Banking System in India

The modern economy cannot be envisioned without a strong banking system in place. Banks are important financial institutions which help mobilise money from savers (or depositors) to investors. They play a central role in economic growth, making them one of the most important pillars in the finance sector of a nation. The strength of a nation’s economy is directly correlated with the health of its banks. If any major bank collapses, then it affects all the other sectors too. Banks in India have evolved over time, and the evolution continues to date. This article would provide detailed information about the banking system in India.

History of Banking System in India

The development of the banking sector can be classified into three phases:

1. Phase 1 or the Pre-Independence phase (from late 1700s to mid-90s): During this phase, the first Indian bank called the Bank of Hindustan was established in Calcutta (now Kolkata), which was the capital of India back then. Slowly, more banks were registered. In this period, over 600 banks were registered with the government. However, most of them ceased their operations and very few actually managed to stay afloat.
   
   There are several reasons why banks set up during this period could not survive. The technology was subpar, and they offered very few facilities to the customers. The process was time-consuming. There was also a risk of fraud, and it was hard to convince the masses to use banks for their financial needs.
2. Post-Independence Period (1947-1991): The State Bank of India (SBI) was formed in 1955. It was the first national bank of independent India. Soon after, 14 more banks were nationalised in 1969. 

They are:

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

The value of the deposits in all the banks combined was more than 50 crores at that time.

In 1980, additional six banks were nationalised:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank 

The reason why so many banks were nationalised within a short period was because the government wanted to mobilise funds for the social upliftment of people. It wanted to aid the struggling agricultural sector of the country. 

3. The period of liberalisation (1991- present): The year 1991 continues to be one of the most significant years for the Indian economy. Liberalisation reforms were introduced that changed the face of the banking system in India. India was facing numerous problems on the financial front. The entry of private players was very limited. The balance of payments problem was increasing. Fiscal deficit was increasing. 

To tackle these problems, Narasimham Committee was formed, which recommended that no more banks shall be nationalised. The proposal to allow foreign banks to be set up in India was also submitted. It was decided that public and private sector banks should not be treated differently to ensure fairness. The need to introduce new technology was stressed upon. 

Need for Banks

The need for banks in any country is undisputed for the following reasons:

1. Mobilisation of capital: Without banks in place, the savers would keep their money locked away in a safe, and investors would not be able to get any ready capital. The movement of funds will be impeded. Through banks, funds are mobilised from one party to another in a safe and secure manner.
2. Credit creation: Banks lend credit to investors at a certain rate of interest. Investors borrow this money, and invest it in their respective ventures, which helps in the economic growth of the country.
3. Eliminating the role of unauthorised middlemen: In rural areas, there are middlemen who give credit to poor farmers at extremely high rates of interest. They exploit farmers. The presence of a banking system in India protects farmers and poor people from exploitation as they can get credit from a more reliable source at lower rates of interest. 

Types of Banks

The following types of banks operate in the Indian economy: 

1. Commercial Banks: They can be private, public, and foreign banks. Public sector banks are owned by the government. For example SBI, Bank of Baroda, etc. Private sector banks like Axis Bank, HDFC Bank, etc., are owned by private entities. Foreign banks like Citibank are the ones that are centrally operated by a foreign entity with their branches situated in India.
2. Cooperative Banks: They come under the purview of state governments. They offer loans to people for welfare purposes.
3. Payments Banks: These banks cannot issue loans or credit cards but can deposit people’s money. They operate at a low-risk.
4. Small Finance Banks: They are meant to serve the underprivileged section of the society, to whom the big banks do not want to provide loans to. They can undertake any activity like a commercial bank.

Conclusion

The banking system in India is the backbone of the Indian financial system. All the banks inside the country’s boundaries are supervised by the RBI (Reserve Bank of India). It was nationalised in 1949 under the Banking Regulation Act 1949. From RBI, any bank can borrow money if it is low on cash, and RBI can also borrow money from other banks. RBI also lends money to the government. Maintaining the good health of banks is crucial in ensuring the good health of the Indian economy.