Indian Banking System

Introduction

Banks play an important part in driving a country’s economic progress and running the financial sector. The banking system is important in promoting economic growth by channelling funds into investments and increasing resource allocative efficiency. An efficient Indian Banking System is increasingly seen as a necessary prerequisite for the country’s development. These institutions, which serve as a hub for savers and investors, are at the heart of India’s financial system. The Indian banking system is governed by a central bank known as the Reserve Bank of India (RBI), which controls the entire Indian financial sector.

Structure of Indian Banking System

The Indian Banking System includes commercial banks, regional rural banks, urban cooperative banks, and primary agricultural credit societies. India’s modern banking began in the 18th century. The State Bank of India is the biggest and oldest surviving bank. It began as the Bank of Calcutta in mid-June 1806. Today it is one of the largest lenders in the country. The Indian subcontinent reaped the benefits of a favourable trade balance, with exports outnumbering imports by wide percentages.

In India, three kinds of banks form the structure of the Indian banking system:

(i) Scheduled Banks 

These are the banks included in the second schedule of the Reserve Bank of India Act of 1934. These banks are eligible for debts or loans at the RBI’s bank rate. Commercial and cooperative banks are subdivisions of scheduled banks.

(ii) Non-scheduled Banks 

Those banks which are not covered by the second section of the Reserve Bank of India Act, 1934. Except in times of crisis, they cannot borrow from the RBI for traditional banking purposes.

(iii) Development Financial Institutions or Development Banks

History of Indian Banking System

The Indian banking system began in the mid-18th century. The Bank of Hindustan, founded in 1770, was dissolved in 1829–32, while the General Bank of India, founded in 1786, collapsed in 1791. Following the history of the Indian Banking System, the oldest surviving bank is the State Bank of India(SBI). Bank of Calcutta, June 1806 The Bank of Bengal (1809), the Bank of Bombay (1840), and the Bank of Madras (1840) amalgamated in 1921 to form the Imperial Bank of India, which became the State Bank of India after independence. Until 1935, when the Reserve Bank of India Act, 1934, established the Reserve Bank of India, the presidential banks were quasi-central. SBI was established in 1959 by the State Bank of India Act, 1959. Affiliate banks In 1969, the Indian government nationalised 14 major commercial banks, including the Bank of India. Others were nationalised in 1980. Indian banking systems are mostly state-owned. Their network and size enable them to dominate banking.

Types of Banks

The Indian Banking System is broadly divided into three types:

Commercial Banks

Commercial banks are the institutions that take public deposits and lend money to profit. Commercial banks are classified as public, private, foreign, sector banks and RRBs(Regional Rural Banks). The government owns most of the Public Sector Banks. Due to the recent merging of smaller banks with larger banks, there are 12 public sector banks in India. State Bank of India is an example. Private investors own private sector banks. Private sector banks in India include HDFC, Kotak Mahindra, ICICI etc. A foreign bank is a private business with its headquarters outside the country. The Indian Banking System must follow the country’s central bank and the parent organisation’s regulations. Citibank is an Indian international bank. The Regional Rural Banks Act of 1975 established Regional Rural Banks to offer institutional credit to rural areas. RRBs may only operate in defined regions. RRBs are owned by the Indian government, states, and banks. E.g. Arunachal Pradesh Rural Bank.

Cooperative Bank

A cooperative bank is a financial organisation owned and run by its members. You may use their banking and financial services. Agriculture, small companies, and self-employment rely on cooperative banks.Eg.  Mehsana Urban Co-operative Bank Ltd. An individual sets up a credit cooperative. The organisation includes borrowers and non-borrowers who have a common interest in business concerns. Membership is open to all residents, bringing people of various statuses together. A region’s societies create a Central Cooperative Bank. Rural and urban cooperative banks are divided. They might be short or lengthy. Agri-credit co-ops and state cooperative banks are examples. Long-term banks are SCARDBs or PCARDBs (Primary Cooperative Agriculture and Rural Development Banks). Urban Co-operative Banks (UCBs) are the cooperative central banks in cities and suburbs.

Development Banks

Development Banks finance Investment-intensive projects with low profits but enormous social benefits. They include the Export-Import Bank of India (1982), Small Industries Development Bank of India (1989), and the National Bank for Rural Development (1982). A country’s financial system may greatly impact its economic progress. It also helps rural and suburban communities prosper by funding small businesses. The structured financial system includes commercial banks, regional rural banks, urban cooperative banks, and primary agricultural credit societies (PACS). Official financial institutions are becoming more accessible thanks to Reserve Bank and Indian government initiatives.

Development of an Indigenous Banking System in the Indian Subcontinent

The indigenous banking system was important in lending money and funding local and international commerce using currency and letters of credit. The development of the indigenous banking system in the Indian subcontinent started from ancient times by exchanging or depositing goods such as precious metals and other valuable things with lending persons acting as bankers or Seths. Money became a vehicle for giving producers a method of creating more things. Intermediaries offered significant financial protection to manufacturers by accepting responsibility for the risks involved, particularly in international commerce. It included commission agents, brokers, and wholesale and retail distributors. The institution of Jagat Seths grew and wielded considerable power during the Mughal period and the days of the East India Company. Bankers started to function as endowment trustees and executors. Loans were used to fund foreign commerce. The rate of interest on longer journeys, on the other hand, was maintained high due to the significant risk involved. Credit transactions and the availability of loans and advances improved business activities. The Indian subcontinent reaped the benefits of a favourable trade balance, with exports outnumbering imports by wide percentages. At the same time, the indigenous banking system provided extra capital funding for growth and development to manufacturers, dealers, and merchants. Later, commercial and industrial banks formed to finance trade and commerce, while agricultural banks evolved to give both short- and long-term loans to agriculturists.

Conclusion

Banks promote economic growth by channelling funds into investments and increasing resource allocative efficiency. The Indian banking system is governed by a central bank known as the Reserve Bank of India (RBI), which controls the entire financial sector. The structure of the Indian Banking System constitutes three kinds of banks in India. Cooperative banks are the main supporters of agriculture, small businesses, and self-employment. The indigenous banking system provided extra capital for growth and development to manufacturers, dealers, and merchants. Commercial and industrial banks were formed to finance trade and commerce, while agricultural banks evolved to give short- and long-term loans.