Commercial Banking in India Module 7

7/31/2019 Commercial Banking in India Module 7

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CommercialBanking In India


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Chapter ContentsCommercial Banking during pre

nationalization Phase

Nationalization of Commercial BankingBanking development during the

postnationalisation Phase

Appraisal of banking since nationalisation

Banking sector reforms during theliberalisation period

Recommendation of the committee onbanking sector Reforms


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Banking sector is mainly divided into

Organized and Unorganized Sector

Organized sector

Commercial Banks

Regional banks

Cooperative banks


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Commercial Banking during pre

nationalization Phase

Major Changes

The no of Scheduled banks reduced from94 to 76

Steady decline in the importance of non-scheduled banks

Regulatory Power was with RBI

Deposits increasedRate of growth of time deposits increased


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Major Changes

Establish State Bank of India

In1960 Create the State Bank Group by

Nationalizing eight Regional BanksOpened new branches in rural and semi

urban areas

Started Term lending ,lending for industries 1n 1962 Established the deposit Insurance

Corporation


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Major events happen

after Independence1949

Banking Regulation act was passed

Nationalisation of RBI


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Nationalization Of

Commercial BanksOn July 19,1969 fourteen commercialbanks with deposits worth Rs.50 croreor were nationalised


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Why, Nationalised the

Banks?Removal of control by a few

Provision for adequate credit for agriculture

and small industry and exportGiving a professional bent for management

To encourage new entrepreneurs

The provision of adequate training as well

as terms of service for bank staff.Nationalized banks can act as a catalyst to

improve the growth


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Why, Nationalised the

Banks?For the rapid growth in agriculture

Small Industries

Exports

Raising of employment

Encourage new entrepreneursDevelopment of backward areas


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Banking development during the

postnationalisation Phase

Expansion of Branches(1969-91)

Deposit Mobilization

Bank Lending


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Lead Bank SchemeLead bank Scheme by Narimann

Committee came into existence .Under

the scheme districts were allotted tothe state Bank Group,then nationalizedbanks and three private groups

They Conducted survey


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Major ChangesNo of offices of Commercial banks

increased from 8,262 to 60,220 giving

an annual increase of 2,362Bank offices locate in rural areas

increased from 22.2% to 58.5%

Regional Imbalances also reduced


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Deposit MobilizationBank deposits increased from 4,665

crore in July 1969 to 1,92,541 crore

Rise was due to Inflationary increase in the quantity of

currency

Rise of National Income Partially due to the deposit mobilization

efforts of the commercial banks.


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Bank LendingTotal bank credit also rose up from

3,399 crore in 1969 to 1,16,301 on

,March 1991Before nationalization the credit given

to agriculture was very less(2.2% in

1968) and large and mediumindustries(60.6%)


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Appraisal of Banking

since NationalizationBank deposit of Household sector rose

from 15% to 38.7% of GDP

No of branches increased from 8,262-60,220 (period 1969-91)


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Appraisal of Banking

since NationalizationDirected Investment

Directed Credit Programme

Subsidization of Credit

Increase in expenditure

Lack of Competition


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Banking Sector

ReformsPrudential Regulation and Supervision

Rehabilitation of Public Sector Banks

Reduction in SLR and CRRDeregulation of Interest ratesCompetition

Phasing out of Directed Credit


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Recommendations of the

committee on the banking

Sector

Narasimham Committees

Recommendations (April 1998) on

Banking Sector Reforms


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The Major recommendations are asfollows:

1.Strong banks should be merged and

relatively weak and unviable ones shouldbe closed. Mergers between banks and

development financial institutions may beconsidered if it makes economic andcommercial sense.


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Recommendations2.The country should have two or three

banks with international orientation,

eight to ten national banks and alarge number of local banks. Thethird tier banks should remainconfined to smaller geographical

regions. The first and the second tierbanks should take care of the needsof the corporate sector.


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Recommendations3.The Committee recommended new

and higher norms for capital

adequacy. It suggested that theminimum capital to risk assets ratiobe increased to 10 percent from it

earlier level of 8 percent.


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Recommendations4. Budgetary support for recapitalization is

not viable and should thus be abandoned.

5. Legal frame work is not adequate for creditrecovery. It should be strengthened.

6. Net non-performing assets for all banks bebrought down to below 5 percent by the

year 2000 and to 3 percent by 2002.7. There should be rationalization of branchesand staff.

8. Bank boards should be depoliticized under

the RBI supervision.


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Recommendations9.The policy of licensing new private banks

may be continued.

10. Foreign banks may be allowed to set upsubsidiaries or joint ventures in India.Such subsidiaries or joint ventures shouldbe treated on par with other private banks

and subject to the same conditions withregard to branches and directed credit asthese banks.


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Recommendations11.There has to be an integrated system of

regulation and supervision to regulate and

supervise the activities of banks, financialinstitutions and non-bank financecompanies. The agency for this purposebe renamed as the Board for Financial

Regulation and supervision (BFRS).

Commercial Banking in India Module 7

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