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Banking in India
The history of modern banking in India is about 100 years old. The first bank of limited liability managed by Indians was Oudh Commercial Bank established in 1881. Later Punjab National Bank was set up in 1894. Swadeshi movement which began in 1906 encouraged the formation of a number of commercial banks. Banking crisis in 1913-17 and failure of 588 banks in various states during the decade ending in 1949, underlined the need of regulating and controlling commercial banks. The Banking Companies (Inspection Ordinance) was passed in January 1946 and the Banking Companies (Restriction of Branches) Act was passed in February 1946. The Banking Companies Act was passed in February 1949. With a view of bringing commercial banks into the main stream of economic development with definite social obligations and objectives, Government issued an Ordinance on July 19, 1969 acquiring ownership and control of 14 major banks in the country with deposits exceeding Z 50 crore each. Another six commercial banks were nationalized in April 1980. But in September 1993, the New Bank of India was merged with the Punjab National Bank. These 19 nationalized banks along with the State Bank of India, which was nationalized in 1956, now constitute the public sector banks. The main objective of public sector banks have been to mobilize savings and utilize them for productive purposes, to serve larger social purpose under close public regulation, legitimize credit needs of private sector industry and trade, to ensure the needs of productive sectors of the economy and to curb the use of bank credit for speculative and other unproductive purposes.
The Reserve Bank of India was set up in 1934 and nationalized in 1949. The main objectives of the Bank are regulating issue of bank notes, keeping foreign exchange reserves of the country, operating currency and credit system and developing financial structure of the country on sound lines consistent with national socio-economic objectives and policies. The State Bank of India is the biggest commercial bank in the country with seven subsidiaries, and ranks as one of the 100 top most banks of the world. In these associated banks, SBI owns either the entire or the majority of share capital.
Besides the public sector banks which control over 90 percent of the banking activity, there are non-nationalized scheduled banks and non-scheduled banks. The number of reporting scheduled commercial banks, both nationalized is 26 and non-nationalized is 90. There were also 4 non-scheduled banks. Of the scheduled commercial banks 224 are in the public sector which account for about 85-90 percent of commercial banking system. Within the public sector banking system, 196 are regional and rural banks and 28 are regular commercial banks which transact all types of banking business.
In the early years of independence, the number of bank offices was very small. In June 1951, it stood at 5,115. It increased to 6,168 in June 1969. After the nationalization of banks in July 1969, there was appreciable increase in the number of banks. At the end of March 1995, there were 62,346 bank offices and branches including those of the foreign banks. A number of Regional Rural Banks are also there catering to the credit requirements of the weaker sections small and marginal farmers, landless labourers, village artisans and small businessmen in the rural areas. There are now'about 196 Regional Rural Banks in all states except Sikkim and Goa having a network of 14,542 branches and covering 408 districts. In August 1996 the lending rates of these Regional Rural Banks was deregulated by the RBI.
In July 1992 National Bank for Agriculture and Rural Development (NABARD) was established with a view to facilitate rural credit and agricultural development. It has the overall responsibility of development, policy-planning and financial support for agriculture and rural development. The NABARD provides credit to rural sector through cooperative banks, commercial banks, regional rural banks and other financial institutions set up to finance rural development.
The Export-Import Bank of India was set up in January 1982 as a statutory corporation wholly owned by the Union Government. The main objectives of the Exim Banks are to ensure an integrated and coordinated approach to solving the problems of exporters; providing special attention to capital goods exports and export technical services; and to tap domestic and overseas markets for resources, undertaking development and financing activities in the area of exports. It provides financial assistance to exporters and importers and acts as the principal financial institute for co-ordinating the working of other institutions engaged in financing exports and imports. It also provides refinance facilities to commercial banks and financial institutions against their export-import financing activities.
In recent years there has been phenomenal growth in banking services and activities. Reforms in the banking sector continues with a view to improving their financial strength and functional efficiency and bringing them up to international standards. In January 1997 the Cash Reserve Ratio (CRR) was reduced from 14 percent to 10 percent resulting in adequate liquidity. There were substantial deposit accretions and slow offtake of credit during 1996-97 in sharp contrast with the scenario in 1995-96 when banks faced difficulties in meeting credit demands. CRR cuts increased banks' lend able resources by about ' 18,000 crore between April 1996 and January 97. Consequently, the money market witnessed easy conditions and all money rates remained easy and the banks lowered their Prime Lending Rates (PLR). The banks also announced the maximum spreads over and above their PLRs. Other important measures witnessed during the year were reduction in interest rates of deposits up to one year, near removal of selective credit controls, great autonomy in foreign exchange management and permission to banks to operate in the secondary market for equities. The income recognition asset classification norms were further improved.
The overall performance of public sector banks was negative which meant 0.07 percent return on assets. Low rates of return of many public sector banks, coupled with heavy losses of a few is a major source of concern. The total non-performing assets (NPAs) of the Indian banking system is the highest in the world. NPAs are lower in private and foreign banks because of a couple of reasons. The government has initiated some measures to correct and improve the situation which include focusing on a drastic reduction of NPAs, further recapitalization of banks, and Asset Reconstruction Fund (ARE) etc. Another important measure is to set up a Settlement Advisory Committee (SAC), headed by a retired high court judge to advise on compromise of onetime settlement proposals.
A good deposit growth and sluggish off take of credit were other features of the banking scene during the period. The deposits of all scheduled commercial banks grew by 16.1 percent (12.1 percent last year); total credit rose by 8.9 percent (20% percent last year). Due to comfortable liquidity position, dependence of the banking system on high cost certificates of deposits for resource mobilization was substantially less. Another important feature of the year was the cross-border capital flows which led to a foreign exchange reserve growth with the attendant appreciation of rupee against dollar.
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