BANKING SERVICES UNIT I

Evolution Of Indian Financial System 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 the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State 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. 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 Lahore in 1895, which has survived to the present and is now one of the largest banks in India. 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. From World War I to Independence. The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), 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. Post-independence In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank 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 an existing bank could be opened without a license from the RBI, and no two banks could have common

directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969. The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalised 14 banks then. These banks were mostly owned by businessmen and even managed by them. Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India

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 GOI 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. Liberalisation In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New 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. Banks in India Allahabad Bank American Express Bank Ltd

Andhra Bank ABN AMRO Bank Bank Muscat (S A O G) Bank Of America Bank Of India Barclays Bank PLC Centurion Bank Ltd Citibank Corporation Bank Dhanlakshmi Bank Ltd Deutsche Bank India Export-Import Bank Of India Global Trust Bank Ltd Hongkong Shanghai Banking Corporation Ltd ICICI Bank Ltd IDBI Bank Ltd IndusInd Bank Ltd Syndicate Bank India Industrial Development Bank Of India ING Vysya Bank Ltd JP Morgan Chase Bank Punjab National Bank Standard Chartered Bank State Bank Of India State Bank Of Indore Canara Bank India Reserve Bank Of India SBI Commercial and International Bank Bank Of Baroda India Federal Bank India HDFC Bank India Union Bank Of India YES BANK India State Bank Of Bikaner And Jaipur Ceylon Bank Catholic Syrian Bank Dena Bank Mizuho Corporate Bank Indian Overseas Bank Karnataka Bank Punjab and Sind Bank Kotak Mahindra Bank State Bank of Hyderabad Karur vysya Bank Limited

State Bank of Patiala Oriental Bank of Commerce State Bank of Travancore United Bank of India State Bank of Mysore Axis Bank Vijaya Bank Tamilnad Mercantile Bank Ratnakar Bank Jammu and Kashmir Bank UCO Bank DBS Bank Ltd. Lakshmi Vilas Bank The Nainital Bank Ltd. State Bank of India (SBI) is the largest bank in India. The bank traces its ancestry back through the Imperial Bank of India to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16000 branches, has the largest branch network in India. Associate banks.. The Subsidiaries of SBI till date State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore Public Sector Banks There are total 27 public sector banks in India (As on 26-09-2009). Of these 19 are nationalised banks, 6(STATE BANK OF INDORE ALSO MEARGED RECENTLY) belong to SBI & associates group and 1 bank (IDBI Bank) is classified as other public sector bank.

RBI RESERVE BANK OF INDIA The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934.the RBI plays an important part in the development strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member-strong Central Board of Directors the Governor(currently Duvvuri Subbarao), four Deputy Governors, two Finance Ministry representative, ten Government-nominated Directors to represent important elements from India's economy, and four Directors to represent Local Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these Local Boards consist of five members who represent regional interests, as well as the interests of co-operative and indigenous banks. STRUCTURE OF RBI:

Functions: The functions are classified into three heads,viz., A) Traditional functions B) Promotional functions and C) Supervisory functions. lets see the detailed accont in these heads.

A) Traditional functions 1.Monopoly of currency notes issue 2.Banker to the Government(both the central and state) 3.Agent and advisor to the Government 4.Banker to the bankers 5.Acts as the clearing house of the country 6.Lender of the last resort 7.Custodian of the foreign exchange reserves 8.Maintaining the external value of domestic currency 9.Controller of forex and credit 10.Ensures the internal value of the currency 11.Publishes the Economic statistical data 12.Fight against economic crisis and ensures stability of Indian economy. B) Promotional functions

1.Promotion of banking habit and expansion of banking systems. 2.Provides refinance for export promotion 3.Expansion of the facilities for the provision of the agricultural credit through NABARD 4.Extension of the facilities for the small scale industries 5.Helping the Co-operative sectors.

6.Prescribe the minimum statutory requirement. 7.Innovating the new banking business transactions. C) Supervisory functions

1.Granting licence to Banks. 2.Inspects and makes enquiry or determine position in respect of matters under various sections of RBI and Banking regulations 3.Implements Deposit insurance scheme 4.Periodical review of the work of the commercial banks 5.Giving directives to commercial banks 6.Control the non-banking finance corporation 7.Ensuring the health of financial system through on-site and off-site verification. These are all the functions which are protective to the Indian Economy, thats why RBI is considered as the head of all banks. Commercial Banks The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

CO OPERATIVE BANKS: The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businesses of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Cooperative banks in India finance rural areas under:

Farming Cattle Milk Hatchery Personal finance

Cooperative banks in India finance urban areas under:

Self-employment Industries Small scale units Home finance Consumer finance Personal finance

Some facts about Cooperative banks in India

Some cooperative banks in India are more forward than many of the state and private sector banks. According to NAFCUB the total deposits & lendings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the

NBFCs: A Non Banking Financial Company (NBFC) is a company registeredunder the Companies Act, 1956 of India, engaged in the business ofloans and advances, acquisition of shares, stock, bond sire-purchase,insurance business, or chit business: but does not include anyinstitution whose principal business is that includes agriculture orindustrial activity; or the sale, purchase or construction of immovableproperty.A non-banking financial company (NBFC) is a company registeredunder the Companies Act, 1956 and is engaged in the business ofloans and advances, acquisition ofshares/stock/bonds/debentures/securities issued by government orlocal authority or other securities of like marketable nature, leasing,hirepurchase, insurance business, chit business, but does not includeany institution whose principal business is that of agricultureactivity, industrial activity, sale/purchase/construction of immovableproperty. A non-banking institution which is a company and which has itsprincipal business of receiving deposits under any scheme orarrangement or any other manner, or lending in any manner is also anon-banking financial company (residuary non-banking company).What is difference between banks & NBFCs ? (i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -immediately or within a very short period -- like your current or savings accounts.) (ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and (iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.Every NBFC should be registered with RBI In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. venture capital fund/merchant banking companies/stock broking companies registered with Sebi, insurance company holding a valid certificate of registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or housing finance companies regulated by National Housing Bank.

With effect from December 6, 2006 the above NBFCs registered with RBI have been classified as(i) Asset Finance Company (AFC) - AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive /economic activity, such as automobiles, tractors, lathe machines,generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. i) Investment Company (IC)(iii) Loan Company (LC)NBFCs not Registered with RBI. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stockbroking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions. Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock- exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, Insurance companies are regulated by Insurance Regulatory and Development Authority. Chit Companies are regulated by the respective State Governments Nidhi Companies are regulated by Ministry of Company Affairs, Government of IndiaCan all NBFCs accept deposits and what are the requirements foraccepting public deposits? All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept/hold public deposits.Some points to note i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is . 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating. v) The deposits with NBFCs are not insured. vi) The repayment of deposits by NBFCs is not guaranteed by RBI. vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.Whether NBFCs can accept deposits from NRIs? Effective from April 24, 2004, NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.What are the requirements for registration with RBI?A company incorporated under the Companies Act, 1956 and desirousof commencing business of non-

banking financial institution asdefined under Section 45 I(a) of the RBI Act, 1934 should have aminimum net owned fund of Rs 25 lakh (raised to Rs 2 crore fromApril 21, 1999).The company is required to submit its application for registration inthe prescribed format alongwith necessary documents for banksconsideration. The bank issues certificate of registration aftersatisfying itself that the conditions as enumerated in Section 45-IA ofthe RBI Act, 1934 are satisfied.