Formal merchant banking activity in India was originated in nbsp nbsp .. @ abhipedia Powered by ABHIMANU IAS

In addition to the Imperial Bank, there were five big banks, each holding public deposits aggregating Rs.100 crore and more, viz., Central Bank of India Ltd., Punjab National Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd. and United Commercial Bank Ltd. All other commercial banks were also in the private sector and had a regional character; most of them held deposits of less than Rs.50 crore. Interestingly, the Reserve Bank was also not completely State owned until it was nationalised in terms of the Reserve Bank of India Act, 1948. 3.32 In order to gradually integrate the non-scheduled banks with the rest of the organised banking, the Reserve Bank continued to make efforts to keep in close touch with the non-scheduled banks and provide them advice and guidance.

3.60 Banking had not penetrated into the rural and semi-urban centres and usury was still having a field day. A great degree of inter-linkage of markets of agricultural output and credit existed with the agricultural moneylender and traders giving advances to the cultivator and purchasing his produce at less than the market price. Such an inter-linkage between the credit and the output markets had sustained high interest rates and low product price cycles that brought about a high-interest rate-high debt-low income kind of equilibrium.

formal merchant banking activities in india was originated in

In order to finance the increase in fiscal deficit of the Government, the Reserve Bank was forced to increase the SLR of banks. At one point of time, 63.5 per cent of the resources of the banking sector were pre-empted by way of CRR and SLR and such deployments were not adequately remunerated. In view of increased demand for funds from various quarters, attempts were made to bring some financial discipline on the part of corporates. The traditional sectors, in particular, faced overall credit restrictions during periods of tight monetary policy. As a result, the traditional sectors started seeking funds from sources other than the banking system such as capital market and raising deposits directly from the public, leading to disintermediation. On the other hand, in order to meet the priority sector targets, credit appraisal standards were lowered.

Characteristics and functions of Central Banks

3.78 With the advent of planning for economic development and the growing social awareness of the role of bank credit in the economy, it was felt that the then commercial bank lending system had little social content and that it aided concentration of economic power. It was felt that the system was unresponsive to the needs of the weaker sections of the economy, small industry and agriculture, as it concentrated on lending to large customers. Although the Indian banking system had made considerable progress in the 1950s and the 1960s, the benefits of this did not flow down to the general public in terms of access to credit.

formal merchant banking activities in india was originated in

For e.g., Section 7 of the regulations state that a capital adequacy requirement of net worth of Rupees Five Crores needs to be fulfilled. The Merchant Banking scenario in developed countries like USA and UK are different from Indian Merchant Banking activities. A brief outline of Merchant Banking in USA and UK has shown in the following paragraphs.

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A broad credit plan tuned to the overall plan and monetary requirements was drawn up, taking into account the national priorities, the anticipated pace of deposits accretion, general economic situation and likely developments in the different economic sectors. The plan had to provide for allocation for certain activities such as Government requirements and certain essential Government commercial operations like food procurement and buffer stock operations. Another important step was that of arriving at aggregate estimates for certain key sectors. Separate estimates were made for the busy and slack seasons, particularly in respect of sectors susceptible to seasonal changes. Against the background of this broad credit plan for the system as a whole, the individual credit plan of each bank was framed. Banks were asked to explore the scope for redeployment of existing credit and linking it to genuine productive purposes.

It was, therefore, necessary to put in place a regulatory framework so as to make the cooperative sector competitive and resilient. It was also felt necessary to find solutions to tackle problems created by dual control of UCBs by the Reserve Bank under Banking Regulation Act, and State Governments under the respective State Co-operative Societies Acts. 3.196 In order to make RRBs an important vehicle of credit delivery in rural areas, the Reserve Bank announced, in December 2005, a special package with the following salient features.

  • A related issue was also to assess the true health of the banking sector as the health code system being followed then was based on subjective considerations and lacked consistency.
  • 3.101 On the whole, scheduled commercial banks’ advances to agriculture, exports and small scale industries showed a significant rise, while those to industry declined (Table 3.28).
  • Until that time, such amalgamation was possible with only another banking company.
  • A great care was taken to maintain an arm’s length relationship between the SBI and the Government.
  • As against the intention to open 114 branches in 5 years, the Imperial Bank of India could open only 63 branches till June 20, 1955.

The next episode of the failure of UCB was in the State of Andhra Pradesh in 2002, when one of the largest banks in the state faced a run, following a newspaper report regarding an inquiry instituted into the affairs of the bank by the State Registrar of Co-operative Societies. 3.205 The initiation of financial sector reforms had posed new challenges for the urban co-operative banks. First, the reform measures had substantially increased competition in the banking sector. Second, the structural changes in the Indian banking sector beginning the early 1990s increased the interdependence among financial institutions, especially through inter-institutional exposures and payments and settlement channels.

3.104 The commercial banks charged very high rates in some cases and the incidence of such high rates fell even on the small borrowers. To address this issue, the Reserve Bank in 1976 prescribed the maximum rate for bank loans in addition to the minimum lending rates. Smaller banks with demand and time liabilities of Rs.25 crore to Rs.50 crore, were given some flexibility. 3.85 The Indian banking system underwent major structural transformation after the nationalisation in 1969.

Merchant bankers and market making

34 The repo rate was subsequently raised in phases to 9.0 per cent effective July 29, 2008. • Section 24 of the BR Act was amended in January 2007 to remove the floor of 25 per cent on the SLR to be statutorily held by banks. • The Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993, which provided for the establishment of tribunals for expeditious adjudication and recovery of non-performing loans. Following the enactment of the Act, debt recovery tribunals were established at a number of places. • A risk based supervision approach that entails monitoring according to the risk profile of each institution was initiated on a pilot basis in April 2004.

formal merchant banking activities in india was originated in

Such consultancy providers assist starting of businesses, raise finance, modernise, broaden or restructure a enterprise, revival of sick models as well as present help to companies in registering, shopping for and promoting shares. It provides consultancy to its clients for financial, marketing, managerial and legal matters. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ covers the entire range of services provided by a merchant banker.

Accordingly, in the 1950s, efforts were tuned towards putting in place an enabling legislation for consolidation, compulsory amalgamation and liquidation of banks. This was required as the then existing procedure for liquidation was long and time consuming. It involved proceedings in the High Court and caused significant cost and hardship to the depositors. This made it easy for the fly-by-night operators to voluntarily wind-up their operations. Of the 165 non-scheduled banks reported to exist in June 1954, the whereabouts of 107 banks were not known.18 The licence of all of these and the remaining non-scheduled banks, barring six, was cancelled. 3.26 The Reserve Bank of India Act, 1934 gave the Reserve Bank powers to regulate issue of bank notes, the custody of the commercial banks’ cash reserves and the discretion of granting them accommodation.

3.218 Recognising the importance of the payment systems, a number of initiatives were undertaken for bringing about efficiency in the payment and settlement systems. To reduce risk in the electronic payment systems, the implementation of real time gross settlement and national electronic fund transfer enabled receipt of funds on a real time/near to real time basis on a credit-push basis. The share of electronic transactions, both in terms of volume and value has increased significantly in recent years (Table 3.47). In India, the spread of the RTGS system was very rapid in comparison with other countries. 3.207 Failures of co-operative banks brought to the fore the need to have appropriate supervision over the co-operative banking system. A supervisory reporting system was introduced for the scheduled UCBs in April 2001 as a first step towards setting up of OSS for all UCBs.

Merchant Banks can be defined as financial institutions which provide a wide range of financial services such as consultation, management, counselling to large corporate houses or individuals. The Commercial Banks deal in activities such as accepting deposits and providing loans, while Merchant Banks only indulge in consultation or management for a certain fee. Although they may also accept deposits and provide credit, but this is done for only select clients of the bank and not to the public in general as commercial banks do.

Merchant banking in india

In this period, various objectives such as enhancing the savings rates, while keeping the cost of credit for productive activities at a reasonably low level, led to a complex structure of interest rates and other micro controls. This period also witnessed several other controls such as credit authorisation scheme and selective credit controls to ensure that credit was not concentrated in the hands of a few and that it was well disbursed. The merchant bankers work is expounded to company investment, commerce finance and real property investment.


However, in view of prevailing monetary conditions, it has not been possible to reduce the SLR either. In the wake of inflation and tighter monetary policy, interest rates have also hardened. Banks were, therefore, urged to review their business strategies so that they would be in a position to combine longer-term viable financing with profitability in operations, recognising the reality of business cycles and counter-cyclical monetary policy responses. April 1998 Banks were given freedom to offer differential rate of interest for bulk deposits above Rs.15 lakh and over and to set their own penal rates of interest on premature withdrawal of domestic term deposits and NRE deposits.

The Government borrowed from the Reserve Bank by way of automatic monetisation of deficit by adhoc Treasury Bills, which resulted in an increase in reserve money and money supply. In order to counter the impact of deficit financing that fuelled excess money growth, the Reserve Bank was required to raise the cash reserve ratio frequently. The CRR was gradually raised from 5.0 per cent in June 1973 to 15.0 per cent by July 1989 (Table 3.30). Besides, an additional CRR of 10.0 per cent was also introduced effective November 1983. The idea was to reduce the capacity of the banks to create credit by affecting the credit multiplier. At the macro level, credit rather than money supply was viewed as the factor affecting demand.

3.56 In order to ensure the safety of deposits of small depositors in banks in India, the Deposit Insurance Corporation Act, 1961 was enacted. Accordingly, Deposit Insurance Corporation of India was established in January 1962. India was then one of the few countries to introduce such a deposit insurance; the US was the first country to introduce the deposit insurance. This scheme was expected to increase depositors’ confidence in the banking system and was expected to facilitate the mobilisation of deposits and help promote the spread and growth of the banking sector.

Later they prolonged their services to the governments of beneath developed nations to raise the long run funds through the floatation of bonds within the London cash market. Over the period they extended their services to loan syndication, underwriting the problems, portfolio administration etc. During the seventeenth and most of the eighteenth century international finance was centered on Amsterdam. Consequently Amsterdam merchants became the formal merchant banking activities in india was originated in first masters of the various financial techniques and developments which, in the course of time, became identified with the emergent profession of ‘Merchant Bankers’. 47.‐‐‐‐‐‐‐‐‐‐‐‐‐ is a long term risk capital to finance high technology projects which involve risk but at same time has strong potential for growth. 3.221 During the last 15 years of reforms, some momentous changes have taken place in the Indian banking sector (Box III.3).

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