INDIAN BANKING SYSTEM

Unit-2

—State Bank of India: Brief History, Objectives Functions; Structure and organization; Working and progress.

—Reserve Bank of India: Objectives; Organization; functions and working; monetary policy, credit control measures and their effectiveness.

                               Evolution of SBI

The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence either as a result of the compulsions of imperial finance or by the felt needs of local European commerce and were not imposed from outside in an arbitrary manner to modernize India's economy. Their evolution was, however, shaped by ideas culled from similar developments in Europe and England, and was influenced by changes occurring in the structure of both the local trading environment and those in the relations of the Indian economy to the economy of Europe and the global economic framework.

The State Bank of India is the biggest commercial bank and holds a special position in the modern commercial banking system in India. It came into existence on July 1, 1955 after the nationalization of the Imperial Bank of India. The Imperial Bank of India was established in 1921 by amalgamating the three Presidency Banks of Madras, Bombay and Bengal.Until the establishment of the Reserve Bank of India in 1935, the Imperial Bank of India, in addition to its normal commercial banking functions had been performing certain central banking functions. It used to act as the banker to the government, as banker’s bank, and as the clearinghouse.

After the establishment of the Reserve Bank of India, the Imperial Bank of India left its central banking functions, but continued to serve as the agent of the Reserve Bank in the areas where the latter did not have its branches. In 1955, on the recommendations of the Rural Credit Survey Committee, the Imperial Bank of India was nationalized and renamed as the State Bank of India through the State Bank of India Act 1955.

SBI Objectives:

The State Bank of India has been established to operate on the normal commercial principles, with the only difference that, unlike other commercial banks in the country, it takes into consideration and responds in a progressively liberal manner the financial requirements of cooperative institutions and small scale industries, particularly in the rural areas of the country.

The main objectives of the State Bank are:

(i) To act in accordance with the broad economic policies of the government;

(ii) To encourage and mobilize savings by opening branches in rural and semi-urban areas and to promote rural credit;

(iii) To establish a government partnership in the provision of cooperative credit;

(iv)To extend financial help for the establishment of licensed warehouses and cooperative marketing societies;

(v) To provide financial help to the small scale and cottage industries;

(vi) To provide remittance facilities to the banking institutions.

SBI Functions:

1-As an agent of the Reserve Bank, the State Bank performs the following functions:

(i) It acts as the government’s bank, i.e., it collects money and makes payments on behalf of the government and manages public debt.

(ii) It acts as the bankers’ bank. It receives deposits from and gives loans to commercial banks. It also acts as the clearinghouse for the commercial banks, rediscounts the bills of exchange of the commercial banks and provides remittance facilities to commercial banks.

2. Ordinary Banking Functions:

The State Bank of India performs all kinds of commercial banking functions:

 (i) It receives deposits from the public.

(ii) It gives loans and advances against eligible securities including goods, bills of exchange, promissory notes, fully paid shares of companies, immovable property or documents of title, debentures, etc.

(iii) It invests its surplus funds in government securities, railway securities, and securities of corporations and treasury bills.

3. Other Functions:

The State Bank of India also performs the following other functions:

(i) It buys and sells gold and silver.

(ii) It acts as an agent of cooperative banks.

(iii) It underwrites issues of stocks, shares, debentures, and other securities in which it is authorized to invest funds.

(iv) It administers, singly or jointly, estates for any purpose as executor, trustee or otherwise.

(v) It draws bills of exchange and grants letters of credit payable out of India.

(vi) It buys bills of exchange payable out of India with the approval of the Reserve Bank; it subscribes buys, acquires, holds, and sells shares in the capital of banking companies.

4. Prohibited Functions:

The State Bank of India has been prohibited from doing certain businesses by the State Bank of India Act:

(i) The State Bank cannot grant loans against stocks and shares for a period of more than six months.

(ii) It can purchase no immovable property other than its own offices.

(iii) It can neither rediscount nor offer loans against the security of exchange bills whose maturity period exceeds six months.

(iv) It cannot rediscount bills which do not carry at least two good signatures.

(v) It can neither discount bills nor grant credit to individuals or firms above the sanctioned limit.

Achievements of State Bank of India:

The following are the major achievements of the State Bank of India in different fields:

(A) General Progress:

The State Bank of India has made a tremendous progress since its inception in 1955.

i. Deposit Mobilisation:

There has been an increasing trend with regard to the mobilisation of deposits by the State Bank of India.

ii. Credit Expansion:

The progress in the field of credit expansion has also been considerable over the years.

iii. Branch Expansion:

The number of branches of the State Bank of India has also grown remarkably since its establishment.

iv. Present Position of State Bank Group:

By the end of March 2001, total deposits of the State Bank Group (i.e., State Bank of India and its seven associates) had reached Rs. 312117 crore, total advances granted by the group were Rs. 150390 crore and the total number of branches of the Group was 13509.

v. Profits, Efficiency, and Capital Adequacy:

Over the years, the SBI continued to show better performance in terms of profits, efficiency, and capital adequacy.

vi. International Banking:

At present (March 2001), the SBI has a network of 52 overseas offices with their operations spread over 31 countries. These foreign offices mainly cater to the needs of the country’s foreign trade and provide foreign currency resources to the Indian corporates.

During 2000-01, the foreign offices of the SBI earned a net profit or Rs. 248 crore. The deposits and advances of the Bank’s foreign offices were Rs. 7932 crore and Rs. 14797 crore respectively at the end of March 2001.

vii. Technology Up gradation and Consumer Services:

The State Bank of India (SBI) has taken significant initiatives in the fields of technology up-gradation and better consumer services.

(B) State Bank and Rural Credit:

The State Bank had made remarkable progress in the field of rural credit. Since its establishment, it has been making tremendous efforts to develop rural credit by extending credit facilities to cooperative institutions and agriculturists.

Important measures are undertaken by the State Bank to promote rural credit are as follows:

I. Expansion of Rural Branches

II. Agricultural Finance

III. Village Adoption Scheme

IV. Integrated Rural Development Programme

V. Regional Rural Banks

VI. Agricultural Development Branches

VII. Remittance Facilities

VIII. Short-Term Credit to Cooperative Banks

IX. Assistance to Land Development Banks

X. Finance for Marketing and Processing Societies

XI. Warehousing Finance

(C) State Bank and Industrial Finance:

The State Bank of India has been extending financial help for the promotion of industrial growth in the economy.

Various forms of assistance to the industries by the Bank are given below:

I. Industrial Finance:

II. Finance to Small Scale Industries:

Organization of State Bank of India:

The organization of the State Bank of India can be discussed under the following heads:

i. Capital:

The State bank of India has an authorized capital of Rs. 20 crores which has been divided into 20 lakh shares of Rs. 100 each. The issued capital of the State Bank is Rs. 5.6 crore. The shares of the State Bank are held by the Reserve Bank, insurance companies, and the general public. At the end of March 2001, the paid-up capital and the reserves of the State Bank was Rs. 13461 crore.

ii. Management:

The management of the State Bank of India is under the control of a Central Board of Directors consisting of 20 members.

The break-up of the Central Board is as given below:

(a) A Chairman and a Vice-Chairman are to be appointed by the Central Government in consultation with Reserve Bank.

(b) Two Managing Directors are to be appointed by the Central Board with the approval of the Central Government,

(c) Six directors are to be elected by the private shareholders.

(d) Eight directors are to be nominated by the Central Government in consultation with the Reserve Bank to represent territorial and economic interests. Not less than two of them should have special knowledge in the working of cooperative institutions and of the rural economy,

(e) One director is to be nominated by the Central Government,

(f) One director is to be nominated by the Reserve Bank.

Subsidiary Banks:

Through the State Bank of India (Subsidiary Banks) Act, 1959, major state- associated banks were converted into a subsidiary banks of State Bank of India.

At present, there are seven subsidiary banks of the State Bank of India:

(a) The State Bank of Bikaner and Jaipur;

(b) The State Bank of Hyderabad;

(c) The State Bank of Mysore;

(d) The State Bank of Patiala;

(e) The State Bank of Saurashtra;

(f) The State Bank of Travancore; and

(g) The State Bank of Indore.

The State Bank of India holds not less than 55 per cent of the issued capital of each subsidiary bank. All subsidiary banks are merged in SBI  in 2017

—There are Local Boards for four regions of the country such as Western, Eastern, Northern and Southern regions. The head quarters of the Local Hoards are situated at Mumbai, Kolkatta, Chennai and New Delhi. Each Local Board consists of five members. All the members are appointed by the Central Government. The members should represent, as far as possible, territorial and economic interests and the interests of cooperative and indigenous banks.

—The members of the Local Board are appointed for a period of four years. They are eligible for reappointment. They elect from among themselves one person as the Chairman of the Board.

—The Central Board of Directors should meet at least six times in a year and not less than once in a quarter. Deputy Governors and the official director may attend the meetings of Board but they have no authority to vote. A Deputy Governor may exercise the right to vote, if he is authorized to do so when the Governor is absent. In the absence of the Governor, the Deputy Governor discharges the duties of the Governor and has the right of control over the affairs of the Bank. The Central Office of the Reserve Bank is located in Mumbai.

Departments of RBI

—The various departments of the Reserve Bank of India are listed below:

—1. Information Technology.

—2. Economic Analysis and Policy.

—3. Statistical Analysis and Computer Services.

—4. Monetary Policy.

—5. Premises Department.

—6. Secretary’s Department.

—7. Press Relations.

—8. Exchange Control.

—9. Rural Planning and Credit.

—10. Financial Institutions Division.

—11. Banking Supervision.

—12. Banking Operations and Development.

—13. Financial Companies.

—14. Non-banking Supervision.

—15. Administration and Personnel Management.

—16. Human Resources Development.

—17. Deposit Insurance and Credit Guarantee Corporation.

—18. Inspection.

—19. Urban Banks.

—20. Currency Management.

—21. External Investments and Operations.

—22. Expenditure and Budgetary Control.

—23. Government and Bank Accounts.

—24. Internal Debt Management Cell.

—25. Industrial and Export Credit.

—26. Legal.