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The Banking System in India consists of :



The Reserve Bank of India


The Reserve Bank of India is the Central Bank of the Country and came into being by the Reserve Bank of India Act 1934. It was nationalized in 1948.


It is:



Development Banks


These were set up to give long term finance for the development of the country. The ones originally set up were The ones originally set up were the Industrial Credit and Investment Corporation of India Ltd (ICICI), the Industrial Finance Corporation of India (IFCI), the Industrial Development Bank of India (IDBI), The Industrial Reconstruction Bank of India (IRBI) and the National Bank for Agriculture and Rural Development (NABARD). ICICI, by a reverse merger in 2002, became a normal commercial bank. IDBI was converted to a commercial bank in October 2004 and merged with IDBI Bank on March 31, 2005. It is expected that the other development banks, having outlived their utility would also be either converted to commercial banks or merged with commercial banks.



Public Sector Banks


These are banks which the Government    either owns or has a majority stake in.


The largest is the State Bank of India which was formed by the merger of the 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, 1955. It has seven subsidiaries or associates.


The other nationalized banks came into being on July 19, 1969 when  Mrs. Gandhi’s Government nationalized fourteen banks that had deposits of Rs. 50 crores or more. On April 15, 1980, six more banks having demand and time liabilities of not less than Rs.200 crores were nationalized. This was done to take banking to the villages and serve the developmental needs of all sectors of the economy.


Foreign Banks


These are branches of banks incorporated outside India.


The larger ones that have been operating in India for many years are Standard Chartered Bank, Citibank, American Express Bank, ABN Amro, BNP Paribas and Hong Kong and Shanghai Banking Corporation.


In 1995/ 96 many other foreign banks (optimistic in view of India’s liberalization) opened branches in India. However, after banking began to become increasingly competitive and margins began to be squeezed coupled with large non performing assets, many banks closed their branches. These include Dresdner Bank, Commerz Bank, KBC Bank and Commercial Bank of Siam.


In March 2004 the RBI issued guidelines permitting NRIs and Foreign Institutional Investors investing in the banking sector. This permitted aggregate foreign investment from all sources up to a maximum of 74 percent of the paid up capital of the bank while the resident Indian holding of the capital was to be atleast 26 percent. It also provided that foreign banks could only operate through one of the following – branches. Wholly owned subsidiary or a subsidiary with an aggregate foreign investment of upto a maximum of 74 percent in a private bank.


On February 28, 2005 the RBI unveiled a new roadmap to operationalise the guidelines. The roadmap is divided into two phases -  March 2005 to March 2009  and April 2009 and onwards.


In the first phase foreign banks will be permitted to set up wholly owned subsidiary by conversion of existing branches into a wholly owned subsidiary. These must have a minimum capital of Rs. 300 crores and must ensure sound corporate governance. They will have flexibility to open more than 12 branches a year and branch expansion in underbanked areas. Permission for acquisition of shareholding in Indian banks will be limited to banks identified by the RBI for restructuring.


Private Sector Banks


These are banks which are not government owned or controlled. Their shares are freely traded in the Stock Markets.


These may be divided into:

·         New Generation Banks such as HDFC Bank, IDBI Bank, UTI Bank and ICICI Bank. These were permitted to open provided they had a capital of Rs. 100 crores. The present requirement is that the capital should be Rs. 200 crores (as on January 3, 2002) with a commitment that this increases to Rs. 300 crores within three years. To meet this requirement all banks in the private sector must have a net worth of Rs. 300 crores at all times. Where the net worth falls below Rs. 300 crores, it must be restored within a reasonable time. 


Cooperative Banks


Cooperative Banks are those that are created by a group of individuals to support either a community or a religious group. They operate in metropolitan, urban and semi urban centers to cater to the need s of small borrowers.


These are controlled by the RBI and by State Cooperative Acts.


In recent years these have been under a cloud on account as several (particularly in Gujarat and Andhra Pradesh) collapsed under controversy. They were used as vehicles by individuals to finance activities which did not succeed.


Regional Rural Banks


These came into being on October 2, 1975 when 5 regional rural banks were established under what became the Regional Rural Banks Act 1975.  These were to bridge the gap in rural credit granting loans and advances to small and marginal farmers, artisans, small entrepreneurs and persons of small means engaged in trade, commerce, industry or other productive activities within their area of operation.


Local Area Banks


Local Area Banks came into existence in 1999 and licences were given for these banks as it was felt that regular commercial banks were not financial the rural/ agricultural sector adequately. Licences were given to open branches in three districts. Branches in urban/ semi urban areas were granted only after ten branches were established in rural areas/ villages. Four licences were in total granted – two in Andhra, one in Punjab and one in  Gujarat. They were opened with an initial capital of Rs. 5 crores. A Report issued in 2002 has recommended that the capital should be increased to Rs. 25 crores and that these be permitted to operate in six districts.








Reserves and Surplus



Other Liabilities and Provisions





Cash and balances with the Reserve Bank of India

Balances with Banks at Money at call and short notice



Fixed assets

Other assets




Letters of  Credit


Foreign Exchange Contracts

Underwriting Commitment




I.              Income

                          Interest Income

                          Other Income


II.            Expenditure

                          Interest expense

                          Operating expenses

                          Provision and contingencies


III.           Profit (Loss)

                          Net  Profit (Loss) for the year

                          Profit (Loss) brought forward


IV.           Appropriations

                          Transfer to statutory reserves

                          Transfer to other reserves

                          Proposed dividend

                          Balance carried forward to the balance sheet.


The remarkable factor of the financials of a bank is that banks seek liabilities in order to be profitable. If they do not have liabilities, they will not have funds to lend.