Abstract
This chapter provides a history of the Indian banking industry, and discusses the process of transformation of banking industry from a state of high degree of regulation to deregulation and liberalization. It has been noted that from the early 1970s through the late 1980s, the role of market forces in the Indian banking system was almost missing, and excess regulation in terms of high liquidity requirements and state interventions in allocating credit and determining the prices of financial products resulted in serious financial repression. Realizing the presence of the signs of financial repression and to seek an escape from any potential crisis in the banking sector, the Government of India embarked upon a comprehensive banking reforms plan in 1992 with the objective of creating a more diversified, profitable, efficient and resilient banking system. Subsequent to the implementation of the extensive financial liberalization programme implemented in 1992, the banking system of India witnessed visible structural changes and transformations during the past 20 years. Use of the state-of-the-art banking technology, increased availability of lendable resources, heightened competition, a trend towards the market-driven interest rate system, improvement in asset quality, imposition of capital market discipline, drive towards consolidation through mergers, greater exposures of non-traditional activities, etc. are the key structural changes and transformations that have taken place in Indian banking industry during the post-deregulation period. These structural changes transformed the Indian banking system from a weak and crisis prone system to a sound and efficient system, which is resilient to external shocks and able to play its vital role in the development of the economy.
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- 1.
A type of business organisation recognisable as managing agency took form in a period from 1834 to 1847. Managing agency system came into existence when an agency house first promoted and acquired the management of a company. This system with no counterpart in any other country functioned as an Indian substitute for a well-organised capital market and an industrial banking system of western countries.
- 2.
They were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters. These banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.
- 3.
It comprises of 3 Presidency banks, 18 class ‘A’ banks (with capital of greater than INR 0.5 million), 23 class ‘B’ banks (with capital of INR 0.1 million to 0.5 million) and 12 exchange banks. Exchange banks were foreign-owned banks that engaged mainly in foreign exchange business in terms of foreign bills of exchange and foreign remittances for travel and trade. Classes A and B were joint-stock banks.
- 4.
State Bank of Bikaner, State Bank of Hyderabad, State Bank of Indore, State Bank of Jaipur, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore are the eight associate banks of SBI. It is worth mentioning here that the State Bank of Bikaner and State Bank of Jaipur have been merged into one bank, namely, State Bank of Bikaner and Jaipur. Recently, in 2008 and 2010, State Bank of Saurashtra and State Bank of Indore have merged with State Bank of India.
- 5.
The fourteen commercial banks that nationalised in 1969 were Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India, and six that nationalised in 1980 were Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind Bank and Vijaya Bank.
- 6.
The Government of India implemented three branch licensing policies (BLPs) between 1979 and 1990. The first covered the period January 1979 to December 1981, while the second BLP ran from April 1982 through March 1985. The third branch licensing policy guided branch expansion between April 1985 and March 1990.
- 7.
Note that Table A.1 is given in the Appendix.
- 8.
SLR indicates the minimum proportion of net demand and time liabilities (NDTLs) that the bank has to maintain in the form of gold, cash or other approved securities, while CRR refers to a portion of NDTLs (deposits) which commercial banks have to keep/maintain with RBI.
- 9.
The Herfindahl-Hirschman index is defined as the sum of squares of market shares and varies between 0 and 10,000. In practice, markets in which HHI is below 1,000 are considered as ‘loosely concentrated’, between 1,000 and 1,800 as ‘moderately concentrated’ and above 1,800 as ‘highly concentrated’.
- 10.
The GOI enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, which provided for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. The act also provided for sale of financial assets by banks/FIs to securitization companies (SCs)/reconstruction companies (RCs).
- 11.
The core banking solutions provides a host of benefits such as anywhere banking, anywhere access and quick funds movement at optimal costs and in an efficient manner.
- 12.
In 2008, the number of associate banks has reduced to six from seven because of the merger of State Bank of Saurashtra with the State Bank of India. Further, the number has reduced to five with the merger of State Bank of Indore with State Bank of India itself in 2010.
- 13.
Cities in India are categorised as Tier 1, Tier 2 and Tier 3 cities on the basis of the population of the city. Tier 1 cities are those cities where population is more than five million, Tier 2 are those cities where population is between one million and five million, and Tier 3 are those cities where population is less than one million.
- 14.
This is evident from the fact that the share of public sector banks in deposits, advances and total assets of Indian banking industry has declined from 87.9 %, 89.3 % and 87.2 % during the financial year 1992–1993 to 76.6 %, 75.3 % and 71.9 % during the financial year 2008–2009, respectively.
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Kumar, S., Gulati, R. (2014). Banking System in India: Developments, Structural Changes and Institutional Framework. In: Deregulation and Efficiency of Indian Banks. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1545-5_2
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