Introduction to the Indian banking system

Introduction to Indian banking system

1. Introduction to Indian
Banking System
Dr. Vasim Ahmad
(Associate Professor)

4. Financial System
✓Thefinancialsystemisthemostimportantinstitutionalandfunctional
vehicleforeconomictransformation.Afinancialsystemplaysasignificant
roleintheeconomicgrowthofacountry.
✓Afinancialsystemisacomplex,wellorganizedsetofsubsystemsof
FinancialInstitutions,FinancialMarkets&FinancialInstrumentswhich
facilitatesthetransferandallocationoffundsefficientlyandeffectively.
✓TheIndianFinancialSystemcanalsobebroadlyclassifiedintotheformal
andtheinformalfinancialsystem.Theformalfinancialsystemworks
underthesupervisionof(MOF)MinistryofFinance,andSecuritiesand
ExchangeBoardofIndia(SEBI)andotherRegulatoryBodies.
Informalfinancialsystemoperateoutsidetheformalregulatoryframework
likeMoneylenders:ChitFunds:PrivateFinanceCompanies:Hundi/Hawala
Systemetc..

5. Functions of The Financial System
It ties the savers and investors and by doing that it helps to mobilize and allocate the fund
more effectively and efficiently.
1. It inspires the investors to observe the investment performance.
2. It provides a payment mechanism for the exchange of goods and services.
3. It helps to achieve maximum allocation of risk bearing.
4. It makes available price related information.
5. It creates financial structure that reduces the transaction and borrowing cost.
6. It helps promoting the process of finance deepening.
7. It controls the risks involved in mobilizing savings and allocating credit.
8. It helps the investors to take the careful and true decision regarding investment.
9. With the help of financial system, people can manage and adjust their portfolio.

6. EVALUATION OF THE INDIAN BANKING SYSTEM
oOriginofBanking:
▪ItalianWord"BANCO":Theterm'bank'isderivedfromthe
Italianword"BANCO,"referringtobenchesusedby
moneylendersinLombardy.
▪EarlyBankingActivities:AncientGreecehadtempleslikethe
TempleofApolloatDelphiservingasfinancialcenters.In
India,earlybankingactivitiesincludedmoneylendingand
depositsystemsmanagedbytemples.

7. oHistorical Development:
▪Ancient Texts:
▪Kautilya’sArthashastra(400 BC):References to financial operations
such as lending and deposits.
▪Professional Banking:
▪Vedic Period:Evidence of money lending activities during this era.
▪Mughal Era:Bankers, such as the 'Nagar Sheths,' played significant
roles in trade financing and money exchange, using instruments like
Hundis (a form of credit note).

8. oAncientPeriod:
▪BankingactivitiesmentionedinancienttextslikeKautilya’sArthashastra(400
BC).
▪TemplesinancientGreeceandIndiaservedascentersformoneylendingand
deposits.
oMedievalPeriod:
▪BankingevolvedwiththedevelopmentoftradeandcommerceduringtheMughal
erainIndia.
▪Bankersplayedsignificantrolesinfinancingtradeandprovidingmoney
exchangeservices.
oColonialPeriod:
▪EstablishmentofthefirstbanksinIndiainthelate18thcentury.
▪TheGeneralBankofIndia(1786)andtheBankofHindustanwereamongthe
earliestbanks.

11. Development Phases of Banking in India
oFoundationPhase(1949-1969):
▪LegalFrameworks:
▪BankingRegulationAct,1949:Establishedguidelinesforbankingoperationsandgovernance.
▪NationalizationofImperialBankofIndia:
▪StateBankofIndia(1955):Convertedtoserveasaprincipalagentforruralcreditandexpansion.
oExpansionPhase(1969-1984):
▪NationalizationofBanks:
▪1969:14majorbanksnationalizedtoensureequitablecreditdistribution.Example:Punjab
NationalBank.
▪1980:Additional6banksnationalized,furtherextendingreachtounderservedareas.Example:
OrientalBankofCommerce.
▪FocusAreas:
▪RuralCredit:Emphasisonprovidingfinancialservicestoruralandagriculturalsectors.

12. oConsolidation Phase (1984-1990):
▪Improvements:
▪Branch Networks:Expansion and strengthening of branch networks.
▪Customer Services:Enhancements in service quality.
▪Loan Portfolios:Diversification and improvement in loan offerings.
oReformatory Phase (1991 Onwards):
▪Economic Reforms:
▪Liberalization, Privatization, Globalization:Introduced competitive and efficient banking practices.
▪Technological Adoption:Implementation of modern banking technologies like ATMs and internet banking.
▪Basel Norms:Adoption of international banking regulations for risk management and capital adequacy.
oPresent Phase (Beyond 2002):
▪Technological Advancements:
▪Internet Banking, ATMs, Mobile Banking:Increased accessibility and convenience for customers.
▪Retail Banking Focus:Greater emphasis on customer-centric services and products.

13. Quizz

14. 1.Which of the following institutions does the formal financial system in India operate under?
a) Ministry of Home Affairs
b) Ministry of Finance
c) Reserve Bank of India
d) Indian Parliament
2.What does the Italian word "BANCO," from which the term "bank" is derived, refer to?
a) A marketplace
b) A chair
c) Benches used by moneylenders
d) A form of currency
3.Which ancient text in India mentions financial operations like lending and deposits?
a) Bhagavad Gita
b) Kautilya’sArthashastra
c) Ramayana
d) Rigveda
4.What financial role did the temples in ancient Greece and India serve?
a) Currency exchange
b) Government treasury
c) Centers for money lending and deposits
d) Stock market

15. 5. What role did temples in ancient Greece and India play in early banking?
a) Served as banks for the kings
b) Acted as centers for money lending and deposits
c) Issued currency for the state
d) Functioned as tax collection centers
6. During which phase were 14 major banks nationalized in India?
a) Foundation Phase
b) Expansion Phase
c) Consolidation Phase
d) Reformatory Phase
7. Which was the first bank to be established in India?
a) State Bank of India
b) Punjab National Bank
c) General Bank of India
d) Reserve Bank of India
8. What financial instrument was commonly used in the Mughal era in India?
a) Cheques
b) Bonds
c) Hundis
d) Promissory notes

16. 9. What significant change occurred in the Indian banking sector in 1991?
a) Increase in agricultural loans
b) Introduction of the Gold Standard
c) Adoption of economic reforms and technological advancements
d) Nationalization of all private banks
10. Which phase of Indian banking is associated with the introduction of ATMs and internet banking?
a) Foundation Phase –
b) Expansion Phase
c) Consolidation Phase
d) Present Phase (Beyond 2002)
11. What was a key focus during the Consolidation Phase (1984-1990) of Indian banking?
a) Opening new branches internationally
b) Improving branch networks and customer service
c) Reducing the number of banks
d) Eliminating traditional banking practices
12. The Banking Regulation Act of 1949 was crucial for what aspect of the banking sector?
a) Setting up the RBI
b) Establishing guidelines for banking operations
c) Nationalizing all banks
d) Introducing internet banking

17. 13. Which period marked the emphasis on rural credit in Indian banking?
a) Foundation Phase
b) Expansion Phase
c) Consolidation Phase
d) Reformatory Phase
14. What is the role of the Ministry of Finance in the Indian financial system?
a) Supervising informal financial systems
b) Regulating the formal financial system
c) Setting up chit funds
d) Managing the stock exchange
15. Which of the following was NOT a focus area during the Reformatory Phase of Indian banking?
a) Liberalization of banking practices
b) Technological advancements
c) Strengthening rural branches
d) Implementation of Basel Norms
16. Which sector received special attention during the nationalization of banks in the Expansion Phase?
a) Urban industries
b) International trade
c) Rural and agricultural sectors
d) Technology companies

18. 17. What was the primary objective of the State Bank of India when it was converted in 1955?
a) Focus on urban credit
b) Expand rural credit and reach
c) Invest in international markets
d) Reduce national debt
18. Which of the following is NOT a characteristic of the financial system as per the presentation?
a) Helps mobilize and allocate funds
b) Inspires investment performance
c) Reduces borrowing costs
d) Directly controls commodity prices
19. What was a significant outcome of the banking nationalization in 1969?
a) Privatization of banks
b) Equitable distribution of credit across sectors
c) Increase in foreign investment
d) Introduction of credit cards
20. The adoption of Basel Norms in Indian banking was aimed at which of the following?
a) Enhancing customer service
b) Improving international trade
c) Managing risks and capital adequacy
d) Increasing loan portfolios

19. Class Assignment
Put the following items into appropriate box –
Machinery, Capital, Loose Tools, Patent, Loan to Mr. P Sinha, Furniture,
Bank Overdraft, Sundry Creditors, Bills Receivables, Investment, Goodwill,
Sundry Debtors, General Reserve, Capital Reserve, Trade Mark, Loan from
Mr. P Ghosh, Cash in Hand, Outstanding Rent, Prepaid Rent, Bills Payable,
Land and Building, Closing Stock, Leasehold Land, Fixed Deposit with
Bank, Investment in Govt. Securities, Secured Loan.

20. Key Contributions to Economic Growth
oEconomic Development:
▪Mobilization of Savings:
▪Example: State Bank of India mobilizing rural savings and providing loans to small
businesses.
▪Credit Provision: Facilitates investments in various sectors, driving economic growth.
▪Example: ICICI Bank's role in financing infrastructure projects.
oFinancial Stability:
▪Monetary Stability: Ensuring stable money supply and managing inflation.
▪Example: Reserve Bank of India regulating monetary policy.
▪Credit Systems: Effective management of credit distribution and recovery.

21. oTechnological Integration:
▪Adoption of New Technologies:
▪Example: HDFC Bank's implementation of mobile banking apps, enhancing customer
experience and operational efficiency.
▪Innovations in Banking Operations: Improved efficiency and service delivery through
technology.
oGlobal Competitiveness:
▪Integration with International Markets:
▪Example: Citibank India facilitating international trade and finance.
▪Compliance with Global Standards: Adhering to international banking regulations to enhance
global competitiveness.
▪Example: Adoption of Basel III norms by Indian banks to ensure financial soundness.

24. Banking Structures in India
oOverview:
▪The Indian banking system comprises various types of banks, each serving
different purposes and operating under different regulations.
oReserve Bank of India (RBI):
▪Central bank and monetary authority of India, established in 1935.
▪Regulates the issuance of banknotes, maintains monetary stability, and
supervises the banking system.

25. oCommercial Banks:
▪Public Sector Banks:
▪Owned by the government, including State Bank of India (SBI) and nationalized
banks.
▪Play a crucial role in economic development and financial inclusion.
▪Private Sector Banks:
▪Owned by private entities, including both old and new private banks.
▪Known for innovative services and technological advancements.
▪Foreign Banks:
▪Banks with headquarters outside India, operating branches within the country.
▪Primarily involved in financing international trade.

26. oRegional Rural Banks (RRBs):
▪Established to provide credit and banking facilities to rural areas.
▪Sponsored by public sector banks with the aim of developing the rural economy.
oCooperative Banks:
▪Operate under the cooperative society's act.
▪Play an important role in providing credit to the agriculture sector and rural areas.
oNon-Banking Financial Companies (NBFCs):
▪Financial institutions that provide banking services without meeting the legal
definition of a bank.
▪Offer loans, credit facilities, retirement planning, and investment products.

27. Structure and Functions of Commercial Banks
o
Primary Functions:
▪Accepting Deposits:
▪Demand deposits (savings and current accounts) and term deposits (fixed deposits).
▪Lending Money:
▪Loans and advances, overdrafts, cash credits, discounting bills of exchange.
oSecondary Functions:
▪Agency Services:
▪Collection and payment of cheques, dividends, interest, and insurance premiums.
▪Acting as trustees and executors.
▪General Utility Services:
▪Safe deposit lockers, issuing letters of credit and travelers cheques, underwriting of shares and debentures.
▪Providing foreign exchange services and offering investment advice.

28. oInnovations in Banking:
▪Adoption of technologies like ATMs, internet banking, mobile
banking, and credit/debit cards.
▪Development of new financial products and services to meet
customer needs.

29. BRANCH VS UNIT BANKING SYSTEMS
oBranch Banking:
▪Single bank operates multiple branches in different locations.
▪Advantages: Better resource allocation, wider customer reach, risk
diversification.
▪Examples: State Bank of India, ICICI Bank.
oUnit Banking:
▪Single, standalone bank without branches.
▪Advantages: Personalized services, easier management.
▪Examples: : Traditional rural banks in some parts of the U.S during the
early 20th century.

30. Retail vs Wholesale Banking
oRetail Banking:
▪Focuses on individual customers and small businesses.
▪Services include savings accounts, personal loans, credit cards.
▪Examples: HDFC Bank, Axis Bank.
oWholesale Banking:
▪Serves large corporations, institutions, and government entities.
▪Services include large-scale loans, asset management, trade finance.
▪Examples: Industrial Development Bank of India (IDBI), Bank of America
Merrill Lynch.

31. Universal Banking
oDefinition:
▪A bank that offers a wide range of financial services, including commercial and investment
banking & Insurance
oAdvantages:
▪Diversification of services: reduces risk Reduces risk by offering various financial products
and services.
▪Convenient for customers: Customers can access multiple services under one roof, enhancing
convenience and satisfaction.who can access a variety of services under one roof.
oExamples:
▪ICICI Bank offers retail banking, corporate banking, investment banking, and insurance
services.
▪HSBC provides comprehensive banking solutions, from personal accounts to global banking
and markets services.