ORIGIN OF BANKING

Origin of the term Bank: The term bank apparently owes its origin to the bank or bench used by the moneychangers during the middle ages. Historically, some banks were called banks of deposit, and mainly held deposits of foreign and domestic currencies and arranged payment in foreign trade transactions. Other banks created deposits that acted as a circulating medium of money in a society. One of the earliest banks in this category, the Bank of Venice, was formed when a group of the governments creditors combined and began using government debt as a means of payment in trade. 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 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.

The Beginning of Banking Industry: The History of Banking began at about 2000BC of the ancient world when merchants made grain loans to farmers and traders started carrying goods between cities within the areas of Assyria and Babylonia. The Code of Hammurabi, dating back to about 1772 BC, is one of the oldest deciphered writings of significant length in the world that deals with matters of contract and set the terms of a transaction. This code also included standardized procedures for handling loans, interest, and guarantees. Later on, in ancient Greece and during the Roman Empire, lenders based in temples made loans and started accepting of deposits. Banking activities in Greece are more varied and sophisticated than in any previous society. They took deposits, made loans, changed money from one currency to another and tested coins for weight and purity. They even engaged in book transactions. Moneylenders can be found who will accept payment in one Greek city and

arrange for credit in another, avoiding the need for the customer to transport or transfer large numbers of coins.

ORIGIN OF BANKING IN INDIA

The Beginning the English traders that came to India in the 17th century could not make much use of the indigenous bankers, owing to their ignorance of the language as well the inexperience indigenous people of the European trade .Therefore, the English Agency. Houses in Calcutta and Bombay began to conduct banking business, besides their commercial business, based on unlimited liability. The Europeans with aptitude of commercial pursuit, who resigned from civil and military, organized these agency houses. A type of business organization recognizable as managing agency took form in a period from 1834 to 1847. The primary concern of these agency houses was trade, but they branched out into banking as aside line to facilitate the operations of their main business. The English agency houses, that began to serve as bankers to the East India Company had no capital of their own, and depended on deposits for their funds. They financed movements of crops, issued paper money and established joint stock banks. Earliest of these was Hindustan Bank established by one of the agency houses in Calcutta in 1770.Banking in India originated in the last decades of the 18th century. The first bank in India, though conservative, was established in 1786 in Calcutta by the name of bank of Bengal. Indian banking system, over the years has gone through various phases.

Early Phase (1786 to 1935) Banking in India originated in the last decades of the 18thcentury. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank 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 quasi-central banks, as did their successors. The East India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as independent units and called it Presidency Banks. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire dEscompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, 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 centre. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 because of the economic crisis of 1848-49.The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank.

Pre Nationalization Phase (1935 to 1969) Organized banking in India is more than two centuries old. Until 1935 all, the banks were in private sector and were set up by individuals and/or industrial houses, which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent. For many years the Presidency banks acted as quasi-central banks, as did their successors. Bank of Bengal, Bank of Bombay and Bank of Madras merged in 1925 to form the Imperial Bank of India, which, upon Indias independence, became the State Bank of India. Even though consolidation in banking was building trust among the investors but a central regulatory, authority was much needed. British Government in India passed many trade and commerce laws but acted little on regulating the banking industry.

Post Nationalization Phase (1969 to 1990) On July 19, 1969 -the erstwhile government of India nationalized 14 major private banks. Nationalization of bank in India was not new or happening first time. From 1955 to 1960, State Bank of India and other seven subsidiaries were nationalized under the SBI Act of 1955.

Central Bank of India Indian Overseas Bank Bank of Maharashtra Bank of Baroda Dena Bank

Nationalized Banks

Union Bank Punjab National Bank Allahabad Bank Syndicate Bank United Bank of India Canara Bank

UCO Bank
Indian Bank

Bank of India

Modern Phase from 1991 till date This is the phase of New Generation tech-savvy banks. This phase can be called as The Reforms Phase. Starting of the modern and current phase of Indian Banking is marked by two important events. Narasimhan Committee The Committee on Banking Sector Reforms Committee headed by Mr M. Narasimhan, it is also known as Narasimhan Committee .The Committee, headed by former Reserve Bank of India governor M Narasimhan, was appointed by the United Front government to review the progress in banking sector reforms. The committee submitted its recommendations to union Finance Minister Yashwant Sinha in November of 1991. Economic Liberalization in India The second major turning point in this phase was Economic Liberalization in India. After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj. The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalization in the Indian media with Manmohan Singh whom he appointed Finance Minister.Dr. Man Mohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms.

Reserve bank of India

The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 193

The Bank was constituted to

Regulate the issue of banknotes Maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949. An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets. The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India.

Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than twofifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

What is retail banking?

Retail banking encompasses the services offered to consumers by commercial banks. The term "retail" refers to the almost storefront-shopping nature of commercial banking services. Most commercial banks have extensive retail banking services and products to reach a wide consumer base. Eg: Here's a brief story about Bob's day at his bank XYZ. He arrives at the bank one day to deposit a $2000 paycheck into his account. He decides to deposit $1000 of the paycheck into his existing checking account. The other $1000 he decides to use to open a savings account. Bob sits with a bank representative who explains the various savings account options and helps him with opening an account once hes made decision. Additionally, the account representative informs Bob of retirement plans the bank offers as well as educational savings plans for his children. Before he leaves, Bob also takes information on auto loans offered by the bank since he is considering purchasing a new car. While at the bank, Bob was able, in one place, to deposit money, open a savings account and find information relating to banking products he may need in the future. Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance.

Retail banks in India

What is corporate banking?

Corporate banking is a term for a group of services that banks provide to companies that open accounts with them. There are a variety of services that comprise this type of banking, including loan, advising and securitization services. Much of corporate banking resembles individual banking, but there are also aspects that are specific to the needs of corporate customers. The practices of corporate bankers have evolved in response to the relaxation of regulations in the United States on the investment activities of banks, so they can provide a wider range of options to their corporate clients. Some functions of corporate banking are similar to the banking services available to individual customers. Eg: corporate banks give loans to companies. As with individual loans, the bankers decision about whether or not to grant the loan is based on the perceived credibility of the applicant. Various rating agencies, such as Moodys and Standard & Poor's, publish assessments of companies credibility; these are often structured as bond ratings, which indicate the likelihood that a company will be unable to pay the obligations set forth in its bond contracts. The decision of the banker is similar to that of the bond investor because, if the company defaults, neither is repaid. List of corporate banks

Recent reforms in Indian banking

The Indian banking sector has witnessed wide ranging changes under the influence of the financial Sector reforms initiated during the early 1990s. The approach to such reforms in India has been one of Gradual and non-disruptive progress through a consultative process. The emphasis has been on Deregulation and opening up the banking sector to market forces. The Reserve Bank has been Consistently working towards the establishment of an enabling regulatory framework with prompt and Effective supervision as well as the development of technological and institutional infrastructure. Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be effected, the Developments so far have brought the Indian financial system closer to global standards Statutory Pre-emptions In the pre-reforms phase, the Indian banking system operated with a high level of statutory preemption, In the form of both the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), reflecting the high level of the countrys fiscal deficit and its high degree of monetisation. Efforts in the recent period have been focused on lowering both the CRR and SLR. The statutory minimum of 25 per cent for the SLR was reached as early as 1997, and while the Reserve Bank continues to pursue its medium-term objective of reducing the CRR to the statutory minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks (SCBs) is currently placed at 5.0 per cent of NDTL (net demand and time liabilities). The legislative changes proposed by the Government in the Union Budget, 2005-06 to remove the limits on the SLR and CRR are expected to provide freedom to the Reserve Bank in the conduct of monetary policy and also lend further flexibility to the banking system in the deployment of resources. Exposure Norms The Reserve Bank has prescribed regulatory limits on banks exposure to individual and group borrowers to avoid concentration of credit, and has advised banks to fix limits on their exposure to specific industries or sectors (real estate) to ensure better risk management. In addition, banks are also required to observe certain statutory and regulatory limits in respect of their exposures to capital markets.

NPL Management

Banks have been provided with a menu of options for disposal/recovery of NPLs (nonperforming loans). Banks resolve/recover their NPLs through compromise/one time settlement, filing of suits, Debt recovery Tribunals, the Lok Adalat (peoples court) forum, Corporate Debt Restructuring (CDR), sale to securitisation/reconstruction companies and other banks or to nonbanking finance companies (NBFCs). The promulgation of the Securitisation and Reconstruction of Financial Assets and enforcement of Security Interest (SARFAESI) Act, 2002 and its subsequent amendment have strengthened the position of creditors. Another significant measure has been the setting-up of the Credit Information Bureau for information sharing on

defaulters and other borrowers. The role of Credit information Bureau of India Ltd. (CIBIL) in improving the quality of credit analysis by financial institutions and banks need hardly be overemphasised. With the enactment of the Credit Information Companies (Regulation) Act, 2005, the legal framework has been put in place to facilitate the full-fledged operationalization of CIBIL and the introduction of other credit bureaus.

Technological Infrastructure In recent years, the Reserve Bank has endeavoured to improve the efficiency of the financial system by ensuring the presence of a safe, secure and effective payment and settlement system. In the process, apart from performing regulatory and oversight functions the Reserve Bank has also played an important role in promoting the systems functionality and modernisation on an on-going basis. The consolidation of the existing payment systems revolves around strengthening computerised cheque clearing, and expanding the reach of Electronic Clearing Services (ECS) and Electronic Funds Transfer (EFT). The critical elements of the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the Indian Financial Network (INFINET) and the development of a Real-Time Gross Settlement (RTGS) System, a Centralised Funds Management System (CFMS), a Negotiated Dealing System (NDS) and the Structured Financial Messaging System (SFMS). Similarly, integration of the various payment products with the systems of individual banks has been another thrust area.