Credit Management: A Study of Public and Private Banks

 1.1 INTRODUCTION:

The financial system is the most important institutional and functional vehicle for economic transformation. A financial system plays a significant role in the economic growth of a country. The pace of achievement of broader national objectives depends on the efficiency of the financial system. It is the system in which investor can invest and lender can lend the money. The financial system of a country diverts the savings of country towards more productive uses which helps to increase the growth of the economy. It mobilizes and allocates scarce resources of a country very usefully. It has been confirmed by research that countries with developed financial system grow faster than others.

A financial system is a complex, well organized set of sub systems of financial institutions, markets, instruments and services which facilitates the transfer and allocation of funds efficiently and effectively. Out of these four elements, the institutions act as intermediaries which mobilize savings and facilitate the fund.

The financial systems of most developing countries are characterized by co – existence and cooperation between the formal and informal financial sectors.1 The Indian Financial System can also be broadly classified into the formal and the informal financial system. The formal financial system works under the supervision of (MOF) Ministry of Finance, and Securities and Exchange Board of India (SEBI) and other Regulatory Bodies.

1.2  FUNCTIONS OF THE FINANCIAL SYSTEM:

It ties the savers and investors and by doing that it helps to mobilize and allocate the fund more effectively and efficiently.

• It inspires the investors to observe the investment performance.

• It provides a payment mechanism for the exchange of goods and services.

• It transfers various economic resources across geographic regions, industries, time and space.

• It helps to achieve maximum allocation of risk bearing. 

•  It makes available price related information.

• It creates financial structure that reduces the transaction and borrowing cost.

• It helps promoting the process of finance deepening and broadening.2 

• It controls the risks involved in mobilizing savings and allocating credit.

• It helps the investors to take the careful and true decision regarding investment.

• With the help of financial system, people can manage and adjust their portfolio.

 1.3 IMPORTANCE OF THE FINANCIAL SYSTEM IN  ECONOMIC GROWTH:

A well-organized financial system puts the country in a motion towards faster economic growth. It makes possible less costly innovation and more profitable and also maintains international competition. The existence of an efficient financial system facilitates economic activities and growth. The growth of financial structure is a precondition to economic growth. It also helps in evaluating assets and escalating liabilities. It also provides important assistance to the management companies. In addition to this, it connects the domestic financial markets with the international financial markets. Therefore, it is worth saying that there is very close relation between financial system and economic growth.3

The financial institutions can further be classified as banking and non-banking financial institutions. The commercial banks and certain variants of NBFCs are some of the market participants. The major participants of the Indian financial system are the Commercial Banks. In fact Commercial Banks are the heart of our financial system. The banking sector plays considerable role in the economic growth of a nation as well as people‟s lives. It is something which no one can think without in life. Without banking, no one can imagine economy moving. In contemporary era, commerce is greatly depended on banking which directs the economic affairs in various ways. The activities of banking have grown manifold and banks are now entering into new fields of economic activities.4

India is one of the fastest growing economies in the world. Without a sound and efficient banking system in India it cannot have a strong economy. Banks are very important from economical and social point of view as well, as it is more concerned about common people‟s development. So, commercial banking system of the country is important for the smooth functioning of its economy.

1.4  ORIGIN OF BANK:

 

The word "bank‟ is basically derived from the Italian word "BANCO‟, a bench – which means the Jews in Lombardy place for the exchange of money and bills. In that time, when a banker failed to do so, his bench was broken by the people and from these circumstances; it was called "bankrupt‟. Banking is as old as is the authentic history and the existence of modern commercial banking are in ancient time, the seeds of bank are plant in ancient time.

In ancient Greece, around 2000 B.C., people were used to deposit their surplus funds with the famous temples of Ephesus, Delphi and Olympia and these temples were the centers for money lending transactions. These temples acted as the financial agents until public confidence was destroyed in the religion.5

    In India, the ancient Hindu culture refers the activity of money lending in the Vedic period. During the period of Ramayana and Mahabharata banking had become full time business activity.

   During the Smriti period, which followed the Vedic period, the business of banking was carried on by the members of the Vaishya community. The Great Manu speaks the earning of interest as the business of Vaishyas. In that period, bankers performed most of those functions which banks perform in modern times, like……… to accept the deposits, to grant the loans, issuing and managing currency of the country etc.

In the time of Mogul, bankers played very important role in lending money and financing to foreign trade and commerce. They were also doing the profitable business of money changing. There was ‟Sheth‟ or "Nagar Sheth‟ in every big or small town, who performed a number of banking functions. They were not doing only money lending business but were also instrumental in transferring funds from place to place and doing collection business mainly through "Hundies‟ which was a major mode of transfer of money for commercial transaction.

1.5 BANK DEFINITION:

The development of banking is evolutionary in nature. A bank performs a multitude of functions and services, which cannot be crunched in to a single definition. A bank may mean different things to different people. So as per different Laws and People, some definitions of banking are as follows:

 
Ø ACCORDING TO LAW:
1. Indian banking regulation act, 1949 :
[Section 5 (1) (b) of the Banking Regulation Act 1949, banking is defined as…..]

“The accepting for the purpose of lending or investment, deposit of money from
the public repayable on demand or otherwise and withdrawable by cheque, draft,
order or otherwise.”

Ø ACCORDING TO DICTIONARY:
1. Oxford English dictionary:
“A bank is an establishment for custody of money received from or on behalf of its customers. Its essential duty is to pay their drafts on it. Its profit arises from the use of the money left unemployed by them.”

2. Webster’s dictionary:
“Bank is an institution which trades in money, establishment for the deposit, custody and issue of money, as also for making loans and discounts and facilitating the transmission of remittances from one place to another.”

Ø ACCORDING TO ACADEMICIANS:
1. Crowhther:
“Collects money from those who have it to spare or who are saving it out of their income, and lends this money out to those who require it.”

2. Cairncroser:
“A bank is a financial intermediary, a dealer in loans and debt.”

3. Prof. Kinley:
“A bank is an establishment which makes to individuals such advances of money or other means of payment as may be required and safely made; and to which individuals entrust money or means of payment when not required by them for use.”

4. Willies and Bogen:
“By banking in the most general sense is meant the business of receiving, conserving and utilizing the funds of the community or of any special section of it.

1.4 HISTORY OF BANKING IN INDIA:

      The existence of professional banking in India could be traced to the 500 BC. Kautilya’s Arthashastra’, dating back to 400 BC contained references to creditors, lenders and lending rates. Banking was fairly varied and catered to the credit needs of the trade, commerce, agriculture as well as individuals in the economy. An extensive network of Indian banking houses existed in the country connecting all cities/towns that were of commercial importance. They had their own inland bills of exchange or ‘Hundis’ which were the major forms of transactions between Indian bankers and their trans-regional connections.

Banking practices in force in India were vastly different from the European counterparts. The dishonoring of „Hundis‟ was a rare occurrence. Most banking worked on mutual trust, confidence and without securities and facilities that were considered essential by British bankers. Banking regulation also had a rich tradition and evolved along with banking in India. In fact, the classic ‘Arthashastra’ also had norms for banks going into liquidation. If anyone became bankrupt, debts owed to the State had priority over other creditors.

PRE-INDEPENDENCE ERA:

   India has a well-developed banking system, and most of the banks in India were founded by Indian entrepreneur’s visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and Indian industrialist. The history of banking in India can be traced back to the last decade of the 18^th century.

The first banks were ‘The General Bank of India’ and ‘The Bank of Hindustan’ which started in 1786. Both of them are now defunct. The oldest bank in existence in India is the State Bank of India which originated in The Bank of Calcutta (1806) in June 1806, which almost immediately became The Bank of Bengal. This was one of the three presidency banks, the other being the Bank of Bombay (1840) and The Bank of Madras (1843). All three of which were established under charters from the British East India Company. For many years the presidency banks acted as quasi – Central Banks, as did their successors. The government had subscribed Rs. 3 lakhs as their share capital to these banks, but major part of their share capital was contributed by the European shareholders. These presidency banks enjoyed the monopoly of government banking. And at the time they were also given the right for issuing the notes in the year 1823 which was withdrawn in 1862 and Government of India started the same and also the limited liability concept was accepted and after that Joint Stock Banks were floated in India. Those 3 presidency banks continued till 1920 and all 3 were merged in 1925 into The Imperial Bank of India which, upon India’s independence became State Bank of India and that is the largest commercial bank in the country.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crises of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock Bank in India. It was not the first through, that honor belongs to the Bank of Upper India which was established in 1863, and which survived until 1913, when it failed with some of its assets and liabilities being transferred to the Alliance Bank of Simla. Around 108 banks failed in the period of 1913-1917 and another 373 banks failed in 1922-36 and this was again followed by the failure of 620 more banks in 1937-48.

The Central Banking Inquiry Committee (1929) traced such major reasons of
bank failures in India are:
Ø Reasons for bank failures
1. Ignorance of people for banking business.
2. Lack of co-ordination among failed stock banks.
3. Lack of such banking acts to operate all banks.
4. Accepted short term deposits and on that base created long term loans.
5. Less efficient and corrupt management.
6. Inexperienced staff at all levels.
7. Poor liquidity assets.
8. Less or insufficient paid up capital and reserves.
9. There was no any central bank to supervise and control over all banks.
10. Mismanagement in decisions and banking operation.

Due to all these reasons commercial bank failed to have the trust and confidence of public upon them. Central Banking is the responsibilities of the RBI, which in 1935, formally took over these responsibilities from The Imperial Bank of India, relegating it to commercial banking functions.

AFTER INDEPENDENCE:

  After India’s independence in 1947, the Reserve Bank was nationalized and given broader power. In the post-independence period banking has witnessed eventful changes. After independence, in the first decade, the attention was on branch expansion and rural credit. On rural credit the thinking about farmers regarding sufficient storage, warehousing and marketing facilities took place.

(To be cont'd)

  How to Cite this Article:

Tanna, F. I. (2016). A comparative study of credit management in public sector and private sector Indian banks. Saurashtra University. Retrieved from http://hdl.handle.net/10603/130558