Banking in India
Content
Due to their influence within a financial system and an economy, banks are generally highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[1] It is followed by Berenberg Bank of Hamburg (1590)[2] and Sveriges Riksbank of Sweden (1668).
Banking in its modern sense evolved in rich cities of Renaissance Italy, such as Florence, Venice and Genoa. In the history of banking, a number of banking dynasties
[3] [4]
—
[5] [6]
among
[7] [8]
them
notably Medici, Fugger, Welser, Berenberg, Baring and Rothschild —have played a central role over many centuries. Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Sialkot Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe.[9] One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397.[10] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[11]
Origin of the word
The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during
the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[12]
One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The
coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table and a bank. Another possible origin of the word is from the Sanskrit words ( ) 'byaya'
(expense) and 'onka' (calculation) = byaya-onka. This word still survives in Bangla, which is one of Sanskrit's child languages. + = . Such expense
calculations were the biggest part of mathematical treatises written by Indian mathematicians as early as 500 B.C.
Definition The definition of a bank varies from country to country. See the relevant country page (below) for more information. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:[13]
conducting current accounts for his customers, paying cheques drawn on him/her, and collecting cheques for his/her customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is organized or regulated.
The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the
actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:
"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).
"banking business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; 2. paying or collecting checks drawn by or paid in by customers.[14] Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.[15]
Banking Standard activities
Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire
transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment
services such as remittance companies are normally not considered as an adequate substitute for a bank account.
Channels Banks offer many different channels to access their banking and other services:
Automated Teller Machines A branch is a retail location Call center Mail: most banks accept cheque deposits via mail and use mail to communicate to
their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking
transactions
Online banking is a term used for performing multiple transactions, payments etc.
over the Internet
Relationship Managers, mostly for private banking or business banking, often
visiting customers at their homes or businesses
Telephone banking is a service which allows its customers to perform transactions
over the telephone with automated attendant or when requested withtelephone operator
Video banking is a term used for performing banking transactions or professional
banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch clarification
Business model A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and
dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.
In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability).
Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.
Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit- debit - cards. This helps in making profit and facilitates economic development as a whole.[16]
Banks in the economy Economic functions
The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.
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1.
i
Boland, Vincent (2009-06-12). "Modern dilemma for world’s oldest bank". Financial Times. Retrieved 23 February 2010.
2. The world's second oldest bank—and its plans for the future, thegatewayonline.com 3. Christopher Hibbert (1975). The House of Medici: Its Rise and Fall. Morrow. ISBN 0-688-00339-7. 4. Mark Häberlein (2012). The Fuggers of Augsburg: Pursuing Wealth and Honor in Renaissance, University of Virginia Press, ISBN 0813932580
5. Richard Ehrenberg: Das Zeitalter der Fugger. Geldkapital und Creditverkehr im 16. Jahrhundert; Bd. 1: Die Geldmächte des 16. Jahrhunderts; Hildesheim: Olms, 1963 ( = Jena: Fischer, 1898); S. 96.195.212; Pius Malekandathil: The Germans, the Portuguese and India; Periplus Parerga 6; Münster: LIT, 1999; ISBN 38258-4350-5; S. 47ff. 6. Percy Ernst Schramm, Kaufleute zu Haus und über See. Hamburgische Zeugnisse des 17., 18. und 19. Jahrhunderts, Hamburg, Hoffmann und Campe, 1949 7. Philip Ziegler (1988). The Sixth Great Power: Barings 1762–1929. London: Collins. ISBN 0-00-217508-8. 8. Frederic Morton: The Rothschilds: Portrait of a Dynasty, ISBN 1-56836-220-X 9. Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company. 10. Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum 11. Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42.doi:10.1336/0275967778. ISBN 978-0-275-96777-2. Retrieved 2009-03-12. "The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407." 12. de Albuquerque, Martim (1855). Notes and Queries. London: George Bell. pp. 431. 13. United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431 14. (Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong. 15. e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70. 16. "How Banks Make Money". The Street. Retrieved 2011-09-08.
Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct. The oldest bank still in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the presidency banks acted as quasicentral banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.
History In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC).[1][2] Later during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another.
Colonial era During the colonial era merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras andPondicherry, then a French possession, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under-capitalised and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were uniiified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in
this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914–1918) through the end of the Second World War (1939–1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Num ber Ye ar s of bank s that faile d 19 13 19 14 19 15 19 16 19 17 19 18 12 274 Author ised capital (Rs. Lakhs) Pai dup Cap ital (Rs. Lak hs) 35
42
710
109
11
56
5
13
231
4
9
76
25
7
209
1
Post-Independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged amixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[4]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
Nationalisation in the 1960s
Banks Nationalisation in India: Newspaper Clipping, Times of India, July 20, 1969 Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the
intention of the Government of India in the annual conference of the All India Congress Meeting
[5]
in
a
paper
entitled "Stray
thoughts
on
Bank
Nationalisation." The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country.[5] Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
Liberalisation in the 1990s In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more.
Current period By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and
personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[6][7][8]
Adoption of banking technology The IT revolution had a great impact in the Indian banking system. The use of computers had led to introduction of online banking in India. The use of the modern innovation and computerisation of the banking sector of India has increased many fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.
Number of branches of scheduled banks of India as of March 2005 The RBI set up a number of committees to define and coordinate banking technology. These have included:
In 1984 formed the Committee on Mechanisation in the Banking Industry (1984)[9] whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee
[10]
were This
introducing MICR technology in all the banks in the metropolis in India. provided use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988)[11] headed by Dr. C.R. Rangarajan which emphasized that settlement operation must be computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made Operational. It also focused on computerisation of branches and increasing
connectivity among branches through computers. It also suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and computerisation began from 1993 with the settlement between IBA and bank employees' association.[12]
In 1994, Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in the Banking Industry (1994)[13] was set up under chairman Shri WS Saraf. It emphasized Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all banks with more than 100 branches.
In 1995, Committee for proposing Legislation On Electronic Funds Transfer and other Electronic Payments (1995)[14] again emphasized EFT system.[12]
Number of ATMs of different Scheduled Commercial Banks Of India as on end March 2005 Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.[15] The New Private Sector Banks in India is having the largest numbers of ATMs which is followed by off-site ATMs belonging to SBI and its subsidiaries and then it is followed by New Private Banks, Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India.[12]
iii
Branches and ATMs of Scheduled Commercial Banks as on end March 2005[12] N u O n O f T o
B an
k ty pe
m b e r
s i t e
f s i t e
t a l
A T M
o f A T b r a n c h e s N ati on ali se d ba nk s St at es ba nk of In di 1 3 6 6 1 3 3 6 2 7 3 2 0 5 M s
A T M s
s
1 5 6 7
4 7 7 2
1 5 4 8
3 6 7 2
5 2 2 0
a Ol d pri va te se ct or ba nk s N e w pri va te se ct or ba nk s Fo rei gn ba nk s 2 4 2 2 1 8 5 8 2 8 0 0 1 6 8 5 1 8 8 3 3 7 2 9 5 6 1 2 4 5 1 1 1 2 4 1
8 0 0
4 4 1
Banking in its modern sense evolved in rich cities of Renaissance Italy, such as Florence, Venice and Genoa. In the history of banking, a number of banking dynasties
[3] [4]
—
[5] [6]
among
[7] [8]
them
notably Medici, Fugger, Welser, Berenberg, Baring and Rothschild —have played a central role over many centuries. Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Sialkot Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe.[9] One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397.[10] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[11]
Origin of the word
The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during
the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[12]
One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The
coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table and a bank. Another possible origin of the word is from the Sanskrit words ( ) 'byaya'
(expense) and 'onka' (calculation) = byaya-onka. This word still survives in Bangla, which is one of Sanskrit's child languages. + = . Such expense
calculations were the biggest part of mathematical treatises written by Indian mathematicians as early as 500 B.C.
Definition The definition of a bank varies from country to country. See the relevant country page (below) for more information. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:[13]
conducting current accounts for his customers, paying cheques drawn on him/her, and collecting cheques for his/her customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is organized or regulated.
The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the
actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:
"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).
"banking business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; 2. paying or collecting checks drawn by or paid in by customers.[14] Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.[15]
Banking Standard activities
Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire
transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment
services such as remittance companies are normally not considered as an adequate substitute for a bank account.
Channels Banks offer many different channels to access their banking and other services:
Automated Teller Machines A branch is a retail location Call center Mail: most banks accept cheque deposits via mail and use mail to communicate to
their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking
transactions
Online banking is a term used for performing multiple transactions, payments etc.
over the Internet
Relationship Managers, mostly for private banking or business banking, often
visiting customers at their homes or businesses
Telephone banking is a service which allows its customers to perform transactions
over the telephone with automated attendant or when requested withtelephone operator
Video banking is a term used for performing banking transactions or professional
banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch clarification
Business model A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and
dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.
In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability).
Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.
Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit- debit - cards. This helps in making profit and facilitates economic development as a whole.[16]
Banks in the economy Economic functions
The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.
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1.
i
Boland, Vincent (2009-06-12). "Modern dilemma for world’s oldest bank". Financial Times. Retrieved 23 February 2010.
2. The world's second oldest bank—and its plans for the future, thegatewayonline.com 3. Christopher Hibbert (1975). The House of Medici: Its Rise and Fall. Morrow. ISBN 0-688-00339-7. 4. Mark Häberlein (2012). The Fuggers of Augsburg: Pursuing Wealth and Honor in Renaissance, University of Virginia Press, ISBN 0813932580
5. Richard Ehrenberg: Das Zeitalter der Fugger. Geldkapital und Creditverkehr im 16. Jahrhundert; Bd. 1: Die Geldmächte des 16. Jahrhunderts; Hildesheim: Olms, 1963 ( = Jena: Fischer, 1898); S. 96.195.212; Pius Malekandathil: The Germans, the Portuguese and India; Periplus Parerga 6; Münster: LIT, 1999; ISBN 38258-4350-5; S. 47ff. 6. Percy Ernst Schramm, Kaufleute zu Haus und über See. Hamburgische Zeugnisse des 17., 18. und 19. Jahrhunderts, Hamburg, Hoffmann und Campe, 1949 7. Philip Ziegler (1988). The Sixth Great Power: Barings 1762–1929. London: Collins. ISBN 0-00-217508-8. 8. Frederic Morton: The Rothschilds: Portrait of a Dynasty, ISBN 1-56836-220-X 9. Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company. 10. Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum 11. Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42.doi:10.1336/0275967778. ISBN 978-0-275-96777-2. Retrieved 2009-03-12. "The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407." 12. de Albuquerque, Martim (1855). Notes and Queries. London: George Bell. pp. 431. 13. United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431 14. (Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong. 15. e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70. 16. "How Banks Make Money". The Street. Retrieved 2011-09-08.
Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct. The oldest bank still in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the presidency banks acted as quasicentral banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.
History In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC).[1][2] Later during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another.
Colonial era During the colonial era merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras andPondicherry, then a French possession, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under-capitalised and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were uniiified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in
this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914–1918) through the end of the Second World War (1939–1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Num ber Ye ar s of bank s that faile d 19 13 19 14 19 15 19 16 19 17 19 18 12 274 Author ised capital (Rs. Lakhs) Pai dup Cap ital (Rs. Lak hs) 35
42
710
109
11
56
5
13
231
4
9
76
25
7
209
1
Post-Independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged amixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[4]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
Nationalisation in the 1960s
Banks Nationalisation in India: Newspaper Clipping, Times of India, July 20, 1969 Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the
intention of the Government of India in the annual conference of the All India Congress Meeting
[5]
in
a
paper
entitled "Stray
thoughts
on
Bank
Nationalisation." The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country.[5] Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
Liberalisation in the 1990s In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more.
Current period By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and
personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[6][7][8]
Adoption of banking technology The IT revolution had a great impact in the Indian banking system. The use of computers had led to introduction of online banking in India. The use of the modern innovation and computerisation of the banking sector of India has increased many fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.
Number of branches of scheduled banks of India as of March 2005 The RBI set up a number of committees to define and coordinate banking technology. These have included:
In 1984 formed the Committee on Mechanisation in the Banking Industry (1984)[9] whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee
[10]
were This
introducing MICR technology in all the banks in the metropolis in India. provided use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988)[11] headed by Dr. C.R. Rangarajan which emphasized that settlement operation must be computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made Operational. It also focused on computerisation of branches and increasing
connectivity among branches through computers. It also suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and computerisation began from 1993 with the settlement between IBA and bank employees' association.[12]
In 1994, Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in the Banking Industry (1994)[13] was set up under chairman Shri WS Saraf. It emphasized Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all banks with more than 100 branches.
In 1995, Committee for proposing Legislation On Electronic Funds Transfer and other Electronic Payments (1995)[14] again emphasized EFT system.[12]
Number of ATMs of different Scheduled Commercial Banks Of India as on end March 2005 Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.[15] The New Private Sector Banks in India is having the largest numbers of ATMs which is followed by off-site ATMs belonging to SBI and its subsidiaries and then it is followed by New Private Banks, Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India.[12]
iii
Branches and ATMs of Scheduled Commercial Banks as on end March 2005[12] N u O n O f T o
B an
k ty pe
m b e r
s i t e
f s i t e
t a l
A T M
o f A T b r a n c h e s N ati on ali se d ba nk s St at es ba nk of In di 1 3 6 6 1 3 3 6 2 7 3 2 0 5 M s
A T M s
s
1 5 6 7
4 7 7 2
1 5 4 8
3 6 7 2
5 2 2 0
a Ol d pri va te se ct or ba nk s N e w pri va te se ct or ba nk s Fo rei gn ba nk s 2 4 2 2 1 8 5 8 2 8 0 0 1 6 8 5 1 8 8 3 3 7 2 9 5 6 1 2 4 5 1 1 1 2 4 1
8 0 0
4 4 1
