Study of Risk Management in Indian Banks

Topics: Bank, Central bank, Banks of India Pages: 9 (2898 words) Published: October 14, 2014
Risk Management in Indian Banks; Public sector, Private sector, Foreign Banks & Cooperative Banks. 1.Introduction

1.1Evolution & Growth of Banking in India

Banking in India was defined under Section 5(A) as "any company which transacts banking, business" and the purpose of banking business defined under Section 5(B),"accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise". In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949). The real roots of commercial banking in India can be traced back to the early eighteenth century with the establishment of the three presidency banks. Three Presidencies’ Banks were opened in Bengal (1809), Bombay (1840) and Madras (1843) with powers to issue Notes. In the year 1921, due to banking crisis during First World War, the three Presidency Banks merged to form Imperial Bank of India. Between the 1865 & 1913 a number of Indian private bank emerged which are even reigning successfully today. The first bank which was exclusively set up by Indians was Allahabad Bank, followed by Punjab National Bank Ltd. set up in 1895 with headquarters at Lahore. Other private banks established during this period were Bank of India & Central Bank of India established in 1911, Bank of Baroda (1908); Canara Bank (1906), Indian Bank (1907) and Bank of Mysore (1913). Until 1935 all the banks which were set up only belonged to the private sector. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds as they wanted, they deemed appropriate and resultantly the bank failure & exploitation of the poor were frequent phenomenon. Therefore in order to control & regulate these banks the Reserve Bank of India was established. Even after the formation as well as nationalization of RBI the growth of economy & banks was very slow and banks still experienced periodic failure. Therefore in order to streamline the functioning and activities of the 1100 commercial banks present then, the Government of India came up with, a special legislation, called the Banking Companies Act, 1949. The second path braking & transformation effort took place in 1955 after Independence, Imperial Bank of India was nationalized and renamed as State Bank of India (SBI) with a primary mandate to go to rural areas by opening at least 400 branches immediately. In the year 1957, the seven banks that were earlier catering to the rulers of different areas or States viz., Patiala, Bikaner, Jaipur, Indore, Saurashtra, Hyderabad, Mysore, Travancore, became subsidiaries of SBI. In 1969 and 1980, Government of India nationalized 14 and 6 major banks respectively. After the merger of New Bank of India with Punjab National Bank during the era of Financial Sector Reforms, the number of PSBs became 27.

1.2Scheduled Banking Structure in India

The RBI has under its ambit the Scheduled banks which are further subdivided in to Scheduled Commercial Banks & Scheduled Cooperative banks (refer figure 1) Figure 1: Scheduled Banking Structure in India

The Scheduled Commercial Banks which are currently 89 in number constitute nearly three fourth of the banking system. The Scheduled banks are further subdivided into three categories:

Public Sector Banks
PSB are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system. There are currently 26 public sector banks in India. They include the SBI and its 5 associate banks, 20 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.

Private Sector Banks
In this type of banks, the majority of share capital is held by private individuals and corporate. Not...
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