The history of the Indian bank industry dates back to various banking institutions, which were established by the British in the 19th century. 

This article discusses the current structure of Indian banks and their role in the economy.

Nowadays, there is a worldwide trend to shift from traditional bank-centered payment systems to electronic transaction-based ones. The Indian Institute for Management and Research (IIMR) reports that this process is happening faster globally. According to NASSCOM, despite COVID-19 disruptions, India’s e-commerce market continues to grow at 5%, with expected sales of US$ 56.6 billion in 2021.

About the Indian Banking Industry

The Indian Banking Industry is the second largest by deposits and one of the largest by assets. It had assets worth US$4.6 trillion and deposits of over US$3.4 trillion. It is growing at about 25% per year with a large pool of potential employees to recruit, which helps it retain over 95% of its employees after two years even though salaries are low compared to the private sector.

The first known bank in India is the “Bank of Hindustan,” an established entity by 1770 and was later renamed Imperial Bank of India. A well-capitalized and legislated Indian banking industry has helped uplift the Indian economy, especially during the British Raj. Their history dates back to 1770 when the Bank of Hindustan was established mainly to facilitate the trading activities of the East India Company. 

The Reserve Bank of India Act 1934 granted banking licenses to private entrepreneurs, and in 1942 all banks were nationalized. The legal framework for Indian Banks was revised in 1959 through several laws and the Banking Regulation Act, covering all aspects of banking in India like lending, investment, deposit mobilization, and compliance.

History of Indian Bank

Indian banks are supervised by the Reserve Bank of India (RBI), which the Ministry of Finance controls, the Department of Economic Affairs, and is under the Union Cabinet’s purview. The basic objective of this department is to promote financial stability within a framework and ensure that business and commercial activities are developed within an efficient and sound environment.

The following key legislations govern Indian banking:

1. The Banking Regulation Act, 1949 mandates all banks in India to file reports on their business practices every quarter.
2. Indian banks have been using technology effectively to address and adapt to changes during the last several years. The Reserve Bank of India has issued a circular, directing all banks in India to send their inter-bank fund transfer (IFS) messages only through SWIFT or an alternative, directed by the Payments System.
3. All branches and offices of a scheduled Indian bank outside India shall open for all business hours on weekdays and banking days (Monday to Saturday) including public holidays on 1 October 2014.

Hence, the history of Indian banks is more clear now.

Structure of Indian Banking System

The Indian banking system is organized into a hierarchical pattern. The Reserve Bank of India is in the middle and between various other banking institutions. The government department for economic affairs has overall control over the Indian banks. It monitors its operations and controls the legality and other aspects required by the regulatory framework. The Reserve Bank of India is assisted by several different agencies that play a part in the functioning of Indian banks. The Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) act as watchdogs for regulatory offenses, money laundering, and terrorist financing. The Reserve Bank also has various administrative departments responsible for financial matters such as treasury management, risk analysis, corporate finance, credit rating, etc.

Structure of Commercial Bank

There are 725 commercial bank branches all around India, which are spread out across the country. There are various plans to take banking services to more places around the country. The branches of these commercial banks are located in various parts of the country and provide banking services to several people.

The RBI regulates the banking sector in India. The main objective is to maintain financial stability and growth, credit creation, and developmental activities within an economic framework. With time, banking has evolved from its original function of receiving deposits and making loans to becoming a major instrument for economic development through long-term financing projects and high-growth activities. Banks also have a social responsibility to promote inclusion in society.

Conclusion

In the initial years of the establishment of banks, the RBI was not part of any system. During this time, banking was left to the private sector, and this led to grave credit and monetary problems, which were only resolved after RBI became an integral part of the Indian Banking System in 1950. Although RBI did not have a significant role during these years, they were involved in many things related to things like granting licenses, monitoring activities. The RBI has been granting licenses for new banks since 1950, when it was involved in giving licenses to 26 new banks.