BANK LICENSING & NATIONALISATION

I'm sure y'all know there are 2 kinds of commercial banks - Public (SBI, PNB etc.) and Private (HDFC , Axis etc.). These banks cannot operate in India unless they get a license from RBI which is India's Central Bank. [There's a commercial bank with the name "Central Bank of India" but wo sirf uska naam h, don't mix the 2!!] But public sector banks me toh already maximum stake Govt ka hi hota h, therefore license sirf private & foreign banks ko required hota h; Public sector banks ka "Nationalisation" hota h!
There are 2 terms which you surely must have read/heard somewhere - Nationalisation & Liberalisation. For easy learning ---->> remember : Nationalisation = Public Sector Banks and Liberalisation = Private Banks.
To clear this concept, Let's go to the beginning!

1. LIBERALISATION    - How private banks got their licenses!!
In general, liberalization refers to a relaxation of previous government restrictions, usually in such areas of social, political and economic policy.

(A) Narsimhan Committee I (1991) -->> Lets look at the recommendations made by this committee and the actions taken based on them :

• Govt./RBI shouldn't regulate Bank's loan interests --> BPLR (Benchmark Prime lending rate)  system came , nowadays called Bank Rate
• Setup Debt recovery tribunals --> Done!
• Liberate branch expansion policy --> Banks can open branches anywhere but 25% branches must be opened in rural areas (every year)
• Reduce SLR & CRR --> from 15 , 40 it was reduced to 4,23
• NBFC (Non Banking Financial Company) regulatory framework --> done!
• Govt should reduce shareholding of banks --> SBI shares sold, Govt now owns 60%
• Allow entry of private sector & foreign banks ---> This lead to 1st round of private Bank licenses

And thus RBI released its guidelines for licensing of new banks in private sector and in 1993 - 10 new private banks were formed :-
1. ICICI
2. HDFC
3. Times Bank (later merged with HDFC)
4. Global Trust Bank (later merged with OBC bank)
5. Centurion Bank (later merged with HDFC)
6. Bank of Punjab (later merged with HDFC)
7. UTI (now renamed as Axis Bank)
8. IDBI (Not exactly private, it's public now)
9. Indus Bank
10. DCB
*Merging aka Amalgamation.

(B) Narsimhan Committee II (1998) -->> Recommendation & action taken :

• Introduce voluntary retirement scheme (VRS) in Public sector banks - done!
• Legal Reforms for Loan recovery - SARFAESI act 2002
• Computerisation, EFT (Electronic Funds Transfer) - done!
• Payment & Settlement Act - Retail (ECS, NEFT, Cards) + Wholesale (RTGS) --- I'll discuss these in the future in detail
• Continue allowing entry of private & Foreign banks - 2001 More applications were invited by RBI

And again in 2001 - RBI revised guidelines for licenses and then in 2003-04 licenses were given to 2 new banks - Kotak Mahindra & Yes Bank.

(C) 2013 - 2014 --->> Then Finance Minister P. Chidambaram recommended more private banks - A total of 26 applicants including Anil Ambani, Birla, Bajaj, Tata, Muthoot, India Post were there. But later 2 withdrew their applications and left the race - Tata & Videocon ; And new applicant - KC Land & Finance joined in. Therefore, total of 25 were there in the end.

Bimal Jalan Committee (2013) ---> Set up to decide the winners and they were announced in April 2014 - only 2 - IDFC (Infrastructure Development & Financial Corporation) and Bandhan Microfinance. Both of them were given in principle approval.

*  In principle approval - Within 18 months, they must get net worth to Rs. 1000 crore, open 25% branches in unbanked rural areas --> only then RBI will give them license under Banking Regulation Act, 1949 and only then public will be able to open Current & Savings Account.

 

2. NATIONALISATION - Means govt. becomes majority shareholder in those bank and govt. can pick board of directors of it's choice for these banks.

 

Timeline :

• Creation of RBI - 1935
• Nationalisation of RBI - 1949
• Enactment of Banking Regulation Act - 1949
• Creation of SBI - 1955
• Creation of SBI Subsidiaries - 1969
• Nationalisation of 14 major Public Sector Banks - 1971
• Creation of RRBs (Regional Rural Banks) - 1971
• Nationalisation of 6 more banks with deposits > 200 crores - 1980

(A) Creation of RBI : RBI Act was passed in 1934 and Bank was established in 1935 on recommendation of Hilton-Young Commission.

• Initially Head Office was in Calcutta, moved to Mumbai in 1937 where Governor sat and formed policies. At that time, RBI was privately owned and Sir Osborne Smith was 1st governor of RBI till 1937
• C D Deshmukh - 1st Indian governor of RBI till 1949. He was a member of Indian Civil Services. He represented India at Bretton Woods Negotiations in 1949.
• In 1949, RBI was nationalised - i.e. fully owned by Govt.

(B) Banking Regulation Act  1949 : 
This act empowers Union govt. in consultation with RBI Governor to issue directions to banks as necessary. This act governs all public & private sector banks & other banks in India. RBI can even remove the entire board of a bank. RBI prevents connected lending [some bank lending to a connected corporation at low rates causing loss in the end]. RBI can check accounts and of those connected corporations as well!! RBI can conduct special audits of co-operative banks and implement penalty on any bank not maintaining cash reserves. Approval of RBI is needed to buy > 5% shares of a bank.
All these powers were granted to RBI by this Act.

(C) Nationalisation of SBI : Earlier k/a Imperial Bank of India, acquired by Govt. in 1955. Remember : SBI is NOT a nationalised bank. It's a public sector bank which is regulated by SBI Act 1955. SBI was already under govt. control in 1969 & 1980 , so there was no need of Nationalisation of SBI. In 1959, 8 banks were converted into SBI subsidiaries - Bikaner , Jaipur, Hyderabad, Indore, Mysore, Patiala, Travancore & Saurashtra. Bikaner & Jaipur were merged to form 1 bank. Saurashtra & Indore were merged with SBI.

(D) Nationalisation of Major Banks :  Banks that were nationalised were either privately owned by companies or individual investors. In 1969 14 banks were nationalised and then in 2nd round in 1980 6 more were nationalised. But later, in 1993 New Bank of India was merged with PNB. This left us with 19 nationalised banks until 2013.

(E) Bharatiya Mahila Bank : 3rd round of Bank Nationalisation! In budget 2013, Fin Min P Chidambaram announced to open this bank with Rs1000 crore = 100% State (Govt.) owned.
In November 2013, BMB was inaugurated on Indira Gandhi's B'day.

• It's an all women bank
• Board of directors = females
• Staff = male + female
• Customers = male + female -->> no distinction
• But loans given predominantly to women. Through BMB, women entrepreneurs can get loans up to Rs1 crore without putting any collateral with the bank.

That's all folks!! :)) Here check out my next article Numbers and their Principles 

What is a Bank? SCHEDULED & COMMERCIAL BANKS

What is a Bank?
It's a financial institution authorized by the government to receive deposits, pay interest, clear cheques, serve loans, act as an intermediary in financial transactions and provide other such financial services to customers.

SCHEDULED BANKS

These are included in the 2nd schedule of RBI Act, 1934. RBI includes only those banks that satisfy section 42 (6)(a) of the act. Two conditions to be fulfilled are :
1. Paid Capital & collected funds of the bank should be >= 5 lakhs
2. any activity of the bank should not adversely affect interests of depositors

Every Scheduled bank :
A. Becomes eligible for debt/loans on bank rate from RBI
B. Automatically acquire membership of clearing house

COMMERCIAL BANKS
These may be defined as institutions that deal with deposits & advances of a business organisation. Remember!!! RBI is NOT a commercial bank! These can be classified into :
1. Public Sector Banks : All government of India undertakings + IDBI + SBI & Assoc.
2. Private Sector Banks : ICICI, YES, HDFC, Axis etc etc ... whose head offices are in India (GoI does not have stakes in these)
3. Foreign Banks : HSBC, Bank of America etc. whose Head offices are not in India
4. Regional Rural Banks - These will be discussed in details in an upcoming article.


That's for today aspirants!! Hang on until 2moro!
P.S. If there's any terms you don't get, don't go digging, try to memorise what I've provided as much as possible and after I'm done posting all my articles, you'll feel differently!! Later!!