Ram Krishna Khatiwada

The banking sector is the lifeline of any modern economy It is one of the important financial pillars of the financial system It plays a vital role in the success/failure of an economy Banks are one of the oldest financial intermediaries in the financial system They play an important role in the mobilization of deposits and disbursement of credit to various sectors of the economy

The banking system is the fuel injection system which spurs economic efficiency by mobilizing savings and allocating them to high return investment Research confirms that countries with a welldeveloped banking system grow faster than those than a weaker one The banking system reflects the economic health of the country The strength of economy of any country basically hinges on the strength and efficiency of the financial system

Which depends on a sound and solvent banking system A sound banking system efficiently deploys mobilized savings in productive sectors and a solvent banking system ensures that the bank is capable of meeting its obligation to the depositors The banking sector is dominant in India as it accounts for more than half the assets of the financial sector Section 5(1) b of the Banking Regulation Act defines banking as 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 Section 5(1) defines banking company as any company which transacts the business of banking in India However, the acceptance of deposits by companies for the purpose of financing their own business is not regarded as banking within the meaning of the act The essential characteristics of the banking business as defined in Section 5(b) of the Banking Regulation Act are as follows:

Acceptance of deposits from the public For the purpose of lending or investment Repayable on demand or otherwise, and Withdrawable by means of any instrument whether a cheque or otherwise Two important functions of the commercial bank emerge: acceptance of deposits and lending of funds Banks have borrowed and lent money to business, trade, and people, charging interest on loans and paying interest on deposits- these two activities are the core activities of banking

Deposits are the main source of funds for commercial banks The amount mobilized as deposits is then lent in the form of advances The higher the amount of deposits mobilized, the higher is the amount of funds lent The growth of deposits depends upon savings Savings held in the form of currency or gold and jewellery are unproductive For economic growth to take place, it is essential that these savings are mobilized and channelized for capital formation which in turn accelerates economic growth

Banks are important financial intermediaries between savers and borrowers Banks mobilize savings by accepting deposits Deposits may be categorized into (i) demand deposits and (ii) time deposits Demand deposits are deposits which can be withdrawn without notice and they can be repaid on demand Current accounts and saving accounts are classified as demand deposits

Time deposits are deposits which are repayable after a fixed date or after a fixed period of notice Fixed deposits, recurring/cumulative deposits, miscellaneous deposits, are classified as time deposits A significant portion of funds is contributed by deposits which account for more than 80% liabilities of scheduled commercial banks

Banks are a special type of financial intermediaries which not only accept and deploy large amounts of uncollateralized deposits but also leverage such funds through credit creation Banks are creators of credit The creation of credit is important function of a bank and this function distinguishes banks from the non-banking institutions Banks create deposits in the process of their lending operations When the bank mobilizes savings, it lends the amount that remains after providing for reserves

The amount lent is either deposited in the same bank or in some other bank For instance, when a bank extends overdraft facility or discounts a bill of exchange, the bank first of all credits this amount in the account of the customer who creates a deposit The bank after keeping aside a certain portion of this deposit in the form of reserves, lends this amount This process continues and repeats in all the banks or in the banking system as a whole This leads to the creation of credit which in turn increases the liabilities and assets in the banking system

Commercial banks mobilize savings from the surplusspending sector and lend these funds to the deficit spending sector They facilitate not only flow of funds but flow of goods and services from producers to consumers through this function of lending Commercial banks facilitate the financial activities of not only the private sector but also of the government Funds are lent in the form of cash credit, overdraft, and loan system Banks discount bills of exchange and give guarantees Loans and advances form around 50% of the aggregate deposits of SCBs

Besides the primary functions of mobilizing deposits and lending funds, banks provide a range of ancillary services, including transfer of funds, collection, foreign exchange, safe deposit locker, gift cheques, and merchant banking Banks provide a wide variety of banking and ancillary services Banks are distinct entities as they fiduciary responsibility, are highly leveraged and the future of any one bank can threaten the integrity of the payments system which is the backbone of any modern economy

Banking Companies (Acquisition) Act, 1970 which is known as the Bank Nationalization Act, and the Bank Regulation Act, 1949, govern nationalized banks while the State Bank of India Act, 1955, and the seven associate banks of the State Bank of India are governed by the State Bank of India (Subsidiary Banks) Act, 1959 Private banks are covered under the Banking Regulation Act, 1949

Scheduled commercial banks are those included in the second schedule of the Reserve Bank of India Act, 1934 RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Being a part of the second schedule confers some benefits to the bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. Commercial banks can be classified into four categories: public sector banks, private sector banks, foreign banks in India, and regional rural banks

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake) and 38 foreign banks . They have a combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively

Public sector banks are banks in which the government has a major holding
Not less than 51% of the paid-up share capital will be held by the Central Govt. All 27 nationalized banks are PSBs.

These can be classified into two groups: (i) the State Bank of India and its associates and (ii) nationalized banks

State Bank of India State Bank of Bikaner and Jaipur State Bank of Travancore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank

The State Bank of India was initially known as the Imperial Bank The Imperial Bank was formed in 1921 by the amalgamation of three presidency banks- the Bank of Bengal, the Bank of Bombay and the Bank of Madras These presidency banks were created as a charter to deal in bills of exchange payable in India and were an integral part of the Indian Treasury They were taken over by the Imperial Bank of India as going concerns under a special legislation in 1920

The Imperial Bank acted as a banker to the government until the establishment of the RBI in 1935 Later on, it was authorised to act as the sole agent of the RBI in places where the latter did not have its own branches The Imperial Bank was nationalised under the State Bank of India Act, 1955, which was passed on 8 May 1955 The State Bank of India came into existence on 1 July 1955

This marked the beginning of the first phase of nationalisation of banks The main objective of nationalisation was extending banking facilities on a large scale, particularly in the rural and semi-urban areas The other objectives for which the bank was established were as follows: To promote agricultural finance and to remedy the defects in the system of agricultural finance To help the Reserve Bank in its credit policies

To help the government to pursue the broad economic policies The State Bank of India has seven subsidiaries: 1. State Bank of India 2. State Bank of Bikaner and Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 5. State Bank of Mysore 6. State Bank of Patiala 7. State Bank of Saurashtra The State Bank of India holds the dominant market position among all Indian Banks It is the worlds largest commercial bank in terms of branch network with a staggering 14,000 branches and 51 foreign branches

In 1969, fourteen big Indian joint stock banks in the private sector was nationalised The nationalisation was effected by an ordinance which was later replaced by an act of parliament, known as the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 This was the second phase of nationalisation Six commercial banks in the private sector with deposits over Rs 200 crore were nationalised on 15 August 1980- the third phase of nationalisation In all 28 banks were nationalised from 1955-1980

The main objectives of nationalization were to widen the branch network of banks particularly in the rural and semi-urban areas which in turn would help in grater mobilization of savings and flow of credit to neglected sectors such as agriculture, and small-scale industries With the amendment to the Banking Companies Act, public sector banks are now allowed to access the capital market to raise funds This has led to a dilution of the shareholding of the government

Public sector banks have an edge over private sector banks in terms of size, geographical reach and access to low-cost deposits Huge size enables them to cater to the large credit needs of corporate Geographical reach through a large number of branches increases their access to low-cost deposits and lowers the portfolio risk through diversification The access to low-cost deposits enables them to lend to the corporate at competitive rates Low-cost deposits are current account and savings account deposits

Current account deposits earn no interest and hence are the cheapest and the most volatile source of funds for a bank Savings account deposits are more stable than current account deposits but carry a higher interest of 3.5% The nationalized banks are a dominant segment in commercial banking The bulk of the banking business in the country is in the public sector

Public sector banks have expanded their branch network and catered to the socioeconomic needs of a large mass of the population, especially the weaker section and in the rural areas Public sector banks dominate with 75 per cent of deposits and 71 per cent of advances in the industry

 Banks set up under the guidelines of RBI other than nationalized banks. Have to follow all the directions, instructions, guidelines from the RBI.
Vysya Bank Ltd UTI Bank Ltd Indusind Bank Ltd ICICI Banking Corporation Bank Ltd Global Trust Bank Ltd HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd

Joint stock banks incorporated abroad having branches in India are foreign banks. New foreign banks are allowed to conduct business in India taking into consideration the financial soundness of the bank, international and home country ranking, international presence, and economic and political relations between the two countries Standard Chartered Bank is the undisputed leader among the foreign banks with assets of over Rs 30,000 crore followed by Citibank which is a distant second

Stanchart has a network of about 80 branches which is fairly big compared to other foreign banks Foreign Banks such as Standard Chartered, Citibank and ABN Amro have a strong presence in the metros and most big cities of India

ABN-AMRO Bank N.V. Abu Dhabi Commercial Bank Ltd. American Express Bank Ltd. Barclays Bank PLC BNP Paribas Citibank N.A. DBS Bank Ltd Deutsche Bank AG HSBC Ltd. Standard Chartered Bank State Bank of Mauritius Ltd.

A new category of scheduled banks came into existence in 1975 when 6 regional rural banks (RRBs) came into existence under the Regional Rural Banks Ordinance, 1975 This ordinance was promulgated by the Government of India on 26 September 1975 The ordinance was subsequently replaced by the Regional Rural Banks Act, 1976 Although cooperative and commercial banks achieved a high reach and disbursement of credit, there existed a vast gap in the area of rural credit

In order to fill up this bank, a new set up of banks, namely, RRBs was established RRBs were set up as institutions which combine the local fee and familiarity with rural problems, which the cooperatives possess and the degree of business organization, ability to mobilize deposits, access to central money markets, and modernized outlook which commercial banks have The major objective of setting up RRBs was to develop the rural economy by providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities,

Particularly to the small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs Each RRB is sponsored by a public sector bank, which provides assistance in the form of subscription to its share capital, managerial and financial assistance, and help in the recruitment and training of personnel Every RRB is authorized to carry on and transact the business of banking as defined in Section (5b) and Section 6(1) of the Banking Regulation Act

The RBI can grant assistance to RRBs by way of loans and advances from the National Agricultural Credit (Stabilization) Fund under Sections 46A and 46B The massive expansion of their branch network enabled them to exploit them to expand banking activities in the unbanked areas and mobilize rural savings Although RRBs are spread over all the States, they have a major presence in seven States, viz, Andhra Pradesh, Uttar Pradesh, Bihar, Karnataka, Madhya Pradesh, Maharashtra, and Rajasthan, which have the highest number of RRBs

RRBs are at par with scheduled commercial banks with respect to priority sector lending, investment avenues, credit discipline, and transparency RRBs have carved out a niche for themselves in terms of geographical coverage, clientele outreach, business volume, and contributions for the development of the rural economy But these RRBs are characterized by low productivity, high transaction costs, negative margins, low recovery rates and high nonperforming assets