in the form of the Statutory Liquidity Ratio (SLR) and the

Cash Reserve Ratio (CRR) exceeded 45%.

Nov

1986182 day TB introduced.

Jan 1987Board for Industrial and Financial Reconstruction set up andbecame operational wef May 1987 reflecting concerns

related to Industrial Sickness.

Mar

1987

Magnetic Ink Character Recognition (MICR) technology

introduced for cheque clearing. Efforts at mechanizing

cheque clearing operations.

28 Dec

1987

Indira Gandhi Institute of Development Research (IGIDR)

was established by Reserve Bank as an advanced studies

institute to promote research on Development issues from a

multi-disciplinary point of view.


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Apr

1988

Security & Exchange Board of India (SEBI) established to

deal with the development and regulation of the securities

market and investor protection.

Apr

1988

The Discount and Finance House of India set up as a money

market institution, commenced operations.

Jul 1988

The National Housing Bank established as an apex body of

housing finance and to promote activities in housing

development.

Aug1988

Stock Holding Corporation of India Ltd. (SHCIL) adepository institution commenced operations.

Oct

1988

Maximum lending rate abolished. Banks free to charge

customers according to their credit record.

Mar

1989

Certificates of Deposit (CDs) and Commercial Paper (CPs)

introduced in India to widen the monetary instruments and

give investors greater flexibility.

Apr

1989

Banking, Public Financial Institution and Negotiable

Instruments Laws (Amendment) Act, 1988 enacted to

encourage the culture of use of cheques in India. It

introduced penalties for the dishonor of cheques.

Apr

1989Service Area Approach for rural lending became operational.

1 Jul

1989

CRR raised to 15 per cent taking statutory preemptions of

banks' resources in the form of the Statutory Liquidity Ratio

(SLR) and the Cash Reserve Ratio (CRR) to over 53%.


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15 May

1990

Agriculture and Rural Debt Relief Scheme, 1990 providing

debt relief up to Rs 10,000 to small borrowers from Public

Sector Banks and Regional Rural Banks announced.

22 Dec

1990S. Venkitaramanan Governor.

Crisis and Reforms - 1991 to 2000

Date Event

1 & 3

Jul 1991

External Payments Crisis. Rupee Devalued in two stages.

Cumulative devaluation about 18 percent in USD terms.

Nov

1991

The Narsimahmam Committee Report suggested far

reaching reforms in the Indian Banking sector. These

included a phased reduction in the SLR and CRR as well as

accounting standards, income recognition norms and capital

adequacy norms.

Mar

1992

A dual exchange rate system called Liberalized Exchange

Rate Management System (LERMS) introduced. This was

the initial step to enable a transition to a market determined

exchange rate system.

Apr

1992

Income recognition and asset classification norms

introduced. Provisioning and Capital adequacy standards

specified. Indian Banks are required to fulfill these norms by

1994 and 1996.


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22 Dec

1992C. Rangarajan appointed Governor.

1992 SEBI formulated Insider Trading Regulations.

1993 Unified Exchange rate.

1993

Guidelines for the establishment of private sector banks

issued. This herald a new policy approach aimed at fostering

greater competition.

15 Jul1994

Nationalized Banks allowed to tap the capital market tostrengthen their capital base.

Jun 1994 National Stock Exchange commenced operations

1994Committee on Reform of the Insurance Sector, RN

Malhotra.

Aug

1994

Rupee made convertible on the Current Account. Acceptance

of Article VIII of the Articles of Agreement of the IMF.

Oct

1994

Lending rates of commercial banks deregulated. Banks are

required to declare their Prime Lending Rates (PLR).

3 Feb

1995

Bharatiya Reserve Bank Note Mudran Limited established as

a fully owned subsidiary of the Reserve bank. Commenced

printing of Notes at Mysore on June 1 and at Salboni on

December 11.

Jun 1995The Office of the Banking Ombudsman established for

expeditious & inexpensive resolution of customer complaints


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related to Banking services.

Oct

1995

Banks are allowed to fix their own interest rates on domestic

term deposits with maturity of two years.

17 Sep

1996RBI Web site made operational.

1 Apr

1997

RBI & Government of India agree to replace the system of

ad hoc Treasury Bills with Ways and Means Advances

ending automatic monetization of fiscal deficits.

6 Jun

1997

RBI Conducts first auction of 14 day Treasury Bills. In

October, auction of 28 day Treasury Bills was introduced.

10 Jul

1997

Foreign Institutional Investors (debt funds) permitted to

invest in dated Government Securities.

22 Nov

1997Bimal Jalan appointed Governor.

28 Nov

1997

A series of measures introduced in response to the Asian

Currency Crisis.

28 Nov

1997

Fixed rate repos in G-Secs introduced to give

maneuverability in liquidity management; and to bring

orderly conditions in money and forex markets.

19 Dec

1997

Capital Index Bonds introduced for first time. Inflation

hedged instrument linked to Wholesale Price Index.


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Apr

1998

Recommendations on the harmonization of the Role and

Operations of Dev

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Economic & Technological Reforms in Indian Banking System

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