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Banking in India

1. The first bank to be established in India on European pattern was – Bank of Hindustan which was established in 1770.
2. The first Bank established by Indians was Awadh Commercial Bank, established in 1881and was closed in1958.
3. First fully Indian which is still functional is Punjab National Bank, established in 1894.
4. Imperial Bank of India was established in 1921 by merging Presidency Banks. In 1955 it was nationalized and became State Bank of India. In 2008 State Bank of Suarashtra was merged in it. In the year 2000 State Bank of Indore merged in it and in 2017 all other state banks - State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Patiala, Sate Bank of Hyderabad, and Indian Women Bank were merged into it. It is the largest commercial bank of India.
5. Reserve Bank of India – It controls Indian Currency and formulates the monetary policy of India. It was established by the Reserve Bank of India Act 1934. Initially it was private. It was Nationalized on 1st January 1949.
6. 14 big private banks were Nationalized on 19th July 1969. At that time total deposits in these bans were more than 50 crore rupees.
7. Lead Bank scheme was introduced by the Reserve Bank in 1969.
8. Regional Rural Banks were established in 1975.
9. 6 more private banks were Nationalized on 15th April 1980. Total deposits in these banks at that time were more than 200 crore Rupees.

Main Committees – 1991 – Narsimhan Committee – 1, 1998 – Narsimhan Committee – 2, 2008 – Raghuram Rajan Committee

Main banks for Rural Banking

1. Regional Rural Banks – These were established for expansion of banking services in rural areas in 1975. They were established jointly by the lead bank of the District and State Government. 196 RRBs were established all over India except Goa and Sikkim. Later many RRBs were merged in each other and now their number is 56.
2. Cooperative Banks – At the lowest level there are the Primary agriculture cooperative societies (PACS) and Large Area Multipurpose Cooperative societies (LAMPS) in tribal areas. At the district level there are District Cooperative Banks and at the State Level – Apex Bank or State Cooperative Bank. These banks mainly give agriculture credit. They also distribute government subsidies in agriculture sector and give part of the loan in kind as seed, fertilizer, insecticide etc. They are also engaged in procurement at MSP in Chhattisgarh and some other States.

Development Banking Institutions

The purpose of development banking is to give credit for development. These are special institutions which do not take deposits like commercial banks and do not open accounts of Public. They give long term credit for agriculture, industry, infrastructure etc. Their main aim is not to earn profit but development of the economy. They do not compete with other financial institutions but work with them. Main development banking institutions in India are -

1. National Bank for Agriculture and Rural Development (NABARD) – Established in 1982 its aim is increasing rural credit. It give credit refinance for agriculture rural crafts, rural industry etc.
2. Land Development Bank– It was established in 1929 as Land mortgage bank. Its main purpose is to give credit for land development and agriculture.
3. Small Industries Development Bank of India (SIDBI) – It is an autonomous financial institution which gives credit for small and medium industries. It also coordinates among other organizations engaged in development of small and medium Industries. It was established on 2nd April 1990.
4. Industrial Finance Corporation of India (IFCI) – It was established as a Government of India Institution for long term credit needs of Industrial development on 1st July 1948. Its constitution was modified in 1993 and it was made a company under the companies Act and its name was changed to IFCI Limited in October 1999.
6. Industrial development Bank of India (IDBI) – It was established in July 1964 as a wholly Reserve Bank of India owned Institution. In 1976 it became autonomous. It provides Industrial Credit.
7. EXIM Bank – it was created in 1982 under the Import-Export Bank of India, Act, 1981. Its objective is to provide financial assistance to Importers and Exporters for increasing International trade. It is the main institution for coordination among organizations for foreign trade and commerce in India.

Terminology –

Scheduled Bank – Those banks which are included in the second schedule under Reserve Bank of India Act 1934. They have to follow the ruled of reserve Bank of India.

Differences between scheduled and non-scheduled banks

1. The paid up capital of scheduled banks is at least Rs lakh.
2. They are included in the schedule of Reserve Bank of India.
3. They have to keep Minimum Cash Reserves in the Reserve Bank, while other banks keep it with themselves.
4. They can get credit from the Reserve Bank.
5. They have to send returns and reports to the Reserve Bank.
6. They can become members of a clearing house.

Nationalized banks – They are those banks which are owned by the Government.

Non-Productive Asset - NPA – These are those debts for which principal amount and interest is not likely to be returned on time or not likely to be returned at all.

Works of Reserve Bank of India

These are written in the preamble to the Reserve Bank of India Act-

"Regulation of the issue of bank notes for monetary stability in India and maintain reserve fund and to operate monetary and loan system in National interest and to make a modern monetary framework to deal with the challenges of a complex economy and maintain price stability in the interest of growth."

1. Financial Supervision – Reserve bank does this work as per the guide lines of Board of Financial Supervision (BFS). This board was created as a committee of Reserve bank in November 1994:
   1. Reorganization of Banking supervision system.
   2. Supervision remotely away from work place.
   3. Strengthen the role of statutory auditors
   4. Strengthening of internal audit of the supervised institutions.
   5. Current aims – Supervision of financial institutions, consolidated accounting, legal matters relating to bank fraud, determination of NPAs, supervisory rating model for banks.
2. Monetary authority – It prepares and implements monetary policy and also supervises it. This policy is made keeping in mind price stability for development.
3. Regulator and supervisor of financial system – It prepares detailed guidelines for banking. Its objective is that people should have trust n the banking system and protect the interest of depositors.
4. Manager of foreign exchange – It administers Foreign Exchange Management Act 1999 (FEMA). Its objective is to facilitate foreign trade and commerce.
5. Issuer of Currency – It issues currency and exchanges it. When the currency is no longer good for being in circulation it destroys it. The objective is to make good quality currency notes and coins available to the public in adequate quantity.
6. Development Role – It encourages development in National Interest.
7. Other works –
   1. Banker of the Government: It acts as a commercial bank for central and state governments.
   2. Bank of bankers: It keeps accounts of all scheduled banks.

Important Laws relating to Banking –

1. Highest Law -
   1. Reserve Bank of India Act 1934.
   2. Banking Regulation Act 1949.
2. Laws for special purposes -
   1. Public Debt Act,1944
   2. Securities Contracts (Regulation) Act 1956.
   3. Indian coins Act 1906
   4. Foreign Exchange Regulation Act, 1973/ Foreign Exchange Management Act, 1999
3. Acts to regulate banking -
   1. Companies Act, 1956 and 2013
   2. Banking Companies (Acquisition and Transfer of Undertakings) Act
   3. Banker books evidence act, 1891
   4. Banking secrecy act
   5. Negotiable Instruments Act

Credit control measures by Reserve Bank of India – There are two types of measures – quantitative and qualitative.

Quantitative measures – These measures affect the availability of cash with banks.

1. Repo – Repurchase Option Rate – This is the interest rate in short term loans. Central bank gives loans to commercial banks on condition of repurchase of securities and for this interest is charged at this rate. When banks need money for their day to day activities for a day and the easiest option available with them is to take an overnight loan from RBI. The interest which they have to pay for this is known as Repo rate.
2. Reverse Repo rate – As per the name this is reverse of repo rate. If some cash is left with commercial banks after their day’s business, they can keep this money with the reserve bank of India for which they get interest. The rate at which interest is paid to then is called reverse repor rate. If the Reserve Bank feels that there is too much cash in the market, it increases the reverse repo rate so that commercial banks feel that they can earn more by keeping their money with the reserve bank and less money is available for credit in the market.
3. Bank Rate – Bank rate is the interest which the central bank (Reserve Bank) charges on commercial loans given to other banks on first class securities.
4. Minimum cash reserve ratio (CRR) – It is required for all banks that they keep a keep a portion of cash available with them with the Reserve Bank. This is called cash reserve ratio. This is done so that if depositors withdraw money in large numbers at any time the banks do not default on payments.
5. Statutory Liquidity Ratio - SLR – Every ban is required to invest a part of the deposits with them in government securities. This ratio is known as SLR. This is kept in government securities like bonds, gold etc. This means that as compared to CRR, banks can earn a certain amount of interest on this amount. SLR is decided as a percentage of total liabilities. Banks are required to pay time deposits on the basis of mutual agreement to the customers and demand liabilities are those which are payable on demand. SLR is used for managing inflation. As of 7.02.2017 SLR is 20.50%.

Qualitative measures –

1. Credit rationing – This is done at the time of high inflation. In this loans are given only for those sectors which are essential for the economy (productive loans).
2. Change in loan margins: Banks give loans only to a certain percentage of the collaterals kept with them. The difference in the value of the loan and the value of collaterals is called margin money. Credit supply can be reduced by increasing margin money.
3. Moral regulation: This is by putting moral pressure on commercial banks for cooperation with the RBI.
4. Open market interventions – Reserve Bank sells and purchases government securities in the open market.

Pradhan Mantri Jan Dhan Yojna

PMJDY is National Mission for financial inclusion in India. Its object is to provide banking services to al families in the country and open of bank account for every family. The scheme was announced by Prime Minister Narendra Modi on 15th August 2014 and inaugurated on 28th August 2014.The Prime Minister sent an email to all the banks to open a bank account for all the 6 crore families in the country. 1.5 crore accounts were opened on the day of its inauguration itself.

Benefits of Jan Dhan Scheme – No minimum balance is required for this bank account. There is also a facility of overdraft of Rs 5000. There are also facilities of insurance cover and Pension with this scheme. Finger prints are taken at the time of account opening and e-KYC is done with Adhar. In addition account can also be opened with ID documents like Voter ID card, Ration Card, Driving License, letter of sarpanch or an officer, Narega card, electricity or telephone bill of birth or marriage certificate. 42% of the population of our country does not have a bank account. According to Crisil only 40% people get financial services like banking, loans, pension, insurance, debit or credit card service etc. This scheme will lead to a major expansion of financial services and financial inclusion.

Priority Sector Lending

As per the rules of RBI, banks have to give a part of their loans to priority sector for development. The limit of priority sector is decided by the ownership pattern of the bank. Both Public Sector and Private Sector local banks have to give 40% of its Net Bank Credit (NBC) to priority sector. The limit for foreign banks is 32%. Domestic Banks have to give 18% of NBC to agriculture, and 10% to socially backward classes. Foreign banks have to give 10% of NBC to small scale industries. They can give up to 12% of NBC as export credit. Rest of the priority sector amount can be given as loan to many sectors. Reserve Bank has prepared a detailed note for priority sector which includes housing loans, education loans, MFI loans etc. Domestic Banks have to contribute to Rural Infrastructure Development fund of NABARD for shortfall in priority sector lending. Foreign Banks have to deposit the amount of shortfall with SIDBI for one year.

Pradhan Mantri Mudra Yojna

People can get loans for their businesses under this scheme. Its full name is Micro Units Development and Refinance Agency Limited. The objective of this agency is to provide financial assistance to small businesses. Main benefits of the scheme are –

1. Loan is given to citizens without any guarantee.
2. There is no processing fee.
3. The repayment duration can be increased to 6 years.
4. The interest rate is less than interest on loans from commercial banks.

Three types of loans are given in this scheme –

1. Child loan – In this any persons can get a loan up to ? 50000 and the rate of interest is 10 to 12%.
2. Adolescent Loans – This is for those people who wish to expand their businesses and under this the loan amount is ? 50000 to ? 5 lakh. the interest rate is 14 to 17%.
3. Youth Loan – This loan up to 10 rupees and the interest rate starts at 16%.

Demonetization of 500 and 1000 rupee notes – This was announced by Prime Minister Narendra Modi in a broadcast to the Nation at 8 PM IST on 8th November 2016. Currency notes of Rs 500 and 1000 denominations were demonetized suddenly from the midnight of 8th November 2016. Its object was to get rid of black money and forged currency notes.

Advantages of Demonetization: -

1. 18 lakh suspected accounts were investigated.
2. Cash deposit of 2.89 lakh Crore rupees is being investigated.
3. 5.56 lakh new suspected cases have been found by advanced data analytics tool.
4. 4,73,003 suspected transactions were found.
5. Undeclared income of Rs 29,213 crore was found.
6. Black money worth Rs 16,000 crore did not return to banking system.
7. Cash transaction was reduced by 21%.
8. 56 lakh new taxpayers were added.
9. The increase in number of persons filing income tax return was 24.70% as compared ot an increase of only 9.9% in the previous year.
10. Increase in self assessment income tax by 34.25%.
11. More than 3 lakh shell companies are under watch.
12. 2.1 lakh shell companies have been deregistered.
13. 37,000 shell companies involved in Hawala and hiding of black money have been identified.
14. More than 400 benami transactions identified and benami property worth more than 800 cores seized.
15. Increase in the deposits in banks by 3 lakh crores.
16. Reduction in interest rates by 100 basis points due to the additional cash which came into the banking system
17. Increase in digital payments by 56%.
18. More than one crore laborers included in EFP and ESIC schemes.
19. Bank accounts of more than 50 lakh laborers opened so that their salary can be deposited directly into their accounts.

Disadvantages of Demonetization: -

1. Common man had to stand in long queues for cash.
2. The growth of the economy slowed down for sometime.
3. Daily wage earners had to face difficulties.
4. The prices of fruits, vegetables etc. increased.
5. GDP growth slowed because of reduction in employment, production, consumption and investment.
6. The cash deposited in banks was much more than expected which means that many people were able to launder their black money.
7. The effect of demonetization was only on the old stock of black money. It does not stop new black money formations and there are already cases reported that bribes are being taken in the new currency notes. New currency notes have already been seized at many places.

Main challenges before the Indian Banking System –

1. The problem of NPAs – Total NPAs in banks in June 2014 were Rs 2.34 lakh crore which increased to Rs 6.46 lakh crores in December 2016. The new strict rules for recovery of loans have not been of much help. Recently banks have stared bankruptcy proceedings against 12 big defaulters on the advice of Reserve Bank. This action has resulted in a major upheaval. Worst affected are the middle class people. There is a possibility of home buyers loosing their hard earned money. Real estate business has fallen flat. Reserve bank has now asked lenders to initiate proceedings against 40 more defaulters. The Vijay Malya and Neerav Mode cases have also brought to light involvement of bank officials in the scam. Criminal cases have been registered against some industrialists and bank employees.
2. Reduction in credit expansion – According to the Reserve Bank credit expansion in the year 2017 was only 5.1% which is the lowest in the last 60 years and is less than half of last year. In the same period the deposits in the banks increased by 11.8%. Banks have approximately 108 lakh crores of surplus funds for credit advancement but are not able to use them because of fall in demand and rice in NPAs. This is bound to have a negative impact on the economy.