Money And banking
Money & Banking
Banking System of India
- Bank of Hindustan (1770) was the first bank to be established in India (Alexander and Co.) at Kolkata under European management. Other banks set-up was Bank of Bengal (1806), Bank of Bombay (1840) and the Bank of Madras (1843) - these were called Presidency Banks.
- First bank with limited liability managed by an Indian board was Oudh Commercial Bank, founded in 1881. The first purely Indian bank was the Punjab National Bank (1894).
RESERVE BANK OF INDIA
- It is the Central Bank of the country.
- It was established on Apr 1, 1935 with a capital of Rs.5 crore. This capital of Rs.5 crore was divided into 5 lakh equity shares of Rs.100 each. In the beginning, the ownership of almost all the share capital was with the non-government share-holders.
- It was nationalized on Jan 1, 1949 as govt., acquired the private share holdings.
- Administration: 14 directors in Central Board of Directors besides the Governor, 4 Deputy Governors and one Government official. The Governor is the Chairman of the board and Chief Executive of the Bank.
- Governors:
- 1st Governor-Sir Smith (1935-37)
- 1st Indian Governor : CD Deshmukh (1948-49)
RESERVE BANK OF INDIA AND ITS FUNCTIONS
- Issue of Notes: Regulates issue of bank notes above 1 rupee. It acts as the only source of legal tender money because the one rupee notes issued by Ministry of Finance are also circulated through it.
The Reserve Bank has adopted the Minimum Reserve System for the note issue. Since 1957, it maintains gold and foreign exchange reserve of Rs.200 crore, of which at least 115 crore should be in gold.
- Banker to the Government: Acts as the banker, agent and advisor the Govt., of India. It also manages the public debt for the Government.
- Banker's Bank: The Reserve Bank performs the same function for other banks as the other banks ordinarily perform for their customers.
- Controller of Credit: The Reserve Bank undertakes the responsibility of controlling credits created by the commercial banks. To achieve this objective, it makes extensive use of quantitative and qualitative techniques to control and regulate the credit effectively in the country.
- Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the Reserve Banks buys and sells the foreign currencies and also protects the country's foreign exchange funds.
- It formulates and administers the monetary policy.
- Acts as the agent of the Government of Indian in respect to India's membership of the IMF and the World Bank.
- No personal accounts are maintained and operated in RBI.
RESERVE BANK OF INDIA AMENDMENT BILL 2005 APPROVED
The Reserve Bank of India (Amendment) Bill 2005 has been approved. This bill amends the Reserve Bank Act for providing flexibility to the Central Bank in fixing the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). CRR is the cash that banks deposit with RBI and is one of the key instruments used by the Central Bank to inject or suck out liquidity from the market.
SLR specifies the minimum amount that banks must invest in government securities. This bill is to arm RBI with greater autonomy and authority to deal with subjects (mainly CRR and SLR) under the Act. This bill also allows the Central Bank to regulate derivatives, repo instruments (overnight rates used to regulate liquidity) and securities.
The amendments also seek to end the ambiguity about the legal validity of derivatives as it was seen to inhibit the growth of the market.
SLR specifies the minimum amount that banks must invest in government securities. This bill is to arm RBI with greater autonomy and authority to deal with subjects (mainly CRR and SLR) under the Act. This bill also allows the Central Bank to regulate derivatives, repo instruments (overnight rates used to regulate liquidity) and securities.
The amendments also seek to end the ambiguity about the legal validity of derivatives as it was seen to inhibit the growth of the market.
IMPERIAL BANK OF INDIA
- It was created in Jan 1921 by amalgamation of 3 presidency banks, viz., Bank of Bengal, Bank of Bombay and Bank of Madras.
- After nationalization in 1955, its name was changed to State Bank of India (SBI).
- It is the biggest commercial bank in the public sector of India.
- It has the largest number of branches in the world.
State Bank of India - SBI
SBI has 7 subsidiaries. These are:
- State Bank of Bikaner and Jaipur
- State Bank of Hyderabad
- State Bank of Indore
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Saurashtra
- State Bank of Travancore
NATIONALIZATION OF BANKS IN INDIA
In order to have more control over the banks, 14 large commercial banks, the reserves of which were more than Rs.50 crore each, were nationalized on July 19, 1969.
The banks were:
The banks were:
- The Central Bank of India
- Bank of India
- Punjab National Bank
- Canara Bank
- United Commercial Bank
- Syndicate Bank
- Bank of Baroda
- United Bank of India
- Union Bank of India
- Dena Bank
- Allahabad Bank
- Indian Bank
- Indian Overseas Bank
- Bank of Maharashtra
On April 15, 1980, those 6 private sector banks whose reserves were more than Rs.200 crore each were nationalized.
These banks were:
These banks were:
- Andhra Bank
- Punjab and Sindh Bank
- New Bank of India
- Vijaya Bank
- Corporation Bank
- Oriental Bank of Commerce
In Sept 1993, the New Bank of India was merged with the Punjab National Bank.
These nationalized banks, together with Regional Rural Banks (RRBs), come under the category of Public Sector Commercial Banks.
The other kind of commercial banks are private Sector Commercial Banks.
At present there are 20 nationalized banks besides the RBI.
These nationalized banks, together with Regional Rural Banks (RRBs), come under the category of Public Sector Commercial Banks.
The other kind of commercial banks are private Sector Commercial Banks.
At present there are 20 nationalized banks besides the RBI.
REGIONAL RURAL BANKS IN INDIA
- Set up in 1975. Their main objective is to develop the rural economy by providing credit and encouraging other productive activities in the rural areas.
- The paid-up capital of each rural bank is Rs.25 lakh, fifty percent of which is contributed by the Central Government, 15 percent by the State Governments and 35 percent by the sponsoring public sector commercial banks which are responsible for the actual setting up of the RRBs.
- The Reserve Bank of India Act, 1934 has classified the banks as Scheduled Banks and non-Scheduled Banks.
Note:
- The Scheduled banks are those which have a paid-up capital and reserves of an aggregate value of not less than Rs.5 lakh and which satisfy RBI that their affairs are carried out in the interests of their depositors.
- These banks have been entered in the Second Schedule of the RBI Act, 1934. All commercial banks-Indian and foreign, RRBs and State Co-Operative Banks are Scheduled banks.
MONETARY AND CREDIT POLICY
It is the policy with the help of which the Government through its Central Bank regulates money supply and achieves price stability. The broader objectives of the monetary and credit policy are to promote investment to bring about greater rate of economic growth with the result that the accompanying benefits of employment generation; inflation management, exchange rate stabilization etc also accrue.
The RBI announced the credit policy traditionally twice a year— the lean season policy in April and busy season policy in October. In 1998, it became once a year, the October intervention being a review. From 1999, it is being announced only in April.
Bank and Other Financial Institutions
Industrial Credit and Investment Corporation of India Bank (ICICI Bank)
Established in 1955 as a public limited company to encourage and assist industrial units of the nation. It has been converted into a bank with effect from May 3, 2002.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
Established in 1990; promotes small scale sector.
NATIONAL BANK OF AGRICULTURE AND RURAL DEVELOPMENT (NABARD)
Established on Now 5, 1982; gives credit facilities to farmers.
EXPORT-IMPORT BANK OF INDIA (EXIM)
Set-up on Jan 1, 1982; grants deferred credit to Indian exporters in order to operate in the international market.
INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
The IDBI which was established as Development Finance Institution under IDBI Act, 1964 has been converted as a banking company. Parliament passed the Act so as to cancel out IDBI Act 1964 and to open the way for the registration of this new banking company.
IDBI got the certificate of commencement of business on Sept 28, 2004 and the IDBI was transformed into IDBI Ltd. on Oct 1, 2004, a company under the Companies Act, 1956 and a Scheduled Bank (on Oct 11, 2004) under the RBI Act, 1934.
INDUSTRIAL FINANCE CORPORATION OF INDIA LTD. (IFCI)
Industrial Finance Corporation of India Ltd. was established in 1948 under a special Act on the recommendations of Central Banking Enquiry Committee.
The basic aim of IFCI is to arrange medium and long term credit for various industrial enterprises of the country. Since July 1, 1993 this corporation has been converted into a company and it has been given the status of a Ltd. company with the name Industrial Finance Corporation of India Ltd.
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. (IIBIL)
Formerly known as IRBI
IRBI was established on Mar 20, 1985 under Indian Industrial Reconstruction Bank Act, 1984 as a result of reconstituting Indian Industrial Reconstruction Corporation Ltd.
The basic aim of establishing IRBI was to revive sick and closed industrial units and to act as a prime loan and reconstruction agency. IRBI grants loans and advances to industrial institutions. It accepts stocks, shares, bonds and debentures and also provides guarantee on deferred payments.
UNIT TRUST OF INDIA (UTI)
The Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 enacted in Dec 2002 provides, inter-alia, that erstwhile Units Trust of India shall be bifurcated, and the "specified undertaking", viz., UTI-I, comprising of US-64, Assured Return Schemes and Development Reserve Fund (appearing in the Schedule-I to the Act) will be transferred and vest in a government appointed Administrator, and the 'undertaking', viz, UTI-II, comprising of Net Asset Value (NAV) based schemes (appearing in the Schedule-II to the Act), will vest in a specified company from an Appointed Day, which is Feb 1, 2003.
UTI-I has been named as "Administrator of the Specified Undertaking of the Units Trust of India."
For the UTI-II, the State Bank of India, Punjab National Bank, Bank of Baroda and the Life Insurance Corporation of India have set up a mutual fund, named, UTI Mutual Fund, UTI Trustee Company and the UTI Asset Management Company as per SEBI (Mutual Fund) Regulations.
UTI Trustee Company has been notified as the specified company. Employees have been transferred to the UTI Asset Management Company keeping in view practice in the mutual fund industry.
For the UTI-II, the State Bank of India, Punjab National Bank, Bank of Baroda and the Life Insurance Corporation of India have set up a mutual fund, named, UTI Mutual Fund, UTI Trustee Company and the UTI Asset Management Company as per SEBI (Mutual Fund) Regulations.
UTI Trustee Company has been notified as the specified company. Employees have been transferred to the UTI Asset Management Company keeping in view practice in the mutual fund industry.
NATIONAL HOUSING BANK (NHB)
National Housing Bank was established in July 1988 as wholly owned subsidiary of RBI. NHB is the apex banking institution providing finances for houses.
A major" activity of NHB includes extending financial assistance to eligible institutions in the housing sector by way of refinance and direct finance.
NON-BANKING FINANCIAL COMPANIES (NBFCS)
Non-Banking Financial entities comprise NBFCs, mutual benefit financial companies (Nidhi Companies), and mutual benefit companies (potential nidhi companies). Department of Company Affairs regulates the mutual benefit financial companies and mutual benefit companies leaving the regulation of NBFCs with the RBI.
Narasimhan Committee
NARASIMHAN COMMITTEE (1991)
Recommendations on Financial Reforms
The Government of India constituted a 9-member committee under the chairmanship of Mr M Narasimhan, retired RBI Governor, on 14lh August 1991 for making recommendation on the existing financial system and to give suggestions for improving structure. Its recommendations were as follows:
- There should be no bar to new banks being set up in the private sector, provided they conformed to the start-up capital and other requirements prescribed by the RBI.
- The Government should indicate that there would not be further nationalisation of banks and there should not be any difference in treatment between public sector banks and private sector banks.
- The banking should evolve towards a broad pattern consisting of three or four large banks, including the. SBI which would become international in character; eight to ten national banks with the network of branches throughout the country engaged in universal banking; local bank whose operations would be generally confined to a specified region and lastly rural banks to cater to rural areas.
- There should be an Assets Reconstruction Fund (ARF) which could take over, from the banks and financial institution (FIs), a portion of their bad debts at a discount. The level of discount being determined by independent auditors on the basis of clearly defined guidelines. The ARF, according to committee should be provided with special powers for recovery, somewhat broader than those contained in sections 29 to 32 of the state financial act 1951. The capital of ARF should be subscribed by the public sector banks and financial institutions.
- The banks and the financial institutions should be authorised to recover bad debts through special tribunals and based on the valuation given in respect of each asset by a panel of at lest two independent auditors.
- The public sector banks with profitable operations should be allowed to tap the capital market for enhancement of their share capital. Subscribers to such issues could be mutual funds, profitable public sector undertakings and the employees of the institutions beside the general public.
- Licensing should be abolished and the option of opening of branches for the present should be left to the commercial judgement of individual banks. Further, the internal organisation of banks is best left to judgement of the management of the individual bank.
- There should be phased reduction Of CRR and SLR.
- A liberal view should be adopted for allowing foreign banks in the country. Both foreign and domestic banks should be treated at par.
- Primary targets for credits should be redefined and such credit should not be more than 10% of total credit.
- Computerisation of banks should be promoted.
- The dual control of RBI and Finance Ministry on banks should be abolished and RBI should function only as regulatory authority for banking system in the Economy.
- RBI representatives should not be included in the management boards of banks, only government representative should be there.
- Granting resources to developmental financial institutions on concessional rates of interest should be abolished in phase within next 3 years. These institutions should be allowed to mobilize resources from open market on competitive rates.
- Review of recruitment procedures, training and remuneration policies in public Sector Banks.
- Threat of action by vigilance and other investigative authorities, even in the case of commercial decisions create low morale. The committee wants this issue to be addressed.
- Need for professionalising and depoliticising the bank boards.
NARASIMHAN COMMITTEE-II (1998)
Banking Sector Reforms
The major recommendations of the committee are:
- Merger of strong banks which have a multiplier effect on industry. It has cautioned against merger of strong banks with weak banks as this will adversely affect the asset quality of strong banks.
- Concept of narrow banking should be tried out to rehabilitate weak banks. If this was not successful the issue of closure should be examined.
- Two or three large Indian banks should be given international character.
- Small and local banks should be combined to states or clusters of districts in order to serve local trade, small industry and agriculture.
- The committee has also commented on the governments’ role in Public Sector Banks by observing that government ownership has become an instrument of management. Such micro-management of banks is not calculated to enhance autonomy and flexibility.
- Functions of the board and management need to be reviewed so that boards remain responsible for enhancing shareholder’s value through corporation or corporate strategy.
- Need to review minimum prescriptions for capital adequacy. RBI Act, Bank Nationalisation Act, Banking regulation Act and State Bank of India Act are in urgent need of review.
- Integration of NBFC’s lending activities into the financial system.
- Review of recruitment procedures, training and remuneration policies in public Sector Banks.
- Threat of action by vigilance and other investigative authorities, mishandling the case of commercial decision screate low morale. The committee wants this issue to be addressed.
- Need for professionalising and depoliticising the bank boards.
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