1.

Banks are prone to crisis:

The traditional bank has an inherent tendency to crisis. This is because the bank
borrows short terms and lends leveraged long term. The sum of deposits and the bank’s
capital will never equal more than a modest percentage of the loans the bank has outstanding.

Even if liquidity is not a concern, if there is no run on the bank, banks can simply
choose a ban portfolio of loans, and lose more money than they have. The US Savings and
Loan Crisis in the late 1980s and early 1990s is such an incident.
Role in the money supply:

A bank raises funds by attracting deposits, borrowing money in the inter-bank market,
or issuing financial instruments in the money market or a securities market. The bank then
lends out most of these funds to borrowers. However, it would not be prudent for a bank to
lend out all of its balance sheet. It most keeps a certain proportion of its funds in reserve so
that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in
the form of a deposit with a central bank. This behavior is called fractional-reserve banking
and it is a central issue of monetary policy. Some government (or their central banks) restrict
the proportion of a bank’s balance sheet that can be lent out, and use this as a tool for
controlling the money supply. Even where the reserve ratio is not controlled by the
government, a minimum figure will still be set by regulatory authorities as part of banking
supervision.

Social control of banks:

Indian banking structure has grown considerably in strength and stability due to the
vigorous control and effective monitoring by reserve bank of India. However, Order to
remove the deficiency pointed above, the Government introduced a scheme of social control
of banks. According to the Banking Commission (1972), the social control scheme was
introduced with the main objective of “achieving a wider spread of bank credit flow to
priority sectors and making it a more effective instrument of development.
Structure of the Indian banking industry

The Indian Banking industry, which is governed by the Banking Regulation Act of
India, 1949 can be broadly classified into two major categories Non-Scheduled Banks and
Scheduled Banks. Scheduled banks comprise commercial banks and the co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, the Stat Bank of India and its group banks, regional rural banks and private sector
banks these banks have over 67,000 branches spread across the country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a
significant growth in the geographical coverage of banks. Every bank had to earmark a
minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and the banking sector
was a critical source. The next wave of reforms saw the nationalization of 6 more commercial
banks in 1980. Since then the number of scheduled commercial banks increased four-fold and
the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with
the new private sector banks and the foreign banks. The new private sector banks first made
their appearance after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. These banks due to their late start have access
to state-of-the-art technology, which in turn helps them to save on manpower costs and
provide better services.
 BANKING STRUCTURE

RESERVE BANK OF INDIA

Scheduled of Banking Sector

COMMERICAL BANKS CO-OPERATIVE BANK

Foreign Banks Regional Urban cooperative State cooperative

Public Banks Private Banks

OLD BANKS New Banks

State Banks of Other Nationalized Banks

Organized banking was active in India since the establishment of the General Bank of India
in 1786. After independence, the Reserve Bank of India (RBI) was established as the central
bank and in 1955, the Imperial Bank of India, the biggest bank at the time, was taken over by
the government to form state-owned State Bank of India (SBI). RBI had undertaken an
exercise to merge weak banks to strong banks and the total number of banks thus reduced
from 566 in 1951 to 85 in 1969.

With the objective of reaching out to masses and meeting the credit needs of all sections of
people, the government nationalized 14 large banks in 1969 followed by another 6 banks in
1980. This period saw enormous growth in the number of branches and the banks’ branch
network became wide enough to reach the weakest sections of the society in a vast country
like India. Sib’s network of 9033 domestic branches and 48 overseas offices is considered to
be one of the largest for any bank in the world.

The economic reforms unleashed by the government in early nineties included banking sector
too, to a significant extent. Entry of new private sector banks was permitted under specific
guidelines issued by RBI. A number of liberalization and de-regulation measures aimed at
consolidation, efficiency, productivity, asset quality, capital adequacy and profitability have
been introduced by the RBI to bring Indian banks in line with International best practices.
With a view to giving the state-owned banks operational flexibility and functional autonomy,
partial privatization has been authorized as a first step, enabling them to dilute the stake of
the government to 51 per cent. The government further proposed, in the Union Budget for the
financial year 2000-01, to reduce its holding in nationalized banks to a minimum of 33 per
cent on a case by case basis.