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MAJOR EVENTS IN THE BANKING HISTORY OF INDIA

YEAR EVENT
1770 Bank of Hindustan, the first bank in India on Modern lines, established.
1850 First General Insurance Company was established.
1875 Bombay Stock Exchange started formal trading.
1918 Oriental Life Insurance Company established.
1921 Three Presidency Banks, Bank of Bengal, Bank of Madras and Bank of
Bombay, merged into Imperial Bank.
1926 Establishment of Hilton-Young Commission to suggest a Central Bank.
1935 Establishment of Reserve Bank of India as the Central Bank.
1947 Control of Capital Issues Act imposed restrictions on issue of capital.
1948 Establishment of Industrial Finance Corporation, the first DFI.
1955 Imperial Bank taken over by State Bank of India; Establishment of Industrial
Credit and Investment Corporation of India
1956 Life Insurance Company of India came into effect; Securities Contract
(Regulation) Act impacted directly and indirectly on securities trading,
running of stock exchanges and prevention of undesirable transaction.
1962 Deposit Insurance Corporation established.
1963 Insertion of a new Chapter in RBI Act, 1934 to effectively supervise, control
and regulate deposit-taking activities of NBFCs.
1964 Establishment of Industrial Development Bank of India.
1966 Deposit insurance extended to co-operative banks.
1969 Nationalisation of 14 largest commercial banks.
1973 Nationalisation of general insurance companies; Foreign Exchange Regulation
Act (FERA) was promulgated which provided an opportunity to develop
Indian Equity Market.
1975 Establishment of Regional Rural Banks.
1980 Second Round of nationalisation of 6 commercial banks.
1982 Establishment of National Bank for Agriculture and Rural Development; First
Credit rating agency established in India.
1990 Establishment of Small Scale Industries Development Bank of India.
1991 Report of the Committee on the Financial System, which provided the
blueprint for the first generation financial sector reforms.
1992 Introduction of prudential norms for income recognition and asset
classification; SEBI obtained statutory powers to promote orderly
development of capital market; Incorporation of National Stock Exchange
(NSE) as the first screen-based and transparent trading platform for
investors; Introduction of auction system for Government securities.
1993 Introduction of Depositories.
1994 Board for Financial Supervision, an autonomous body under the aegis of RBI,
establish; New guidelines for entry of new private sector banks announced;
Wholesale debt market operation initiated by NSE.
1996 Establishment of Institute for Development and Research in Banking
Technology; Depositories Act was passed which allowed for holding of
securities in dematerialised form.
1997 Promulgation of RBI (Amendment) Act for intensified regulation of deposit-
ranking NBFCs; Termination of automatic monetisation of Government
deficit; Bank Rate activated as a signaling rate; Statutory Liquidity Ratio
(SLR) reduced to 25%
1999 Insurance Regulation and Development Act was passed allowing new
players/joint ventures to undertake insurance business; Detailed guidelines
on risk management in banks announced; Standing Committee on
International Financial Standards and Codes set up to evolve sound standards
based on recognized best practices.
2000 Guidelines issued regarding interest rate swaps and forward rate agreement to
enable financial entities to hedge interest rate risk; New guidelines for
categorization and valuation of banks’ investment portfolio announced;
Liquidity Adjustment Facility introduced; Foreign Exchange Management
Act, replacing the earlier FERA, introduced.
2001 Establishment of Credit Information Bureau of India Ltd.
2002 Revised guidelines announced for entry of new private banks; Enactment of
SARFAESI Act for enforcement of security interest for secured creditors;
Establishment of first universal bank in the country; Clearing Corporation of
India Limited became operational; Consolidated guidelines issued on FDI in
Banking.
2003 Central Listing Authority was constituted.
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and internal
factors.

For the past three decades India's banking system has several outstanding achievements
to its credit. The most striking is its extensive reach. It is no longer confined to only
metropolitans or cosmopolitans in India. In fact, Indian banking system has reached
even to the remote corners of the country. This is one of the main reason of India's
growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with
the nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a
draft or for withdrawing his own money. Today, he has a choice. Gone are days when the
most efficient bank transferred money from one branch to other in two days. Now it is
simple as instant messaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct
phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks


• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
• New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and
Phase III.

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 (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established which started as private shareholders banks, mostly Europeans
shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank,
and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small. 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 powers for the supervision of banking in india as the
Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence.
In 1955, it nationalised 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 was nationalised in 1960 on 19th
July, 1969, major process of nationalisation 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 nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980
with seven more banks. This step brought 80% of the banking segment in India under
Government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

• 1949 : Enactment of Banking Regulation Act.


• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in 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.
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
set up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put
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.

The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves
are high, the capital account is not yet fully convertible, and banks and their customers
have limited foreign exchange exposure.
BANKING
The first bank of limited liability managed by Indians was Oudh Commercial Bank
founded in 1881. Subsequently, Punjab National Bank was established in 1894.Swadeshi
movement, which began in 1906, encouraged the formation of a number of commercial
banks. Banking crisis during 1913 -1917 and failure of 588 banks in various States during
the decade ended 1949 underlined the need for regulating and controlling commercial
banks. The Banking Companies Act was passed in February 1949, which was
subsequently amended to read as Banking Regulation Act, 1949.This Act provided the
legal framework for regulation of the banking system by RBI.
The largest bank - Imperial Bank of India - was nationalised in 1955 and rechristened as
State Bank of India, followed by formation of its 7 Associate Banks in 1959. With a view
to bringing commercial banks into the mainstream of economic development with
definite social obligations and objectives, the Government issued an ordinance on 19
July 1969 acquiring ownership and control of 14 major banks in the country. Six more
commercial banks were nationalised from 15 April 1980. As certain rigidities and
weaknesses were found to have developed in the banking system during the late
eighties, the Government of India felt that these had to be addressed to enable the
financial system to play its role in ushering in a more efficient and competitive economy.
Accordingly, a high-level Committee on the Financial System (CFS) was set up on 14
August 1991 to examine all aspects relating to the structure, organisation, functions and
procedures of the financial systems. Based on the recommendations of the Committee
(Chairman: Shri M.Narasimham), a comprehensive reform of the banking system was
introduced in 1992-93. A high-level Committee, under the Chairmanship of Shri
M.Narasimham was constituted by the Government of India in December 1997 to review
the record of implementation of financial system reforms recommended in 1991 by the
Committee on Financial System and chart the reforms necessary in the years ahead. The
Committee submitted its report to the Government in April 1998. Some of the
recommendations of the Committee, on prudential accounting norms, particularly in
the areas of Capital Adequacy Ratio, classification of government guaranteed advances,
provisioning requirements on standard advances and more disclosures in the Balance
Sheets of banks were accepted and implemented. Recent major initiatives undertaken
for strengthening the financial sector in pursuance to the recommendations of the above
Committee relate to guidelines to banks on Asset-Liability Management and integrated
risk management systems, compliance with Accounting Standards, consolidated
accounting and supervision, fine-tuning of prudential norms for income recognition,
asset classification and provisioning for NPAs, etc. The guidelines on setting-up of Off-
shore Banking Units in Special Economic Zones, Fair Practices Code for Lenders,
Corporate Governance, Anti-Money Laundering measures, etc., are other important
developments in the banking sector. The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 is expected to facilitate NPA
management by banks more effectively. In 1993, in recognition of the need to introduce
greater competition, new private sector banks were allowed to be set up in the banking
system. These new banks had to satisfy certain requirements. Further, revised
guidelines for entry of new banks in private sector were issued on 3 January 2001. The
applications for setting up new banks received within the stipulated period were
scrutinised by RBI and “in principle” approvals were issued to two entities on 7
February 2002. Kotak Mahindra Bank Ltd, on satisfactory completion of other
formalities, was granted banking licence on 6 February 2003. It commenced operations
from 22 March 2003 and subsequently was included in the Second Schedule of the
Reserve Bank of India Act, 1934 w.e.f 12 April 2003.
On satisfactory completion of all formalities, a licence was granted to “YesBank Ltd” on
24 May 2004. The bank commenced its operations from 16 August 2004 and was
included in the second Schedule of the RBI Act, 1934 on 21 August 2004. A draft
comprehensive policy framework for ownership and governance in private sector banks
was put in the public domain on 2 July 2004 for discussion and feedback. After taking
into consideration the feedback received from all concerned and in consultation with
Government of India, RBI issued detailed Guidelines on ownership and governance in
private sector banks on 28 February 2005. The underlying principles of the guidelines
inter alia are to ensure that the all banks in the private sector have a networth of Rs.300
crore, ultimate ownership and control of private sector banks is well diversified,
important shareholders (i.e., shareholding of 5 per cent and above) are ‘fit and proper’
as laid down in the guidelines dated 3 February 2004 and the directors and the CEO
who manage the affairs of the bank are ‘fit and proper’ as laid down in the circular dated
25 June 2004. The guidelines also provide for restrictions on cross holding of 5 per cent
or above by one bank/FI in another bank/FI as laid down in the circular dated 6 July
2004 and observance of sound corporate governance principles. The RBI held
discussions with banks to review the position.
RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) was established under the Reserve Bank of India Act,
1934 on 1 April 1935 and nationalised on 1 January 1949. The Bank is the sole authority
for issue of currency in India other than one-rupee coins and subsidiary coins. As the
agent of the Central Government, the Reserve Bank undertakes distribution of one-
rupee coin as well as small coins issued by the Government. The Bank acts as banker to
the Central Government, and State Governments by virtue of agreements entered into
with them. The Reserve Bank also handles the borrowing programme of the Central and
State Governments. It formulates and administers monetary policy with a view to
ensuring price stability while promoting higher production in the real sector through
proper deployment of credit. The RBI plays an important role in maintaining orderly
conditions in the foreign exchange market and acts as an agent of the Government in
respect of India’s membership of International Monetary Fund. The Reserve Bank also
performs a variety of developmental and promotional functions. The Reserve bank also
regulates and supervises commercial banking system, urban co-operative banks and
non-banking financial sector.
COMPOSITION OF BANKING SYSTEM
Commercial Banking System in India consisted of 218 scheduled commercial banks
(including foreign banks) as on 31 March 2006. Of the scheduled commercial banks, 161
are in public sector of which 133 are regional rural banks (RRBs) and these account for
about 75.2 per cent of the deposits of all scheduled commercial banks. The regional rural
banks were specially set up to increase the flow of credit to small borrowers in the rural
areas. The remaining 28 banks, other than RRBs, in the public sector consist of 19
nationalised banks, 8 banks in SBI group and IDBI Ltd. And transact all types of
commercial banking business. Amongst the public sector banks, as on 31 March 2006,
the nationalised banks (including IDBI Ltd.) group is the biggest unit with 33,868
offices, deposits aggregating
Rs 10,13,664 crore and advances of Rs 7,21,066 crore. The State Bank of India group
(SBI and its seven Associates) with 13,820 offices, deposit aggregating Rs 4,90,375 crore
and advances Rs 3,50,961 crore is the second largest. The nationalised banks accounts
for 67.3 per cent of aggregate banking business (aggregate of deposits and advances)
conducted by the public sector banks (excluding RRBs) and 48.0 per cent of the
aggregate business of all scheduled commercial banks. The SBI and its associates as a
group accounts for 32.7 per cent of aggregate banking business conducted by the public
sector banks (excluding RRBs) and 23.3 per cent of the aggregate business of all
scheduled commercial banks (Source: Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks – March 2006).

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