REPORT ON THE EVOLUTION OF BANKING AND FINANCIAL SECTOR

REFORMS IN INDIA IN SUPPORT OF SBI

Ankush ShawAnuj SinghAvinash Chaudhary

INTRODUCTION

The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary experience since then.

The largest bank, and the oldest still in existence, 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.

The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.

Growth of banking system in India

Evolutionary Phase (prior to 1950) The RBI Act 1935 gave birth to scheduled banks in India, and some of these banks had already been established around 1981. The prominent among the scheduled banks is the Allahabad Bank, which was set up in 1865 with European management.

Foundation phase (1950-1968) In those initial days, the need of the hour was to reorganize and to consolidate the prevailing banking network keeping in view the requirements of the economy. On July l969, 14 banks were nationalized with a view to extending credit to all segments of the economy and also to mitigate regional imbalances.

Expansion phase (1968-1984) The aim of bank nationalization was to make banking services reach the masses that can be attributed as "first- banking revolution". Commercial banks acted as vital instruments for this purpose by way of rapid branch expansion. This period also witnessed the birth of Regional Rural Bank (RRBS) in 1975 and NABARAD in 1982 which had priority sector as their focus of activity.

Consolidation phase (1984-1990) This phase began in 1985 when a series of policy initiatives were taken with the objectives of consolidating the gains of branch expansion undertaken by the banks. By this time about 90% of commercial banks were in the public sector and closely regulated in all its facets. Prices of assets liability were fixed by the RBI

Reformatory phase (since 1990) The main objective of the financial sector reforms in India initiated in the early 1990s was to create an efficient, competitive and stable financial sector that could then contribute in greater measure to stimulate growth.

EVOLUTION OF STATE BANK OF INDIA

Establishment

The establishment of the Bank of Bengal marked the advent of limited liability, joint-stock banking in India. So was the associated innovation in banking, viz. the decision to allow the Bank of Bengal to issue notes, which would be accepted for payment of public revenues within a restricted geographical area. This right of note issue was very valuable not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras.

Business

The business of the banks was initially confined to discounting of bills of exchange or other negotiable private securities, keeping cash accounts and receiving deposits and issuing and circulating cash notes. Loans were restricted to Rs.one lakh and the period of accommodation confined to three months only.

Major change in the conditions A major change in the conditions of operation of the Banks of Bengal, Bombay and Madras occurred after 1860. With the passing of the Paper Currency Act of 1861, the right of note issue of the presidency banks was abolished and the Government of India assumed from 1 March 1862 the sole power of issuing paper currency within British India.

First Five Year Plan

In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest priority. The commercial banks of the country including the Imperial Bank of India had till then confined their operations to the urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural areas. The State Bank of India was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub offices and three Local Head Offices inherited from the Imperial Bank.