Banking in India
The commercial Banking in India started in the late 18th century. Banking starts from Bank of Hindustan established in 1770 and it was first bank at Calcutta under British management. The First bank wholly owned by India(with limited liability) is Awadh Bank(1881). The first bank which is wholly owned by India is Punjab National Bank(1894).
Nationalisation of Banks
In India banks were nationalized twice. First time nationalization process started on 19 July 1969 in which 14 Banks were nationalized. Second time nationalization was done on 15 April 1980. This time 6 banks were nationalized. Total 20 banks were nationalized out of which the New Bank of India was merged with PNB on 4 Sept 1993.
Reserve Bank of India
Reserve Bank of India is established on Ist April 1935(Under RBI act 1934). Earlier its Head Quarter was situated at Calcutta (Kolkata) upto 1937 after 1937 was shifted to Mumbai. The Reserve Bank of India started with a capital of 5 crore rupee. RBI was nationalized on 01-01-1949. The first governor or RBI was Sir Osborne Smith and the first Indian governor of RBI Shri C.D. Deshmukh.
Points to remember:
- No female become the governor of RBI
- There are three female governor of RBI(KJ Udeshi, Shyala Gopinath, Usha Thorat).
- Retirement age of governor is 65 years or 4 years in office.
- Financial year of RBI is 1st July to 30th June.
Functions of RBI
Important Functions of RBI are:
- It acts as the Banker’s Bank
- It acts as the Banker’s to govt.
- It keeps faith of public in paper Notes.
- It is the lender at last resort.
- It issues the currency
- To review the monitory policy
- To represent the India at International level(IMF, World Bank etc).
- To control foreign exchange market.
RBI Tools to Manage Monetary Policy
There are four major tools which are used to manage monetary policy
- Repo and Reverse Repo Rate.
- Cash Reserve Ratio (CRR).
- Open Market Operations.
- Statutory Liquidity Ratio.
- Bank Rate.
Repo and Reverse Repo Rates
Repo and reverse repo rates are one of the major tools to manage the monetary policy.
- Repo Rates: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
- Reverse Repo Rates: Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI.
Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) is a specified Portion of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank (Reserve Bank in India).
Statutory Liquidity Ratio
The portion of net demand and time liabilities in the form of liquid assets like cash, gold which bank have to maintain safe with itself.
Bank rate is the rate charged by the central bank for lending funds to commercial banks. The difference between bank rate and repo rate is bank rate usually deals with loans, whereas, repo or repurchase rate deals with the securities. The bank rate is charged to commercial banks against the loan issued to them by central banks (RBI), whereas, the repo rate is charged for repurchasing the securities.
State Bank of India
The story of the State Bank of India starts with the first decade of the 19th century, when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. On 1 July 1955, the imperial Bank of India became the State Bank of India.
SBI and Associates
There are seven associate banks of SBI
- State Bank of Bikaner and Jaipur (SBBJ)
- State Bank of Hyderabad (SBH)
- State Bank of Travancore (SBT)
- State Bank of Mysore (SBM)
- State Bank of Patiala (SBP)
- State Bank of Saurashtra (SBS) – Merged with SBI in 2008
- State Bank of Indore (SBIR) – Merged with SBI in 2010
Currently all associate banks of SBI are merged in SBI.
Some Banking Terms
- NEFT (National Electronic Fund Transfer): Neft stands for National Electronic Funds Transfer is a payment system which facilitates one-to-one funds transfer. Like RTGS, Neft also transfers funds from one bank, but unlike RTGS the settlement takes place in batches (that may include transfers from various individuals) rather than individually.
- RTGS(Real Time Gross Settlement): Real-time gross settlement systems (RTGS) are specialist funds transfer systems where the transfer of money or securities takes place from one bank to another on a "real time" and on a "gross" basis.
- White Label Atm: ATM stands for Automated teller machine. A white labelled ATM is a private company ATM which is permitted by RBI. But White label ATM doesn’t have such Bank logo, hence called White label ATMs.