INTRODUCTION OF BANKING INDUSTRY

A bank i s l i c e n s e b y a government. Its primary activity is to

lend money. Many other fi nancial activities were allowed
over time. For example banks are important players in
financial markets and offer financial services such a s
i n v e s t m e n t f u n d s I n so m e co u n tr i e s s u c h a s Germany,
banks
have
h i s t o r i c a l l y o w n e d m a j o r s t a ke s i n i n d u s tr i a l co r p o r a t i o
n s w h i l e i n o t h er countries such as the United States banks
are prohibited from owning non-financial companies. In Japan,
banks
are
usually
the
nexus
of
a
crossshareh o l d i n g e n t i t y k n o w n a s t h e zaibatsu. InFrance,banc
assurance is p re v a l e n t , a s m o s t b a n k s o ff e r i n s u r a n c e
s e r v i c e s ( a n d n o w re a l e s t a t e services) to their clients. T h e
l e v e l o f government regulation of the banking industry
varies widely, with counties such as Iceland, th e United
Kingdom and the United States having relatively light
regulation
of
the
banking
sector,
and
countries
suchasChinahaving relatively heavier regulation (including
stricter regulationsregarding the level of reserves).

History

Banks have influenced economies and politics for centuries.

Historically, thep r i m a r y p u r p o s e o f a b a n k w a s t o p ro v i d e
loans
to
tr a d i n g
c o m p a n i e s . B a n k s p ro v i d e d f u n d s t o a l l o w b u s i n e s s e s t
o p u rc h a s e i n v e n t o r y , a n d co l l e c t e d t h o s e f u n d s b a c k
w i t h i n t e re s t w h e n t h e g o o d s w e re so l d . Fo r centuries,
the banking industry only dealt with businesses, not
consumers.Banking services have expanded to include services
directed at individuals,and risk in these much smaller transactions
are pooled..

Origin of the word

Silver drachm coin from Trapezus, 4th century BC

The name
bank
derives from the Italian word
banco
"desk/bench", usedduring theRenaissancebyFlorentineb a n ke r s ,
w h o u s e d t o m a ke t h e i r transactions above a desk
covered by a green tablecloth. However, there are traces of
banking activity even in ancient times.

ABOUT BANKING:-

Section
5(b)
of
the
Banking
Regulation
Act,
1949d e fi n e s b a n k i n g a s th e a c c e p t i n g , f o r th e p u r p o s e
o f l e n d i n g o r investment, of deposits of money from the p
ublic, repayable on demand or otherwise, and withdrawal by c
heque, draft, order or otherwise.Section 5(c) of the Banking
Regulation Act, 1949 defines a banking company asany
company which transacts the business of banking in India.

Definition of Banking:-

The definition of a bank varies from country to country.Under

English common law
, a banker is defi ned as a person who carries on the business
of banking, which is specified as:
Conducting current accounts for his customers
Paying cheques drawn on him, and
Collecting cheques for his customers.The borrowing, raising
or taking up of money, the lending or advancing of moneyeither
with or without security;Ac t i n g a s a g e n t s f o r a n y
g o v e rn m e n t o r l o c a l a u t h o r i t y o r a n y o t h er p er s o n
o r persons.Contracting for public and private loans and
negotiating and issuing the same.The effecting, insuring,
guaranteeing,
underwriting,
participating
in
managing
andcarrying out of any issue, public or private, of state, municipal
or other loans or of sh a re s , s to c k , d e b e n t u re s o r

d e b e n t u re
stock
of
any
company,
corporation
o r association and the lending of money for the purpose of any
such issue

Examples of statutory definitions

"banking business" means the business of receiving money on

current or d e p o s i t a c c o u n t ,
paying and collecting
c h e q u e s d r a w n b y o r p a i d i n b y customers, the making of
advances
to
customers,
and
includes
such
other b u s i n e s s a s t h e A u t h o r i t y m a y p r e s c r i b e f o r t
h e p u r p o s e s o f t h i s A c t ; (Banking Act (Singapore), Section
2, Interpretation).
"banking business" means the business of either or both of the
following:
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;
Paying or collecting cheques drawn by or paid in by customers
Since the advent of EFTPOS(Electronic Funds Transfer at
Point Of Sale), direct credit, direct debit and internet banking, the
cheque has lost itsprimacy in most banking systems as a
payment
instrument.
This
has
ledl e g a l t h e o r i s t s t o s u g g e s t t h a t t h e c h e q u e b a s e
d d e fi n i t i o n s h o u l d b e 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 cheques

Commercial role:-

The commercial role of banks is not limited to banking, and

includes:
issue of banknotes(promissory notesissued by a banker and
payable tobearer on demand)

processing of payments by way of telegraphic tran

s f e r , EFTPOS,internet banking or other means
issuingbank draftsandbank cheques
accepting money onterm deposit
lending money by way of overdraft, installment loan or otherwise
providing documentary and standbyl e t t er s o f c re d i t (trade
fi nance ),guarantees,performance bonds, securities underwriting
commitments andother forms of off-balance sheet exposures
safekeeping of documents and other items insafe deposit boxes
currency exchange
acting as a 'financial supermarket' for the sale, distribution or
brokerage,with or without advice, of insurance, unit trusts and
similar financial products

Economic functions:The economic functions of banks include:

1)Issue of money, in the form of banknotesand current accounts
subjecttochequeor payment at the customer's order. These claims
on banks canact as money because they are negotiable
and/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 cheque that the payee may bankor
cash.
2)Netting and settlement of payments banks act as both
collection
andp a y i n g a g e n t s f o r c u s t o m e r s , p a r t i c i p a t i n g i n i n
t e r b a n k c l e a r i n g a n d settlement systems to collect, present,
be
presented
with,
and
pay
paymenti n s t r u m e n t s . T h i s e n a b l e s b a n k s t o e c o n o m i
s e o n r e s e r v e s h e l d f o r settlement of payments, since
inward and outward payments off set eachother. It also
enables
the
offsetting
of
payment
flows
between
geographicalareas, reducing the cost of settlement between
them.
3)Credit intermediation banks borrow and lend back-toback on their own account as middle men

4)Credit quality improvement banks lend money to ordinary

commerciala n d p e r s o n a l b o r r o w e r s ( o r d i n a r y c r e d i t q
u a l i t y ) , b u t a r e h i g h q u a l i t y borrowers. The improvement
comes from diversification of the bank's assetsand capital which
provides a buffer to absorb losses without defaulting on
itsobligations.
5)Maturity transformation banks borrow more on demand
debt ands h o r t t e rm d e b t, b u t p ro v i d e m o re l o n g t e rm
l o a n s . I n o t h e r w o rd s , t h e y borrow short and lend long.
With a stronger credit quality than most other borrowers,
banks can do this by aggregating issues (e.g. accepting
depositsand
issuing
banknotes)
and
redemptions
(e.g.
withdrawals ).

Law of banking:Banking law is based on a contractual analysis of the relationship

betweenthe
bank
(defined above) and the
customer
defined as any entity for whichthe bank agrees to conduct
an account.The law implies rights and obligations into this
relationship
as
follows:1 . T h e
b a n k a c c o u n t
b a l a n c e
i s t h e
fi n a n c i a l
p o s i t i o n
b e t w e e n the bank and the customer:
when the account is in credit, the bank owes theb a l a n c e to th e
c u s t o m e r ; w h e n t h e a c c o u n t i s o v e rd r a w n , t h e
c u s t o m e r owes the balance to the bank.
2 . T h e
b a n k
a g r e e s
t o
p a y
t h e
c u s t o m e r ' s
c h e q u e s
u p
t o
t h e amount standing to the credit of the
customer's account, plus any agreedoverdraft limit
.3 . T h e b a n k
m a y n o t p a y f r o m
t h e
c u s t o m e r ' s
a c c o u n t w i t h o u t

a mandate from the customer, e.g. a cheque drawn by the

customer.
4 . T h e
b a n k a g r e e s
t o p r o m p t l y
c o l l e c t
t h e
c h e q u e s
d e p o s i t e d to
the customer's account as the customer's agent, a
n d t o c r e d i t t h e proceeds to the customer's account.
5 . T h e
b a n k
h a s
a
r i g h t
t o
c o m b i n e
t h e
c u s t o m e r ' s
a c
c o u n t s , since each account is just an aspect of the same
credit relationship.
6.The
bank
has
alienon
cheques
deposited
to
the
customer'saccount, to the extent that the customer is indebted to
the bank.
7 . T h e
b a n k m u s t n o t
d i s c l o s e
d e t a i l s
o f t r a n s a c t i o n
s
t h r o u g h the
customer's
accountunless
the
customer consents, there is a public duty to disclose, the
bank's interests require it, or the law demands it.

Entry regulation:Currently in most jurisdictions commercial

b a n k s a r e r e g u l a t e d b y government entities and
require
a
special
bank
licence
to
operate.U s u a l l y t h e d e fi n i t i o n o f t h e b u s i n e s s o
f b a n k i n g f o r t h e p u r p o s e s o f regulation
is
extended to include acceptance of deposits, even if
they arenot repayable to the customer's orderalthough
money lending, by itself, isgenerally not included in the
definition.U n l i ke m o s t o t h e r r e g u l a t e d i n d u s t r i e s , t
h e r e g u l a t o r i s t y p i c a l l y a l s o a participant
in
the
market, i.e. a government-owned (central) bank.
Centralb a n k s a l s o t y p i c a l l y h a v e a m o n o p o l y
on the business of issuing
banknotes.

However, in some countries this is not the case. In the UK,

for example, the
Fina ncial Services Authority
licenses banks, and somec o m m e r c i a l b a n k s ( s u c
h as the
Bank of Scotland) i s s u e t h e i r o w n
banknotes
in addition to those issued by the
Bank of England
, t h e U K government's central bank.Some types of
fi nancial institution, such as
building societies
and
credit unions
, may be partly or wholly exempt from bank licence
requirements,and therefore regulated under separate
rules.
The requirements for the issue of a bank licence vary
between jurisdictionsbut typically include:.
1
)
M
i
n
i
m
u
m
c
a
p
i
t
2 . M i n i m u m
c a p i t a l
r a t i o 'Fit and Proper' requirements for the
bank's controllers, owners, directors,and/or senior
officersThe requirements for the issue of a bank licence
varybetween jurisdictions but typically include:
3 . ' F i t
a n d
P r o p e r '
r e q u i r e m e
n t s
f o r
t h e
b a n k ' s
c o n t r o l l e
r s , owners, directors, and/or senior officers
4 . A p p r o v a l
o f
t h e
b
a n k ' s
5.Business plan as being sufficiently prudent.The
economic functions of banks include:
I s s u e o f m o n e y, i n t h e f o r m o f
banknotes
and current accountssubject to
cheque
or payment at the customer's order. These claims
onbanks can act as money because they are negotiable

and/or repayable ondemand, and hence valued at

par. They are effectively transferable by meredelivery, in
the case of
banknotes
, or by drawing a cheque that the payee may bank or
cash.
Netting and settlement of payments banks act as
both collectionand paying agents for customers,
participating in interbank clearing and settlement
systems to collect, present, be presented with, and pay
paymenti n s t r u m e n t s . T h i s e n a b l e s b a n k s t o e c o
n o m i s e o n r e s e r v e s h e l d f o r settlement
of
payments, since inward and outward payments off set
eachother. It also enables the offsetting of payment flows
between
geographicalareas,
reducing
the
cost
of settlement between them.
Credit intermediation banks borrow and lend back-toback on their own account as middle men
C r e d i t q u a l i t y i m p r o v e m e n t b a n k s l en d m o n e y t
o o r d i n a r y commercial
and
personal
borrowers
(ordinary
credit
quality),
but
are
high quality
borrowers. The improvement comes from diversification
of the bank's

a s s e t s a n d c a p i t a l w h i c h p r o v i d e s a b u ff e r t o
absorb losses withoutdefaulting on its obligat
i o n s . H o w e v e r, b a n k n o t e s a n d d e p o s i t s a r e gen
erally unsecured; if the bank gets into diffi culty and
pledges assets assecurity, to raise the funding it
needs to continue to operate, this puts thenote
holders and depositors in an economically subordinated
position.
a s s e t s a n d c a p i t a l w h i c h p r o v i d e s a b u ff e r t o
absorb losses withoutdefaulting on its obligat
i o n s . H o w e v e r, b a n k n o t e s a n d d e p o s i t s a r e gen
erally unsecured; if the bank gets into diffi culty and

pledges assets assecurity, to raise the funding it

needs to continue to operate, this puts thenote
holders and depositors in an economically subordinated
position.
10.
Maturity transformation
:-Banks borrow more on demand debt ands h o r t t e r m
d e b t , bu t p r o v i d e m o r e l on g t e r m l o a n s . In o t h e r
w o r d s , t h e y borrow short and lend long. With a
stronger credit quality than most other borrowers,
banks can do this by aggregating issues (e.g. accepting
depositsand issuing banknotes) and redemptions (e.g.
withdrawals
and
redemptionso f b a n k n o t e s ) , m a i n t a i n i n g r e s e r v e s o f
c a s h , i n v e s t i n g i n m a r ke t a b l e s e c u r i t i e s t h a t c a n
be readily converted to cash if needed, and
r a i s i n g replacement funding as needed from various
sources (e.g. wholesale cashmarkets and securities
markets).Banking law is based on a contractual analysis of
the relationship betweenthe
bank
(defi ned above) and the
Customer:d e fi n e d a s a n y e n t it y f o r which the bank agrees
to conduct an account.The law implies rights and
obligations into this relationship as follows:11.. The bank
agrees to promptly collect the cheques deposited to
thecustomer's account as the customer's agent, and to
credit the proceeds tothe customer's account.12 . The
banks have a right to combine the customer's
accounts, sinceeach account is just an aspect of the
same credit relationship.13. The bank has alienon cheques
deposited to the customer's account,to the extent that the
customer is indebted to the bank.1 4 . T h e b a n k m u s t
not disclose details of transactions through
t h e customer's accountunless the customer consents,
there is a public duty todisclose, the bank's interests
require it, or the law demands it.
16

15 . The banks must not close a customer's account

without
reasonablenotice,
since
cheques
are
outstanding in the ordinary course of business for several
days.These
implied
contractual
terms
may
be
modifi ed by express agreementbetween the customer
and the bank. The statutes and regulations in
forcew i t h i n a p a r t i c u l a r j u r i s d i c t i o n m ay a l s o
m o d i f y t h e a b o v e t e r m s a n d / o r create new rights,
obligations or limitations relevant to the bankcustomer relationship.C u r r e n t l y i n m o s t j u r i s d i c
t i o n s c o m m e r c i a l b a n k s a r e r e g u l a t e d b y go
vernment entities and require a special bank licence to
operate.U s u a l l y t h e d e fi n i t i o n o f t h e b u s i n e s s o
f b a n k i n g f o r t h e p u r p o s e s o f regulation
is
extended to include acceptance of deposits, even if
they arenot repayable to the customer's orderalthough
money lending, by itself, isgenerally not included in the
definition.U n l i ke m o s t o t h e r r e g u l a t e d i n d u s t r i e s , t
h e r e g u l a t o r i s t y p i c a l l y a l s o a participant
in
the
market, i.e. a government-owned (central) bank.
Centralbanks also typically have a monopoly on the
business of issuingbanknotes.However, in some countries
this is not the case. In the UK, for example, theFinancial
Services
Authoritylicences
banks,
and
some
commercial banks( s u ch a s th e Bank of Scotland )
i s s u e t h e i r o w n banknotesin addition tothose issued by
theBank of England, the UK government's central
bank.S o m e t y p e s o f fi n a n c i a l i n s t i t u t i o n , s u ch
a s building societies andcredit unions, may be partly
or wholly exempt from bank licence requirements,
andtherefore regulated under separate rules.

History of Banking in India

The
first
bank
in
India,
though
conservative,
was established in 1786. From 1786t i l l t o d ay, th e
journey
of
In d i a n
B an k i n g
System
can
be
s e g r e g a t e d i n t o t h r e e distinct phases. They are as
mentioned below:-Early phase from 1786 to 1969 of Indian
Banks N a t i o n a l i z a t i o n o f I n d i a n B a n k s a n d u p t o
1 9 9 1 p r i o r t o I n d i a n b a n k i n g s e c t o r Reforms. N e w
p h a s e o f In d i a n B a n k i n g S y s t e m w i t h th e a d v e n t
of
Indian
F in a n c i a l
& Banking Sector Reforms after 1991.To make this writeup more explanatory, I prefi x the scenario as 1)Phase
2)Phase
and 3)Phase

(1)Phase
The General Bank of India was set up in the
y e a r 1 7 8 6 . N e x t c a m e B a n k o f Hindustan and
Bengal Bank. The East India Company established Bank of
Bengal(1809), Bank of Bombay (1840) and Bank of Madras
(1843) as independent unitsand called it Presidency
Banks. These three banks were amalgamated in
1920and Imperial Bank of India was established which
started as private shareholdersbanks, mostly Europeans
shareholders.

In 1865 Allahabad Bank was established and fi rst

time
exclusively
by
Indians,P u n j a b N a t i o n a l B a n k L t d . w a s
s e t u p i n 1 8 9 4 w i t h h e a d q u a r t e r s a t L a h o r e . Betwe
en 1906 and 1913, Bank of India, Central Bank of
India, Bank of Baroda,Canara Bank, Indian Bank, and
Bank of Mysore were set up. Reserve Bank
of I
n
d
i
a
c
a
m
e
i
n
1
9
3
5
.
D u r in g t h e

fi r s t p h a s e t h e g r o w t h w a s v e r y s l o w a n d b a n k s
a l s o e x p e r i e n c e d periodic failures between 1913 and
1948. There were approximately 1100 banks,mostly small.
To streamline the functioning and activities of commercial
banks, theGovernment of India came up with The Banking
Companies Act, 1949 which waslater changed to
Banking Regulation Act 1949 as per amending Act of
1965 (ActNo. 23 of 1965). Reserve Bank of India was
vested
with
extensive
powers
for
thes u p e r v i s i o n o f b a n k i n g i n I n d i a a s
t h e C e n t r al B a n k i n g Au t h o r i t y.

(11)Phase
Government took major steps in this Indian B
a n k i n g S e c t o r R e f o r m a f t e r independence. In 1
955, it nationalized Imperial Bank of India with e
x t e n s i v e banking facilities on a largescale especially in
rural and semi-urban areas. It formed State Bank of India
to actas the principal agent of RBI and to handle banking
transactions of the Union andState Governments all over
the country.Seven banks forming subsidiary of State Bank
of India was nationalized in 1960 on19th July, 1969, major
process of nationalization was carried out. It was the
effort
of the then Prime Minister of India, Mrs. Indira Gandhi.14
major
commercial
banksin
the
country
were nationalized.Second phase of nationalization Indian
Banking Sector Reform was carried out in1980 with seven
more
banks. This
step brought
80% of
the banking segment inIndia
under
Governmentownership.
The following are th e steps taken by th e
G o v e r n m e n t o f I n d i a t o R e g u l a t e Banking Inst
itutions in the Country: 1949: Enactment of Banking Regulation Act.1
955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.

 1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.
1980: Nationalization of seven banks with
deposits
over 200
crore
.After
the
nationalization of banks, the branches of the
public
sector
bank
India
raised
to
approximately
800%
in
deposits
and
a d v a n c e s t o o k a h u g e j u m p b y 11,000%.
Banking in the sunshine of Government ownership
gave the public implicit faith and immense confidence
about the sustainability of these institutions.

(111)Phase

This phase has introduced many more products and

facilities
in
the
banking
sector i n i t s r e f o r m s m e a s u r e . I n 1 9 9 1 , u n d e r t h e
chairmanship of MN a r a s i m h a m , a c o m m i t t e e
was set up by his name which worked for t
h e liberalization of banking practices.The country is
flooded with foreign banks and their ATM stations. Efforts
are beingput to give a satisfactory service to customers.
Phone banking and net banking isintroduced. The entire
system became more convenient and swift. Time is
givenm
o
r
e
i
m
p
o
r
t
a
n
c
e
t
h
a
n
m
o
n
e
y
.
The fi nancial system of
India has shown a great deal of resilience. It is
shelteredfrom any crisis triggered by any external
macroeconomics shock as other EastAsian Countries
suff ered. This is all due to a fl exible exchange rate
regime, theforeign reserves are high, the capital account
is
not
yet
fully
convertible,
and
banksand their customers have limited foreign exchange e
xposure.

INTRODUCTION TO THE
ORGANIZATIONBANKING SYSTEM IN INDIA
The Banking System in India consists of:
1. Reserve Bank
2. Development Banks
3. Public Sector Bank.
4. Foreign Banks
5. Private Sector Banks
6. Cooperative Banks
7. Regional Rural Banks
Reserve Bank of India is the bank that issues and
regulates the issue of currencyin India .The banker to
the Government of India and the State governments.
Itmanages the public debt. It has the obligation to
transact the banking business
of t h e C e n t r a l G o v e r n m e n t . I t u n d e r t a k e s t o
a c c e p t m o n e y o n b e h a l f o f t h e Government
and make payment on its behalf. The bankers bank.
Commercialbanks maintain their current account with the
Reserve Bank of India.The bank that manages the volume
of credit created by the commercial banks toensure price
stability.The bank that manages the external value of the
currency (Indian rupee).
Development Banks:These were set up to give long term fi nance for the
development of the
country.T h e s e a r e t h e I n d u s t r i a l F i n a n c e C o r
p o r a t i o n o f I n d i a a n d t h e I n d u s t r i a l Develop

ment Bank of India, The Industrial Reconstruction

Bank of India and theNational Bank for Agriculture
and Rural Development. A former developmentbank,
the Industrial Credit and Investment Corporation of
India Ltd. by a reversemerger in 2002,became a
normal commercial bank.It is expected that the
other development banks, having outlived their utility
would also be either converted tocommercial banks or
merged with commercial banks.
Public Sector Banks:These are banks which the Government either owns or has
a majority stake in it.T h e l a r g e s t i s t h e S t a t e B a n k o f
India which was formed by the merger of
t h e Presidency Banks the Bank of Bengal, the Bank
of Bombay and the Bank of Madras in 1921. It was
then known as the Imperial Bank. It was nationalized
in
1955 by the passing of the
State Bank of India Act,
1 9 5 5 . I t h a s s e v e n subsidiaries or associates.
Foreign Banks:These are branches of banks incorporated outside India. In
1995/ 96m a n y o t h e r f o r e i g n b a n k s ( o p t i m i s t i c i n v i
ew of Indias liberalization) openedb r a n c h e s i n I
n d i a . H o w e v e r, a f t e r b a n k i n g b e g a n t o b e c o m e
increasinglyc o m p e t i t i v e a n d m a r g i n s b e g a n
t o b e s q u e e z e d c o u p l e d w i t h l a r g e n o n perfor
ming assets, many banks closed their branches
Private Sector Banks:These are banks which are not government owned or
controlled.
Their sharesare freely traded in the Stock Markets.
Cooperative Banks:Cooperative Banks are those that are created by a group
of individual to supporteither a community or a religious
group. They operate in metropolitan, urban andsemi urban
centers to cater to the needs of small borrowers.
Regional Rural Banks:-

These came into being on October 2, 1975 when 5

regional rural banks wereestablished under what
became the Regional Rural Banks Act 1975. These were
24
to bridge the gap in rural credit granting loans and
advances to small and marginalfarmers, artisans, small
entrepreneur and persons of small means engaged
intrade, commerce, industry or
other productive ,activities within their area of operation.
Local Area Banks:Local Area Banks came into existence in 1999 and licenses
were given for thesebanks as it was felt that regular
commercial banks were not fi nancial the
rural/agricultural sector adequately. Licenses were
given to open branches in
threed i s t r i c t s . B r a n c h e s i n u r b a n / s e m i u r b a n
a r e a s w e r e g r a n t e d o n l y a f t e r t e n branches were
established in rural areas/ villages.

Reserve Bank of India is the bank that issues and

regulates the issue of currencyin India .The banker to
the Government of India and the State governments.
Itmanages the public debt. It has the obligation to
transact the banking business
of t h e C e n t r a l G o v e r n m e n t . I t u n d e r t a k e s t o
a c c e p t m o n e y o n b e h a l f o f t h e Government
and make payment on its behalf. The bankers bank.
Commercialbanks maintain their current account with the
Reserve Bank of India.The bank that manages the volume
of credit created by the commercial banks toensure price
stability.The bank that manages the external value of the
currency (Indian rupee).
Development Banks:These were set up to give long term fi nance for the
development of the
country.T h e s e a r e t h e I n d u s t r i a l F i n a n c e C o r

p o r a t i o n o f I n d i a a n d t h e I n d u s t r i a l Develop
ment Bank of India, The Industrial Reconstruction
Bank of India and theNational Bank for Agriculture
and Rural Development. A former developmentbank,
the Industrial Credit and Investment Corporation of
India Ltd. by a reversemerger in 2002,became a
normal commercial bank.It is expected that the
other development banks, having outlived their utility
would also be either converted tocommercial banks or
merged with commercial banks.
Public Sector Banks:These are banks which the Government either owns or has
a majority stake in it.T h e l a r g e s t i s t h e S t a t e B a n k o f
India which was formed by the merger of
t h e Presidency Banks the Bank of Bengal, the Bank
of Bombay and the Bank of Madras in 1921. It was
then known as the Imperial Bank. It was nationalized
in
23
1955 by the passing of the
State Bank of India Act,
1 9 5 5 . I t h a s s e v e n subsidiaries or associates.
Foreign Banks:These are branches of banks incorporated outside India. In
1995/ 96m a n y o t h e r f o r e i g n b a n k s ( o p t i m i s t i c i n v i
ew of Indias liberalization) openedb r a n c h e s i n I
n d i a . H o w e v e r, a f t e r b a n k i n g b e g a n t o b e c o m e
increasinglyc o m p e t i t i v e a n d m a r g i n s b e g a n
t o b e s q u e e z e d c o u p l e d w i t h l a r g e n o n perfor
ming assets, many banks closed their branches
Private Sector Banks:These are banks which are not government owned or
controlled.
Their sharesare freely traded in the Stock Markets.
Cooperative Banks:Cooperative Banks are those that are created by a group
of individual to supporteither a community or a religious

group. They operate in metropolitan, urban andsemi urban

centers to cater to the needs of small borrowers.
Regional Rural Banks:These came into being on October 2, 1975 when 5
regional rural banks wereestablished under what
became the Regional Rural Banks Act 1975. These were
24
to bridge the gap in rural credit granting loans and
advances to small and marginalfarmers, artisans, small
entrepreneur and persons of small means engaged
intrade, commerce, industry or
other productive ,activities within their area of operation.
Local Area Banks:Local Area Banks came into existence in 1999 and licenses
were given for thesebanks as it was felt that regular
commercial banks were not fi nancial the
rural/agricultural sector adequately. Licenses were
given to open branches in
threed i s t r i c t s . B r a n c h e s i n u r b a n / s e m i u r b a n
a r e a s w e r e g r a n t e d o n l y a f t e r t e n branches were
established in rural areas/ villages.