Professional Documents
Culture Documents
Chapter 3
Evolution & Origin of Commercial
Banking
The word bank is used in the sense of a commercial
bank.
The word bank has a German origin though some
people believe that it has come from a French word
‘Banqui’ and yet others believe that it has come from
the Italian word ‘Banca’. Whatever it is, it referred to
a bench for keeping , lending and exchanging of
money or coins in the market place by money lenders
and money changers.
There was no such word as banking before 1640,
although the practice of safe keeping and savings
flourished in the temples of Babylon as early as 2000
BC.
In India also reference of banking system could be
found in the ancient Jain Temples and literary works
like that of Chanakya etc.
The first bank called the ‘Bank of Venice’ was established in Venice,
Italy in 1157 to finance the monarch in this wars.
The bankers of Lombardy were famous in England, but modern
banking began with the English Goldsmiths only after 1640.
The First Bank in India was Bank of Hindustan started in 1770 by
Alexender and Co.
But the first bank in modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.
Action on the
Recommendations:
Phasing of reduction of Reserve Requirements
◦ SLR: 25% on the basis of incremental NDTL wef. 30.9.94
◦ CRR reduced to 14% & then to 13% in Credit pol of April, 1996. 12%..
Then 10% finally to 8% by July 99
Interest Rate on CRR Balances : (4%)
Phasing out of directed credit programme:
Interest rate deregulation: Banks were given the freedom to
have their own reference rate (PLR) instead of floor and ceiling rates, and
fix individual borrower’s int rate within a band of PLR.
Capital Adequacy Norms: RBI introduced it as per the rec.
and as of 31st March 1997 only 2 banks (UCO and the Indian banks) were
not able to achieve the norm of 8%
Asset Classification: wef 1.4.92 had to implement the guidelines
of RBI and classified their loan assets based on record of recovery and
also started recognising income based on this. Because of this many
banks in the period March 93-March 97 reported huge losses.
Transparency: RBI came up with a different format of bank B/s
and P&L a/c as distinct from the one suggested by the committee, in
march 1992. During 96-97 more significant additions such as: break up of
capital adequacy ratio, provisions made for the year, NPA % etc were
introduced. In 1998 banks were directed to disclose 7 critical ratios
relating to productivity and profitability.
Capital Adequacy:
Minimum capital to risk-
weighted-asset ratio
Tax Treatment of Provisions: The limit of admissible
deductions was enhanced to 5% of the income and 10% of av. Aggregate
advances of rural branches.
Loan Recovery: As recommended the Govt, passed an Act in 1993
for the creation of recovery tribunals for loan accounts with outstanding
balances of Rs. 10 L or more, it also established 8 such tribunals and an
appellate tribunal in Mumbai which upto March 1998 covered 20 states
and 4 UT.
Tackling of DD: No steps had yet been taken in regard to creation
of an Asset Reconstruction Fund, as recommended by the committee.
Restructuring of the Banks: No progress in this respect was
made except that on 4.9.93 a loss making bank called New Bank of India
merged with PNB.
Private Banks: BR(A)Act 1994 was passed to permit private sector
banks to enter the banking field. RBI gave licence to 9 pvt banks. By the
end of 1994.
Narsimham Committee II Rep
It was again reconstituted in the year
1997 to suggest measures to strengthen
the banking sector of the country.
The committee submitted a report on
April 1998
Main recommendations of the committee
are as follows:
Major Recommendations
Merger of Strong PSBs & Recapitalisation scheme for weak banks
Government should have a lesser role & greater autonomy should be
allowed
Functions of boards and managements need to be reviewed
Moving away from excessive concentration on asset mgt. to ALM with a
view to modifying their liability in consonance with their desired asset
structure.
Thee is a need to review minimum prescription for Capital Adequacy. In
this regard the committee recommended that minimum CAR be raised to
10% by 2002. By now most of the banks have a CAR of 11% or higher.
The committee also felt the need to lay down prudential and disclosure
norms and sound procedures for the purpose of supervision and
disclosure.
There should be greater specialisation by banks in various niche areas like
Retail, agriculture, SSI, Industry etc.
Banks should place greater reliance on non fund based business such as
advisory and consultancy services, guarantee and custody services
There is a need for PSBs to speed up computerisation and focus on
relationship banking.
Need for professionalising and depoliticising of bank boards
Should have thrust on greater financial intermediation with large
companies. Accessing securities debt domestically and from financial
markets abroad. (There should be an integration of NBFCs lending
activities into the financial services)
A review of recruitment procedures, training and remuneration policies in
PSBs should be carried out. BSRB should be abolished
Should concentrate on mgt of credit risk and better mgt of NPAs.
The NC-II rep. defined a weak bank as one whose accumulated losses and
NPA exceeds its net worth and whose adjusted operating profits (op
profits – income on recapitalisation bonds) was negative for three
consecutive years.