An Overview of Indian

Banking Industry/ System @

@Source Data Acknowledgement: RBI & Various Internet Sources

History of Banking in India
The first bank The General Bank of India was set up in the year 1786 followed
by Bank of Hindustan and Bengal Bank

The Three Presidency Banks established Bank of Bengal (1809), Bank of

Bombay (1840) and Bank of Madras (1843) were established as independent
units by The East India Company

These three banks were amalgamated in 1920 as Imperial Bank of India# with
private shareholders banks mostly Europeans

The State Bank of India [SBI#] formerly Bank of Bengal is one of the oldest
banks in India

The first exclusively Indian Banks was Allahabad Bank [1865] then during 1894-
1913 Punjab National Bank Ltd, 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 [RBI] was established in 1935

Types of Banks/Institutions in the Indian Banking
System
Central Bank [And Bankers Bank] The Reserve Bank of India [RBI]

Scheduled Banks* Commercial Banks & Non-Commercial Banks

Unscheduled Banks

Nationalized Banks [Public Sector Unit Banks (PSU Banks)

Private Banks

Foreign Banks

Non banking Financial institutions [NBFIs] / Non-Banking Finance Companies

[NBFCs]

Cooperative Credit Banks [Urban , Rural , District,State]

Development Finance Banks**

Types of Banks/Institutions in the Indian Banking
System
Local Area Banks [LAB]

Regional Rural Banks [RRBs]

Primary Agricultural Credit Societies [PACs]

Primary & Secondary Cooperative Agriculture & Rural Development Banks

[PCARDB] & [SCARDB]

 Primary Dealers [8 Authorized dealers in GOI securities]

Indian Bank Association [IBA] (Voluntary Authority]

Banking Ombudsman [For Customer Grievance Redressal]

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The Types of Banking Institutions in India
*Scheduled Banks constitute those banks, which have been included in the
Second Schedule of Reserve Bank of India (RBI) Act, 1934
RBI includes only those banks in this schedule, which satisfy the criteria
laid down vide section 42 (6) (a) of the Act
There are 77 Scheduled Commercial Banks & 53 scheduled Cooperative
Banks The break-up of above 77 Commercial banks are
27 Nationalized PSU Banks) [including 7 banks of the SBI group]
15 Private sector banks [including 7 New]
34 Foreign Banks

**Development Finance Banks. The select 5 Financial Institutions under the

regulation of RBI are:
Export Import Bank [EXIM Bank]
Small Industries Development Bank of India [SIDBI]
National Bank for Agriculture and Rural Development [NABARD]
National Housing Bank [NHB]
Industrial Investment Bank of India [IIBI - under winding-up]

There are about 320 banks with about 75000 branches pan India

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The Type & Spread of Cooperative Credit Institutions
in India

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Three Phases of Growth of Indian Banking
System
 From 1786 till today, the journey of Indian Banking System can be segregated
into three distinct phases

 Phase I: Commencement phase from 1786 till independence

[Pre Independence]

 Phase II: Post Independence leading up to 1991 the year of initiation of Indian
Banking & Financial Sector Reforms. Inter-alia, the era of creation
of SBI and nationalization of commercial banks

 Phase III: Post Reforms Phase resulting in emergence of strong vibrant

Indian Banking System with global ambitions

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 The Progress During the Three Phases
Phase I
The growth was very slow and banks also experienced periodic failures
between 1913 and 1948
There were approximately 1100 banks, mostly small and credit given largely
to traders
Public confidence and participation in the banking system was low impacting
deposit mobilization and hence growth
To streamline the functioning of commercial banks, the Government
introduced The Banking Companies Act, 1949
The RBI was made the Central Banking Authority and given the task of
supervision of banking in India

Phase II
In 1955 GOI nationalized Imperial Bank of India and formed SBI
SBI was appointed 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 nationalized in
1960
In 1969 14 major commercial banks in the country was nationalized
In 1980 seven more were nationalized thus resulting in 80% of the banking
segment in India under Government ownership
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The Progress During the Three Phases

Phase III
The wave of reforms and liberalization process has brought sea changes.
Many new Private and Foreign Banks registered their presence
New products and facilities were introduced pan India
Significant improvements were made in areas of foreign exchange reserves
and foreign exchange management
 The banking system displayed commendable resilience to global and local
financial crisis
At the same time the banking system has been impacted by very many types
of frauds

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Important Events in the Indian Banking Industry
1770 Bank of Hindustan, the first bank in India on modern lines, 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 for

the country

1935 Establishment of Reserve Bank of India RBI] as the central bank

1948 Establishment of Industrial Finance Corporation [IFCI], the first DFI

1955 Imperial Bank taken over by State Bank of India [SBI]

Establishment of Industrial Credit and Investment Corporation of
India[ICICI]

1962 Deposit Insurance Corporation established

1963 Changes in RBI Act, 1934 to effectively supervise, control and regulate
deposit-taking activities of NBFCs

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Important Events in the Indian Banking Industry
1964 Establishment of Industrial Development Bank of India [IDBI]

1966 Deposit insurance extended to co-operative banks

1969 Nationalization of 14 largest banks commercial banks

1975 Establishment of Regional Rural Banks

1980 Second round of nationalization of 6 commercial banks

1982 Establishment of National Bank for Agriculture and Rural Development

[NABARD]

1990 Establishment of Small Industries Development Bank of India [SIDBI]

1991 Report of the Committee on the Financial System, which provided the
blueprint for first generation financial & banking sector reforms

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Important Events in the Indian Banking Industry
1994 Board for Financial Supervision, an autonomous body under the aegis of
RBI, established
New guidelines for entry of new private sector banks announced

1996 Establishment of Institute for Development and Research in Banking

Technology

1997 Promulgation of RBI (Amendment) Act for intensified regulation of deposit-

taking NBFCs

2001 Establishment of Credit Information Bureau of India Ltd

2002 Revised guidelines announced for entry of new private banks

Enactment of Securitization & Reconstruction of Financial Assets &
Enforcement of Security Interest [SARFESI Act 2002] to tackle NPAs &
Securitization & Reconstruction of weak banks
Prevention of Money Laundering Act

2003 Central Listing Authority was constituted

2008 Steps taken to meet global crisis of 2008

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Key achievements during 2000-2010
Continued thrust on Banking and Financial Sector Reforms

Automated Data Flow across Banks & Core Banking Systems [CBS] Pan India

Thrust on Information Technology System and Centralized Funds Management

System [CFMS]

Introduction of Clearing , Settlement and Payment Systems

Introduction of E-payment systems [RTGS,NEFT,ECS,NECS]

Installation of over 60,000 Automated Teller Machines [ATMs] pan India

Introduction of Collateralized Borrowing Lending Obligations [CBLO]

Establishment Clearing Corporation of India [CCIL]

Introduction of Liquidity Adjustment Facility [LAF]

Base Lending Rate System of Interest to replace Prime Lending Rate [PLR]
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Key achievements during 2000-2010
Introduction of strict Know Your Customer [KYC] norms

Implementation of prudential norms and advanced approaches under Basel I & II

norms

Recapitalization of PSU Banks and RRBanks by GOI to meet CAR

Liberalization of Branch Authorization Policy

Distribution of bank branches pan India & opening of bank branches in Tier 3-6
centers

Separate classification & criteria for Infrastructure Finance Companies

Rural Infrastructure development fund [RIDF] thru NABARD

Micro finance as a component of financial inclusion Increase in sources of Micro

Finance delivery

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 Key achievements during 2000-2010
Full fledged Customer Service Department set-up for customer service to redress
customer grievance

Significant fund raising by Indian and Foreign banks from the Primary Markets both
in India and Abroad

Introduction of exchange traded currency derivatives , interest rate & currency

futures

Important mergers and restructuring of Banks

First Universal Bank Set up

Implementation of International Financial Reporting Standards [IFRS]

Negotiated Dealing System [NDS] for GOI Securities introduced

Financial Literacy and Credit Counseling Centres [FLCCs] set up

Introduction Core Banking System [CBS] and payment systems like RTGS,NEFT,ECS

Consolidated guidelines issued on FDI in banking

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 Current Status of Indian Banking Sector
The banking system remains, as always, the most dominant segment of the
financial sector

Indian banks continue to be well-regulated, and under the regulator's watchful

eye, have emerged stronger

In the annual international ranking conducted by UK-based Brand Finance Plc, 20
Indian banks have been included in the Brand Finance® Global Banking 500

 SBI has become the first Indian bank to be ranked among the Top 50 banks in
the
world, capturing the 36th rank, as per the Brand Finance study

 The brand value of PSU Bank SBI increased from US$ 1.5 billion in 2009 to
US$ 4.6 billion in 2010. ICICI Bank [Private Bank] also made it to the Top 100 list
with a brand value of US$ 2.2 billion.

The total brand value of the 20 Indian banks featured in the list stood at
US$ 13 billion

Nationalized Bank as a group account for ~ 52% of the aggregate deposits

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Soundness of Main Indian Banks

Basel Norms 8%
RBI Norms 9%

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 Rating of Indian Banks on Critical Parameters
Regulatory Systems
Better than China, Brazil, Russia, UK
 At par with Japan, Singapore and Hong Kong
Above par or at par with USA

Risk Management Systems

 More advanced than China, Brazil and Russia
Above or at par with Japan, Hong Kong, Singapore , UK & USA

Credit Quality
Above par than China, Brazil, Russia, UK and USA
At par with Hong Kong, Singapore & Japan

Technology Systems
More advanced than Brazil and Russia
Below par with China, Japan, Hong Kong, Singapore, UK and USA

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Challenges Faced by Indian Banking Industry

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Non-income Opportunities for Indian Banks

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Significant Benefits from Core Banking Systems

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The Successful Implementation of E-Payment
Process

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Comparative Indicators of Financial Access & Depth
of Indian Banking System

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Banking Industry Outlook & Expectations for the
Future
 RBI has been actively encouraging Financial Inclusion to extend the reach of the
banking sector
Only around 40% of the Indian population is currently connected to the banking system
RBI has issued directives to Public Sector Banks to ensure all villages with population
of over 2000 [about 145 millions customers] are brought under banking network by 2012

Mobile technology to drive the next leg of the banking sector growth
Mobile technology is expected to widen the reach of the banking network and provide
for ease of transactions
Together with the Business Correspondent model and UID, the mobile technology is
expected to making banking services accessible to very small villages where setting up
a branch is unfeasible
This would support the RBI’s thrust on financial inclusion

 Consolidation the way forward for the banking sectors

RBI is contemplating to specify a minimum capital of more than Rs. 10 billion to obtain
a new bank license & with that around 8 domestic banks still have a net worth lower
than Rs.10 billion, in FY10, there is further scope for consolidation
 This would help banks in meeting capital adequacy requirements and financing large
transactions and investments made by the Indian corporate

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 Banking Industry Outlook & Expectations for the
Future
 
Credit growth to continue on upward trajectory
With the overall economy expected to grow at ~ 8.8% & services sector &
Industry expected to grow at ~ 10 for FY11 and if future the bank credit is
expected to continue at a healthy pace 

Take-out financing expected to be in revival mode on the back of

infrastructure growth
 Take-out financing to finance longer duration projects (say of 15 years) by banks
by sanctioning medium term loans (say 5-7 years) is expected to revive given the
RBI allowing take out financing by external commercial borrowings [ECBs] 

***Source Data Acknowledgement: RBI &

Internet Sources
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MANY THANKS

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