An overview of banking system

Evolution of Indian Banking System, Types of Banks and Role of RBI

1. Banking Law and Practice An Overview of Banking System Dr. Shaifali mathur

2. Introduction- Overview of Indian Banking System Banking Definition According to Indian Banking Regulation Act (1949) Sec 5 (b ) “Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque , draft, order or otherwise .” From this definition, we can say that a bank has two main features: The bank accepts deposits of money which are withdrawable by cheques . The bank uses the deposits for lending.

3. Evolution- Indian Banking System Phase I- Pre Independence Banking in India Originates in the last decades of 18 th century . The first bank was Bank of Hindustan , established in 1770 (liquidated in 1829-32). General Bank of India , established in 1786 but failed in 1791. Origination of State Bank of India as Bank of Calcutta . Bank of Bombay, Bank of Bengal and Bank of Madras was funded by presidency government. In 1921 all three banks merged to form the Imperial Bank of India (after independence became State bank of India 1955).

4. Given below is a list of other banks which were established during the Pre-Independence period: Bank Name Year of Establishment Allahabad Bank 1865 Punjab National Bank 1894 Bank of India 1906 Central Bank of India 1911 Canara Bank 1906 Bank of Baroda 1908

5. Phase II- After independence commercial banks were in private sector those days. In 1950-51 there were 430 commercial banks . The commercial bank failed helping the government in attaining their objectives. Government nationalize 14 major commercial banks on 19 th July 1969 with a deposit base over R s 50 crores. The second dose of nationalization came in April 1980 another 6 banks were nationalized taking the number to 20 banks. These banks included : Andhra Bank Corporation Bank New Bank of India Oriental Bank of Comm. Punjab & Sind Bank Vijaya Bank  Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalized in 1959: State Bank of Patiala  State Bank of Hyderabad  State Bank of Bikaner & Jaipur  State Bank of Mysore  State Bank of Travancore  State Bank of Saurashtra  State Bank of Indore All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which was merged in 2008 and State Bank of Indore, which was merged in 2010.

6. Reserve bank Of India   The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank is permanently situated in Mumbai since 1937 . The Reserve Bank is fully owned and operated by the Government of India . The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: Regulating the issue of Banknotes Securing monetary stability in India Modernizing the monetary policy framework to meet economic challenges

7. Establishment OF Rbi

8. Role of RBI Monetary Authority : Formulates, implements and monitors the monetary policy for  maintaining price stability, keeping inflation in check ; ensuring adequate flow of credit to productive sectors . Regulator and supervisor of the financial system :  lays out parameters of banking operations within which the country's banking and financial system functions for- A ) maintaining public confidence in the system, B ) protecting depositors’ interest ; C ) providing cost-effective banking services to the general public . Regulator and supervisor of the payment systems : A) Authorizes setting up of payment systems; https:// www.rbi.org.in/scripts/PublicationsView.aspx?Id=12043 B ) Lays down standards for working of the payment system; C)lays down policies for encouraging the movement from paper-based payment systems to electronic modes of payments. D ) Setting up of the regulatory framework of newer payment methods . E ) Enhancement of customer convenience in payment systems . F ) Improving security and efficiency in modes of payment.

9. Manages Foreign Exchange : RBI manages forex under the FEMA- Foreign Exchange Management Act, 1999.  in order to A) facilitate external trade and payment B) promote the development of foreign exchange market in India. Issuer of currency :  RBI issues and exchanges currency as well as destroys currency & coins not fit for circulation to ensure that the public has an adequate quantity of supplies of currency notes and in good quality. Developmental role :  RBI performs a wide range of promotional functions to support national objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc. Banker to the Government :  performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks :  An important role and function of RBI is to maintain the banking accounts of all scheduled banks and acts as the banker of last resort. An agent of Government of India in the IMF.

10. Commercial Banks Commercial Banks are regulated under the Banking Regulation Act, 1949 and their business model is designed to make profit. Their primary function is to accept deposits and grant loans to the general public, corporate and government. Commercial banks can be divided into- Private Sector banks Public sector banks Foreign banks Private Sector banks- Private Sector Banks are those where greater part of share or equity are not held by the government but by private shareholders. New genetartion Private sector Banks Old Generation Private sector bank Foreign Banks The new private sector banks were incorporated as per the revised guidelines issued by RBI regarding the entry of private sector banks in 1993 The private sector banks which were operating in India prior to the liberalization year of 1991 are known as Old generation private Sector banks. Foreign banks  are defined as  banks  from a  foreign  country working in  India  through branches. 

11. RBI formulated Guidelines for Private Banks: The private banks should be established as public limited companies under the then Indian Companies Act 1956. The paid-up capital shall not be less than Rs . 100 Crore. The new guidelines issued in 2001 raised the minimum paid-up capital to Rs . 200 Crore, which should be enhanced to Rs . 300 Crore within three years after the commencement of business . The promoters’ share shall not be less than 40 per cent and the voting right of a shareholder shall not exceed 10 per cent.

12. Facts Housing development finance corporation limited (“HDFC”) was the first private bank in I ndia to receive license from RBI, to set up a bank in the private-sector in I ndia. Nine banks were set-up in private sector including some by development financial institutions. Prominent among them are ICICI bank, global trust bank, HDFC and IDBI bank. There were mergers of the banks. ( Bareily corporation ltd. Merged with bank of baroda in 1999 , T imes bank merged with HDFC bank in 1996 , Bank of M adura ltd. Merged with ICICI bank in 2001 and N edungadi bank ltd. merged with PNB in 2003.)

13. Public sector Banks There are 12 total 12 public sector baks at present SBI Nationalized Banks Https://insertlearning.Com/v1/lesson/5f517fe66dde50b969769e83

14. Cooperative Banks The cooperative banks were established by British government in India after tracing out the consequences of Bengal famine of 1840 such as rural poverty, indebtedness and matters associated with such conditions of rural farmers. In order to strengthen the credit availability to agriculturists, in the year 1904 the co-operative credit societies act was passed enabling establishment of co-operative credit societies for making available agricultural credit through such societies In 1912 a comprehensive cooperative societies act was passed to facilitate starting of non-credit related societies too. After independence in 1966 co-operative banks were brought under the supervision of rbi through the banking regulation (co-operative societies) rules, 1966. From the year 2012 (through a banking law amendment act, 2012) a primary cooperative society can carry on the business of banking only after obtaining a license from RBI. Cooperative banking in I ndia is federal in structure. These banks thus face duel control from state governments/central government (in the case of multi-state co-operative societies) and RBI which exercises control over their banking operations. Co-operative banks are owned by members who subscribe to their shares.

15. In a cooperative bank, one shareholder has one vote whatever the number of shares he may hold . Cooperative banks are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities . Short-Term Rural Cooperative Credit Structure : In rural India, there exists a 3-tier short-term rural cooperative structure . Tier-I includes state cooperative banks (SCBs) at the state level; Tier-II includes central cooperative banks (CCBs) at the district level; and Tier- III includes primary agricultural credit societies (PACSs). In 19 states, there exists a 3-tier short-term cooperative credit structure, comprising SCBs, CCBs and PACSs. And rest of the states , there exists a 2-tier short-term cooperative structure. In the north-eastern states, including Sikkim, the structure is 2-tier, comprising only SCBs and PACSs.

16. Regional Rural Banks Regional Rural Banks (RRBs) were established in 1975 under Regional Rural Banks Act, 1976. The main objective for establishing these banks were “to develop the rural economy and to create a supplementary channel to the ‘Cooperative Credit Structure’” so as to expand the scope of institutional credit for rural and agriculture sector. The share capital of these banks were contributed in the proportion of 50%,15% and 35% respectively by Government of India, the concerned State Government and the Sponsoring bank, of a RRB . RRBs were permitted to engage in all permitted Banking activities with their area of operation restricted to a few notified districts in a State . There are at present 56 RRBs existing in India.

17. Small Finance Banks Established with an aim of financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities . In July 2014 , draft guidelines for small finance banks > the final guidelines were released in November 2014 > Thereafter, in February 2015, RBI released the list of 72 entities which had applied for a small finance bank license> in September 2015, RBI had issued 10 provisional licenses to entities.

18. Small Finance Banks are – 1 . Ujjivan Small Finance Bank Limited. 2 . Jana Small Finance Bank Limited . 3. Equitas Small Finance Bank Limited. 4 . AU Small Finance Bank Limited . 5. Capital Small Finance Bank Limited. 6 . Fincare Small Finance Bank Limited. 7 . ESAF Small Finance Bank Limited. 8 . North East Small Finance Bank Limited. 9 . Suryoday Small Finance Bank Limited . 10 . Utkarsh Small Finance Bank Limited

19. These banks can be promoted by individuals, corporate houses, trusts or societies . Promoters should have 10 years ’ experience in banking and finance and they should have a capital stake of 40% of equity which must be brought down to 26% over a period of 12 years . Joint ventures are not permitted . Foreign shareholding will be allowed in these banks as per the Foreign Direct Investment rules in private banks in India. Existing Non-banking Financial Companies (NBFCs), Micro Finance Institutions (MFI) and Local Area Banks (LAB) may convert themselves to become small finance banks by making applications to RBI. These Small Finance Banks need to be registered as Public Limited Companies under The Companies Act, 2013 and Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes, are applicable to them. The banks will not be restricted to any region . 75% of its Net Credit should be lent to Priority Sector and 50% of its loans should be in the range of up to Rs . 25 lakhs . The Small Payment Banks should have capital of at least Rs . 100 crore . At net worth of Rs . 500 crore , listing will be mandatory within three years. Those Small finance banks having net worth of below Rs.500 crore could also get their shares listed voluntarily

20. Payment Banks There were 41 applications from various applicants including some corporate houses who applied for Payment Banks. Guidelines for payment Banks- To be registered as a public limited company under the Companies Act, 2013. Payment Banks cannot form subsidiaries . For the first five years, the promoters stake to remain at 40% at minimum . Foreign shareholding will be allowed in these banks as per extant FDI norms. The voting rights will be regulated as per provisions of The Banking Regulation Act 1949. [ Voting rights are restricted at 10% for any one share holder . RBI has the discretion to raise this to 26% on merits.]. If there is any acquisition of more than 5% shares this will require prior RBI approval. The majority of the bank’s board of directors should consist of independent directors, appointed according to RBI guidelines . The bank should be fully networked from the beginning . Initially, the deposits will be capped at Rs . 1,00,000 per customer, but later it may be raised on the basis of performance of the bank . No lending activity is permitted . Bank can accept utility bills. A quarter of its branches should be in unbanked rural areas .

21. The list of Payment Banks operating in India are – The Airtel Payments Bank Limited. Paytm Payments Bank Limited. India Post Payments Bank Limited. Fino Payments Bank Limited. Aditya Birla Idea Payments Bank Limited * 6. Jio Payments Bank Limited. 7 . NSDL Payments Bank Limited. * Note: As of November 2019, Aditya Birla Idea Payments Bank Limited is put under liquidation.

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