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East India Co. established three presidency banks viz.

Bengal 1806

Bombay 1840

Madras 1842

1861 : All 3 were given right to issue currency

1921 : Formation of Imperial Bank of India by merging all above 3 banks

1955 : Nationalization of imperial bank Birth of SBI

Pre Independence banks in India

Foreign Banks (Pre independence)

Bombay, Bengal, Madras Presidency Banks Imperial Bank 21 SBI 55

Catered British Army, Bureaucrats, Judges, merchants

Indian Banks (Pre independence)

Allahabad Bank, PNB, BoB, Canara Bank

Focus was majorly on Foreign trade

Catered Merchants, Shroff & Moneylenders

Birth of RBI

By 1930 India had more than 1000 banks working solely on companys law

In October 24, 1929, the stock market bubble finally burst, as investors began dumping
shares en masse.

A record 12.9 million shares were traded that day, known as Black Thursday.

Finally in 1934, to check this kind of situation in future RBI as bankers bank was
institutionalized.

Post Independence banks in India

SBI, ICICI, PNB, BOB

Catered Merchant & industrial houses

Bank branches increases but only to cater industrial markets

No expansion in rural areas No

No Financial inclusion No help in five year plans achievement

Hence to cater the needs of rural banks Government began nationalizing the banks
Bank Nationalization problems

Administered interest rate by government

Political interference loan for government nepotism Rise in NPA Burden on Civil
Courts

High reserve requirement CRR 15%, SLR 40%

Hard to get loans for business Balance of Payment crisis

High cost (interest rates) for credit (loans)

Business expansion decreased Jobs creation decreased

Tax-Collection decreased Government borrowing: Fiscal deficit increased

Exports decreased Current Account Deficit increased

Narsimhan Committee I 1991

Narsimhan Committee I was formed to overhaul banking sector of India & to overcome its problems
viz.

Rising NPA

Lack of Rural Expansion

Bank Nationalization

Lack of Financial inclusion

High Interest Rates

Recommendation Result

Government / RBI must not regulate the banks loan


interest rates. Banks should be allowed to decide that by RBI adopted Benchmark Prime Lending Rate
themselves. (BPLR) Now days Base Rate system (2010)

Setup Debt recovery tribunals, so loan defaulters cannot get Debt recovery tribunal setup in 1993 Later came
stay orders from courts. SARFAESI act in 2002 with more powers

Banks can open branches anywhere. Only condition 25


Liberate Branch expansion policy. of branches in rural areas.

Reduce CRR and SLR so banks are left with more money to
lend. Gradually reduced from (15,40) (4, 21.5)
NBFC regulatory framework Implemented

Done, SBI shares sold, nowadays government owns ~


Government should reduce its shareholding from public (this facilitates entry of professionals in the board of
sector banks. directors)

Allow entry of private sector banks and foreign banks. Done, leads to first round of bank licenses

Benchmark Prime Lending Rate (BPLR) Base Rate system

RBI does NOT fix the base rate. It has issued broad guidelines to bank as to how they should
arrive at the base rate.

Thus, individual bank itself fixes its own base rate.

The calculations of the BPLR by various banks were not transparent.

In case of BPLR, Banks normally used to take into consideration the factors like cost of funds,
administrative costs and a margin over it.

However, such parameters were neither disclosed by banks nor were same for all the banks

Result Base Rate system (2010)

Bank licences 1st Round (1993)

Total 10 private banks given licenses 6 still running + 4 closed down

6 Running ICICI, HDFC, UTI (became Axis bank (2007)), IDBI, Indusind, DCB (Development
Credit Bank)

4 Closed Global Trust Bank merged with Oriental bank of Commerce, Bank of Punjab
merged with Centurion bank, Centurion bank merged with HDFC bank, Times Bank merged
with HDFC bank

Narsimhan Committee II 1998

Introduced Voluntary retirement scheme (VRS) in public sector banks.

Legal reforms for loan recovery SARFAESI act 2002

Computerization, electronic fund transfer, legal framework

Payment and Settlement Act

Retail Transaction ECS, NEFT, Credit Card

Wholesale Transaction RTGS

Permit new private / foreign banks


Older Classification

Banks New Classification

NBFI Banks

DFI (Development Financial institutions) ICICI, IDBI, IFCI etc. NBFI

New Bank licenses 2nd round (2001)

This time RBI gave license only two strongest contenders viz.

Kotak Mahindra

Yes Bank

New Bank licenses 3rd Round (2013 14) RBI conditions

10 years successful work-ex with minimum capital Rs. 5 billion

Get its shares listed on stock exchange within 3 years; bring down voting rights to 15%
within 12 years.

foreign shareholding must not be more than 49% (for the first five years)

50% of directors should be independent & such bank must not invest in shares/bonds of its
parent group.

Must open at-least 25% branches in the unbanked rural areas & Have to comply with PSL
norms

RBI Bimal Jalan Committee

Based on committees recommendations RBI gave license only two strongest contenders viz.

Bandhan Microfinance

IDFC

Bandhan Microfinance Chandra Shekhar Ghosh

Micro-finance company at West Bengal

Net worth 1100 Cr., 45% branches in rural areas

IDFC (Infrastructure Development and Financial Corporation) Rajiv Lal

Infrastructure finance company at Mumbai

Net worth 21000 cr., but rural presence low

These two are given only in-principle approval which means

Within 18 months must get net worth Rs. 1000 crore

Must open 25% branches in unbanked rural areas.

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