Banking System of India

Banking System of India

• Bank of Hindustan (1770) was the first bank to be established in India (Alexander and Co.) at Kolkata under European management. Other banks set-up was Bank of Bengal (1806), Bank of Bombay (1840) and the Bank of Madras (1843) - these were called Presidency Banks.

• First bank with limited liability managed by an Indian board was Oudh Commercial Bank, founded in 1881. The first purely Indian bank was the Punjab National Bank (1894).

Reserve Bank of India

• It is the Central Bank of the country.

  • It was established on Apr 1, 1935 with a capital of Rs.5 crore. This capital of Rs.5 crore was divided into 5 lakh equity shares of Rs.100 each. In the beginning, the ownership of almost all the share capital was with the non-government share-holders.

  • It was nationalized on Jan 1, 1949 as govt., acquired the private share holdings.

  • Administration: 14 directors in Central Board of Directors besides the Governor, 4 Deputy Governors and one Government official. The Governor is the Chairman of the board and Chief Executive of the Bank.

  • Governors:
    • 1st Governor-Sir Smith (1935-37)
    • 1st Indian Governor : CD Deshmukh (1948-49)
  Reserve Bank of India and its functions

  1. Issue of Notes: Regulates issue of bank notes above 1 rupee. It acts as the only source of legal tender money because the one rupee notes issued by Ministry of Finance are also circulated through it.

     The Reserve Bank has adopted the Minimum Reserve System for the note issue. Since 1957, it maintains gold and foreign exchange reserve of Rs.200 crore, of which at least 115 crore should be in gold.

  2. Banker to the Government: Acts as the banker, agent and advisor the Govt., of India. It also manages the public debt for the Government.

  3. Banker's Bank: The Reserve Bank performs the same function for other banks as the other banks ordinarily perform for their customers.

  4. Controller of Credit: The Reserve Bank undertakes the responsibility of controlling credits created by the commercial banks. To achieve this objective, it makes extensive use of quantitative and qualitative techniques to control and regulate the credit effectively in the country.

  5. Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the Reserve Banks buys and sells the foreign currencies and also protects the country's foreign exchange funds.

  6. It formulates and administers the monetary policy.

  7. Acts as the agent of the Government of Indian in respect to India's membership of the IMF and the World Bank.

  • No personal accounts are maintained and operated in RBI.

  Reserve Bank of India Amendment Bill 2005 Approved

  The Reserve Bank of India (Amendment) Bill 2005 has been approved. This bill amends the Reserve Bank Act for providing flexibility to the Central Bank in fixing the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). CRR is the cash that banks deposit with RBI and is one of the key instruments used by the Central Bank to inject or suck out liquidity from the market.

  SLR specifies the minimum amount that banks must invest in government securities. This bill is to arm RBI with greater autonomy and authority to deal with subjects (mainly CRR and SLR) under the Act. This bill also allows the Central Bank to regulate derivatives, repo instruments (overnight rates used to regulate liquidity) and securities.

  The amendments also seek to end the ambiguity about the legal validity of derivatives as it was seen to inhibit the growth of the market.