Structure & Regulatory
Framework of Banking in
India
Garima Goswami
Assistant professor of Law
Centre Head- GNLU Centre for Banking and Financial Laws
Gujarat National Law University
Let's Retrograde
What banking was?
What it is today?
Where it is today?
How have we reached to this
phase?
What banking was?
Origin:
➢The word of bank is derived from the Italian word ‘banco’,(which means
bench) which is derived from German word ‘back’ meaning a joint stock fund.
➢The term bankrupt and broke is similarly derived from banca rotta, which refers
to an out of business bank, having its bench physically broken.
➢Money lenders in Northern Italy originally did business in open areas or big
open rooms with each lender working from his own bench or table.
➢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 Genoa.
➢ The Bardi and Peruzzi families dominated banking in 14th century in Florence,
establishing branches in many other parts of Europe. Perhaps the most famous
Italian bank was the Medici bank, set up by Giovanni
Medici in 1397.
➢The earliest known state deposit bank, Banco di San Giorgio (Bank of St.
George), was founded in 1407 at Genoa, Italy.
Phases of Indian Banking System
i. Early phase from 1720 to 1969 of Indian banks.
ii. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
iii. New phase of Indian Banking System with the advent of Indian Financial and
Banking Sector Reforms after 1991.
History of Banking in India:
➢According to the Central Banking Enquiry
Committee (1931), money lending activity in India
could be traced back to the Vedic period, i.e.,
2000 to 1400 BC.
➢ Smriti period which followed the vedic period
and epic age
➢ Mostly rudimentary banking
➢Kautilya’s Arthashastra , dating back to 400 BC
contained references to creditors, lenders and
lending rates.
➢Mr. W.E. Preston, member, Royal Commission on
Indian Currency and Finance set up in 1926,
observed “....it may be accepted that a system of
banking that was eminently suited to India’s then
requirements was in force in that country many
centuries before the science of banking became
an accomplished fact in England.”
➢The beginning of commercial banking of the joint stock variety that
prevailed elsewhere in the world could be traced back to the early 18th
century
➢The western variety of joint stock banking was brought to India by the
English Agency houses of Calcutta and Bombay
➢The first bank of a joint stock variety was Bank of Bombay, established
in 1720 in Bombay
➢This was followed by Hindustan Bank in Calcutta, which was
established in 1770
➢The General Bank of Bengal and Bihar, which came into existence in
1773
➢Modern Concept of Banking in India
originated in the last decades of the 18th
century
➢The first banks were The General Bank of
India, 1786
➢Bank of Hindustan, which started in 1790
➢Three Presidency Banks
➢Established by The East India Co.
[Link] of Bengal (1809) was formed as Bank
of Calcutta in 1806 and renamed as Bank
of Bengal in 1809
[Link] of Bombay (1840)
[Link] of Madras (1843)
➢These three banks were amalgamated in 1921 and
Imperial Bank of India was established which started as
private shareholders bank, mostly European shareholders
,which after the Independence of India became the State
Bank of India in 1955.
➢In 1865 Allahabad Bank was established and first time
exclusively by Indians, Punjab National Bank Ltd. was set up
in 1894. Between 1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up.
➢1905-Swadeshi Movement…….
➢1906-13 was a period of boon for the Indian Banking
➢1913-24 was the period of bank failures (1913-17,78 banks
failed. Further, in 1922,1923 and 1924 there were 15, 20 and
18 banks failed respectively)
This resulted into:
❑ Panic and instability
❑ Need was felt for a strong central Bank
Therefore…………….
Reserve Bank Bill,1927
Central Banking Enquiry Committee,1931
RBI Act,1934
Establishment of the RBI,1935
Nationalization of the RBI, on 1 January 1949 under the
terms of the Reserve Bank of India (Transfer to Public
Major steps to regulate banking were:
➢1948-Nationalisation of RBI
➢1949-Banking Companies Act
➢Requirement of licence from RBI
➢However, despite the above steps, banks in
India(except SBI)continued to be owned and
operated by Private players
➢Thus, nationalisation………
Bank Nationalization
➢Nationalization of banks in India was an
important phenomenon.
➢Private sector ownership( except RBI & SBI)
➢private commercial banks were lacking in
fulfilling the social & developmental goals of
banking.
➢Industries' share in loans almost doubled
between 1951 and 1968, from 34% to 68%.
On the other hand, agriculture which was a
major occupation received less than 2% of
total credit
➢The Government of India nationalized the 14 largest commercial banks with
effect from the midnight of July 19, 1969 by promulgating the Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969,which
became an act in August 1969.
➢All commercial banks with a deposit base over Rs.50 cr. were nationalized.
➢1980 -Nationalization of six banks with deposits over 200 cr. Under the Banking
Companies (Acquisition and Transfer of Undertakings) Act,1980
Social control over banks
➢Advances to the large and medium scale
industries and the priority sectors such as
agriculture, small-scale industries and exports were
neglected.
➢The chairmen and directors of banks were mostly
industrialists.
➢To overcome these deficiencies found in the
working of the banks, the Banking Laws
(Amendment) Act was passed in December 1968
and came into force on 1-2-1969. It is known as the
scheme of 'social control' over the banks.
The then deputy Prime Minister, Mr. Morarji
Desai made a statement in the Parliament on
the eve of introducing the bill to amend the
Banking Regulation Act.
He explained that the aim of social control
was, "to regulate our social and economic
life so as to attain the optimum growth rate
for our economy and to prevent at the same
time monopolistic trend, concentration of
economic power and misdirection of
resources".
Objectives
➢Class to mass banking
➢Social Welfare
➢Controlling Private Monopolies
➢Expansion of Banking
➢Reducing Regional Imbalance
➢Priority Sector Lending
➢Developing Banking Habits
➢Increase in efficiency and profits
Demerits & Limitations
➢Inadequate banking facilities
➢Limited resources mobilized and allocated
➢Political and Administrative Interference
➢Increased expenditure
➢Lowered efficiency and profits
➢Weak infrastructure
➢ Poor competitiveness
Bank Nationalization case
➢R.C. Cooper v. Union of India AIR 1970 564
NARASIMHAM
COMMITTEE
➢In the year 1991 RBI proposed the
committee chaired by M. Narasimham,
former RBI Governor to review the Financial
System & aspects relating to the Structure,
Organization, Procedures and Functioning
of the financial system in India.
➢Constituted in 1991, the Committee
submitted two reports, in 1991 and 1998,
which laid significant thrust on enhancing
the efficiency and viability of the banking
sector.
NARASIMHAM COMMITTEE REPORT 1991
The 1st Narasimham Committee was set up by Manmohan Singh as India’s
Finance Minister on 14th August 1991.A nine member committee was set up
under the chairmanship of M. Narasimham, a former Governor of Reserve Bank
of India. The Committee submitted its Report to the Finance Minister in
November 1991.
Major Recommendations:
➢Reduction in the Statutory Liquidity Ratio
➢Reduction in the Cash Reserve Ratio
➢Redefining the priority sector
➢Asset Classification and defining the Non Performing Assets
➢Tribunals for recovery of Loans
➢Tackling doubtful debts
➢ Restructuring the banks
➢Allow entry of the new private banks
➢The 2nd Narasimham Committee was set up by P. Chidambaram as Finance
Minister of India in December 1997. It is also known as the Committee on Banking
Sector Reforms. The Committee submitted the report to the Finance Minister in
April 1998 .
➢Review Progress & Implementation of banking reforms Further Strengthening of
financial institutions of India Focus on -Size of the Banks, Capital Adequacy Ratio.
Major Recommendations:
➢Greater autonomy was proposed for the public sector banks – in both
ownership & management
➢Merger of the strong banks
➢Raising the capital adequacy ratio to 9% by 2000 and 10% by 2002
➢Need for zero non-performing assets for all Indian banks
➢A need for creation of Asset Reconstruction Funds or Asset Reconstruction
Companies
➢Entry of Foreign Banks
➢ Computerization process in public sector banks
➢Universal Banking
Impact:
➢Banking Sector Reforms' opened the gates to the private sector & to foreign
banks which in turn significantly increased the level of competition .
➢Asset reconstruction co.
➢DRT, Act
➢SARFAESI , Act
➢Introduction of Basel Norms
➢Redefining of priority sectors
➢Merger of banks.
➢Modernization and computerization
➢Virtual Banking
➢Universal Banking , etc.