BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Structure of Commercial Banks in India

The commercial banking system in India now consists of public sector scheduled banks and private sector scheduled as well as non-scheduled bank. In terms of business, the public sector banks now have a dominant position. They account for more than 80 percent of the entire banking business in the country. Under the Reserve Bank of India Act, 1934, banks were classified as scheduled and non-scheduled banks. The scheduled banks are those which are entered in the second schedule of RBI Act, 1934. All commercial banks, Indian and foreign, regional rural banks, and state co-operative banks are scheduled banks. 

Non – scheduled banks are those, which have not been included in the second schedule of RBI Act, 1934. At present, there are only five non- scheduled banks in the country. To be included in the second schedule, a bank (a) must have paid up capital and reserves of not less than Rs.5 lakhs. (b) It must also satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of depositors. Scheduled banks are required to maintain a certain amount of reserves with the RBI.

i. SBI and its Associate Banks: On the recommendations of the Rural Credit Survey Committee, the Imperial Bank of India was converted into the State Bank of India on July 1, 1955. 92 per cent of its shares were acquired by the RBI, and thus it had the distinction of becoming the first state owned commercial bank in the country. In 1959, the State Bank of India (Associate Banks) Act was passed and this paved the way for creating the State Bank Group. Now State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore consists of the State Bank Group. These were the banks of the erstwhile prince by states. The State Bank Group comprising the State Bank of India, and its associates has increased the number of branches from 2,462 on June 30, 1969 to 13, 684 in June, 2009. (Now State Bank of Saurashtra has merged with State Bank of India). The State Bank of India and its Associate Banks together account for around 20 per cent of the total branches of all commercial banks in the country. The share of the banking business of the State Bank Group is roughly 29 percent. In 1933, the State Bank of India Act was amended to enable it to have access to the capital markets. The SBI thus raised over Rs.2,400 crore through public issue. The RBI stake in SBI is now 55 per cent against 99 per cent earlier. (In March 2010, Pranab Mukherjee moved the SBI Bill in the Lok Sabha, which seeks to reduce the Union Government’s shareholding in the State Bank of India from 55 per cent to 51 per cent, to allow the SBI to raise more capital from the market)

ii. Other Nationalised Banks: A second category of public sector banks is of nineteen commercial banks, of which fourteen were nationalised on July 19, 1969. Each one of these fourteen banks had deposits of Rs.50 crore or more at that time. After nationalisation of 14 banks there was a rapid expansion of branch network. On April 15, 1980 six privately owned commercial banks were nationalised. With the nationalization of these six banks, the share of the private sector in the entire banking sector declined to just 9 percent. In 1993, New Bank of India merged with Punjab National Bank. As a result, the number of public sector banks other than the State Bank of India and its Associates declined to nineteen. The total number of branches of the nineteen nationalized banks was 38,046 as of 2008.

iii. Other Scheduled Commercial Banks: At present relatively small scheduled commercial banks and ten newly established banks with a network of 5,445 branches are the ones operating in the private sector. In terms of branches and also the business done by them, most of the private sector banks are much smaller than both nationalized banks and foreign banks. Their role in the financial system of the country is just marginal. So far ten new private sector banks have been set up and three more proposals for setting up banks in the private sector have been approved in principle. These private sector banks (both old and new) account for less than 15 per cent of both deposits and aggregate advances.

iv. Regional Rural Banks: Under the chairmanship of U. Narsimham, the Working Group on Rural Banks recommended the setting up of these banks as part of a multi – agency approach to rural credit. The first bank was set up on October 2, 1975. The regional rural banks meet the credit requirement of weaker sections, small and marginal farmers landless labours, artisans and small entrepreneurs. As of June 2008, there were 196 regional rural banks with a network of 14,832 branches in the country. Ninety per cent of these have been opened in rural areas and unbanked.

v. Foreign Banks: As of June 30, 2009 the country had 29 foreign banks with 273 branches located mainly in big cities. Apart from financing of foreign trade, these banks had made significant contribution to the development of banking habits in the country as they have performed all the functions of a commercial bank, including acceptance of deposits and lending of funds for trade and commerce.

vi. Lead Bank Scheme: The idea of the Lead Bank Scheme was mooted by the Gadgil Study Group in 1969. It had the backing of Nariman Committee also. The Lead Bank had to formulate a plan for the banking structure in the districts where such facilities were lacking at the time of nationalization. The scheme now function as a way of monitoringcredit flow for social and economic development in a district