COMMERCIAL BANKS & INDUSTRIAL FINANCE:
THE EVOLVING ROLE
Financial System in India
 Financial Sector includes three main segments viz.,
1) Financial Markets - Money Market, Debt Market,
Capital Market, Forex Market
2) Financial Institutions - Banks, Mutual Funds,
Insurance Companies etc.
3) Financial Products - Loans, Deposits, Bonds, Equities
etc.
Financial Sector - Regulators
REGULATORS
Reserve Bank of
India
(RBI)
Securities
Exchange
Board of India
(SEBI)
Insurance Regulatory
and Development
Authority
(IRDA)
Banks
Capital
Markets/
Mutual Funds
Insurance
Companies
BANK: Meaning & Definition
• Bank is a financial intermediary between Money Savers and
Money Seekers.
• Bank is engaged in the business of purchasing and selling of
MONEY.
• Bank is a financial intermediary which accepts/takes deposits
from public at large and make loans to different entities.
Banking in India
Banking in India is governed by Banking Regulation
Act,1949 and RBI Act,1934
Banking in India is controlled /monitored by RBI and
Govt. of India
Phase – 1:
Phase of Banking Consolidation
• Three presidency banks were established in Calcutta
(1806) in Bombay (1840) and in Madras (1843)
• In the early part of 20th century, on account of the
Swadeshi movement a number of join stock banks were
established by Indians like Bank of India, Bank of Baroda
and Central Bank of India.
• In 1921 the three presidency banks were merged and the
IMPERIAL BANK OF INDIA was created.
• The Reserve Bank of India Act was passed in 1934 and
the RBI came into existence in 1935 and RBI was
nationalized in 1949.
Phase – 1:
Phase of Banking Consolidation...
• The Banking Regulation Act,1949 gave wide
powers to RBI to act as the REGULATOR FOR
BANKS in India
• In 1955, State Bank of India became the
successor to the Imperial Bank of India, under
the State Bank of India Act, 1955.
• Credit Authorization Scheme (CAS) was launched
in November 1965.
Phase – 2
Phase of Innovative Banking (1964 – 1990)
• MAJOR ISSUES:
• Social Control and Service
- Banking Coverage and Credit Gaps (Priority Sector Finance)
- Agricultural Finance Corporation Ltd
• Organizational Changes
• National Credit Council (1968)
– To assess the DD of bank credit from various sectors of economy
– To decide the priorities for grant of loans for various industries
– To coordinate the investment policies of comm. Banks in India
• LEAD BANK Scheme (1969)
• Various committees were appointed by Govt. to improve the
banking sector performance:
A. Daheja Committee Report:
• Key Findings:
• Industries were over – relying on bank credit
• Industries using excess credit facilities
• Poor Credit Appraisal by Banks
• Suggestions:
•
•
•
•
Effective Credit Appraisal Mechanism
Industries should keep minimum inventories
Availability of Credit to Priority Sector
New Bill Market Scheme (NBMS)
B. Tondon Committee Report
• Key Findings:
• Rationing/Regulating of Bank Credit
• Suggestions:
•
•
•
•
MPBF Mechanisms
Credit Control Standards for Banks
Bank Credit to priority sector
Uniform distribution of credit across industries
Nationalization of Banks:
(From Private to Govt. Ownership)
• In 1969, the Govt. of India NATIONALIZED 14 major
commercial banks having deposits of Rs. 50 crore
or more.
• In 1980, SIX more commercial banks were
NATIONALIZED, with a deposit of Rs. 200 crore.
• The aim behind nationalization is to safeguard the
Public Interest and Social Control.
Phase – 3
Phase of Prudential Banking (1991)
• Banking Sector Reforms:
• Appointed “NARSIMHAM COMMITTEE – I” in 1991
MAJOR RECOMMENDATIONS:
• On Directed Investments (CRR & SLR)
• SLR and CRR should be reduced to prudent levels
• On Directed Credit Programmes
• On Interest Rate Structure
• On Capital Adequacy Norms
• On Income Recognition, Asset Classification and Provisioning
Requirements
“NARSIMHAM COMMITTEE – I” (1991)
• MAJOR RECOMMENDATIONS:
• On Organisation Structure





Branch Licensing
Universal Banking Service
International Banking
Expansion of RRBs (Regional Rural Banks)
Banking Orgn. Structure (Thee tire & Four Tire)
• Free Entry to Foreign Banks
• Free Entry for Private Sector Banks
• Supervisory Authority
(Board of Financial Supervision setup under RBI)
NARSIMHAM COMMITTEE – II
MAJOR RECOMMENDATIONS (1998)
• CAPITAL ADEQUACY
– Capital Adequacy should include “CREDIT RISK” & “MARKET RISK”
– CRAR Should be increased from 8% to 10%.
– The capital base of banks should meet International standards
• ASSET QUALITY, NPAs AND DIRECTED INVESTMENTS
• PRUDENTIAL NORMS AND DISCLOSURE REQUIREMENTS
– Banks Should Strictly comply the RBI Prudential Norms
• ASSET – LIABILITY MANAGEMENT
NARSIMHAM COMMITTEE – II
MAJOR RECOMMENDATIONS (1998)…
• SYSTEM AND METHODS IN BANKS
– More Operational Freedom to Banks
– More Concentration on RURAL BANKING
– Technology Up-gradation
– Human Resource Development
• INTERNAL SYSTEMS
– Internal Audit and Inspection
– Periodical Visits to Branch Offices
– Simplification of documents and inter bank communication
process
NARSIMHAM COMMITTEE – II
MAJOR RECOMMENDATIONS (1998)…
• HUMAN RESOURCE MANAGEMENT
–
–
–
–
Free/Decentralized Recruitment
Training and Development Programmes for Employees
Flexibility to decide the “WAGE Structure”
VRS for employees
• TECHNOLOGY UPGRADATION
– MIS
– COMPUTERISATION
– TELE BANKING
NARSIMHAM COMMITTEE – II
MAJOR RECOMMENDATIONS – Contd…
• STRUCTURAL ISSUES
–
–
–
–
No further NATIONALIZATION to be made
No distinction between ‘public’ and ‘private’ sector banks
Control of banking sector to be centralized
Emphasis upon ‘de-regulation’ of INT. RATE
• RURAL AND SMALL INDUSTRIAL CREDIT
• Development of RRBs and Dist. Credit Co-op Banks
• Assigning KEY role to NABARD for AGRI. Finance
Classification of Banks
Regional
Rural
Banks
Central
Bank
RBI
Cooperative
Banks
Public
Sector
Banks
New
Private
Sector
Banks
Foreign
Banks
Old
Private
Sector
Commercial Banks:
DEPOSIT PRODUCTS
CURRENT
CERTIFICATE
SAVINGS
DEPOSITS
FLEXI
FIXED
RECURRING
Loan Products
CASH CREDIT
BILLS
FINANCE
OVERDRAFT
LOANS
&
ADVANCES
TERM
FINANCE
RETAIL
FINANCE
Thank You