Essay on Commercial Banking in India

Essay on Commercial Banking in India!

The beginning of Commercial Banking in India was made in the seventeenth century when the British established agency houses in the country. Before those indigenous bankers in the form of Seths, Mahajans etc. were in the field.

But the commercial banking in systematic form was initiated in the early part of nineteenth century when the Presidency Banks were established. In 1913, 18 such commercial banks were functioning.

The Imperial Bank of India was set up in 1920 with the merger of three Presidency banks. Since then the Imperial Bank was reigning vigorously throughout the country until 1955 when this bank was nationalized and renamed as the State Bank of India. The banking business in India was seriously affected during the depression of 1930s and also after partition of the country.

In 1949, the Banking Regulation Act, 1949, was passed and as per this Act Reserve Bank was awarded with extensive regulatory power over the commercial banks. In 1950-51, there were nearly 430 commercial banks in India. But the number of such banks declined later on due to amalgamation of small banks with big banks.

Accordingly, in 1960-61, there were nearly 256 such small non-scheduled banks. Gradually all these banks were merged with bigger banks. In 1969, 14 major commercial banks were nationalized. At present there are 27 such nationalized banks (including the SBI groups) working in India. In 2011-12, total number of scheduled commercial banks operating in the country was 283.

With the introduction of banking sector reforms, in recent years, the composition of the banking system in India has also recorded considerable change. At the end of March 2012, the commercial banking system in India consisted of 287 scheduled banks and four non-scheduled banks.

Over the period March 1996 to January 1997, the number of scheduled banks has increased by new 47 banks and the number of non- scheduled banks remained unchanged at two. Of the scheduled banks, 223 are in the public sector and all these banks account for nearly 80 per cent of deposits of all scheduled banks.

In this public sector banking system, there are 196 regional rural banks which are specially set up so as to increase the flow of credit to small borrowers in the rural areas. These RRBs are having specified areas of operations which are normally limited to two to three districts. These banks also undertake some other commercial banking business.

Remaining 27 banks in the public sector (New Bank of India since merged with Punjab National Bank in September 1993) are all regular commercial banks and they are all involved in different types of business and transactions. The following table shows the progress of commercial banking in India during the post-nationalisation period.

Table 14.1 (a) Progress of Commercial Banking in India:

For 1969 based on 1961 census, 1973 to 1985 based on 1971 census, 1990 to 1991 based on 1981 census and for 1992, 1993 and 1994 mid-year population estimates. For 1996 and 1997 population estimate relate to 1 March 1995, based on Economic Survey, 1996-97.

1. Based on Banking Statistics, March 1997 to March 2012.

2. Based on estimated mid-year population figures supplied by the Office of the Registrar General, India.

3. Provisional.

During the post-nationalisation period, commercial banking in India experienced considerable changes. Accordingly, total number of commercial banks increased from 89 in June 1969 to 287 in March 2012.

Out of which total number of scheduled commercial banks also increased from 73 in June 1969 to 283 in March 2012 and total number of non-scheduled commercial banks, however, declined from 16 in June 1969 to 4 in March 2012.

Again total number of branches of all commercial banks increased considerably during the post-nationalisation period, i.e., from 8262 in June 1969 to 98,591 in March 2012. Accordingly, the population per bank offices declined from 64,000 in June 1969 to 12,275 in March 2012. Both the aggregate deposit and aggregate credit of all scheduled commercial banks reached the level of Rs 64,77,240 crore and Rs 50,27,210 crore.

As a result of which the per capita deposit of these banks increased from a mere Rs 88 in June 1969 to Rs 53,522 in March 2012 and the per capita credit also increased considerably from Rs 68 to Rs 41,540 in March 2012. Again the deposits as percentage of national income at current prices also increased from mere 14.8 per cent in June 1969 to 87.53 per cent March 2012.

Initially, the banking business was very much restricted in the urban centres. But after the nationalisation of major commercial banks and with the introduction of the Lead Bank Scheme, the commercial banks started to extend its banking network in the rural areas so as to provide the benefits of banking business to the rural people of the country.

Table 14.2 shows the expansion of branches of all commercial banks with special reference to rural areas.

Table 14.2 reveals expansion of banking network during the last 45 years after nationalisation of banks, where the total number of bank branches has increased from 8,262 in June 1969 to 62,881 in June 1996, showing an increase of 761 per cent. It is also found that there was spectacular increase in number of rural branches from a mere 1,860 in June 1969 to 36,800 in 1995 and then declined to 34,921 in 1996.

Rural branches as percentages of the total branches has also increased from 22.0 per cent in June 1969 to 55.5 per cent in June 1996. In this connection, a professional banker Mr. M. Gopalkrishnan observed, “The single striking feature of the post nationalisation banking scene is the rapidity with which the branch network has multiplied itself.

The rate of branch expansion has been unparalleled anywhere else in the world.” The size and the reach of the banking system have increased tremendously over the last four and a half decades. Total number of bank branches have increased from 8,262 in June 1969 to 1,18,450 in March, 2014.

Accordingly, population per branch has gradually declined from 64000 in June 1969 to 10,215 in March 2014. Out of these total bank branches, 39.6 per cent are now rural/semi urban as against less than 22 per cent in 1969.

Aggregate bank deposits have increased from a mere Rs 4,646 crore in June 1969 to Rs 83,36,175 crore in Dec. 2014 and accordingly aggregate deposits have risen from about 15 per cent of GDP to 67 per cent. The gross bank credits have also increased from Rs 3,599 crore in June 1969 to Rs 69,46,702 crore in Dec. 2014.

The outstanding aggregate deposits of scheduled commercial banks has increased from Rs 1,47,160 crore as on March 31,1989 to Rs 83,36,175 crore as on Dec. 28, 2014. Again, the outstanding credit of scheduled commercial banks has increased from Rs 89,370 crore as on March 31, 1989 to Rs 69,46,702 crore as on Dec. 28, 2014.

Accordingly, the credit-deposit ratio on the basis of outstanding credit and deposit of scheduled commercial banks stood at 76.13 per cent as on Dec. 28, 2014.

As per one recent estimate made by RBI, the top hundred centres arranged according to size of deposits accounted for 61.5 per cent of the total deposits. Similarly, the top 10 centres arranged according to bank credit size constituted 70.2 per cent of the total bank credit.

Nationalized banks as a group contributed 71.2 per cent of aggregate deposits while the State Bank of India and its associates accounted for another 28.3 per cent. The shares of other bank groups were 7.8 per cent for foreign banks, 2.5 per cent for regional rural banks and 5.1 per cent for private sector banks.

As compared to these shares the nationalized banks accounted for a lower share of 71.4 per cent of total bank credit, while State Bank of India and its associates claimed a higher share of 34.6 per cent. Foreign banks, other scheduled commercial banks and regional rural banks followed with shares of 6.9 per cent, 4.8 per cent and 2.8 per cent respectively.

The all India credit-deposit ratio was worked out to 58.0 per cent as on December 1993. This ratio was relatively high for SBI and its associates (70.9 per cent) and regional rural banks (64.8 per cent), while it was lower in case of other scheduled commercial nationalized banks (52.4 per cent), foreign banks (15.5 per cent).

Population group-wise metropolitan centres had the highest credit deposit ratio on 80.5 per cent followed by rural centres (53.5 per cent), urban centres (52.5 per cent) and semi-urban centres (40.5 per cent).

Again in 2013-14 (April 01, 2013 to March 31, 2014), the credit-deposit ratio of scheduled commercial banks in India reached to 77.1 per cent. Moreover, the investment-deposit ratio has reached the level of 16.60 per cent in 2010-11 as compared with 62.1 per cent in 1995-96.

Profits:

The financial performance of the Scheduled Commercial Banks (SCBs) of the country has recorded an improvement in recent years. The operating profits of SCBs increased by over 876 per cent from Rs 19,755 crore in 2000-01 to Rs 1,73,175 crore in 2011-12.

The ratio of operating profits to total assets increased from 1.5 per cent to 2.08 per cent in the same period. The net profits of SCBs increased by over 1275 per cent from Rs 6,403 crore in 2000-01 to Rs 81,658 crore in 2011-12. The ratio of net profit to total assets increased from 0.5 per cent in 2000-01 to 0.97 per cent in 2011-12.