Banker’s Capsule 2018

Dear Aspirants,

We know that many of you are preparing for the Main examination of the Banking Sector. So in this article of ours we have traced back the origin of the Reserve Bank of India.

Origin of Reserve Bank of India

Prior to establishment of RBI, the functions of a central bank were virtually being done by the Imperial Bank of India . RBI started its operations from April 1, 1935. It was established via the RBI act 1934, so it is also known as a statutory body. Similarly, SBI is also a statutory body deriving its legality from SBI Act 1955.

RBI did not start as a Government owned bank but as a privately held bank without major government ownership. It started with a Share Capital of Rs. 5 Crore, divided into shares of Rs. 100 each fully paid up. In the beginning, this entire capital was owned by private shareholders. Out of this Rs. 5 Crore, the amount of Rs. 4,97,8000 was subscribed by the private shareholders while Rs. 2,20,000 was subscribed by central government.

After independence, the government passed Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI from private shareholders after paying appropriate compensation. Thus, nationalization of RBI took place in 1949 and from January 1, 1949, RBI started working as a government owned bank.

What was Hilton Young Commission?

Hilton-Young Commission was the Royal Commission on Indian Currency and Finance set up by British Government of India in 1920s. In 1926, this commission had recommended to the government to create a central bank in the country. On the basis of mainly this commission, the RBI act was passed.

Where were the original headquarters of RBI?

Original headquarters of RBI were in Kolkata, but in 1937, it was shifted to Shahid Bhagat Singh Marg, Mumbai.

In which year was the Banking Regulation Act passed ?

Immediately after the independence, the Government of India came up with the Banking Companies Act 1949. This act was later changed to Banking Regulation (Amendment) Act 1949. Further, the Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank of India as India’s central banking authority.

Beginning of Banking Reforms and Nationalization of the Banks

The banking sector reforms started immediately after the independence. These reforms were basically aimed at improving the confidence level of the public because in those days, most banks were not trusted by the majority of the people. Instead, the deposits with the Postal department were considered rather safe. Banking sector and Financial sector reforms are not static events but continuous processes happening even today and will keep continuing. Nationalization of Banks, consolidation, diversification and liberalization of the banking industry in the 1980s and 1990s were part of this ongoing process. A few recent events as part of banking sector reforms include:

Deregulation of interest rates
Payment banks
Increased autonomy to banks
Basel III compatibility of banks
Regulation of Non-banking Finance Companies etc.

The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act. State Bank of India was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments.

After that, in a major process of nationalization, seven subsidiaries of the State Bank of India were nationalized via the State Bank of India (Subsidiary Banks) Act, 1959. In 1969, fourteen major private commercial banks were nationalized. These 14 banks Nationalized in 1969 are shown in the below table.

List of 14 Banks Nationalized in 1969
1.	Central Bank of India
2.	Bank of Maharashtra
3.	Dena Bank
4.	Punjab National Bank
5.	Syndicate Bank
6.	Canara Bank
7.	Indian Bank
8.	Indian Overseas Bank
9.	Bank of Baroda
10.	Union Bank
11.	Allahabad Bank
12.	United Bank of India
13.	UCO Bank
14.	Bank of India

The above was followed by a second phase of nationalization in 1980, when Government of India acquired the ownership of 6 more banks, thus bringing the total number of Nationalized Banks to 20. The private banks at that time were allowed to function side by side with nationalized banks and the foreign banks were allowed to work under strict regulation.

What was the impact of Nationalization of Banks?

Nationalization of the Banks brought the public confidence in the banking system of India. After the two major phases of nationalization in India, the 80% of the banking sector came under the public sector / government ownership. After the nationalization of banks, the branches of the public sector banks in India rose to approximately 800 per cent in deposits, and advances took a huge jump by 11,000 per cent. Government ownership gave the public implicit faith and immense confidence in the sustainability of public sector banks.

What are financial sector reforms ? Why they are needed?

The financial sector reforms are one of the most important policy agenda of the authorities around the world. There are several reasons for the same.

Firstly, the reforms are needed to increase the efficiency of financial resource mobilizations and generate higher levels of growth.
Secondly, financial sector reforms are utmost necessary for the macro-economic stability. India saw its worst economic crisis in the decade of 1980s.

In 1991, India embarked into an era of Economic Reforms which led to liberalization, privatization and globalization of the Indian Economy. The financial sector reforms were an integral part to these reforms.

The financial sector reforms got momentum with the recommendations of various committees such as Chakravarty Committee (1985), Vaghul Committee (1987) and most notably by Narasimham Committee (1991), which is also known as first Narasimham Committee.

What is the importance of year 1991 in banking of India?

Prior to 1991, India was more or less an isolated economy, loosely integrated with the economy of rest of the world. The public sector was born out of a planned economy model, which was underpinned by a Nehruvian-Fabian socialist philosophy.

In 1991, India embarked on the path of liberalization, privatization and globalization. This injected new energy into the slow growing Indian Economy. With reference to Banking sector, it was in this year that the first Narasimham Committee gave a blueprint of banking sector reforms. On the basis of these recommendations, the government launched a comprehensive financial sector liberalization programme which included interest rates liberalization, reduction of reserved rations, reduced government control in banking operations and establishment of a market regulatory framework. Another outcome of liberalization was the dismantling of prohibitions against foreign direct investment.

Some more outcomes of reforms that impacted the banking sector were:-

Steps were taken to move to a market determined exchange rate system, and a unified exchange rate was achieved in the 1990s itself
The government also released a slew of norms pertaining to asset classification, income recognitions, capital adequacy etc which the banks had to comply with
Current account convertibility was allowed for the Rupee in accordance with IMF conditions
Nationalized banks were allowed to raise funds from the capital markets to strengthen their capital base
The lending rates for commercial banks was deregulated, thereby freeing them to lend more or as they saw fit
Also, banks were allowed to fix their own interest rates on domestic term deposits that matures within two years
Customers were encouraged to move away from physical cash, as RBI issued guidelines to the banks pertaining to the issuance of debit cards and smart cards
The process of introducing computerization in all branches of banks began in 1993 in line with the Committee on Computerization in Banks’ recommendations, which had been submitted in 1989
FII (Foreign Institutional Investors) were allowed to invest in dated Government Securities
The Foreign Exchange Management Act (FEMA) was enacted in 1999 and effectively repudiated the Foreign Exchange Regulation Act (FERA) of 1973. FEMA enabled the development and maintenance of the Indian foreign exchange markets and facilitated external trade and payments
The NSE (National Stock Exchange) began its operations in 1994
RBI began the practice of auctioning Treasury Bills spanning 14 days and 28 days

Capital index bonds were introduced in India for the first time. The newly adopted policy of liberalization led the RBI to provide licenses to conduct banking operations to some private banks such as ICICI Bank, HDFC Bank etc. The growth of industries and expansion of economic operations also revitalized banking operations, which had to keep up with the demand for various banking operations by the flourishing and even nascent enterprises.

Bankers also responded to the renewed demand from the industrial sector and regular customers. New technology and customer-friendly measures were adopted by bankers to attract and retain customers. The Banking Ombudsman was established, so that consumers could have a forum to address their grievances against banks and the services they provided.

Important Dates in Banking History of India

Timeline of Banking in India
1770	First bank was established at Cacutta under European Management.
1786	General Bank of India was set up.
2 June 1806	Bank of Calcutta was established in 1806; it was renamed in 1809 as Bank of Bengal
15 April 1840	Bank of Bombay established
1 July 1843	Bank of Madras established
1861	Paper Currency Act was enacted by British Government of India
1863	Oldest Joint Stock bank of India named Bank of Upper India was established.
1865	Allahabad Bank was established.
1881	Oudh Commercial Bank, the first Bank of India with Limited Liability to be managed by Indian Board was established at Faizabad
1895	Punjab National Bank was established. It was first bank purely managed by Indians.
1911	Central Bank of India, first Indian commercial bank which was wholly owned and managed by Indians, was established. It was called First Truly Swadeshi bank
1921	Three presidency banks viz. Bank of Calcutta, Bank of Bombay and Bank of Madras amalgamated to form Imperial Bank of India
1935	Creation of Reserve bank of India
1949 (January )	Nationalization of Reserve Bank of India
1949 (March)	Enactment of Banking Regulation Act
1955	Nationalization of Imperial Bank of India, which now became State Bank of India
1959	Nationalization of SBI Subsidiaries
1969	Nationalization of 14 major Banks
1971	Creation of Credit Guarantee Corporation
1975	Creation of Regional Rural Banks
1980	Nationalization of 7 more banks with deposits over Rs. 200 Crore

Dates of Establishment of various Banks

Year / Date	Bank
1786	General Bank of India (First bank established in India)
1790	Bank Of Hindustan which lasted until. 1832.
1839	Union Bank
02 June 1806	Bank of Calcutta
15th April 1840	Bank of Bombay
01st July 1843	Bank of Madras
1863	Bank of Upper India
1865	Allahabad Bank
1881	Oudh Commercial Bank
19th May 1894	Punjab National Bank
1895	Punjab National Bank In Lahore
1904	City Union Bank
1906	Bank of India
12-Mar-06	Corporation Bank
15th August 1907	Indian Bank
1908	Bank of Baroda
01st July 1906	Canara Hindu Permanent Fund (Renamed as Canara Bank in 1910)
21st December 1911	Central Bank of India
1916	Karur Vysya Bank
11-Nov-19	Union Bank of India
26th November 1920	Catholic Syrian Bank
1921	Imperial Bank of India by merger of three presidency banks.
11th May 1921	Tamilnad Mercantile Bank Limited
1923	Andhra Bank
1924	Karnataka Bank Limited
1925	Syndicate Bank
1926	Lakshmi Vilas Bank Limited
1927	Dhanlaxmi Bank Ltd
1929	South Indian Bank Limited
23rd October, 1931	Vijaya Bank
1934	Reserve Bank of India
16th Sept 1935	Bank of Maharashtra
1937	Indian Overseas Bank
1938	Jammu & Kashmir Bank
26th May 1938	Dena Bank
19th February 1943	Oriental Bank of Commerce
1943	UCO Bank
1943	United Bank of India
1945	Federal Bank Limited
1954	Nainital Bank Limited
1955	State Bank of India (Imperial Bank of India renamed as SBI)
1985	Kotak Mahindra Bank
1994	UTI Bank (Now Axis Bank)
Aug-94	HDFC Bank
1996	ICICI Bank
2003	Yes Bank
2013	Bhartiya Mahila Bank

Key Landmarks in the journey of RBI

In 1926, the Royal Commission on Indian Currency and Finance recommended creation of a central bank for India.
In 1927, a bill to give effect to the above recommendation was introduced in the Legislative Assembly, but was later withdrawn due to lack of agreement among various sections of people.
In 1933, the White Paper on Indian Constitutional Reforms recommended the creation of a Reserve Bank. A fresh bill was introduced in the Legislative Assembly.
In 1934, the Bill was passed and received the Governor General’s assent
In 1935, Reserve Bank commenced operations as India’s central bank on April 1 as a private shareholders’ bank with a paid up capital of rupees five crore.
In 1942 Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar).
In 1947, Reserve Bank stopped acting as banker to the Government of Burma.
In 1948, Reserve Bank stopped rendering central banking services to Pakistan.
In 1949, the Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
In 1949, Banking Regulation Act was enacted.
In 1951, India embarked in the Planning Era.
In 1966, the Cooperative Banks came within the regulations of the RBI.
In 1966, Rupee was devaluated for the first time.
In 1969, Nationalization of 14 Banks was a Turning point in the history of Indian Banking.
In 1973, the Foreign Exchange Regulation act was amended and exchange control was strengthened.
In 1974, the Priority Sector Advance Targets started getting fixed.
In 1975, Regional Rural Banks started
In 1985, the Sukhamoy Chakravarty and Vaghul Committee reports embarked the era of Financial Market Reforms in India.
In 1991, India came under the Balance of Payment crisis and RBI pledged Gold to shore up reserves. Rupee was devaluated.
In 1991-92, Economic Reforms started in India.
In 1993, Exchange Rate became Market determined.
In 1994, Board for Financial Supervision was set up.
In 1997, the regulation of the Non Banking Financial Companies (NBFC) got strengthened.
In 1998, Multiple Indicator Approach for monetary policy was adopted for the first time.
In 2000, the Foreign Exchange Management Act (FEMA) replaced the erstwhile FERA.
In 2002, The Clearing Corporation of India Ltd Started operation.
In 2003, Fiscal Responsibility and Budget Management Act (FRBMA) enacted.
In 2004, Liquidity Adjustment Facility (LAF) started working fully.
In 2004, Market Stabilization Scheme (MSS) was launched.
In 2004 Real Time Gross Settlement (RTGS) started working.
In 2006, Reserve Bank of India was empowered to regulate the money, forex, G-Sec and Gold related security markets.
In 2007, Reserve bank of India was empowered to regulate the Payment systems.