COMMERCIAL BANKING IN

INDIA

Submitted By:
Shaikh Azhar s.
Roll No.28
 Banking Development-1949-69
At the time of independence Indian banking
system was not sound.
There were hundreds of small banks under
the unscrupulous management.
Hence, in 1949 two major actions were taken
which were very important from the point of
view of structural reforms in banking sector.
 Banking regulation act.
 Nationalisation.
• Banking regulation act 1949 gave the
extensive regulatory powers to Reserve Bank
of India over the commercial banks.
• Due to the act Indian Banking System
developed in many respects, it not only grew
geographically but also structurally and
functionally.
• The number of scheduled banks
however,decresed from 94 to 76 over the
period.
• However there was a steady decline in
importance of non-scheduled commercial
banks.
The establishment of State bank of India in
1955 and creation of state bank group by
nationalising eight regional banks in 1960.
It allowed scope for a new experiment in
Indian Banking.
Under the statutory obligation these banks
opened new offices in semi-urban and rural
areas
During the period under the reference not
only commercial banks credit to industry
increased also developed interest in term
lending.
 Nationalisation of Banks
In free enterprise economy,commertial banks
operate like any other business and are mainly
concerned with maximisation of their private
gains.
Lacking any social purpose they often
channelise funds to the business units in which
management has interest.
Thus contribute to growth of monopoly and
concentration of economic and political power.
 • While overall economic activity suffers
because priority sectors or industries fail to
get funds.
On July 19,1960 fourteen commercial banks
with deposit worth Rs.50 crore /more were
nationalised.
• Objectives of Nationalisation:
– Social control over banks.
– Adequate credit for agriculture.
– To bring professionalism.
– To prevent monopoly in financial sector.
– To reduce regional disparities.
– Utilize funds in accordance to plan priorities.
Achievements:

Branch expansion: 8
times:48% in rural
area-Southern area
No. of branches
19698262
200467283
Deposit Mobilization:350 times

• 19694,665 Cr.
• 200416,22,579 Cr.
 Bank lending
• Bank lending 3,369 Cr. 10,27,009 Cr.
• Advance to priority sector-15%  40%
• Agriculture credit-5%  60%
• Indian bank abroad.
 Failures:
• High non performing assets.
• Inefficiency and corruption.
• Problem of maintaining rural branches.
• Poor infrastructure.
• Political interference.
• Subsidization of credit.
Structure Of Banking In India:

RBI

Commercial Banks Co-operative

Public Sector State Co-operative
Private, District Co-operative
RRB’S Primary Co-operative
 BANK LENDING AND
EVALUATION OF BANKING
SINCE NATIONALISATION

PRESENTED BY:
OJAS LALAJI
ROLL NO : 29
 BANK LENDING
• IT IS THE MOST IMPORTANT FUNCTION OF
BANK.
• TOTAL ADVANCES INCREASED TO 17,33,679
CRORES IN 2006 AS COMPARED TO 3,399
CRORES IN 1969.
• PROVIDES WORKING CAPITAL TO COMMERCE
AND INDUSTRY
 Phase 1
• During the first phase the growth was very slow and banks
also experienced periodic failures between 1913 and 1948.
• There were approximately 1100 banks, mostly small.
• To streamline the functioning and activities of commercial
banks, the Government functioning and activities of
commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to
Banking Regulation Act .
• Reserve Bank of India was vested with extensive powers for
the supervision of banking in India as the Central Banking
• During those days public has lesser confidence in the banks.
• Moreover, funds were largely given to traders
 Phase 2
• Government took major steps in this Indian Banking Sector Reform
• After independence In 1955, it nationalized Imperial Bank of India
with extensive banking facilities on a large scale specially in rural
and semi facilities on a large scale specially in rural and semi--urban
areas.
• It formed State Bank of India to act as the principal agent of RBI and
to handle banking transactions of India and the Union and State
Governments all over the country.
• in 1960 on19th July, 1969, major process of nationalisation was
carried out.
• It was the effort of the then Prime Minister of India, Mrs. Indira
Gandhi. 14 major commercial banks in the country was
nationalised
• Second phase of nationalisation Indian Banking Sector Reform
was carried out in 1980 with seven more banks.
• This step brought 80% of the banking segment in India under
Government
• The following are the steps taken by the Government of India
to Regulate Banking Institutions in the Country: Banking Institutions
in the Country:
• 1949 : Enactment of Banking Regulation Act.
• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200
crore.After the nationalisation of banks, the branches of the public
sector bank After the nationalisation of banks, the branches of the
public sector bank India rose to approximately 800% in deposits
and advances took a huge jump by 11,000%.
 Phase 3

• This phase has introduced many more products and facilities .in
This phase has introduced many more products and facilities
inthe banking sector in its reforms measure
• In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalisation of
banking practices.
• The country is flooded with foreign banks and their ATM stations.
• Efforts are being put to give a satisfactory service to customers.
Phone banking and net banking is introduced.
• The entire system became more convenient and swift.
• Time is given more importance than money
 Causes of low profitabilty of banks in pre
reform period
• Direct investment
• Directed credit programmes
• Subsidisation of credit
• Increase in expenditure
• Lax regulation and supervision
• Lack of competition
 conclusion
• Considering overall situation, it may be argued that since the
later post nationalisation phase overall profitability of the
banks was either low or negative and their non performing
loans both as a percentage of total advances and as a
percentage of assets were fairly high, their financial position
was extremely weak.
 EVALUATION OF BANKING SINCE
NATIONALISATION
• Aggregate bank deposit constituting about
two-fifths of financial assets of the household
sector have risen from 15 per cent of GDP to
around 39.5 per cent, and the total number of
branches from 8,262 to 69,618.
Of these around 44 per cent are now in rural area
as against less than 22.5 per cent at the time of
nationalization of major banks in 1969.
• Opening rural branches has improved
mobilization of saving in the rural sector.
Presently rural deposit account for about 15 per
cent of total deposits. Since bank nationalization
in this country priority sector credit has
increased from about 14 per cent of total bank
credit to around 36 per cent.
 CAUSES OF LOW PROFITABILITY
OF BANKS IN PRE-REFORM PERIOD

1.DIRECTED INVESTMENT :
Banking regulation act 1949, RBI Act ,1934there are the
provision…..
“the return on the government securities is less than the market
lending interest rates.
Moreover , the RBI pays a relatively lower interest on the cash
reserve kept by the banks with it under CCR (cash reserve ratio).at
its peak.the total directed investment reached 63.5 per cent of
incremental bank deposits which severaly undermined the
profitability of the commercial banks.
2.Directed Credit Programmes :-
Major objectives of bank nationalization in 1969 was
to make bank credit available to agriculture, small
scale manufacturing unit, export sector, food
procurement operations transporters and so on.
“There was a considerable deterioration in the quality of
the loan portfolio on account of fixation of targets for
priority sectors lending, neglect of qualitative aspects
of lending, degeneration of socially oriented credit
into irresponsible lending and accumulation of
overdue.”
3.Subsidization of credit:-
Since nationalization of commercial
banks priority sectors have been receiving
bank credit at concessional interest rates
which has adversely affected the
profitability of banks.
According to, Narasimham committee,
“easy and timely access to credit is far
more important than its cost”
4.Increase in Expenditure:-
Under the cover of societal concerns many
unremunerative branches have been setup in
semi-urban and rural areas. These branches
have operated primarily as deposit center and
never generated adequate credit business and,
consequently, income. Moreover, while band
credit to agriculture and small industry has
been provided at subsidized interest rates,
the unit cost of administering the loans has
been high.
5. Lax regulation and supervision:-
The supervisory system to control the working of the
commercial banks has always been lax though the
degree of political interference has been very high.
“Laxity in regulation was partly on account of the
absence of clarity on internationally comparable
accounting norms.”
This in practice had resulted in lack of essential
elements of financial discipline. The bank
themselves never attempted to set up their own
control system.
6. Lack of competition:-
“ The public sector banks which shared more than
90 per cent of the banking business among them
had little incentive to compete. Competition was
inhibited by the regulated interest rates.”
Non price competition was also completely missing.
Customers, under the circumstances, found it difficult
to shift from one bank to another. Lending to large
borrowers being subject to consortium arrangements
meant absence of any competition.
PRESENTED BY-GOPAL FUSE

ROLL NO-27

MMS-1

CKT IMSR
 BANKING SECTOR REFORMS
• Government appointed a committee in the under of
Dr. Narasimham

• For the reformation in the banking sector.

• He suggested a following reformations

 PREDUNTIAL REGULATION AND
SUPERVISION
• Financial market need supervision to prevent a crime
and fraud and to control over the whole banking
sector that’s why supervision and regulation are
essential for healthy growth of banking sector .
• This recommendations accepted by government
• That’s why RBI issues guidelines in 1992 for income
recognitions and adapted the Basel capital adequacy
standards.
REHABILITATION OF PUBLIC SECTORE BANKS

• In this period Government sector banks were very

weak i.e. why government decided to follow the
recapitalization route for restoration of net worth .

• The recapitalization require direct infusion of capital

to the banks from the budget and the non
performing assets are left on their books .
 REDUCTIUON IN SLR AND CRR
• For the long time government intervene in
Indian banking sector was in the form of high SLR
CRR
• Narasimham committee on the financial system
therefore recommended that reduction in the SLR to
25% 1996 and suggested also unspecified reduction
in the CRR
• Government follows the recommended policies of
Narasimham committee .
 DEREGULATION OF INTEREST RATES
• Narasimham committee Suggest that interest rates
should increasingly be allowed to perform their main
function of allocating scarce loanable funds among
alternative users.
• Starting in 1992 the structure of interest rates has
become much freer and simplier.Now banks are
allowed to set interest rates on all term deposits of
maturity of over 30 days and are free to determine
the prime term loading rates for term loans of three
years and above.
 PHASING OUT OF DIRECTED CREDIT
• The effects of directed credits on equity are not
encouraging .In agriculture sector medium and large
farmers have pre empted a large part of such credit
and have received large subsidies.
• Further the committee suggested that the credit
target for this sector is to be reduced from 40% to
10% aggregate.
 PROMOTING COMPITITION

• The government has now recommended the need to

make banking industry more competitive.
• It has thus made certain policy changes such as
deregulation of interest rates and dilution of
consortium lending requirements .
• Moreover banking has been opened up to the
private sector.
THANK YOU