BANKING STRUCTURE

A B SINGH
Indian Banking - Structure
 Progress of Banking in India (1)

➢Reserve Bank of India - 1935

➢Nationalisation of Reserve Bank of India -1949
➢Nationalisation of State Bank of India -1955
➢State Bank of India (Subsidiary Banks) Act, 1959
➢Industrial Development of India -1964
➢Nationalisation of 14 largest banks – 1969
➢Regional Rural Banks - 1976
➢Nationalisation of 6 largest banks – 1980
➢National Bank of Agriculture and Rural Development – 1981
➢Rapid growth of banking post-independence
 Progress of Banking in India (2)

➢Branch expansion – Post 1969

❖ Branch expansion in rural areas
➢Liberalised policy after 1990-91
❖ Several banks set up in private sector
❖ New Private Sector Banks e.g. ICICI, HDFC, AXIS
❖ Yes Bank, Kotak Mahindra Bank, DCB
➢Rationalisation of Regional Rural Banks
➢Merger & amalgamation of weak banks
➢Privatisation of public sector banks
➢Financial Inclusion as a policy
➢Payment Banks
➢Small Finance Banks
 Public Sector Banks (1)
➢State Bank of India nationalised in 1955
➢Subsidiaries of SBI (7) merged with SBI
➢Out of all the private sector banks (before 1969)
❖Largest 14 banks nationalised in 1969
❖Remaining largest 6 nationalised in 1980
➢Total No. of public sector banks in 1980 were 1+7+14+6= 28
➢Govt major shareholder in these banks
➢Govt was required to infuse capital in these banks from time to
time
➢Govt. now encourage them to
❖Raise funds from the market and
❖Sell their non-core assets
 Public Sector Banks (2)
➢Weak, small & non-viable public sector
❖ Merged with strong ones
❖ To make them world class banks
➢Now only 12 banks in public sector
➢A few incurring losses – High NPA level
➢2021-22 Central budget, GOI decided to
❖ To privatise 2 public sector banks
❖ Central Bk of India, Indian Overseas Bk
➢IDBI Bank categorised as a
❖ Private sector bank for regulatory purposes
➢As a result of LIC’s acquiring its 51% of shares ?
 Public Sector Banks (3)
➢Nationalised bank is the one
❖Which started as a private sector bank
❖But was taken over by the Govt. later on
❖Through Banking Companies (Acquisition and Transfer
of Undertaking) Act
➢Public sector bank is the one which had been under the
control of
❖Central or State Govt from the beginning
❖Govt has a majority stake in these banks
❖More than 50% shares are owned by Govt
➢All nationalised banks are public sector banks
 Private Sector Banks - Old

➢Banks where major part of shares or Equity owned by

private shareholders
➢Old Private Sector Banks
❖Existed prior to nationalisation but
❖Not nationalised in 1969/1980 as they were
❖Too small to be nationalised
❖Mostly owned by certain communities
❖Trade, or business class
❖A few merged with public sector banks
❖Very small role in banking system today
 Private Sector Banks – New

➢Incorporated after 1991–92 reforms

➢Preference of well–to-do class
➢Play crucial role in growth of banking
➢Offer healthy competition to public sector
➢High efficiency & professional management
➢Encourage foreign investment
➢Help access to foreign capital markets
➢Help in innovation & expertise
❖ ICICI Bank, HDFC Bank
❖ Kotak Mahindra Bank, Axis Bank
❖ Yes Bank, Development Co –operative Bank
 Regional Rural Banks (1)
➢ Set up as a scheduled bank
❖ To meet rural & agricultural credit

➢ Regulated by RBI, supervised by NABARD

➢ 196 RRBs established under the

❖ Regional Rural Bank Act, 1976

➢ Capital by
❖ Central Govt- 50%
❖ State Govt–15%
❖ Sponsor Bank-35%

➢ Create an alternative channel to

❖ Co-operative credit structure
➢ Conceived as low cost banks having
❖ Local ethos, local feel & pro-poor focus
 Regional Rural Banks (2)
➢Cater to Rural, Agricultural & allied sector
❖Cover one or more adjoining districts
❖Not ventured by commercial banks
➢Reform of weak, unviable & with high NPA
❖RRBs resorted to through amalgamation
❖Initiated structural consolidation in 2005
➢Merged with sponsor banks on the basis of
❖Geographical proximity and contiguity
❖Number now reduced to 42 banks
➢GOI keen to have one large RRB in each state
 Foreign Banks
➢ Headquarters outside India
➢ Required to follow regulations of both
❖ Home Country
❖ Host countries
➢ Technologically efficient
➢ Allowed to operate through branches
➢ 46 banks with 296 offices
➢ Facilitate foreign trade
➢ Relaxed norms for priority sector lending
➢ Liberal policy for those who are
❖ Willing to go to unbanked pockets
➢ Preference for the elite class
➢ Function as Class banking
 Foreign Banks - Role

➢Enhance competition in banking sector

➢Transfer of Technology & skills
➢Financial innovations
➢Expansion of modern banking services
➢Enhancement of customer satisfaction
➢Enhancement of foreign currency
➢Deepening financial system
➢Facilitate trade with foreign countries
➢Provide employment to local persons
 Why Foreign Banks ?
➢Existed even before independence
➢Facilitated foreign trade & commerce
➢Huge size of Indian market
➢Fast developing economy
➢Diversified resources
➢Cheap labour force
➢Improvement in infrastructure
➢Information Technology revolution
➢Encouragement to FDI
➢Increasing bank credit
➢Liberal bank/branch licensing policy
 Co-operative Banks (1)
➢Organised, owned and controlled by co- operative
organisations
➢Provide a wide range of banking &
❖Financial services to co-ops & members
➢Mostly confined to one State but
❖A few have Multi-state operations
➢A retail & commercial banking
❖Organised on a co-operative basis
➢A financial entity which belongs to its members who are at
the same time owners & customers of the bank
➢Dual control of State Govt & RBI
 Co-operative Banks (2)

➢Created by persons belonging to

❖Same local or professional community
❖Sharing a common interest
➢Registered with co-operative societies
➢Governed by Banking Reg Act, 1949 (AACS)
➢Organised & managed on principles of
❖Co-operation, self-help & mutual help
➢Corruption in some banks
➢Failure of a few banks
➢Now, role of State Govt is being
❖Reduced in phases
 Structure of Co-op Banks

➢State Co-operative Bank

❖At apex level
➢District Co-operative Bank or
❖Central Co-operative Bank
❖At district level
➢Primary Co-operative Bank
❖At village or equivalent level
➢Urban Co-operative bank
❖In urban areas
 Commercial vs Co-operative Banks

Single structure p Three tier structure

Commercial principles – Co operative principles -
profit motive Social welfare motive
Banking Regulation Act, 1949 Banking Regulation Act (AACS)
Profit not distributed Profit distributed in members
Credit to all without Credit only to members
discrimination
All India Confined to one state generally
Regulated by RBI Dual control of RBI & State
Govt
 Payment Banks

➢ As per recommendation of
❖Nachiket Mor Committee
❖New category bank for financial inclusion
➢ Accept deposits upto Rs.2 lakh per individual
➢ Issue ATM and debit cards
➢ Not allowed to grant loans or issue credit card
➢ 25% branches in rural areas
➢ Invest 75% liabilities in Govt securities
❖25% in current/FD account with
❖Scheduled commercial banks for
❖Operational purposes & liquidity management
 Small Finance Banks

➢Focus on financial inclusion

❖Provide banking service to
❖Unserved & underserved areas
➢Provide credit to small business, farmers
➢Micro & small industries & unorganised sectors
➢Provide remittance & credit card facilities
➢High technology, low-cost operations
➢Ensure priority sector lending 75%
➢Ensure 50% advances only upto Rs.25 lakh
➢Reasonably successful in reaching desired people
 Merger/Consolidation of Banks (1)

➢Combination of 2 or more banks by

❖Pooling their assets & liabilities
➢Function more efficiently with profitability
❖Reap benefits of economy of scale
❖Decision making bandwidth
❖Ability to absorb shocks
❖Capacity to raise more resources
❖Speed up resolution of NPA & risk management
❖Reduce cost & competition
❖Approval of large ticket loans
 Merger/Consolidation of Banks (2)

➢Create world standard stronger banks

➢Strong national & global presence
➢Dependence on RBI for borrowings reduced
➢Rationalisation of staff
➢Creation of expertise within the bank
➢Need for recapitalization by Govt reduced
➢Govt funds released for better uses
➢Geographical reach of bank broadened
➢Capital base & liquidity of bank enhanced
➢Goodwill is enhanced
 Merger/Consolidation of Banks (3)

➢Basis - technology compatibility & Regional coherence as

far possible with minimum disruption
❖New Bank of India with Punjab National Bank
➢Small private sector banks (old) merged with public
sector banks viz.
❖State Bank of India & Punjab National Bank
➢Weak public sector banks merged with strong ones
❖Seven Associate banks merged With State Bank of
India
 Merger/consolidation of Banks (4)

❖Vijaya Bank & Dena Bank merged with Bank of

Baroda
❖Oriental Bank of Commerce & United Bank of
India merged with Punjab National Bank
❖Allahabad Bank with Indian Bank
❖Syndicate Bank with Canara Bank
❖Andhra Bank & Corporation Bank with Union
Bank of India
❖After merger, 12 public sector banks
 Merger of Banks - Issues

➢ Technological integration
➢ Compatible technology platform
➢ Human resource displacement
➢ Customer integration with new set up
➢ Cultural difference of merged banks
➢ Strategy of functioning
➢ Product uniformity
➢ Business plans
➢ Rationalisation of branches
➢ Continuity of business
➢ Ability to raise capital from market
➢ Reduce dependence on State exchequer
➢ Ring fence banks against frauds
 Privatisation of Public Sector Banks (1)

➢Transfer of ownership from

❖Govt to private sector
❖Considered to bring in more efficiency
❖In the operations of concerned bank
➢Recommendations of
❖Narasimham and Nayak Committee
❖As a part of Govt disinvestment programme
❖For economic reforms
➢Degradation of financial position of PSBs
❖In the form of increased NPAs & stressed assets
➢Announced in the Annual budget 2021-22
 Privatisation of Public Sector Banks (2)

➢Two state run banks viz.

❖Indian Overseas Bank & Central Bank of India
❖Alongwith IDBI Bank would be privatized
➢It would release
❖Central Govt resources for other uses
➢Requires amendment to
❖Banking Regulation Act, 1949 &
❖Reserve Bank of India Act, 1934
➢Proposal put on hold for the time being
➢May be reviewed after 2024 general elections
 Indian Banking – Way Forward
➢ Financial inclusion to be buzzword
➢ It is an opportunity rather than responsibility
➢ Creation of large sized banks
➢ Shift from expansion to consolidation phase
➢ Private players to be encouraged/strengthened
➢ Fair competition amongst different segments
➢ Focus on technology upgradation
➢ Concept of no branch visit
➢ Contactless banking in all spheres
➢ Focus on non interest income
➢ Due diligence in credit appraisal & monitoring
➢ Reduction in NPA & stressed assets
➢ No more capital infusion by Central Govt
➢ Banks to raise their own capital
Any Questions ?

THANK YOU !