BANKING AND INSURANCE Notes - Finance and Business

ORIGIN OF BANKING

It is of Germanic origin though some persons trace its origin to the French word ‘Banqui’ and the Italian word ‘Banca’. It referred to a bench for keeping, lending, and exchanging of money or coins in the market place by money lenders and money changers.

The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157

A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is a connection between customers that have capital deficits and customers with capital surpluses.

HISTORY OF BANKING IN INDIA

PRE INDEPENDENCE PERIOD (1786- 1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then, Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832.

During the Pre Independence period over 600 banks had been registered in the country, but only a few managed to survive.

Following the path of Bank of Hindustan, various other banks were established in India. They were:

During the British rule in India, the East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “Imperial Bank of India.”

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank.

Given below is a list of other banks which were established during the Pre-Independence period:

Reasons as to why many major banks failed to survive during the pre-independence period, the following conclusions can be drawn:

POST-INDEPENDENCE PERIOD (1947-1991)

At the time, when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance.

With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949.

Following it was the formation of State Bank of India in 1955 and other 14 banks were nationalised between the time duration of 1969 to 1991. These were the banks whose national deposits were more than 50 crores.

Given below is the list of these 14 Banks nationalised in 1969:

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks included:

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959:

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which was merged in 2008 and State Bank of Indore, which was merged in 2010.

IMPACT OF NATIONALISATION

There were various reasons why the Government chose to nationalise the banks. Given below is the impact of Nationalising Banks in India:

• This lead to an increase in funds and thereby increasing the economic condition of the country
• Increased Efficiency
• Helped in boosting the rural and agricultural sector of the country
• It opened up a major employment opportunity for the people
• The Government used profit gained by Banks for the betterment of the people
• The competition was decreased, and work efficiency had increased

This post Independence phase was the one that led to major developments in the banking sector of India and also in the evolution of the banking sector.

LIBERALISATION PERIOD (1991-TILL DATE)

Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking sector development plays a significant role.

To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the Indian banking industry.

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

The other measures taken include:

• Setting up of branches of the various Foreign Banks in India
• No more nationalisation of Banks could be done
• The committee announced that RBI and Government would treat both public and private sector banks equally
• Any Foreign Bank could start joint ventures with Indian Banks
• Payments banks were introduced with the development in the field of banking and technology
• Small Finance Banks were allowed to set their branches across India
• A major part of Indian banking moved online with internet banking and apps available for fund transfer

Thus, the history of banking in India shows that with time and the needs of people, major developments have been done in the banking sector with an aim to prosper it.

NEW MERGERS INCLUDE:

1. Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender.
2. Canara Bank and Syndicate Bank will merge.
3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank.
4. Indian Bank will merge with Allahabad Bank.

WHY MERGER IS GOOD? – BENEFITS FOR VARIOUS STAKEHOLDERS:

For Banks:

1. Small banks can gear up to international standards with innovative products and services with the accepted level of efficiency.
2. PSBs, which are geographically concentrated, can expand their coverage beyond their outreach.
3. A better and optimum size of the organization would help PSBs offer more and more products and services and help in integrated growth of the sector.
4. Consolidation also helps in improving the professional standards.
5. This will also end the unhealthy and intense competition going on even among public sector banks as of now.
6. In the global market, the Indian banks will gain greater recognition and higher rating.
7. The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
8. This will also reduce unnecessary interference by board members in day to day affairs of the banks.
9. After mergers, bargaining strength of bank staff will become more and visible.
10. Bank staff may look forward to better wages and service conditions in future.
11. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.

For economy:

1. Reduction in the cost of doing business.
2. Technical inefficiency reduces.
3. The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
4. After merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably.
5. Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
6. A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
7. Customers will have access to fewer banks offering them wider range of products at a lower cost.
8. Mergers can diversify risk management.

For government:

1. The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
2. This will also help in meeting more stringent norms under BASEL III, especially capital adequacy ratio.
3. From regulatory perspective, monitoring and control of less number of banks will be easier after mergers.

Concerns associated with merger:

1. Problems to adjust top leadership in institutions and the unions.
2. Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
3. Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances.
4. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
5. When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.