DEVELOPMENT OF BANKING IN INDIA
The development of banking industry in India has been intertwined with the story of its Nationalisation
» Once the Reserve Bank of India (RBI) was nationalised in 1949 and a central banking was in place, the government considered the nationalising of selected private banks in the country.
1. EMERGENCE OF THE SBI
The government of india, with the enactment of the SBI Act, 1955 partially nationalised the three imperial banks and named them the State Bank of India.
» The first public sector bank emerged in India.
» The RBI had purchased 92 percent of the share in this partial nationalisation.
» The government in a related move partially nationalised eight more private banks Act, 1959 and named them as the associates of the SBI.
» After merging of the State Bank of Bikaner and the state bank of jaipur as well.
» The RBI came up with the state bank of bikaner and jaipur.
» Now the SBI group has a total number of six banks.
» SBI being one and five of its associates.
2. EMERGENCE OF NATIONALISED BANKS
» With the help of the banking nationalisation Act, 1969, the government nationalised a total number of 20 private banks.
i) 14 banks with deposits were more than Rs. 50 crore of nationalised in July 1969, and
ii) 6 banks with deposits were more than Rs.200 crore of nationalised in April 1980.
» After the merger of the loss - making new bank of India with the Punjab National Bank (PNB) in september 1993.
» The total number of nationalised banks came down to 19.
» Today there are 27 public sector banks in India out of which 19 are nationalised.
» Three related developments allowed the further expansion of banking industry in the country.
i) In 1993 the SBI was allowed access to be the capital market with permission given to sell its share to the tune of 33 percent through SBI ( Amendment) Act, 1933.
» At present the government of India has 59.73 percent shares in the SBI.
ii) In 1994 the government allowed the nationalised banks to have access to the capital market with a ceiling of 33 percent sale of share through the banking companies (Amendment) Act, 1994.
iii) In 1994 itself the government allowed the opening of private banks in the country.
» The first private bank of the reform era was the UTI bank.
» Since then a few dozens Indian and foreign private banks have been opened in the country.
3. EMERGENCE OF THE RRBs
The Regional Rural Banks (RRBs) were first setup on October 2, 1975 with main aim to take banking services to the doorsteps of the rural masses specially in the remote areas with no access to banking services with twin duties to fulfill.
i) To provide credit to the weaker sections of the society at concessional rate of interest who previously depended on private money lending and
ii) To mobilise rural savings and channelise them for supporting productive activities in the rural areas.
Banking Sector Reforms
The government commenced a comprehensive reform process in the financial system in (1992 - 93).
» In December 1997 the Government did set up another committee on the banking sector reform under the chairmanship of M. Narasimham.
» The Narasimham Committee - II (popularly called by the Government of India) handed over its reports in April 1998 which included the following major suggestions.
i) Need for a stronger banking system for which merges of the PSBs and the Financial Institutions (AIFIs)
» Were suggested
» Stronger banks and DFIs (Development Financial Institutions, i.e. AIFIs) to be merged while weaker and unviable ones to be closed.
ii) A - 3 tier banking structure was suggested after mergers
a) Tier - I to have 2 to 3 banks of international orientation.
b) Tier - II to have 8 to 10 banks of national orientation and
c) Tier - III to have large number of local banks.
iii) Higher norms of Capital - to - Risk - weighted Adequacy Ratio (CRAR) suggested - increased 10 percent.
iv) Budgetary recapitalisation of the PSBs is not viable and should be abandoned.
v) Legal Framework of loan recovery should be strengthened.
vi) Net NPAs for all banks suggested to be cut down to below 5 percent by 2000 and 3 percent by 2002.
vii) Rationalisation of branches and staffs of the PSBs suggested.
viii) Licensing to new Private Banks was suggested to continue with
ix) Banks board should be depoliticised under RBI supervision.
x) Board for Financial Regulation and Supervisions (BRFS) should be setup for the whole banking, financial and the NBFCs in India.
BASEL ACCORDS
The Basel Accords (i.e. Basel I, II and now III) are set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to Capital Risk, Market Risk and Operational Risk.
» The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
» They are of paramount importance to the banking world and are presently implemented by over 100 countries across the world.
» The BIS accords were the outcome of a long - drawn - out initiative to strive for greater International uniformity in Prudential Capital Standards for bank's credit risk.
» The objectives are
i) To strengthen the international banking system
ii) To promote convergence of national capital standards
iii) And to iron out competitive inequalities among banks across countries of the world.
» The first Basel Accord, known as Basel I was issued in 1988 and focuses on the capital adequacy of financial institutions.
» The second Basel Accord, known as Basel - II is to be fully implemented by 2015. it focuses on three main areas, including minimum capital requirements supervisory review and market discipline, which are known as the three pillars.
» The third Basel Accord, known as Basel III is a comprehensive set of reform measures aimed to strengthen the regulation, supervision and risk management of the banking sector, these measures aim to
i) Improve the banking sector's ability to absorb stocks arising from financial and economic stress, whatever the source be
ii) Improve risk management and governance and
iii) strengthen banks transparency and disclosures.
LIQUIDITY OF MONEY
As we move from M1 to M4 the liquidity of the money goes on decreasing and in the opposite direction, the liquidity increases.
NARROW MONEY
In banking terminology, M1 is called narrow money as it is highly liquid and banks cannot run their lending programmes with this money.
BROAD MONEY
The money component M3 is called broad money in the banking terminology. With this money (which lies with banks for a known period) banks run their lending programmes.
MONEY SUPPLY
The level and supply of M3 is known as money supply.
» The growth rate of broad money (M3) i.e., money supply was not only lower than the indicative growth set by the Reserve Bank of India but it also witnessed continuous and sequential deceleration in the last 7 quarters.
» The source of broad money are net bank credit to the government and to the commercial sector.
MINIMUM RESERVE
The RBI is required to maintain a reserve equivalent of Rs. 200 crores in gold and foreign currency with itself, of which Rs. 115 crores should be in gold.
» This is being followed since 1957 and is known as the Minimum Reserve System (MRS).
RESERVE MONEY
The gross amount of the following six segments of money at any point of time is known as Reserve Money (RM) for the economy or the government.
i) RBI's net credit to the Government
ii) RBI's net credit to the Banks
iii) RBI's net credit to the commercial banks
iv) net forex reserve with the RBI
v) Government's currency liabilities to the public
vi) Net non - monetary liabilities of the RBI
RM = 1 + 2 + 3 + 4 + 5 + 6
NON - RESIDENT INDIAN DEPOSITS
Foreign Exchange Management (Deposit) Regulations, 2000 Permits Non - Resident Indian's (NRIs) to have deposit accounts with authorised dealers and with banks authorised by the Reserve Bank of India (RBI) which include
i) Foreign currency Non - Resident (Bank) Account [FCNR(B) Account]
ii) Non - Resident External Account (NRE Account)
iii) Non - Resident Ordinary Rupee Account (NRO Account)
FCNR(B) Accounts can be opened by NRIs and overseas corporate Bodies (OCBs) with an authorised dealer.
» The accounts can be opened in the form of term deposits.
» Deposits of funds are allowed in pound, sterling, US Dollar, Japanese Yen and Euro
NRE accounts can be opened by NRIs and OCBs with authorised dealers and with banks authorised by RBI
» These can be in the form of savings, current, recurring or fixed deposit accounts.
NRO accounts can be opened by any person resident outside India with an authorised dealer or an authorised bank for collecting their funds from local bonafide transactions in Indian Rupees.
» These accounts can be in the form of current, saving, recurring or fixed deposit accounts.
Repatriation of funds in FCNR(B) and NRE accounts is permitted. Hence, deposits in these accounts are included in India's external department outstanding
» Deposits in NRO accounts too are included in India's external debt.
GUIDELINES FOR LICENSING OF NEW BANKS
The RBI, released the Guideline for Licensing of New Banks in the Private sector key features of the guidelines are
i) Eligible Promoters: A private sector/ public sector/ NBFCs/ Entity/ group eligible to set up a bank through a wholly - owned non - operative Financial Holding company (NOFHC).
ii) Fit and proper criteria: A past record of sound credential, integrity and sound financial background with a successful track record of 10 year will be required.
iii) Corporate structure of the NOFHC: The NOFHC to be wholly - owned by the promoter/ promoter group Which shall hold the bank as well as all the other financial services entities of the group
iv) Minimum voting equity capital requirements for banks and share holding by NOFHC minimum paid - up voting equity capital for a bank shall be Rs. 5 billion
» The NOFHC shall initially hold a minimum of 40 percent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years.
v) Regulatory framework: the bank to be regulated by the relevant Acts/ Statutes/ Directives, issued by the RBI and other regulators.
vi) Foreign share holding in the bank: Foreign share holding upto 49 percent for the first 5 years after which it will be as per the extant policy
vii) Corporate governance of NOFHC: At least 50 percent of the Directors of the NOFHC should be independent directors.
viii) The prudential norms will be applied to NOFHC on similar lines as that of the bank.
ix) The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC
x) The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
xi) Existing NBFCs if considered eligible, may be permitted to promote a new bank or convert themselves into banks.
TWO NEW BANKS GET LICENSE
The RBI by early April, 2014 granted in - principle approval to two applicants, IDFC limited and Bandhan Financial services private limited, to set up banks.
» In principle approval granted will be valid for 18 months during which the applicants have to comply with the requirements and fulfill other conditions.
» Both are leading non - banking finance companies while IDFC deals in infrastructure finance, Bandhan is in micro finance business.
CHIT FUND
Chit fund (also known by their other names such as chitty, kuri, miscellaneous Non - Banking company) are essentially saving institutions.
» They are of various forms and lack any standardised form.
» Chit funds have regular members who make periodical subscriptions to the fund.
» The periodical collection is given to some member of the chit funds selected on the basis of previously agreed criterion.
» The beneficiary is selected usually on the basis of bids or by draw of lots or in same cases by auction or by tender.
» Chit funds are the Indian version of Rotating savings and credit Associations Found across the globe.
» Chit fund business is regulated under the central chit fund Act, 1982 and the Rules Framed under this Act by the various state government for this purpose.
