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 Banking sector profile

Banking in India originated in the first decade of 18th century. The first banks were The

General Bank of India, which started in 1786, and Bank of Hindustan, both of which

are now defunc t . The o ldes t ba nk in ex i s tence in Ind ia i s the S ta te Bank o f  

I n d i a, wh ic h originated in the "The Bank of Bengal" in Calcutta in June 1806. This was one

of the three presidency banks, the other two being the Bank of Bombayand theBank of Madras. 

The presidency banks were established under charters from the British East India

Company.T h e y m e r g e d i n 1 9 2 5 t o f o r m t h e I m p e r i a l B a n k o f  

I n d i a , w h i c h , u p o n I n d i a ' s independence, became the Sta te Bank o f  

I n d i a. Fo r m an y ye ar s t he P r es i d en c y ba nk s acted as quasi-central banks, as did

their successors. TheReserve Bank of India formally took on the responsibility of regulating the

Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was

nationalized and given broader powers. A couple of decades later, foreign banks such as

Credit Lyonnais started thei r Calcutta operations in the 1850s. At that point of ti me,

Calcutta was the most active trading port ,mai nl y d ue to th e t ra de of th e British

Empire, an d du e t o w hi ch ba nk i ng ac ti vi t y t oo k roots there and prospered.

EARLY HISTORY

The first fully Indian owned bank was the Allahabad Bank , established in 1865. However ,at the

end of late-18th century, there were hardly any banks in India in the modern sense of th e term.

At the time of the  American Civil War, a void was created as the suppl y of cotton to

Lancashire stopped from the Americas. Some banks were opened at that time to f i n a n c e

i n d u s t r y , i n c l u d i n g s p e c u l a t i v e t r a d i n g i n c o t t o n . W i t h l a r g e

e x p o s u r e t o speculative ventures, most of the banks opened in India during that

per iod fai led. The dep osi t ors los t money and los t in te res t in keepi ng

deposits with banks. Subsequently, banking in India remained the exclusive

domain of Europeans for next several decades until the beginning of the 20th century.

Structure of the organized banking sector in India. Numbers of banks are in brackets. A t

th i s t ime , the Ind ian economy was pass ing th rough a re la t ive pe r iod o f  

st ab il it y. Around five decades have elapsed since the India's First war of 

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Independence, and thesocial, industrial and other infrastructure have developed. At

that time there were very s m a l l b a n k s o p e r a t e d b y I n d i a n s , a n d m o s t o f  

t h e m w e r e o w n e d a n d o p e r a t e d b y particular communities. The presidency banks

dominated banking in India. There were also some exchange banks and a number of 

Indian  joint stock banks. All these banks operated in different segments o f t he econo my.

The exchange banks , mos t ly owned by Europeans , concen t ra ted on

financing foreign trade. Indian joint stock banks were generally under capitalized

and lacked the experience and maturity to compete with the presidency and

exchange banks . This segmentation let Lord Curzon to observe,

" In respec t o f bank ing i t seems we a re beh ind the t imes . We a re l ike some

ol d fa sh io ne d sa il in g sh ip , di vi de d by so li d wo od en bulk heads into separate and

cumbersome compartments."

By the 1900s , the marke t expanded wi th the es tab l i shment o f banks such

a s Punjab National Bank , in 1895 in Lahore and Bank of India, in 1906, in Mumbai- 

both of which were founded under private ownership. Punjab National Bank is the first

Swadeshi Bank founded by the leaders li ke Lala Lajpat Rai , Sard ar Dyal Singh

Majithia. The Swadeshi movement in particular inspired local businessmen and political

figures to found banks of and for the Indian community. A number of banks established

then have survived to thepresent such as  Bank of India,Corporation Bank ,  Indian

Bank ,Bank of Baroda, Canara Bank and Central Bank of India. 

FROM WORLD WAR I TO INDEPENDENCE

The period during the First World War(1914-1918) through the end of the Second

World War( 1 9 3 9 - 1 9 4 5 ) , a n d t w o y e a r s t h e r e a f t e r u n t i l t h e independence

o f I n d i a w e r e challenging for Indian banking. The years of the First World

War were turbulent, and i t too k i ts to l l wi th banks s impl y co l laps ing despi tet h e Indian economy gaining indirectboost due to war-related economic activities. At

least 94 banks in India failed between1913 and 1918 as indicated in the following

table

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POST-INDEPENDENCE

The partition of Indiain 1947 adversely impacted the economies of  Punjab and

West  Bengal, paralyzing banking activities for months. India's  independence 

marked the end of a regime of the Laissez-fairef or the Indian banking.

TheGovernment of India initiated measures to play an active role in the economic

life of the nation, and the Industrial PolicyResolution adopted by the government in

1948 envisaged a mixed economy. This resulted into greater involvement of the

state in different segments of the economy include in g banking and finance.

The major steps to regulate banking included

  In 1948, theReserve Bank of India, India's central banking authority,

wasnationalized, and it became an institution owned by the Government of 

India.

  In 1949, the Banking Regulation Act was enacted which empowered the

ReserveBank of India (RBI) "to regulate, control, and inspect the banks in

India."

  The Banking Regulation Act also provided that no new bank or branch of 

anexisting bank may be opened without a license from the RBI, and no two

bankscould have common directors.

However, despite these provisions, control and regulations, banks in Indiaexcept the State Bank of India, continued to be owned and operated by private

persons. This changed withthe nationalization of major banks in India on 19th

July, 1969.

NATIONALISATION

By the 1960s, the Indian banking i ndustry has become an important tool to

facilitate the development of the Indian economy. At t he same time, it has

emerged as a large employer, and a debate has ensued about the possibility to

nationalize the banking industry. Indira Gandhi, the -then Prime Minister of India

expressed the intention of the GOIin the annual conference of the All India

Congress Meeting in a paper entitled "Stray thoughts on Bank 

Nationalisation."The paper was received with positive enthusiasm. Thereafter,

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her move was swift and sudden, and the GOI issued an ordinance and

nationalised the 14 largest commercial banks with effect from the midnight of 

July 19,1969.Jayaprakash Narayan, a national leader of India, described the step

as a "masterstroke of political sagacity. "Within t wo weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquition and

Transfer of Undertaking) Bill, and it received the presidential approval on9th

August, 1969.A second dose of nationalisation of 6 more commercial banks

followed in 1980. The state dreason for the nationalisation was to give the

government more control of credit delivery. With the second dose of 

nationalisation, the GOI controlled around 91% of the bankingbusiness of India.

Later on, in the year 1993, one of the nationalised banks, namely,New Bank of 

Indiawas merged with Punjab National Bank. It was the first and only merger of 

a Nationalised Bank into a Nationalised Bank, resulting in the reducing the

number of Nationalised Banks from 20 to 19.After this, un til the 1990s, the

nationalised banks grew at a pace of around 4%, closer tothe average growth rate

of the Indian economy.

LIBERALISATION

In the early 1990s the thenNarsimha Raogovernment embarked on a policy of 

liberalisationand gave licences to a small number of private banks, which came

to beknown as New Generation tech-savvy banks, which included banks such as

Global TrustBank (the first of such new generation banks to be set up)which

later amalgamated withOriental Bank of Commerce,UTI Bank (now re -named

asAxis Bank ),ICICI Bank and HDFC Bank . This move, along with the rapid

growth in theeconomy of India, kickstarted the banking sector in India, which

has seen rapid growth with strong contribution from allthe three sectors of 

banks, namely, government banks, private banks and foreign banks.The next

stage for the Indian banking has been setup with the proposed relaxation in

thenorms for Foreign Direct Investment, where all Foreign Investors in banks

may be givenvoting rights which could exceed the present cap of 10%,at present

it has gone up to 49%with some restrictions.The new policy shook the Banking

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sector inIndiacompletely. Bankers, till this time, wereused to the 4 -6-4 method

(Borrow at 4%;Lend at 6%;Go home at 4) of functioning. Thenew wave ushered

in a modern outlook and tech-savvy methods of working for traditionalbanks.All

this led to the retail boom in India. People not just demanded more from

theirbanks but also received more.

CURRENT SITUATION

Currently (2007), banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a

challenge for the private sector and foreign banks. In terms of quality of assets

and capital adequacy, Indian bank sare considered to have clean, strong and

transparent balance sheets relative to other bank s in comparable economies in

its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government. The stated policy of the Bank on the Indian

Rupee is to manage volatility but without an y fixed exchange rate-and this has

mostly beentrue. With the growth in the Indian economy expected to be strong

for quite some time-especially in its services sector-the demand for banking

services, especially retail banking ,mortgages and investment services are

expected to be strong. One may also expect M&As, takeovers, and asset sales. In

March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first

time an investor has been allowed to hold more than 5% in a private sector bank 

since the RBI announced norms in 2005 that any stake exceeding 5% in the

private sector banks would need to bevetted by them. Currently, India has 88

scheduled commercial banks (SCBs) - 27 public sector banks (thatis with the

Government of Indiaholding a stake)after merger of New Bank of India inPunjab

National Bank in 1993, 29 private banks (these do not have government stake;

be publicly listed and traded on st ock exchanges) and 31 foreign banks. They

have acombined network of over 53,000 b ranches and 17,000ATMs. According

to a report by ICRA Limited, a r ating agency, the public sector banks hold over

75 percent of total assets of the banking industry, with the private and foreign

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banks holding 18.2% and 6.5%respectivelyIntroduction of many more products

and facilities in the banking sector in its reforms measure. In 1991, under the

chairmanship of M Narasimham, a committee was set up by his name which

worked for the liberalization of banking practices.The country is flooded with

foreign banks and their ATM stations. Efforts are being put togive a s atisfactory

service to customers. Phone banking and net banking is introduced. Theentire

system became more convenient and swift. Time is given more importance than

money.

TYPES OF DEPOSITS OFFERED BY HDFC BANK

While various deposit products offered by the bank are assigned different names, the deposit

products can be categorised broadly into the following types. Definition of major deposit

schemes are as under : -

"Demand Deposits " means a deposit received by the bank which is withdrawable on

demand;

"Savings Deposits" means a form of Demand Deposit which is subject to restrictions as to the

number of withdrawals as also the amounts of withdrawals permitted by the bank during anyspecified period;

"Term Deposit" means a deposit received by the bank for a fixed period withdrawable only

after the expiry of the fixed period and includes deposits such as Recurring / Double Benefit

Deposits / Short Deposits / Fixed Deposits / Monthly Income Certificate / Quarterly Income

Certificate etc.

''Notice Deposit'' means Term Deposit for a specific period but withdrawable on giving at

least one complete banking day's notice;

"Current Account" means a form of Demand Deposit wherefrom withdrawals are allowed

any number of times depending upon the balance in the account or up to a particular agreed

amount and will also include other deposit accounts which are neither Savings Deposit nor

Term Deposit;

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