The document summarizes the evolution of banking in India from 1786 to the present. It discusses 3 phases: (1) Early Indian banks from 1786-1969 prior to reforms, which saw the establishment of colonial banks and slow growth. (2) Nationalization of banks from 1969-1991 for social benefits and rural credit. (3) Post-1991 reforms introducing privatization, competition and new technologies. Key events included the nationalization of SBI in 1955 and major commercial banks in 1969/1980, establishing RRBs in 1975, and liberalization reforms starting in 1992.

1. COMMERCIAL
BANK MANAGEMENT
Kanhaiya Singh | Vinay Dutta
Copyright
©
2013
by
McGraw
Hill
Education
(India)
Private
Limited

2. EVOLUTION OF BANKS IN
INDIA
 The history of banking system in India can be traced to
1786s when “The General Bank of India” was established.
 Prior to this, the concept of “desi banking” was much
popular and the business of banking was done through
hundies which were issued by bankers known as Shroffs,
Sahukars or Mahajans
 The various phases of banking growth in India can be
broadly segregated as:
– Banking in Pre-Independence Era
– Banking Growth in Post-Independence Era
– Banks Nationalisation Phases
– Diversification of Banking Operations
– Banking in Post-Liberalisation Era

3. Origin of banks
• Phase 1: Early phase From 1786-1969 of
Indian banks
• Phase 2: Nationalization of Indian banks
upto 1991 prior to Indian banking sector
reforms
• Phase 3: Indian financial and banking
sector reforms after 1991

4. Phase I:
• The General Bank of India was set up in the year 1786. Next
came Bank of Hindustan and Bengal Bank. The East India
Company established Bank of Bengal (1806), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and
called them Presidency Banks. These three banks were
amalgamated in1921 and imperial Bank of India was established
which started as private shareholders banks, mostly Europeans
shareholders.

5. • During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948.
• To streamline the functioning and activities of commercial banks,
the Government of India came up with the Banking Companies
Act, 1949 which was later changed to Banking Regulation Act,
1949 as per amending Act of 1965 (Act No. 23 of 1965).
• Reserve Bank of India was vested with extensive power for the
supervision of banking in India as the Central Banking
Authority.
• During those day’s public has lesser confidence in the banks.

6. Phase II:
Government took major steps in the Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale specially in rural and semi urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India were nationalized on 19th
July 1959.
In 1969, major process of nationalization was carried out.
It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi 14 major
commercial banks in the country was nationalized.
Second phase of nationalization in Indian Banking Sector Reform was carried out
in 1980 with six more banks. This step brought 80% of the banking segment in
India under Government ownership.

7. • The following are the steps taken by the Government of India to
Regulate Banking Institutions in the country.
• i. 1949: Enactment of Banking Regulation Act.
• ii. 1955: Nationalization of State Bank of India.
• iii. 1959: Nationalization of SBI subsidiaries.
• iv. 1961: Insurance cover extended to deposits.
• v. 1969: Nationalization of 14 major banks.
• vi. 1971: Creation of credit guarantee corporation.
• vii. 1975: Creation of regional rural banks.
• viii. 1980: Nationalization of 6 banks with deposits over 200
crore.
• After the Nationalization the branches of the public sector banks
in India rose to approximately 800% and deposits and advances
took a huge jump by 11,000%.
• Banking in the sunshine of Government ownership gave the
public implicit faith and immense confidence about the
sustainability of these institutions.

8. Phase III:
• This phase has introduced many more products and facilities in
the banking sector in its reforms measure. In 1991, under the
chairmanship of M Narasimham, a committee was setup by his
name which worked for the liberalization of banking practices.
• The country is flooded with foreign banks and their ATM
stations. Efforts are being made to give a satisfactory service to
customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given
more importance than money.

9. BANKING GROWTH IN PRE-INDEPENDENCE
AND POSTINDEPENDENCE
 Banking in Pre-Independence Era
– The Banker’s Status and Service
• The Rise of Joint Stock Banks in India
o Agency Houses
o Banking Turmoil
o The Presidency Banks

10. BANKING GROWTH IN PRE-INDEPENDENCE
AND POSTINDEPENDENCE (Contd.)
 Banking Growth in Post-Independence Era
– The Reserve Bank of India, being the controller of banks in
India, was nationalized in 1948
– In July 1955, Imperial Bank of India was renamed as State
Bank of India
– In 1975, the Regional Rural Banks were promoted exclusively
to serve agriculture and rural development growth process
– In 1985, banking operations were diversified
– In 1991, the banking operations were further strengthened in
view of the opening up of the economy and in pursuant to
liberalization process
– In 2001, major focus was given to globalization process

11. BANK NATIONALISATION AND
PHASES OF GROWTH
 Nationalisation of Banks
– Nationalisation of Major Commercial Banks
(Objectives)
• Bringing banking services into public sector so as to reap social
benefits
• Providing adequate credit for the core sector like agriculture,
small industry and exports
• Giving a professional bent to bank management
• Encouraging new classes of entrepreneurs
• Providing adequate training as well as reasonable terms of
service for bank staff

12. BANK NATIONALISATION AND
PHASES OF GROWTH (Contd.)
 Nationalisation of Banks
– Introduction of the Lead Bank Scheme
• Under the scheme, the country was divided into 336 districts
(1969)
• The intention was that banks should come out of the regional
blocks
• The lead bank is expected to assume a major role in the
development of banking and credit in the allotted districts
• In other words, the lead bank is expected to promote all round
development of the allotted district through designing and
developing credit plans for each district

13. BANK NATIONALISATION AND
PHASES OF GROWTH (Contd.)
 Nationalization of Banks
– Introducing the Priority Credit Concept (RBI
guidelines)
• 40 per cent of the priority sector advances should be earmarked
for agriculture and allied activities
• Direct advances to the weaker sections in agriculture and allied
activities should reach a level of at least 50 per cent of the total
direct lending to agriculture (including allied activities) by 1983
• Advances to rural artisans, village craftsmen and cottage
industries should constitute 12.5 per cent of the total advances
to small-scale industries by 1985

14. BANK NATIONALISATION AND
PHASES OF GROWTH (Contd.)
 Nationalisation of Banks
– Branch Expansion Phase
Number of Scheduled Commercial Bank Branches

15. BANK NATIONALISATION AND
PHASES OF GROWTH (Contd.)
 Nationalisation of Banks
– Regional Rural Banks
• Established Regional Rural Banks (RRBs) under the
Regional Rural Banks Act, 1976
• The main objective of setting up the RRBs is to provide
credit and other banking facilities
• The RRBs basically provided small loans for agriculture
and rural development activities on liberal terms
• The RRBs that were originally promoted as a low cost
operating agency in rural areas were given treatment at
par with commercial banks

16. BANK NATIONALISATION AND
PHASES OF GROWTH (Contd.)
 Nationalisation of Banks
– Differential Interest Rate (DIR) Scheme
• Implemented in March 1972 for advances to be made by
public sector banks
• The basic purpose is to make poor self-sufficient
• The scheme could not catch the popularity due to larger
number of loans turning as bad
• The scheme is still under force but there are few takers to
take advantages under the scheme

17. BANKING SECTOR REFORMS
 Post-Liberalisation Era
– The first phase of banking sector reforms began in 1992. The
following were the areas identified for bringing desired
improvements:
• Liberalisation of interest rates on deposits and loans and
advances
• Phased reduction in statutory pre-emption
• Encouraging private sector to banking operations for bringing
more efficiency in services and also the spirit of competitiveness
• Bringing transparency in financial reporting
• Fixing capital standards as per Basel Accord Capital Standards.
• Fixing prudential norms for asset classification, income
recognition and provisions for bad debts

18. BANKING SECTOR REFORMS (Contd.)
 Post-Liberalisation Era
– The first phase of banking sector reforms began in 1992. The
following were the areas identified for bringing desired
improvements:
• Added focus on reduction of Non Performing Assets (NPAs)
• Bringing operational autonomy
• Diversification of banking operations
• Improved profitability and efficiency
• Better supervisory arrangements for banks by RBI
• Added focus on IT related services
• Disinvestment of public ownership

19. BANKING SECTOR REFORMS (Contd.)
 Post-Liberalisation Era
– In the second phase emphasis was laid on the following
measures:
• Reduction of government stake in banks to 33 per cent
• Stricter prudential norms
• Greater emphasis on asset-liability management
• Introduction of narrow banking concept to rehabilitate weak
banks
• Setting up of the Asset Reconstruction Fund
• Integration of NBFCs with financial system
• Consolidation of the banking industry by merging strong banks
• Focus on rationalisation of staff strength and branches

20. BANK AND ITS FUNCTIONS
 Some of the important and commonly accepted
definitions of a bank are:
– According to Britanica.Com, “A bank is an institution that deals in
money and its substitutes and provides other financial services.
Banks accept deposits and make loans and derive a profit from the
difference in the interest rates paid and charged, respectively”.
– Bank is an establishment authorised by a government to accept
deposits, pay interest, clear cheques make loans act as an
intermediary in financial transactions, and provide other financial
services to its customers.
– According to the Banking Regulation Act 1949, banking means the
accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.

21. BANK AND ITS FUNCTIONS (Contd.)
 Functions of a Bank:
– Acceptance of deposits from the public and other
organisations in different forms by developing innovative
deposit schemes
– Extending loans and advances

22. FINANCIAL SYSTEM STRUCTURE
IN INDIA AND TYPES OF BANKS
 Structure of Banking and Financial Institutions in India
– Apex Level Institutions
– All India Development Financial Institute
– Commercial Banks
• Scheduled Commercial Banks
o Public Sector Banks
» State Bank of India and its associates
» Nationalised Banks
» Regional Rural Banks
o Private Sector Banks
o Foreign Banks
• Non-Scheduled Commercial Banks

23. FINANCIAL SYSTEM STRUCTURE IN
INDIA AND TYPES OF BANKS (Contd.)
Structure of a commercial bank (as in June 2011)

24. FINANCIAL SYSTEM STRUCTURE IN
INDIA AND TYPES OF BANKS (Contd.)
 Structure of Banking and Financial
Institutions in India
– The Non-Banking Finance Companies
• There are more than 38000 NBFCs presently registered
with the RBI
• NBFCs in India have become prominent in a wide range of
activities
• RBI issues directions to companies on the acceptance of
public deposits

25. TYPES OF BANKING
 On the basis of organisation
structure
– Unit Banking
– Branch Banking
 On the Basis of banking
business lines
– Retail Banking
– Corporate Banking
– Universal Banking
– Private Banking
– Investment Banking
– Merchant Banking
 Other classification
– Relationship Banking
– Personal Banking
– Correspondent Banking
– Off-shore Banking
– Online Banking
– Mobile Banking
– Islamic Banking