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Banking Industry in India
chillibreeze writer — Malavika Roy
The Indian banking industry started taking shape after India’s independence in 1947. Though the Indian banking industry can be traced as far back as 1806 with the establishment of Bank of Bengal, the industry was in a state of turmoil.
Under the British influence, Calcutta witnessed a surge in trading activities, giving rise to a number of banking establishments during the period. Several banks, set up in order to finance trading, went out of business. For instance, Union bank, formed by Indian merchants, failed due to economic recession during 1848-49 resulting in depositors losing money. Such events resulted in shifting the reigns of the industry into the hands of Europeans till the early twentieth century.
From 1906 to1911, several banks were set up based on the principles of the Swadesi movement. The movement inspired Indian businessmen and politicians to set up banks for the Indian community and many new banks were launched to promote trade and finance in communal groups. Some of the prominent ones among these are Bank of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of India.
Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of Madras, set up by British East India Company, merged in 1921 to give birth to Imperial bank of India, now known as State bank of India.
During 1914-1945, India went through several ups and downs politically and economically and the effects were felt in the banking sector too. The World Wars disrupted banking activities of the nation and almost 94 banks failed during this period. After 1947, however, banking activities flourished.
After the partition of India, the government toook drastic steps to regulate the banking industry. For example, in 1948, additional powers and authority were vested in the Reserve bank of India to monitor the functioning of the entire banking system. The passing the Banking regulation act in 1949, empowered RBI to further regulate, inspect, and control Indian banks.
The nationalization and liberalization of banks 1969 and 1991 respectively also boosted the development of the Indian banking sector. Nationalization resulted in 91% of government holding in the banking industry and liberalization paved the path for private players to participate in the industry. As a result, banks like Oriental bank of Commerce, HDFC bank, ICICI bank, and AXIS bank came into being. Foreign banks too were permitted to set up their offices in India. The rationalization of FDI norms in 2002 also allowed foreign players to acquire stakes in Indian banks.
These banks implemented innovative forms of banking like ATMs, mobile banking, phone banking, internet banking, and debit/credit cards. The private players constantly improved services in order to retain customers and win the severe competition which had become a feature of the Indian banking industry.
The public sector banks have been grappling with attrition which surfaced after the Voluntary Retirement Scheme was announced. The dilution of equity from 51% to 33% has opened up opportunities for takeovers.
The Indian banking system, however, proved resilient to shocks arising out of the global financial recession. In terms of quality of assets, the Indian banking players have come out clean with strong and transparent balance sheets compared to their counterparts in other nations.
Following the financial crisis, new deposits made their way towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5% of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8%. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8%, 5.6%, and 3%, respectively.
Ever since US declared recovery from the global financial crisis, the confidence of non-resident Indians (NRIs) in the Indian economy has revived again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.
The report also found that scheduled commercial banks served 34,709 banked centers. Of these centers, 28,095 were single office centers and 64 centers had 100 or more bank offices.
The expansion plans are self evident from the example of SBI, which is adding 23 new branches abroad, bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers.
Currently, the Indian banking framework is comprised of 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake, they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 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.
In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS.
Currently the banking industry looks optimistic in terms of strong inflow of funds. This could be supported by the declaration made by RBI in 2009. According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to:
The money supply growth on a year-on-year basis at 18.9% as on October 9, 2009, remained above the indicative projection of 18% set out in the First Quarter Review of July 2009. The main source of the expansion was bank credit to the government, reflecting large market borrowings of the government.
Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in March, 2010. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.
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