Page 43 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes
Did u know? There are two methods to meet bank’s expansion needs:

Organic means of growth that comes out of an increase in the bank’s own business activity, and
Inorganic means that includes mergers or takeovers.
The last decade has seen many positive developments in the banking sector of India. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial sector regulatory entities, have made several notable efforts to improve
regulation in the sector. The sector now compares favourably with banking sectors in the region
on metrics like growth, profitability and non-performing assets (NPAs). A few banks have
established an outstanding track record of innovation, growth and value creation. This is reflected
in their market evaluation. However, improved regulations, innovation, growth and value
creation in the sector remain confined to a small part of it. The cost of banking intermediation in
India is higher and bank penetration is far lower than in other markets. The banking industry of
India needs to make itself more stronger because it has to support the vibrant and modern
economy that India aspires to be. An enabling policy and good regulatory framework will be
very crucial for the success of management of bank with the burden of this change. Many
developed countries have failed to react to the changing market realities and the same has
stunted the development of their financial sectors. A weak banking structure could not enable
itself to fuel its continued development that has harmed the long-run development of their
economies.

!
Caution There is a need to act both decisively and quickly to build an enabling, rather than
a limiting, banking sector in India.

Self Assessment

Fill in the blanks:
8. The idea of creating bigger banks to take on ……………… sounds attractive.

9. The ………………. between bank employees and customers has become increasingly
remote.
10. The functional efficiency of banks has achieved huge ……………….... for their survival in
the present scenario.

3.4 Reserve Bank of India: Role and Functions

The Reserve Bank of India (RBI) was established on 1st April 1935 under the Reserve Bank of
India Act, 1934. After its establishment, it took over the function of issuing paper currency from
the Government of India and of controlling credit from the Imperial Bank of India. It originally
started as a shareholders bank with a paid-up capital of ` 5 crores. It was nationalized on 1st
January 1956 and since then it has been functioning as a State owned and State-controlled Central
Bank.
3.4.1 Role of RBI

The Reserve Bank had a paid up capital of ` 5 crore divided into 5 lakh shares of ` 100 each. The
Government of India owns all shares. The management is vested in the Central Board of Directors,
which has twenty members as given below:

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