Evolution of Banking System in India

Bank

• Bank is a financial institution or financial intermediary between savers and borrowers. 
• It accepts deposits (liabilities of a bank) from the public and creates credits (assets of a bank). 
• It, in general, mobilizes public deposits into investments and loans.
• The Indian banking system has several outstanding achievements to its credit since independence. 
• The most striking is its extensive reach even to the remote corners of the country.

Evolution of Banking System in India

Indian banking history, post independence, can be classified into 3 phases:

Phase-I (1947-1969)

• The Reserve Bank of India (RBI) was established in April 1935, but was nationalized on 1 January 1949. 
• In 1949, the Banking Regulation Act was enacted, which empowered the RBI to regulate, control, and inspect the banks in India.
• In 1955, the Government nationalized the State Bank of India (Formerly, Imperial Bank of India) with extensive banking facilities on a large scale, especially in rural and semi urban areas. 
• As a result, the State Bank of India (SBI) was formed to act as the principal agent of the RBI to handle banking transactions of the Union and State Governments all over the country.
• Seven banks forming subsidiaries of the SBI were also nationalized in 1960. 
• During those days, the public had lesser confidence in the banks and deposit mobilization was low in banks. Rather, the savings bank facility provided by the Postal department was considered comparatively safer. Moreover, funds were largely given to traders.

1969-1991

• 14 major commercial banks were nationalised in the first phase of bank nationalization during this period. 
• Nationalization in this context, is the process of transforming private assets into public assets by bringing them under the public ownership of a national or state government.
• In the second phase, 7 more banks were nationalised.
• Regional Rural Banks (RRBs) were created to serve the rural masses.

1991 onwards

• The banking sector reforms in India started as a follow up measures of the economic liberalization and financial sector reforms in the country.
• The reforms were aimed at making the Indian banking industry more competitive, versatile, efficient, and free from the government’s control.
• As a result, licenses were provided to a small number of private banks. Gradually, foreign direct investment (FDI) in the banking sector was also relaxed. It has gone up to 74% with some restrictions.

Nationalization of Banks

• Nationalization is the process of transferring private assets of the banking sector entities under the control of the government. 
• Objectives of Nationalization:

1. At the time of independence, there were many small banks in India. One of the reasons was to streamline the functioning of banks. 
2. To provide access to banking service to the masses and reduce inequalities. 
3. To provide social orientation to the banking sector i.e. to ensure adequate credit flow in agriculture and rural sectors.