Banking System In India





In India the banks and banking have been divided in different groups. Each group has their own benefits and limitations in their operations. They have their own dedicated target market. Some are concentrated their work in rural sector while others in both rural as well as urban. Most of them are only catering in cities and major towns.

Banking System In India

The banking system plays an important role in promoting economic growth not only by channeling savings into investments but also by improving allocative efficiency of resources. The recent empirical evidence, in fact, suggests that banking system contributes to economic growth more by improving the allocative efficiency of resources than by channeling of resources from savers to investors. An efficient banking system is now regarded as a necessary pre-condition for growth.

The banking system of India consists of the central bank (Reserve Bank of India - RBI), commercial banks, cooperative banks and development banks (development finance institutions). These institutions, which provide a meeting ground for the savers and the investors, form the core of India’s financial sector. Through mobilization of resources and their better allocation, banks play an important role in the development process of underdeveloped countries.

Banking development in India has been, by and large, a state-induced activity. The Reserve Bank of India was nationalized in 1949 followed by the nationalization of Imperial Bank of India (now the State Bank of India - SBI) in 1955. In 1969, 14 major commercial banks were nationalized and the exercise was repeated when 6 more commercial banks were nationalized in 1980. Thus, prior to economic reforms initiated in early 1990s, banking business in India was a near-monopoly of the Government of India.

The underlying philosophy of this approach was to encourage growth, via availability of adequate credit at reasonable/concessional rates of interest, in areas where commercial considerations did not allow for disbursal of credit.

The Financial Sector in India

Along with the rest of the economy and perhaps even more than the rest, financial markets in India have witnessed a fundamental transformation in the years since liberalization. The going has not been smooth all along but the overall effects have been largely positive.

Nationalization of commercial banks was a mixed blessing. After nationalization there was a shift of emphasis from industry to agriculture. The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalization created its own problems like excessive bureaucratization, red-tapism and disruptive tactics of trade unions of bank employees. It was in this backdrop that wide-ranging banking sector reforms were introduced as an integral part of the economic reforms programme started in early 1990s and which is still under way.

The Indian banking sector has witnessed wide ranging changes under the influence of the financial sector reforms initiated during the early 1990s. The approach to such reforms in India has been one of gradual and non-disruptive progress through a consultative process. The emphasis has been on deregulation and opening up the banking sector to market forces. The Reserve Bank has been consistently working towards the establishment of an enabling regulatory framework with prompt and effective supervision as well as the development of technological and institutional infrastructure.

Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be effected, the developments so far have brought the Indian financial system closer to global standards.

Private banks are today increasingly displacing nationalized banks from their positions of pre-eminence. Though the nationalized State Bank of India (SBI) remains the largest bank in the country by far, private banks like ICICI Bank, Axis Bank and HDFC Bank have emerged as important players in the retail banking sector. Though spawned by government-backed financial institutions in each case, they are profit-driven professional enterprises.

Financial Sector in India consists of three main segments:

  1. Financial institutions -banks, mutual funds, insurance companies
  2. Financial markets -money market, debt market, capital market, forex market
  3. Financial products -loans, deposits, bonds, equities

Financial Regulators in India

There are mainly three Financial regulators in India:

  1. Reserve Bank of India (RBI) - Banking Sector
  2. Securities Exchange Board of India (SEBI) - Capital Markets /Mutual Funds
  3. Insurance Regulatory and Development Authority (IRDA) - Insurance Companies

Structure of Banking System In India

Banks can generally be classified into various sub-categories as follows:

  • Public Sector Banks In India

    • The State Bank Group and Nationalized banks: Is a group of 27 banks
    • Has the largest number of branches in metro/ urban/rural areas throughout the country
    • Contributes to about 75% of the total deposits
    • Contributes about 70% of total advances of all commercial banks in India.
    • Most have a very large branch network spread over all parts of the country
    • Have a Large deposits and assets base
    • Perform all kinds of core and modern banking functions
  • Scheduled Banks:

    • These are banks which are listed in the second schedule of the Reserve Bank of India Act, 1934
    • These banks are required to maintain certain amounts with RBI and, in return, they enjoy the facility of financial accommodation and remittance facilities at concessionary rates from RBI
    • State Co-operative Banks
    • Commercial Banks
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