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Banking and Insurance

Notes State Bank of Saurashtra
State Bank of Travancore
UCO Bank

Union Bank of India
United Bank of India
Vijaya Bank

1.3 Private Banks in India

Prior to nationalization, Banks in India with the sole exception of State Bank of India were in
private hands with community and trade orientation. Nationalization of 14 banks in the year
‘1969 and another set of 6 banks in the year 1980 reduced the importance of private sector banks
and public sector banks started playing a major role in extending the horizon of banking services
to the nook and corner of the country.

With history repeating itself, private sector banking got a fillip with the Government of India
relaxing the conditions for opening of private sector banks in the year 1994, as a part of their
liberalization programme. Housing Development Finance Corporation Limited (HDFC) was
amongst the first to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector. As on 31st of March 2005, there are 30 private sector banks
operating in the country.
Private Banks have been playing a crucial role in enhancing customer oriented products with no
choice left with the public sector banks except to innovate and compete in the process. Reserve
Bank of India has come out on clear-cut terms their guidelines on ownership and governance in
private sector banks.
The broad principle underlying the guidelines on ownership and governance in private sector
banks is to ensure that the control of private sector banks is well diversified to minimize the risk
of misuse or imprudent use of leveraged funds. The guidelines require that:

Important shareholders (i.e., with shareholding of five percent and above) are fit and
proper as per the Reserve Bank guidelines on acknowledgement for allotment and transfer
of shares;

The Directors and the Chief Executive Officer who manage the affairs of the bank are fit
and proper and observe sound corporate governance principles;
Banks have minimum capital/net worth for optimal operations and systematic stability;
and
Policy and processes are transparent and fair.
Some additional requirements are:

Banks maintain a net worth of Rs.300 crore at all times;
Shareholding or control in any bank in excess of 10% of the paid up capital by any single
entity or group of related entities requires the Reserve Bank’s prior approval;

Banks (including foreign banks having branch presence in India/financial institutions are
not allowed to exceed equity holding of 5% of the equity capital of the investee bank;
Large industrial houses are allowed to acquire shares not exceeding 10% of the paid up
capital of the bank subject to the Reserve Bank’s approval;

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