The Management that governs the Indian Bank System

The banking introduction to India started with establishing the first scheduled bank, The Bank of Hindustan. It was established in 1806 by an act of the British Parliament. After three decades, two more banks were established, namely, Oriental Bank and the Bank of Madras in 1837 and 1840, respectively.

The Indian banking system has undergone rapid growth in recent years, from many banks to customers registered with them.  The sector is large relative to the rest of the economy and provides many small business loans. Despite the recent growth, the banking system is still relatively small relative to India’s economy.

Banking Introduction

The banking sector in India is relatively young and has a long way to go. At present, the Indian banking system is dominated by public sector banks. The private sector has a very small presence in the Indian market, though it is rising.

The Management that governs the Indian Banking System:

The major part of the Indian banking system is controlled by various regulatory authorities, under the direct control of the Indian Government. The main control that the Indian Government exercises through these regulatory authorities are as follows:

• The Reserve Bank of India (RBI) is a governmental organisation established under the Reserve Bank of India Act, 1934. It was set up in its present form on 1 April 1935 due to an order issued by The Central Government on 20 March 1934. It started functioning on 2 April 1935. 

• Reserve Bank of India Act, 1934: This Act was passed on 29 July 1934 to constitute the Reserve Bank of India. The Act was amended in 1962, and finally in 1969.

• The Banking Regulation Act: The Banking Act, 1949 was passed by the Parliament of India to regulate the banking sector in India. This Act is one of the most important acts enacted after independence.

• The Foreign Exchange Management Act: This is a comprehensive legal document meant for implementing various directives on controlling foreign exchange in India. First came into effect in 1973, it was again amended and expanded in 2011, after the global economic crisis.

The two main players in the Indian banking system are the public sector banks owned and controlled by the Government of India and the private sector banks. The first bank established in this country was The Bank of Hindustan in 1806.

Function of RBI

The important functions of RBI are as follows:

• To issue of currency notes and coins
• To take care of banking needs of the Government
• To decide cash reserves of commercial banks
• To maintain the reserve of foreign currencies
• To lend money to all commercial banks in financial difficulties
• To control the credit created by commercial bank

RBI and Indian Banking System

The Reserve Bank of India (RBI) is considered as India’s central bank and also known as the banker’s bank. The RBI governs the monetary and other banking policies of the Indian government.

The RBI regulates and supervises the financial sector as a whole. This boosts public confidence in the financial system, protects interest rates, and gives people more favourable banking options. Finally, the RBI serves as the nation’s currency issuer.

The Banking System

As of now, Indian banking has two defining characteristics. One is that lending decisions are not based on the concept of the ‘creditworthiness’ of a borrower. The other is that it allows foreign capital to enter and sit on the boards of banks. The first characteristic is a by-product of our socialist past. In this country, economic liberalisation began in 1991, so We can call it a recent phenomenon. The second characteristic is, in a way, an outgrowth of the first. Even today, Indian banks are reluctant to lend to the private sector. Also, they do not want to risk their capital on unproven start-ups. This may change once India liberalise its economy even further.

The competition among public sector banks is based on the size of their loans and deposits and other factors attributable only partially to market forces.

Growth of the Indian Banking Sector

The banking sector in India is expected to continue growing. The industry fuels this growth; commerce and individuals prefer bank financing as an alternative to other financing options. Also, the Indian Government’s promotion of entrepreneurship, as directly evidenced by its economic liberalisation policies (1991), will positively impact the growth of this sector.

Banking in India has undergone many changes since its inception. In the beginning, there were no banks except for The Bank of Hindustan, established in 1806. The first bank to be established in the country was The Bank of Hindustan in 1806.

The banking system initially consisted only of four banks, namely:

• The Bank of Hindostan (Established in 1806)
• The Chartered Bank of India and China, London (1814)
• The Imperial Bank of India and Burma (1833)
• The Macau Branch, Imperial Bank of India (1835)

There were no restrictions on foreign participation in the Indian financial sector and ‘native’ shareholders wholly-owned banks. The Imperial Bank of India was the first bank to issue its notes in 1838 and was followed by the Bank of Baroda in 1835. The first clearinghouse to open outside London was The Clearing House Association, which opened a branch in Bombay (now Mumbai) in 1846.

In 1858, The Central Bank of India was set up. Later on, the Reserve Bank of India Act, 1934 (enacted in 1934) laid down the basic framework for the Reserve Bank of India functioning that continues to be relevant today.

Conclusion

The banking sector in India is relatively young and has a long way to go. The Indian banking system is dominated by public sector banks. The private sector has a very small presence in the Indian market, though it is rising. The competition among public sector banks is based on the size of their loans and deposits and other factors attributable only partially to market forces. The Indian banking sector is expected to continue growing in the long run. This growth is fueled by the industry, commerce, and individuals preferring bank financing as an alternative to other financing options.