History of Banking — Set 3

Correct Answer: C. 1949

• **1949** = the Banking Regulation Act was originally enacted as the Banking Companies Act, 1949 — it came into force on March 16, 1949, and was renamed the Banking Regulation Act in 1966. • **Key provisions** — it gave RBI comprehensive powers to license banks, inspect their books, regulate capital adequacy, prescribe SLR, and supersede bank managements — forming the legal backbone of Indian bank regulation. • It is separate from the RBI Act, 1934 (which governs RBI itself) — the Banking Regulation Act governs the commercial banks that RBI regulates. • 💡 1934 is wrong — that is the year the RBI Act was passed (establishing the legal framework for RBI, not for commercial banks); 1947 is wrong — Indian Independence year; no major banking legislation was enacted in 1947; 1955 is wrong — the State Bank of India Act was passed in 1955, not the Banking Regulation Act.

Correct Answer: A. Canara Bank

• **Canara Bank** = founded on July 1, 1906 by Ammembal Subba Rao Pai in Mangalore (then part of South Canara district) — inspired by the Swadeshi Movement of 1905 that called for Indian enterprise over British dependence. • **Centenary in 2006** — Canara Bank celebrated 100 years of operations in 2006; it was originally called 'Canara Hindu Permanent Fund' and was later renamed Canara Bank in 1910. • Canara Bank was nationalised in 1969 (first phase) and is today one of India's largest public sector banks, headquartered in Bengaluru. • 💡 Corporation Bank is wrong — also founded in 1906 in Udupi but it did not brand itself as the Swadeshi Movement bank that celebrated its centenary in the public consciousness the same way; Bank of Baroda is wrong — founded in 1908 by Maharaja Sayajirao Gaekwad III; Bank of India is wrong — founded in 1906 in Mumbai but by a group of businessmen, not directly linked to the Swadeshi Movement narrative in this context.

Correct Answer: A. Reserve Bank of India

• **Reserve Bank of India** = acts as banker, agent, and financial adviser to both the Central and State Governments under Section 20 and 21 of the RBI Act, 1934 — hence officially called 'Banker to the Government'. • **What this means in practice** — RBI maintains government accounts, manages public debt, conducts government borrowings (G-secs auctions), and handles foreign exchange on behalf of the government. • SBI acts as RBI's agent (sub-agent) at locations where RBI has no office, but SBI itself is NOT the Banker to the Government — that role belongs exclusively to RBI. • 💡 Finance Ministry is wrong — it is the policymaking body for government finances but does not perform banking functions; NITI Aayog is wrong — it is a policy think-tank, not a banking or financial institution; State Bank of India is wrong — SBI is the largest public sector bank but acts only as RBI's agent at certain locations, not as the primary government banker.

Correct Answer: B. Narasimham Committee II

• **Narasimham Committee II** = the Committee on Banking Sector Reforms (1998), again chaired by M. Narasimham — recommended that India should have 3 or 4 large international banks, 8–10 national banks, and many local/regional banks instead of ~27 fragmented PSBs. • **Led to PSB mergers** — this recommendation eventually drove major consolidations: SBI absorbed 5 associates (2017), Bank of Baroda-Vijaya-Dena merger (2019), and the 10-into-4 mega merger of 2020. • Narasimham Committee I (1991) focused on opening the sector to private players; Narasimham Committee II (1998) focused on consolidating and strengthening existing banks — two distinct phases of reform. • 💡 Verma Committee is wrong — it (1999) identified weak/sick PSBs and suggested restructuring individual banks, not mergers for strength; Nayaku Committee is a fabricated name, not a real committee; Tarapore Committee is wrong — it focused on Capital Account Convertibility (1997) and Narrow Banking, not PSB mergers.

Correct Answer: B. Vijaya Bank

• **Vijaya Bank** = was NOT nationalised in the 1969 first phase — it was nationalised in the second phase on April 15, 1980, because it did not meet the ₹50 crore deposit threshold that triggered the 1969 round. • **1969 criterion** — the 14 banks nationalised in 1969 were those with deposits of ₹50 crore or more; Vijaya Bank's deposits were below this threshold at that time. • Vijaya Bank was later merged into Bank of Baroda on April 1, 2019, along with Dena Bank — all three banks ceased to exist independently after that merger. • 💡 Dena Bank is wrong (as an answer) — it WAS among the 14 nationalised in 1969; Allahabad Bank is wrong (as an answer) — it was also nationalised in 1969; Central Bank of India is wrong (as an answer) — it was one of the original 14 in 1969, being one of India's largest banks at the time.

Correct Answer: B. 1938

• **1938** = RBI issued its first own currency note — a ₹5 note bearing the portrait of King George VI — in January 1938, three years after it began operations in 1935. • **Why not 1935** — when RBI commenced on April 1, 1935, currency notes were still being issued by the Government of India; RBI took over this function gradually, with its first note only in 1938. • The ₹1 note remains a Government of India note (signed by the Finance Secretary, not the RBI Governor) to this day — all other denominations are issued by RBI. • 💡 1935 is wrong — RBI started operations that year but did not yet issue its own notes; the Government of India continued issuing currency until RBI's first note in 1938; 1947 is wrong — Independence year, but RBI had already been issuing notes since 1938; 1950 is wrong — the Republic of India was declared in 1950, but RBI's first note predates this by 12 years.

Correct Answer: D. Governor

• **Governor** = the chief executive of the RBI is designated as the Governor, appointed by the Government of India for a term of 3 years (extendable) — this designation is established by the Reserve Bank of India Act, 1934. • **Support structure** — the Governor is assisted by four Deputy Governors; the Governor chairs the Central Board of Directors and represents India in international bodies like the IMF and BIS. • As of recent years, the Governor has 4-year term precedents; Shaktikanta Das served the longest recent term (2018–2024), followed by Sanjay Malhotra. • 💡 President is wrong — 'President' is the designation for India's constitutional head of state; RBI uses 'Governor' for its chief; Chairman is wrong — some banks (like SEBI) use 'Chairman'; RBI's head is specifically 'Governor' as per its founding Act; Managing Director is wrong — this is a corporate designation for commercial entities; RBI's executive head is called Governor, not MD.

Correct Answer: D. HSBC

• **HSBC** = the Hongkong and Shanghai Banking Corporation installed India's first Automated Teller Machine (ATM) in Mumbai in 1987 — allowing customers to withdraw cash without visiting a bank branch. • **Indian banks followed later** — Indian public sector banks were slow to adopt ATMs; Citibank and HSBC (both foreign banks) pioneered ATM technology in India; SBI's ATM network expanded significantly only in the late 1990s and 2000s. • Today India has over 2.5 lakh ATMs; the White Label ATM concept (ATMs run by non-bank entities) was introduced in 2012 to expand access in rural areas. • 💡 Citibank is wrong — it also introduced ATMs early in India but HSBC was first (1987); State Bank of India is wrong — as a public sector bank, SBI adopted ATMs significantly later than foreign banks; ICICI Bank is wrong — ICICI Bank was licensed only in 1994, seven years after HSBC's first ATM in 1987.

Correct Answer: C. ICICI Bank

• **ICICI Bank** = became India's first universal bank in 2002 when ICICI Limited (a development finance institution) merged with its own subsidiary ICICI Bank — combining commercial banking, investment banking, insurance, and asset management under one entity. • **Universal banking defined** — a universal bank offers both commercial banking (deposits, loans) and investment banking (securities, insurance) services; this model was recommended by the Khan Committee (1998) to India. • ICICI's 2002 reverse merger was a landmark: a DFI absorbed its banking subsidiary (instead of the usual direction), and the combined entity listed on NYSE, making it a truly global universal bank. • 💡 Axis Bank is wrong — it was established as UTI Bank in 1993 and renamed Axis Bank in 2007; it is a private sector bank but never merged a DFI to become a universal bank; IDBI Bank is wrong — IDBI converted to a bank in 2004, after ICICI's 2002 merger; HDFC Bank is wrong — it has always been a pure commercial bank since 1994, not a universal bank in the DFI-merger sense.

Correct Answer: D. Tarapore Committee

• **Tarapore Committee** = the Committee on Capital Account Convertibility (1997), chaired by S.S. Tarapore (former Deputy Governor, RBI) — proposed 'Narrow Banking' as a solution for weak, financially stressed public sector banks. • **Narrow Banking concept** — under this model, weak banks would be prohibited from making risky loans; instead they would invest only in risk-free government securities (G-secs), ensuring they could always repay depositors even if they couldn't grow. • The idea was to quarantine financial stress — prevent a weak bank's bad loans from spreading systemic risk — while restructuring or merging such banks over time. • 💡 Khanna Committee is wrong — it dealt with the unit trust and securities markets (1998), not banking restructuring; Janakiraman Committee is wrong — it investigated the 1992 securities scam (Harshad Mehta), not bank restructuring concepts; Gadgil Committee is wrong — it focused on social objectives in banking and the priority sector approach, not narrow banking.