Banking Sector Reforms

An Introduction to India’s Banking Sector

Considering that India is one of the largest countries in the world with a population of over a billion, its supporting infrastructure needs to correspond with the same. Our country’s financial system needs to match with the enormity of our population and its needs.

The following is a round-up of India’s countrywide banking sector in statistics:

• 12 public sector banks
• 22 private sector banks
• 56 regional rural banks or RRBs
• 1485 urban cooperative banks
• 96000 rural cooperative banks
• Over 2 lakh ATMs across the country

These institutions fall under the regulation of the Reserve Bank of India, which is the apex of India’s financial and banking sector. Aside from these institutions, there are also various programmes and initiatives launched by the government to promote the use of banks. Trust is a major proponent of furthering the reach of banks to citizens.

Banking Sector Reforms in India: An Overview

The banking sector reforms in India can be traced over three phases from before we gained independence till the present day. Each phase has a distinct banking system that underwent several changes to arrive at the next.

Pre-Independence Banking in India: before 1947

What we now call state banks often have roots in being ‘Presidency Banks’ of the times when India was made of presidencies. The Bank of Madras (1843), Bank of Bombay (1720) and Bank of Calcutta (1906) were the first presidency banks in the country. In 1921, all three of these were combined to create the Imperial Bank of India (IBI).

Other banks established in pre-independent India are:

• Allahabad Bank, established in 1865
• Punjab National Bank, established in 1894
• Bank of India, established in 1906
• Canara Bank, established in 1907
• Bank of Baroda, established in 1908
• Federal Bank, established in 1931

The IBI functioned as the country’s central bank until 1935 – when the Reserve Bank of India was formed. This started a new era in the Indian banking sector.

Post-Independence Phase: 1947 to 1990

India had five big banks aside from the Imperial Bank at the time of independence. All of these banks were under private ownership at the time. In 1949, the Banking Regulation Act was passed to oversee India’s financial system. The Imperial Bank became the State Bank of India in 1955. Under it were Associate Banks functioning in different regions.

In the year 1969, keeping the Banking Regulation Act of 1949 in mind, 14 private banks were nationalised:

1. Allahabad Bank
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Central Bank of India
6. Dena Bank
7. Syndicate Bank
8. Canara Bank
9. Punjab National Bank
10. Union Bank of India
11. Indian Overseas Bank
12. Indian Bank
13. UCO Bank
14. United Bank of India

The idea behind this was that by making these banks public, they would better help our country meet its national policy objectives. Making these banks public would also provide more access to the people to partake in banking activities, thus furthering our economy.

In 1980, six more banks underwent the same process:

1. Punjab and Sind Bank
2. Vijaya Bank
3. Corporate Bank
4. New bank of India
5. Andhra Bank
6. Oriental Bank of India

The LPG Phase: 1990 to present

Until 1990, India’s economy was closed, and international trade was difficult and very expensive. Our leaders had adopted protectionist policies to help our internal economy develop into self-sufficiency. In the year 1991, India opened its economy to international trade by adopting the LPG policy:

• Liberalisation
• Privatisation
• Globalisation

The banking sector had a large role in this, being the central body that undertakes all the financial and monetary aspects of the economy. These policies govern the functioning of banks and related financial institutions. To this day, we follow LPG policies which have only furthered our economy in terms of growth and development. However India Banking sector has seen many mergers in recent times. Punjab National Bank (PNB) took over Oriental Bank of Commerce and United Bank of India; Allahabad Bank joined Indian Bank; Canara Bank took over Syndicate Bank; Andhra Bank and Corporation Bank joined with Union Bank of India.

Conclusion

India’s banking sector consists of divisions to care for its citizens in various aspects. There are different rural and urban banks, different banks to take care of the financial needs of different socio-economic strata. Considering that finance takes centre stage in all aspects of life, it is vital to know banks’ role in managing it. The banking sector reforms in India have played a significant role in the development of our country.