Banking System In India & Its History

The first bank in India, managed by Indians was the oudh commercial bank, founded in 1881. It was a bank of limited liability. However many institutions undertook banking business under the british regime as agency houses carrying on banking along with their trading business. The second Indian bank to be established was the Punjab national bank in 1884. With the beginning of the swadeshi movement in 1906, a number of commercial banks surfaced. In 1921, three presidency banks operating in India were amalgamated into the imperial bank of india following serious financial troubles. In the 1940’s, a need of regulating and controlling commercial banks was felt in January 1946, the first banking act in the banking companies (Inspection Ordinance) act was introduced, which was followed by another, then banking companies (Restriction of branches ) act in February 1946. The banking companies act was amended in 1949 and its name changed to the Banking Regulation act. Outsource Product Upload services

In 1993, new private sector banks were allowed to be set up in the indian banking system as the government recognized the need to introduce greater competition which can play an important role in ushering in a more efficient and competitive economy. However a new bank had to satisfy the following requirements:

  1. The initial minimum paid-up capital for a new bank shall be Rs.200 crore. The initial capital will be raised to Rs.300 crore within three years of commencement of business. The overall capital structure of the proposed bank including the authorised capital shall be approved by the RBI.
  2. The promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time. The initial capital, other than the promoters’ contribution, could be raised through public issue or private placement. In case the promoters’ contribution to the initial capital is in excess of the minimum proportion of 40 per cent, they shall dilute their excess stake  after one  year of the bank’s operations. (In case divestment     after one year is proposed to be spread over a period of time, this would require specific approval of the RBI). Promoters’ contribution of 40% of the initial capital shall be locked in for a period of five years from the date of licensing of the bank.
  3. While augmenting capital to Rs.300 crore within three years of commencement of business, the promoters will have to bring in additional capital, which would be at least 40 per cent of the fresh capital raised. The remaining portion could be raised through public issue or private placement. The promoters’ contribution of a minimum of 40% of additional capital will also be locked in for a minimum period of 5 years from the date of receipt of capital by the bank.
  4. NRI participation in the primary equity of a new bank shall be to the maximum extent of 40 per cent.  In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter, equity participation shall be restricted to 20 per cent within the above ceiling of 40 per cent. In cases of shortfall in foreign equity contributions by NRIs, designated multilateral institutions would be allowed to contribute foreign equity to the extent of the shortfall in NRI contribution to the equity.  The proposed bank shall obtain necessary approval of Foreign Investment Promotion Board of the Government of India and Exchange Control Department of RBI.
  5. The new bank should not be promoted by a large industrial house. However, individual companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank up to a maximum of 10 per cent but will not have controlling interest in the bank.  The 10 per cent  limit would apply to all inter- connected companies belonging to the concerned large industrial houses. In taking a view on   whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final.
  6. The proposed bank shall maintain an arms length relationship with business entities in the promoter group and the individual company/ies investing upto 10% of the equity as stipulated above. It shall not extend any credit facilities to the promoters and company/ies investing up to 10 per cent of the equity.The relationship between business entities in the promoter group and the proposed bank shall be of a similar nature as between two independent and unconnected entities. In taking view on whether a company belongs to a particular Promoter Group or not, the decision of RBI shall be final.
  7. For registering a private company in India the guidelines of RBI and Ministry of Commerce is mandatory to follow.

The banking system in india consists of commercial banks in both in public and private sector, Regional Rural Banks (RRBs) and Co-operative banks. There were 171 scheduled commercial banks as of june 30, 2009. Out of this 113 banks in public sector, there are 19 nationalized banks, 7 banks in SBI group and one in IDBI bank ltd and rest are RRBs.