History and Development of Banks in India

History and Development of affirms in IndiaINTRODUCTIONThe deposeing industry in India seems to be unaffected from the population(a) fiscal crises which started from U.S in the coating quarter of 2008. Despite the f anyout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental tush and seems to be well insulated from the pecuniary turbulence emerging from the western economies. The Indian banking industry is well placed as compargon to their banking industries western counterparts which be depending upon organization bailout and stimulus packages. The strong stinting appendage in the past, low defaulter ratio, absence of complex monetary products, regular intervention by central bank, proactive adjustment of m unmatchedtary polity and so called bordering banking culture has favored the banking industry in India in recent global monetary turmoil. Although there declare oneself no impact on the Indian banking consti tution similar to that in west save the banks in India allow watch over for much of defensive procession in quotation expenditure in coming period. In order to safe guard their interest, banks will follow stringent norms for course recognize disbursal. There will be more than focus on analyzing borrower fiscal health .A nation with 1 billion plus, India is the fastest growing demesne in damage of population and soon to becharm China as worlds prominentst populated country. The discerning impact on the over-stretched limited resources explains why India invariably tends to be deficient in infra social structure and opportunity. The largest economy of the world often frustrated researchers, as there was no single predictable anatomy of the market the multiplicity of government regulations and widespread government ownership had always kept investors away from exploring the vast Indian market. How ever so, with India be liberalised today, banking intermediation has b een playing a crucial purpose in frugal reading with its conviction channel. Foreign banks hold entered the soil but that has non yet posed a threat to the vast network of prevalent celestial sphere banks that still wear 92% of banking business in India. stranding in India has lowg wiz a major revamp. It has advance a abundant way since its creation which dates buttocks to the British era. The open banking schemes has come into place by and by(prenominal) many transformations from the Older systems. Against this background the present chapter deals with the growth of the Indian argoting systems, the various reforms that has been do to make banks more effective, the role of private and un corresponding vault of heaven banks and make it the challenges the Indian banks faces in the New Millennium .The banking system is central to a nations economy. cambers argon special as they not only need and deploy large amounts of uncollateralised popular specie in a f iduciary capacity, but likewise leverage such funds through credit creation. In India, prior to nationalization, banking was restricted mainly to the urban aras and neglected in the untaught and semi-urban scopes. Large industries and big business houses enjoyed major grammatical constituent of the credit facilities. Agriculture, small- scale industries and exports did not receive the de performd attention. Therefore, inspired by a larger social purpose, 14 major banks were nationalised in 1969 and six more in 1980. Since and so the banking system in India has played a pivotal role in the Indian economy, acting as an instrument of social and scotch change. The rationale behind bank communisation has been succinctly put forth by eminent bankersMany bank failures and crises over two centuries, and the damage they did under laissez faire conditions the take awayfully of planned growth and equitable distribution of credit, which in privately owned banks was concentrated mainly on the hold upling industrial houses and influential borrowers the needs of growing small scale industry and farming regarding finance, equipment and inputs from all these there emerged an inexorable demand for banking legislation, some government control and a central banking authority, adding up, in the final analysis, to social control and nationalisation (Tandon, 1989).Post nationalisation, the Indian banking system registered amazing growth in volume. Despite the undeniable and multifold gains of bank nationalization, it whitethorn be noted that the important financial institutions were all situate owned and were subject to central ingestion and control. cusss enjoyed little autonomy as twain lending and get rates were controlled until the end of the 1980s. Although nationalisation of banks helped in the spread of banking to the farming(prenominal) and hitherto uncovered areas, the monopoly granted to the domain sector and miss of competition led to boilersuit in ex pertness and low productivity. By 1991, the countrys financial system was saddled with an inefficient and financially unsound banking sector. Some of the reasons for this were (i) highschool reserve requirements, (ii) administered interest rates, (iii) directed credit and (iv) lack of competition (v) political tour of duty and corruption. As recommended by the Narasimham charge Report (1991) several reform measures were introduced which included reduction of reserve requirements, de-regulation of interest rates, introduction of prudent norms, strengthening of bank command and improving the competitiveness of the system, particularly by allowing entry of private sector banks. With a view to adopting the Basel Committee (1988) framework on p for each oney adequateness norms, the curb commit introduced a risk-weighted asset ratio system for banks in India as a capital adequacy measure in 1992. Banks were asked to maintain risk-weighted capital adequacy ratio initially at the lo wer level of 4 per cent, which was piecemeal increased to 9 per cent. Banks were in like manner directed to signalise problem loans on their equilibrize sheets and make provisions for bad loans and bring down the burgeoning problem of non-performing assets. The period 1992-97 laid the foundations for reform in the banking system (Rangarajan, 1998). The punt Narasimham Committee Report (1998) focused on issues like strengthening of the banking system, upgrading of technology and human resource development. The report laid emphasis on two aspects of banking regulation, videlicet, capital adequacy and asset potpourri and resolution of NPA-related problems.Commercial banks in India are expected to start implementing Basel II norms with effect from March 31, 2007. They are expected to adopt the standardised approach for credit risk and the basic indicator approach for operational risk initially. After adequate skills are developed, both at the banks and at the supervisory levels, some banks may be allowed to migrate to the internal rating based (IRB) approach (Reddy 2005).At present, banks in India are venturing into non-traditional areas and generating income through diversify activities opposite than the core banking activities. Strategic mergers and acquisitions are being explored and implemented. With this, the banking sector is currently on the threshold of an exciting stagecoach. Against this backdrop, this paper endeavours to study the important banking indicators for the last 25- stratum period from 1981 to 2005. These indicators behave been broadly grouped into incompatible categories, viz., (i) bend of banks and offices (ii) deposits and credit (iii) investments (iv) capital to risk-weighted assets ratio (CRAR) (v) non performing assets (NPAs) (vi) Income composition (vii) Expenditure composition (viii) return on assets (ROAs) and (ix) some take away ratios. Accordingly, the paper discusses these banking indicators in club offices in the s ame order as listed above. The paper concludes in section X by drawing important inferences from the trends of these several(predicate) banking parameters.The effect of offices of all plan commercial-gradeised message banks well-nigh doubledfrom 29,677 in 1980 to 55,537 in 2005. This rapid increase in the number of bank offices is observed in the causal agency of all the bank groups. However, the number of banks in the case of foreign bank group and domestic private sector bank group decreased from 42 in 2000 to 31 in 2005 and from 33 in 2000 to 29 in 2005, respectively. This fall in the number of banks is reflective of the consolidation process and, in particular, the mergers and acquisitions that are the order of the banking system at present (Table 1).BANKING IN THE OLDER DAYSBanking is believed to be a part of Indian society from as early as Vedic age transformation from mere money lending to banking must have happened before Manu, the great Hindu jurist, who had devote d a large section of his work to deposits and advances and also hypothesize rules for calculating interest on both 1. During the Mogul period indigenous bankers (rich individuals or families) helped foreign trades and commerce by lending money to the business. It was during the East Indian period when agency houses started managing the banking business.The world-class Joint Stock bank India saw came in 1786 named the General Bank of India followed by the Bank of Hindustan and the Bengal Bank. Only the Bank of Hindustan act to be in the show until 1906 while the otherwise two disappeared in the meantime. East India Company realized 3 banks in first half of nineteenth century the Bank of Bengal in 1809, the Bank of Bombay in 1840, and the Bank of Madras in 1843. Eventually these three banks (which used to be referred to as Presidency Banks) were made free-lance units and they really did well for almost a century. In 1920, these three were amalgamated and a rude(a) majestic Ba nk of India was conventional in 1921. substitute Bank of India chip was passed in 1934 and finally in 1935, the Central Bank was created and christened as Reserve Bank of India. Imperial Bank was undertaken as State Bank of India after passing the State Bank of India wreak in 1955. During the last phase of freedom fighting (Swadeshi Movement) few banks with purely Indian management were open up like Punjab National bank (PNB), Bank of India (BoI) Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd, etc.July 19, 1969 was an important day in the history of Indian banking industry. xiv major banks of the country were nationalised and on April 15, 1980 six more commercial private banks were taken over by the Indian government.In the wake of liberalisation that started in the last decade a few foreign banks entered the foray of commercial banks. To date there are around 40 banks of foreign origin that areoperating in the market, like ABN AMRO Bank, ANZ Grindlays Bank, American Express Bank, HSBC Bank, Barclays Bank and Citibank groups to name a few major of them.HISTORY OF Indian BANKSWe can identify three distinct phases in the history of Indian Banking.Early phase from 1786 to 1969Nationalisation of Banks and up to 1991 prior to banking sector ReformsNew phase of Indian Banking with the advent of monetary Banking Sector Reforms after 1991.The first phase is from 1786 to 1969, the early phase up to the nationalisation of the cardinal largest of Indian schedule banks. It was also the traditional or blimpish phase of Indian Banking. The advent of banking system of India started with the establishment of the first joint buy in bank, The General Bank of India in the year 1786. After this first bank, Bank of Hindustan and Bengal Bank came to earthly concern. In the mid of 19th century, East India Company established three banks The Bank of Bengal in 1809, The Bank of Bombay in 1840, and bank of Madras in 1843. These ba nks were indie units and called Presidency banks. These three banks were amalgamated in 1920 and a new bank, Imperial Bank of India was established. All these institutions started as private shareholders banks and the shareholders were broadly speaking Europeans. The Allahabad Bank was established in 1865. The next bank to be set up was the Punjab National Bank Ltd., which was established with its headquarters at Lahore in 1894 for the first time exclusively by Indians. Most of the Indian commercial banks, however, owe their origin to the 20th century. Bank of India, Central Bank of India, Bank of Baroda, the Canara Bank, the Indian Bank, and the Bank of Mysore were established between 1906 and 1913. The last major commercial bank to be set up in this phase was the United Commercial Bank in 1943. Earlier the establishment of Reserve Bank of India in 1935 as the central bank of the country was an important shout in the development of commercial banking in India.The history of join t stock banking in this first phase was regionised by slow growth and periodic failures. There were as many as one thousand one nose candy banks, mostly small banks, failed during the period from 1913 to 1948. The Government of India concerned by the frequent bank failures in the country causing miseries to count slight small depositors and others enacted The Banking Companies Act, 1949. The title of the Act was changed as Banking statute Act 1949, as per amending Act of 1965 (Act No.23 of 1965). The Act is the first regulatory tonicity undertaken by the Government to contour the functioning and activities of commercial banks in India. Reserve Bank of India as the Central Banking Authority of the country was vested with extensive powers for banking supervision. Salient features of the Act are discussed in a separate page/ denominationAt the time of independence of the country in 1947, the banking sector in India was relatively small and extremely weak. The banks were general ly moderate to urban areas, extending loans primarily to traffic sector dealing with agricultural produce. There were a large number of commercial banks, but banking services were not obtainable at rural and semi-urban areas. much(prenominal) services were not extended to different sectors of the economy like land, small industries, professionals and self-employed entrepreneurs, artisans, retail traders etc.DRAW punt OF INDIAN BANKING SYSTEM in the beginning NATIONALISATIONCommercial banks, as they were privately owned, on regional or sectarian theme issueed in development of banking on ethnic and provincial basis with parochial outlook. These Institutions did not play their due role in the planned development of the country. Deposit mobilisation was slow. Public had less confidence in the banks on account of frequent bank failures. The nest egg bank facility provided by the Postal department was viewed a comparatively safer field of operations of investment of savings by the public. Even the deficient savings thus mobilised by commercial banks were not channeled for the development of the economy of the country. Funds were largely precondition to traders, who hoarded agricultural produce after harvest, creating an artificial scarcity, to make a good fortune in selling them at a later period, when prices were soaring. The Reserve Bank of India had to step in at these occasions to introduce selective credit controls on several commodities to remedy this situation. Such controls were imposed on advances against Rice, Paddy, Wheat, Other foodgrains (like jowar, millets, kurakkan etc.) pulses, oilseeds etc.When the country succeed independence Indian Banking was exclusively in the private sector. In addition to the Imperial Bank, there were five big banks each keeping public deposits aggregating Rs.100 Crores and more, viz. the Central Bank of India Ltd., the Punjab National Bank Ltd., the Bank of India Ltd., the Bank of Baroda Ltd. and the United Co mmercial Bank Ltd. Rest of the banks were exclusively regional in character holding deposits of less than fifty Crores. Government first implemented the exercise of nationalisation of a significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalised in that year for the evinced objective of extension of banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes to form State Bank of India. SBI was to act as the principal agent of the RBI and handle banking transactions of the wedding State Governments throughout India. The step was in fact in furtherance of the objectives of supporting a powerful rural credit cooperative movement in India and as recommended by the The All-India artless Credit Survey Committee Report, 1954. State Bank of India was obliged to open an accepted number of branches within five age in unbanked centres. Government subsidised the bank for o pening unremunerative branches in non-urban centres. The seven banks now forming subsidiaries of SBI were nationalised in the year 1960. This brought one-third of the banking segment under the direct control of the Government of India. only the major process of nationalisation was carried out on 19th July 1969, when the then Prime Minister of India, Mrs.Indira Gandhi announced the nationalisation of fourteen major commercial banks in the country. One more phase of nationalisation was carried out in the year 1980, when seven more banks were nationalised. This brought 80% of the banking segment in India under Government ownership. The country entered the second phase, i.e. the phase of Nationalised Banking with emphasis on Social Banking in 1969/70.Chronology of Salient steps by the Government after Independence to Regulate Banking Institutions in the farming1949 Enactment of Banking Regulation Act.1955 (Phase I) Nationalisation of State Bank of India1959 (Phase II) Nationalisation o f SBI subsidiaries1961 Insurance cover extended to deposits1969 (Phase III) Nationalisation of 14 major banks1971 Creation of credit tell corporation1975 Creation of regional rural banks1980 (Phase IV) Nationalisation of seven banks with deposits over 200 crores.Shortcomings in the Functioning of Nationalised Banking InstitutionsHowever Nationalised banks in their enthusiasm for development banking, flavor exclusively to branch opening, deposit accretion and social banking, neglected prudential norms, profitability criteria, risk-management and building adequate capital as a buffer to counter-balance the ever expanding risk-inherent assets held by them. They failed to recognise the emerging non-performing assets and to build adequate provisions to neutralise the adverse effects of such assets. Basking in the sunshine of Government ownership that gave to the public implicit faith and confidence about the sustainability of Government-owned institutions, they failed to collect befor e hand whatever is needed for the rainy day. And surfeit blindly indulged is sure to bring the demented hour. In the early Nineties after two decades of lop-sided policies, these banks paid heavily for their misdirected performance in place of pragmatic and fit policies. The RBI/Government of India has to step in at the crisis-hour to implement remedial steps. Reforms in the financial and banking sectors and liberal re capitalisation of the ailing and weakened public sector banks followed. However it is applicable to mention here that the advent of banking sector reforms brought the era of modern banking of global standards in the history of Indian banking. The emphasis shifted to efficient, and prudential banking linked to better guest care and customer service. The old ideology of social banking was not abandoned, but the responsibility for development banking is blended with the paramount need for complying with norms of prudency and efficiency.Composition of Indian Banking organisationThe Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions 2. The Reserve Bank of India acts a centralized body monitoring any discrepancies and blemish in the system. Since the nationalization of banks in 1969, the public sector banks or the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become passing customer focused has forced the slow-moving public sector banks to adopt a fast track approach. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look into their existing portfolio offering. Conservative banking practices allowed Indian banks to be insulated partially from the Asian currency crisis. Indian banks are now quoting al higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippine s etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in approach and armed with efficient branch networks focus primarily on the high revenue niche retail segments. The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly split up with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their vaporific size and penetrative networks which assures them high deposit mobilization.The banking system has three tiers. These are the scheduled commercial banks the Regional rural banks which operate in rural areas not covered by the scheduled banksAnd the cooperative and special purpose rural banks. Under the ambit of the nationalized banks come the specialized banking institutions. These co-operatives, rural banks focus on areas of agriculture, rural development etc., unlike commercial banks these co-operative banks do not lend on the basis of a prime lending rate. They also have various taxation sops because of their holding pattern and lending structure and hence have lower overheads. This enables them to give a marginally higher percentage on savings deposits. Many of these cooperative banks diversified into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck finance etc. In order to forbid pace with their public sector and private counterparts, the co-operative banks too have invested heavily in information technology to offer high-end computerized banki ng services to its clients. Given below is the score list of banks operating in India.SCHEDULED AND NON SCHEDULED BANKSThere are approximately Eighty scheduled commercial banks, Indian and foreign almost twain Hundred regional rural banks more than Three Hundred Fifty central cooperative banks, Twenty land development banks and a number of cistronal agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.India had a fairly well developed commercial banking system in existence at the time of independence in 1947. The Reserve Bank of India (RBI) was established in 1935. While the RBI became a state owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity.The first step towards the nationalisation of commercial banks was the result of a report (under the protect ive cover of RBI) by the Committee of Direction of All India Rural Credit Survey (1951) which till today is the locus classicus on the subject. The Committee recommended one strong co-ordinated state partnered commercial banking institution to stimulate banking development in general and rural credit in particular. Thus, the Imperial Bank was taken over by the Government and renamed as the State Bank of India (SBI) on July 1, 1955 with the RBI acquiring overriding substantial holding of shares. A number of erstwhile banks owned by princely states were made subsidiaries of SBI in 1959. Thus, the beginning of the forge era also saw the emergence of public ownership of one of the most prominent of the commercial banks.The All-India Rural Credit Survey Committee Report, 1954 recommended an integrated approach to cooperative credit and emphasised the need for viable credit cooperative societies by expanding their area of operation, encouraging rural savings and diversifying business. T he Committee also recommended for Government participation in the share capital of the cooperatives. The report afterward paved the way for the present structure and composition of the Cooperative Banks in the countryThere was a feeling that though the Indian banking system had made considerable progress in the 50s and 60s, it established close links between commercial and industry houses, resulting in cornering of bank credit by these segments to the exclusion of agriculture and small industries. To meet these concerns, in 1967, the Government introduced the concept of social control in the banking industry. The scheme of social control was aimed at bringing some changes in the management and distribution of credit by the commercial banks. The close link between big business houses and big banks was intended to be snapped or at least made ineffective by the reconstitution of the Board of Directors to the effect that 51 per cent of the directors were to have special knowledge or possible experience. Appointment of whole-time chairman with special knowledge and practical experience of working of commercial banks or financial or economic or business administration was intended to professionalize the top management. Imposition of restrictions on loans to be granted to the directors concerns was another step towards avoiding undesirable flow of credit to the units in which the directors were interested. The scheme also provided for the take-over of banks under original circumstances.Political compulsion then partially attributed to inadequacies of the social control, led to the Government of India nationalising, in 1969,fourteen major scheduled commercial banks which had deposits above a cut-off size. The objective was to serve better the needs of development of the economy in conformity with national priorities and objectives. In a somewhat repeat of the same experience, eleven years after nationalisation, the Government announced the nationalisation of sev en more scheduled commercial banks above the cut-off size. The second round of nationalisation gave an impression that if a private sector bank grew to the cut-off size it would be under the threat of nationalisation.From the fifties a number of exclusively state-owned development financial institutions (DFIs) were also set up both at the national and state level, with a lone exception of Industrial Credit and Investment Corporation (ICICI) which had a minority private share holding. The unwashed fund activity was also a virtual monopoly of Government owned institution, viz., the Unit Trust of India. Refinance institutions in agriculture and industry sectors were also developed, similar in nature to the DFIs. Insurance, both Life and General, also became state monopolies.REFORM MEASURESThe major challenge of the reform has been to introduce elements of market incentive as a dominant factor gradually replacing the administratively coordinated planned actions for development. Such a paradigm shift has several dimensions, the corporate governance being one of the important elements. The evolution of corporate governance in banks, particularly, in PSBs, thus reflects changes in monetary policy, regulatory environment, and structural transformations and to some extent, on the character of the self-regulatory organizations functioning in the financial sector. Policy Environment During the reform period, the policy environment enhanced competition and provided greater opportunity for exercise of what may be called genuine corporate element in each bank to replace the elements of coordinated actions of all entities as a joint family to fulfill predetermined Plan priorities.Greater competition has been infused in the banking system by permitting entry of private sector banks (Nine licences since 1993), and liberal licensing of more branches by foreign banks and the entry of new foreign banks. With the development of a multi-institutional structure in the financial sec tor, emphasis is on efficiency through competition irrespective of ownership. Since non-bank intermediation has increased, banks have had to alter efficiency to procure survival.REGULATORY surroundingsPrudential regulation and supervision have formed a critical component of the financial sector reform create mentally since its inception, and India has endeavored to international prudential norms and practices. These norms have been progressively tightened over the years, particularly against the backdrop of the Asian crisis. Bank exposures to sensitive sectors such as equity and real state have been curtailed. The Banking Regulation Act 1949 prevents connected lending (i.e. lending by banks to directors or companies in which Directors are interested).Periodical inspection of banks has been the main instrument of supervision, though recently there has been a move toward supplementary on-site inspections with off-site surveillance. The system of Annual pecuniary Inspection was i ntroduced in 1992, in place of the foregoing system of Annual Financial Review/Financial Inspections. The inspection objectives and procedures, have been redefined to evaluate the banks safety and soundness to appraise the quality of the Board and management to ensure compliance with banking laws regulation to provide an appraisal of soundness of the banks assets to analyse the financial factors which determine banks solvency and to identify areas where corrective action is needed to strengthen the institution and improve its performance. Inspection based upon the new guidelines have started since 1997.SELF REGULATORY ORGANIZATIONSIndia has had the distinction of experimenting with Self Regulatory Organisations (SROs) in the financial system since the pre-independence days. At present, there are four SROs in the financial system Indian Banks draw (IBA),Foreign Exchange Dealers Association of India (FEDAI),Primary Dealers Association of India (PDAI) andFixed Income Money Market De alers Association of India (FIMMDAI).INDIAN BANKS ASSOCIATIONThe IBA established in 1946 as a voluntary association of banks, strove towards strengthening the banking industry through consensus and co-ordination. Since nationalisation of banks, PSBs tended to dominate IBA and developed close links with Government and RBI. Often, the oxidizable and consensus and coordinated approach bordered on cartelisation. To illustrate, IBA had worked out a schedule of bench mark service charges for the services rendered by share banks, which were not mandatory in nature, but were being adopted by all banks. The practice of fixing rates for services of banks was consistent with a government activity of administered interest rates but not consistent with the principle of competition. Hence, the IBA was directed by the RBI to desist from working out a schedule of benchmark service charges for the services rendered by member banks. Responding to the imperatives caused by the changing scenario in the reform era, the IBA has, over the years, refocused its vision, redefined its role, and modified its operational modalities.FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA (FEDAI)In the area of foreign exchange, FEDAI was established in 1958, and banks were required to abide by terms and conditions prescribed by FEDAI for transacting foreign exchange business. In the light of reforms, FEDAI has refocused its role by giving up fixing of rates, but plays a multifarious role covering training of banks personnel, accounting standards, evolving risk measurement models like the volt-ampereHistory and Development of Banks in IndiaHistory and Development of Banks in IndiaINTRODUCTIONThe banking industry in India seems to be unaffected from the global financial crises which started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental base and seems to be well insulated from th e financial turbulence emerging from the western economies. The Indian banking industry is well placed as compare to their banking industries western counterparts which are depending upon government bailout and stimulus packages. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil. Although there will no impact on the Indian banking system similar to that in west but the banks in India will adopt for more of defensive approach in credit disbursal in coming period. In order to safe guard their interest, banks will follow stringent norms for credit disbursal. There will be more focus on analyzing borrower financial health .A nation with 1 billion plus, India is the fastest growing country in terms of population and soon to overtake China as worlds la rgest populated country. The discerning impact on the over-stretched limited resources explains why India always tends to be deficient in infrastructure and opportunity. The largest economy of the world often frustrated researchers, as there was no single predictable pattern of the market the multiplicity of government regulations and widespread government ownership had always kept investors away from exploring the vast Indian market. However, with India being liberalised today, banking intermediation has been playing a crucial role in economic development through its credit channel. Foreign banks have entered the soil but that has not yet posed a threat to the vast network of public sector banks that still conduct 92% of banking business in India.Banking in India has undergone a major revamp. It has come a long way since its creation which dates back to the British era. The present banking systems has come into place after many transformations from the Older systems. Against this b ackground the present chapter deals with the evolution of the Indian Banking systems, the various reforms that has been made to make banks more effective, the role of private and foreign sector banks and last the challenges the Indian banks faces in the New Millennium .The banking system is central to a nations economy. Banks are special as they not only accept and deploy large amounts of uncollateralised public funds in a fiduciary capacity, but also leverage such funds through credit creation. In India, prior to nationalisation, banking was restricted mainly to the urban areas and neglected in the rural and semi-urban areas. Large industries and big business houses enjoyed major portion of the credit facilities. Agriculture, small-scale industries and exports did not receive the deserved attention. Therefore, inspired by a larger social purpose, 14 major banks were nationalised in 1969 and six more in 1980. Since then the banking system in India has played a pivotal role in the In dian economy, acting as an instrument of social and economic change. The rationale behind bank nationalisation has been succinctly put forth by eminent bankersMany bank failures and crises over two centuries, and the damage they did under laissez faire conditions the needs of planned growth and equitable distribution of credit, which in privately owned banks was concentrated mainly on the controlling industrial houses and influential borrowers the needs of growing small scale industry and farming regarding finance, equipment and inputs from all these there emerged an inexorable demand for banking legislation, some government control and a central banking authority, adding up, in the final analysis, to social control and nationalisation (Tandon, 1989).Post nationalisation, the Indian banking system registered tremendous growth in volume. Despite the undeniable and multifold gains of bank nationalization, it may be noted that the important financial institutions were all state owned a nd were subject to central direction and control. Banks enjoyed little autonomy as both lending and deposit rates were controlled until the end of the 1980s. Although nationalisation of banks helped in the spread of banking to the rural and hitherto uncovered areas, the monopoly granted to the public sector and lack of competition led to overall inefficiency and low productivity. By 1991, the countrys financial system was saddled with an inefficient and financially unsound banking sector. Some of the reasons for this were (i) high reserve requirements, (ii) administered interest rates, (iii) directed credit and (iv) lack of competition (v) political interference and corruption. As recommended by the Narasimham Committee Report (1991) several reform measures were introduced which included reduction of reserve requirements, de-regulation of interest rates, introduction of prudential norms, strengthening of bank supervision and improving the competitiveness of the system, particularly by allowing entry of private sector banks. With a view to adopting the Basel Committee (1988) framework on capital adequacy norms, the Reserve Bank introduced a risk-weighted asset ratio system for banks in India as a capital adequacy measure in 1992. Banks were asked to maintain risk-weighted capital adequacy ratio initially at the lower level of 4 per cent, which was gradually increased to 9 per cent. Banks were also directed to identify problem loans on their balance sheets and make provisions for bad loans and bring down the burgeoning problem of non-performing assets. The period 1992-97 laid the foundations for reform in the banking system (Rangarajan, 1998). The second Narasimham Committee Report (1998) focussed on issues like strengthening of the banking system, upgrading of technology and human resource development. The report laid emphasis on two aspects of banking regulation, viz., capital adequacy and asset classification and resolution of NPA-related problems.Commercial banks in India are expected to start implementing Basel II norms with effect from March 31, 2007. They are expected to adopt the standardised approach for credit risk and the basic indicator approach for operational risk initially. After adequate skills are developed, both at the banks and at the supervisory levels, some banks may be allowed to migrate to the internal rating based (IRB) approach (Reddy 2005).At present, banks in India are venturing into non-traditional areas and generating income through diversified activities other than the core banking activities. Strategic mergers and acquisitions are being explored and implemented. With this, the banking sector is currently on the threshold of an exciting phase. Against this backdrop, this paper endeavours to study the important banking indicators for the last 25-year period from 1981 to 2005. These indicators have been broadly grouped into different categories, viz., (i) number of banks and offices (ii) deposits and credit (iii ) investments (iv) capital to risk-weighted assets ratio (CRAR) (v) non performing assets (NPAs) (vi) Income composition (vii) Expenditure composition (viii) return on assets (ROAs) and (ix) some select ratios. Accordingly, the paper discusses these banking indicators in nine sections in the same order as listed above. The paper concludes in section X by drawing important inferences from the trends of these different banking parameters.The number of offices of all scheduled commercial banks almost doubledfrom 29,677 in 1980 to 55,537 in 2005. This rapid increase in the number of bank offices is observed in the case of all the bank groups. However, the number of banks in the case of foreign bank group and domestic private sector bank group decreased from 42 in 2000 to 31 in 2005 and from 33 in 2000 to 29 in 2005, respectively. This fall in the number of banks is reflective of the consolidation process and, in particular, the mergers and acquisitions that are the order of the banking system at present (Table 1).BANKING IN THE OLDER DAYSBanking is believed to be a part of Indian society from as early as Vedic age transition from mere money lending to banking must have happened before Manu, the great Hindu jurist, who had devoted a large section of his work to deposits and advances and also formulated rules for calculating interest on both 1. During the Mogul period indigenous bankers (rich individuals or families) helped foreign trades and commerce by lending money to the business. It was during the East Indian period when agency houses started managing the banking business.The first Joint Stock bank India saw came in 1786 named the General Bank of India followed by the Bank of Hindustan and the Bengal Bank. Only the Bank of Hindustan continued to be in the show until 1906 while the other two disappeared in the meantime. East India Company established three banks in first half of 19th century the Bank of Bengal in 1809, the Bank of Bombay in 1840, and the Bank of Madras in 1843. Eventually these three banks (which used to be referred to as Presidency Banks) were made independent units and they really did well for almost a century. In 1920, these three were amalgamated and a new Imperial Bank of India was established in 1921. Reserve Bank of India Act was passed in 1934 and finally in 1935, the Central Bank was created and christened as Reserve Bank of India. Imperial Bank was undertaken as State Bank of India after passing the State Bank of India Act in 1955. During the last phase of freedom fighting (Swadeshi Movement) few banks with purely Indian management were established like Punjab National bank (PNB), Bank of India (BoI) Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd, etc.July 19, 1969 was an important day in the history of Indian banking industry. Fourteen major banks of the country were nationalised and on April 15, 1980 six more commercial private banks were taken over by the Indian go vernment.In the wake of liberalisation that started in the last decade a few foreign banks entered the foray of commercial banks. To date there are around 40 banks of foreign origin that areoperating in the market, like ABN AMRO Bank, ANZ Grindlays Bank, American Express Bank, HSBC Bank, Barclays Bank and Citibank groups to name a few major of them.HISTORY OF INDIAN BANKSWe can identify three distinct phases in the history of Indian Banking.Early phase from 1786 to 1969Nationalisation of Banks and up to 1991 prior to banking sector ReformsNew phase of Indian Banking with the advent of Financial Banking Sector Reforms after 1991.The first phase is from 1786 to 1969, the early phase up to the nationalisation of the fourteen largest of Indian scheduled banks. It was also the traditional or conservative phase of Indian Banking. The advent of banking system of India started with the establishment of the first joint stock bank, The General Bank of India in the year 1786. After this first bank, Bank of Hindustan and Bengal Bank came to existence. In the mid of 19th century, East India Company established three banks The Bank of Bengal in 1809, The Bank of Bombay in 1840, and bank of Madras in 1843. These banks were independent units and called Presidency banks. These three banks were amalgamated in 1920 and a new bank, Imperial Bank of India was established. All these institutions started as private shareholders banks and the shareholders were mostly Europeans. The Allahabad Bank was established in 1865. The next bank to be set up was the Punjab National Bank Ltd., which was established with its headquarters at Lahore in 1894 for the first time exclusively by Indians. Most of the Indian commercial banks, however, owe their origin to the 20th century. Bank of India, Central Bank of India, Bank of Baroda, the Canara Bank, the Indian Bank, and the Bank of Mysore were established between 1906 and 1913. The last major commercial bank to be set up in this phase was the Un ited Commercial Bank in 1943. Earlier the establishment of Reserve Bank of India in 1935 as the central bank of the country was an important step in the development of commercial banking in India.The history of joint stock banking in this first phase was characterised by slow growth and periodic failures. There were as many as one thousand one hundred banks, mostly small banks, failed during the period from 1913 to 1948. The Government of India concerned by the frequent bank failures in the country causing miseries to innumerable small depositors and others enacted The Banking Companies Act, 1949. The title of the Act was changed as Banking Regulation Act 1949, as per amending Act of 1965 (Act No.23 of 1965). The Act is the first regulatory step undertaken by the Government to streamline the functioning and activities of commercial banks in India. Reserve Bank of India as the Central Banking Authority of the country was vested with extensive powers for banking supervision. Salient f eatures of the Act are discussed in a separate page/articleAt the time of Independence of the country in 1947, the banking sector in India was relatively small and extremely weak. The banks were largely confined to urban areas, extending loans primarily to trading sector dealing with agricultural produce. There were a large number of commercial banks, but banking services were not available at rural and semi-urban areas. Such services were not extended to different sectors of the economy like agriculture, small industries, professionals and self-employed entrepreneurs, artisans, retail traders etc.DRAW BACK OF INDIAN BANKING SYSTEM BEFORE NATIONALISATIONCommercial banks, as they were privately owned, on regional or sectarian basis resulted in development of banking on ethnic and provincial basis with parochial outlook. These Institutions did not play their due role in the planned development of the country. Deposit mobilisation was slow. Public had less confidence in the banks on ac count of frequent bank failures. The savings bank facility provided by the Postal department was viewed a comparatively safer field of investment of savings by the public. Even the deficient savings thus mobilised by commercial banks were not channeled for the development of the economy of the country. Funds were largely given to traders, who hoarded agricultural produce after harvest, creating an artificial scarcity, to make a good fortune in selling them at a later period, when prices were soaring. The Reserve Bank of India had to step in at these occasions to introduce selective credit controls on several commodities to remedy this situation. Such controls were imposed on advances against Rice, Paddy, Wheat, Other foodgrains (like jowar, millets, ragi etc.) pulses, oilseeds etc.When the country attained independence Indian Banking was exclusively in the private sector. In addition to the Imperial Bank, there were five big banks each holding public deposits aggregating Rs.100 Cror es and more, viz. the Central Bank of India Ltd., the Punjab National Bank Ltd., the Bank of India Ltd., the Bank of Baroda Ltd. and the United Commercial Bank Ltd. Rest of the banks were exclusively regional in character holding deposits of less than fifty Crores. Government first implemented the exercise of nationalisation of a significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalised in that year for the stated objective of extension of banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes to form State Bank of India. SBI was to act as the principal agent of the RBI and handle banking transactions of the Union State Governments throughout India. The step was in fact in furtherance of the objectives of supporting a powerful rural credit cooperative movement in India and as recommended by the The All-India Rural Credit Survey Committee Report, 1954. State Ba nk of India was obliged to open an accepted number of branches within five years in unbanked centres. Government subsidised the bank for opening unremunerative branches in non-urban centres. The seven banks now forming subsidiaries of SBI were nationalised in the year 1960. This brought one-third of the banking segment under the direct control of the Government of India.But the major process of nationalisation was carried out on 19th July 1969, when the then Prime Minister of India, Mrs.Indira Gandhi announced the nationalisation of fourteen major commercial banks in the country. One more phase of nationalisation was carried out in the year 1980, when seven more banks were nationalised. This brought 80% of the banking segment in India under Government ownership. The country entered the second phase, i.e. the phase of Nationalised Banking with emphasis on Social Banking in 1969/70.Chronology of Salient steps by the Government after Independence to Regulate Banking Institutions in the Country1949 Enactment of Banking Regulation Act.1955 (Phase I) Nationalisation of State Bank of India1959 (Phase II) Nationalisation of SBI subsidiaries1961 Insurance cover extended to deposits1969 (Phase III) Nationalisation of 14 major banks1971 Creation of credit guarantee corporation1975 Creation of regional rural banks1980 (Phase IV) Nationalisation of seven banks with deposits over 200 crores.Shortcomings in the Functioning of Nationalised Banking InstitutionsHowever Nationalised banks in their enthusiasm for development banking, looking exclusively to branch opening, deposit accretion and social banking, neglected prudential norms, profitability criteria, risk-management and building adequate capital as a buffer to counter-balance the ever expanding risk-inherent assets held by them. They failed to recognise the emerging non-performing assets and to build adequate provisions to neutralise the adverse effects of such assets. Basking in the sunshine of Government ownership tha t gave to the public implicit faith and confidence about the sustainability of Government-owned institutions, they failed to collect before hand whatever is needed for the rainy day. And surfeit blindly indulged is sure to bring the sick hour. In the early Nineties after two decades of lop-sided policies, these banks paid heavily for their misdirected performance in place of pragmatic and balanced policies. The RBI/Government of India has to step in at the crisis-hour to implement remedial steps. Reforms in the financial and banking sectors and liberal re capitalisation of the ailing and weakened public sector banks followed. However it is relevant to mention here that the advent of banking sector reforms brought the era of modern banking of global standards in the history of Indian banking. The emphasis shifted to efficient, and prudential banking linked to better customer care and customer service. The old ideology of social banking was not abandoned, but the responsibility for de velopment banking is blended with the paramount need for complying with norms of prudency and efficiency.Composition of Indian Banking SystemThe Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions 2. The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the public sector banks or the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look into their existing portfolio offering. Conservative banking practices allowed Indian banks to be insulated partially from the Asian currency crisis. Indian banks are now quoting al higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in approach and armed with efficient branch networks focus primarily on the high revenue niche retail segments. The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to the ir sheer size and penetrative networks which assures them high deposit mobilization.The banking system has three tiers. These are the scheduled commercial banks the Regional rural banks which operate in rural areas not covered by the scheduled banksAnd the cooperative and special purpose rural banks. Under the ambit of the nationalized banks come the specialized banking institutions. These co-operatives, rural banks focus on areas of agriculture, rural development etc., unlike commercial banks these co-operative banks do not lend on the basis of a prime lending rate. They also have various tax sops because of their holding pattern and lending structure and hence have lower overheads. This enables them to give a marginally higher percentage on savings deposits. Many of these cooperative banks diversified into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck finance etc. In order to keep pace with their public sector and private counterpa rts, the co-operative banks too have invested heavily in information technology to offer high-end computerized banking services to its clients. Given below is the total list of banks operating in India.SCHEDULED AND NON SCHEDULED BANKSThere are approximately Eighty scheduled commercial banks, Indian and foreign almost Two Hundred regional rural banks more than Three Hundred Fifty central cooperative banks, Twenty land development banks and a number of primary agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.India had a fairly well developed commercial banking system in existence at the time of independence in 1947. The Reserve Bank of India (RBI) was established in 1935. While the RBI became a state owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity.T he first step towards the nationalisation of commercial banks was the result of a report (under the aegis of RBI) by the Committee of Direction of All India Rural Credit Survey (1951) which till today is the locus classicus on the subject. The Committee recommended one strong integrated state partnered commercial banking institution to stimulate banking development in general and rural credit in particular. Thus, the Imperial Bank was taken over by the Government and renamed as the State Bank of India (SBI) on July 1, 1955 with the RBI acquiring overriding substantial holding of shares. A number of erstwhile banks owned by princely states were made subsidiaries of SBI in 1959. Thus, the beginning of the Plan era also saw the emergence of public ownership of one of the most prominent of the commercial banks.The All-India Rural Credit Survey Committee Report, 1954 recommended an integrated approach to cooperative credit and emphasised the need for viable credit cooperative societies b y expanding their area of operation, encouraging rural savings and diversifying business. The Committee also recommended for Government participation in the share capital of the cooperatives. The report subsequently paved the way for the present structure and composition of the Cooperative Banks in the countryThere was a feeling that though the Indian banking system had made considerable progress in the 50s and 60s, it established close links between commercial and industry houses, resulting in cornering of bank credit by these segments to the exclusion of agriculture and small industries. To meet these concerns, in 1967, the Government introduced the concept of social control in the banking industry. The scheme of social control was aimed at bringing some changes in the management and distribution of credit by the commercial banks. The close link between big business houses and big banks was intended to be snapped or at least made ineffective by the reconstitution of the Board of D irectors to the effect that 51 per cent of the directors were to have special knowledge or practical experience. Appointment of whole-time Chairman with special knowledge and practical experience of working of commercial banks or financial or economic or business administration was intended to professionalise the top management. Imposition of restrictions on loans to be granted to the directors concerns was another step towards avoiding undesirable flow of credit to the units in which the directors were interested. The scheme also provided for the take-over of banks under certain circumstances.Political compulsion then partially attributed to inadequacies of the social control, led to the Government of India nationalising, in 1969,fourteen major scheduled commercial banks which had deposits above a cut-off size. The objective was to serve better the needs of development of the economy in conformity with national priorities and objectives. In a somewhat repeat of the same experience, eleven years after nationalisation, the Government announced the nationalisation of seven more scheduled commercial banks above the cut-off size. The second round of nationalisation gave an impression that if a private sector bank grew to the cut-off size it would be under the threat of nationalisation.From the fifties a number of exclusively state-owned development financial institutions (DFIs) were also set up both at the national and state level, with a lone exception of Industrial Credit and Investment Corporation (ICICI) which had a minority private share holding. The mutual fund activity was also a virtual monopoly of Government owned institution, viz., the Unit Trust of India. Refinance institutions in agriculture and industry sectors were also developed, similar in nature to the DFIs. Insurance, both Life and General, also became state monopolies.REFORM MEASURESThe major challenge of the reform has been to introduce elements of market incentive as a dominant factor graduall y replacing the administratively coordinated planned actions for development. Such a paradigm shift has several dimensions, the corporate governance being one of the important elements. The evolution of corporate governance in banks, particularly, in PSBs, thus reflects changes in monetary policy, regulatory environment, and structural transformations and to some extent, on the character of the self-regulatory organizations functioning in the financial sector. Policy Environment During the reform period, the policy environment enhanced competition and provided greater opportunity for exercise of what may be called genuine corporate element in each bank to replace the elements of coordinated actions of all entities as a joint family to fulfill predetermined Plan priorities.Greater competition has been infused in the banking system by permitting entry of private sector banks (Nine licences since 1993), and liberal licensing of more branches by foreign banks and the entry of new foreig n banks. With the development of a multi-institutional structure in the financial sector, emphasis is on efficiency through competition irrespective of ownership. Since non-bank intermediation has increased, banks have had to improve efficiency to ensure survival.REGULATORY ENVIRONMENTPrudential regulation and supervision have formed a critical component of the financial sector reform programme since its inception, and India has endeavored to international prudential norms and practices. These norms have been progressively tightened over the years, particularly against the backdrop of the Asian crisis. Bank exposures to sensitive sectors such as equity and real estate have been curtailed. The Banking Regulation Act 1949 prevents connected lending (i.e. lending by banks to directors or companies in which Directors are interested).Periodical inspection of banks has been the main instrument of supervision, though recently there has been a move toward supplementary on-site inspections w ith off-site surveillance. The system of Annual Financial Inspection was introduced in 1992, in place of the earlier system of Annual Financial Review/Financial Inspections. The inspection objectives and procedures, have been redefined to evaluate the banks safety and soundness to appraise the quality of the Board and management to ensure compliance with banking laws regulation to provide an appraisal of soundness of the banks assets to analyse the financial factors which determine banks solvency and to identify areas where corrective action is needed to strengthen the institution and improve its performance. Inspection based upon the new guidelines have started since 1997.SELF REGULATORY ORGANIZATIONSIndia has had the distinction of experimenting with Self Regulatory Organisations (SROs) in the financial system since the pre-independence days. At present, there are four SROs in the financial system Indian Banks Association (IBA),Foreign Exchange Dealers Association of India (FEDAI ),Primary Dealers Association of India (PDAI) andFixed Income Money Market Dealers Association of India (FIMMDAI).INDIAN BANKS ASSOCIATIONThe IBA established in 1946 as a voluntary association of banks, strove towards strengthening the banking industry through consensus and co-ordination. Since nationalisation of banks, PSBs tended to dominate IBA and developed close links with Government and RBI. Often, the reactive and consensus and coordinated approach bordered on cartelisation. To illustrate, IBA had worked out a schedule of benchmark service charges for the services rendered by member banks, which were not mandatory in nature, but were being adopted by all banks. The practice of fixing rates for services of banks was consistent with a regime of administered interest rates but not consistent with the principle of competition. Hence, the IBA was directed by the RBI to desist from working out a schedule of benchmark service charges for the services rendered by member banks. Respon ding to the imperatives caused by the changing scenario in the reform era, the IBA has, over the years, refocused its vision, redefined its role, and modified its operational modalities.FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA (FEDAI)In the area of foreign exchange, FEDAI was established in 1958, and banks were required to abide by terms and conditions prescribed by FEDAI for transacting foreign exchange business. In the light of reforms, FEDAI has refocused its role by giving up fixing of rates, but plays a multifarious role covering training of banks personnel, accounting standards, evolving risk measurement models like the VaR