Commercial Banking in India

Dr G D Sharma USMS GGSIP University, New Delhi

History of Banking in India

There were three oldest Banks
Bank of Bengal Bank of Bombay Bank of Madras These banks were called Presidency Banks.

They merged in 1925 to form the Imperial Bank of India, which after
independence became State Bank of India. Reserve Bank of India came into existence in 1935 which took the responsibility of regulating Banking sector as Central Bank in India.

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Banking Scenario after independence

In 1948, the Reserve Bank of India 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."

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Nationalization of Banks
On July 19, 1969, 14 major banks were nationalized. On April 15, 1980 another 6 banks were nationalized. With the nationalization, the banking in India shifted from Class banking to
Mass Banking

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Banking Services
Deposit Products: Savings Account, Current Account, Term Deposit
schemes, Recurring Deposit Schemes etc.

Loan Facilities: Personal loans, Housing loans, Vehicle loans, Consumer

loans, Farm Credit, Corporate loans, CC/OD etc.

Remittance facilities: Cheques, Drafts, RTGS/NEFT etc.

Other facilities: Bank Guarantees, letter of credit etc.

Bill Discounting and Merchant Banking
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Breakthroughs in Banking sector

Innovation in Product Development

Internet Banking
Credit Cards Electronic Banking Debit Cards

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Internet Banking
The Nottingham Building Society launched the first Internet banking
service in United Kingdom in 1983.

Nottingham Building Society derived from a system known as Prestel

that is deployed by the postal service department of United Kingdom.

The first online banking service in United States was introduced in

October 1994 by Stanford Federal Credit Union.

Further improvised to Online BillPay , account aggregation and

mobile banking and Passmark authentication system in 2005.
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Credit Cards
Use of credit cards originated in the United States during the 1920s offered
by oil companies and hotel chains

The first bank issued credit card was invented by John Biggins of the
Flatbush National Bank of Brooklyn in New York.

In 1946, Biggins invented the "Charge-It" program between bank customers

and local merchants.

Merchants could deposit sales slips into the bank and the bank billed the
customer who used the card.

American Express issued their first credit card in 1958. Bank of America
issued the BankAmericard (now Visa) bank credit card later in 1958.
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E-banking
During 1950s, researchers at the Stanford Research Institute invented
"ERMA

ERMA is a project for the Bank of America to computerize the banking

industry.

ERMA computerized the manual processing of checks and account

management and automatically updated and posted checking accounts.

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Debit Cards
First National Bank of Seattle offered to Business Executives in 1978 Customers required a large savings account be kept at the bank to cover the
funds

Landmark created the first nationwide debit system in 1984 This allowed the smaller banking systems within states to connect with banks
systems outside of states

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Front End Distribution

Branches
Internet banking Telephone banking
Retail outlets of banks Electronic method of banking Transactions through the phone

Mobile banking
Card system

Mobile apps that allow banking

Credit cards / Debit cards The medium to interact with customers

Employees

Front End Distribution

Customer Care Courier Services Call centers
Toll free numbers For delivery for various bank documents

Tele marketers
Advertisements about various products / schemes ATM network for convenient cash
To Keep check on employees and their knowledge about financial products and procedures

Promotion
ATM
Mystery Shoppers

Back End Distribution

RBI Government
SEBI Indian bank Association CCIL Credit Rating Agencies
Regulatory Authority for banks Policy makers and licenses Shareholding and ESOS To render assistance and to provide various services to Members and to the banking industry. The Clearing Corporation of India

Company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments .

Back End Distribution

Income tax Department Investors Technology Outsourcing Suppliers Safety and Security
Check on Banks Income Tax Payments
Major source of cash inflow, Also Venture Capitalists For software development and Maintenance /Support Cheque books ,pass books , printers , lockers etc Digital Signature ,Digital Certificates ,Cyber Security

Internet Service Providers Setup and enablement of Inter and Intra-network

Banking legislations in India

Reserve Bank of India Act, 1934, governs the RBI functions
Banking Regulation Act, 1949 The Companies Act, 1956

State Bank of India Act, 1959

Banking Companies (Acquisition and Transfer of Undertaking) Acts of 1970 and 1980

FEMA Act , 1999 Prevention of money laundering Act, 2002

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Licensing of Banks in India

Licensing - License from the Reserve Bank is required Opening of new branches by banks and change in the location of existing
branches are also regulated

License not required where population is below 50,00 If the company is incorporated outside India- RBI has to inspect the books
of the company or be satisfied with the functioning of the company

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RBI guidelines

CRR/SLR - Maintain a certain Cash Reserve Ratio and Statutory Liquidity Ratio The Reserve Bank also monitors compliance with these requirements

Interest rates RBI regulates interest rates on savings account and NRI deposits
Capital Adequacy - Banks to maintain adequate capital on a continuous basis. Banks are required to maintain adequate capital for market risk, operational risk and other risks. non-performing assets

Loans - Reserve Bank requires banks to classify their loan assets as performing and

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RBI guidelines (contd)

Disclosure norms - Disclosures in their annual report about capital
adequacy, assets, liquidity, earnings

Know Your Customer Norms - To prevent money laundering through the

banking system, RBI has issued Know Your Customer

KYC - Establish identity and report suspicious transactions to authorities. Para-banking - The Reserve Bank has permitted banks to undertake
diversified activities like asset management, mutual funds, insurance, merchant banking, venture capital

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Basel Norms
Basel Norms- Bureau of International Settlement (BIS), which fosters cooperation among central banks with a common goal of financial stability and common standards of banking regulations.
Basel I -1988 - credit risk

Basel II -2004 - Capital Adequacy Requirements

Basel III -2010 Basel III-The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
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gagan.is.sharma@gmail.com

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