Banking

Although some form of banking, mainly of the money-lending type, has been in existence in India since ancient times, it was only over a century ago that proper banking began. The earliest institutions which undertook banking business under the British regime were agency houses which carried on banking business, in addition to their trading activities. Most of these agency houses were closed down between 1929-32. Following serious financial troubles, three presidency banks were later amalgamated into Imperial Bank of India in 1919.

The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881. Subsequently, the Punjab National Bank was established in 1894. Swadeshi movement which began in 1906 encouraged the formation of a number of commercial banks. Banking crisis during 1913- 1917 and failure of 588 banks in various states during the decade ending in 1949 underlined the need for regulating and controlling commercial banks. The Banking Companies (Inspection Ordinance) was passed in January 1946 and the Banking Companies (Restriction of Branches) Act in February 1946. The Banking Companies Act was passed in February 1949 which was subsequently amended to read Banking Regulation Act.

With a view to bringing commercial banks into the mainstream of economic development with definite social obligations and objectives, the Government issued ordinance on 19 July 1969 acquiring ownership and control of 14 major banks in the country, with deposits exceeding Rs 50 crore each. Six more commercial banks were nationalised from 15 April 1980. The objectives of public sector banking system were outlined on 21 July 1969.

The three decades after nationalisation had seen a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties, the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organisation, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman  Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process.

In the post-nationalisation era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which can lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements:
(i) it should be registered as a public limited company;
(ii) the minimum paid-up capital should be Rs 100 crore;
(iii) the shares should be listed on the stock exchange;
(iv) the headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank; and
(v) the bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI.

It will have to achieve capital adequacy of eight per cent from the very beginning.

A High Level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. A draft comprehensive policy frame work for ownership and governance in private sector banks was put in the public domain on 2 July, 2004 for discussion and feedback. After taking into consideration, RBI issued detailed guidelines on ownership and governance in private sector banks on February 2005.