Seventy Years of Banking System in India

Financial institutions are at the heart of an economic system. A modern economy, characterised by acute specialisation and exchange, is unthinkable without financial intermediaries. India has a long and chequered history of financial intermediation, particularly commercial banking. Soon after Independence in 1947, Government of India followed a policy of social control of important financial institutions. The nationalisation of the Reserve Bank of India (RBI) in 1948 marked the beginning of this policy. This was followed by the takeover of the then Imperial Bank of India in 1956 which was rechristened as State Bank of India. In another significant development, Government nationalised 14 major commercial banks in 1969. In 1980, 6 more commercial banks were nationalised and brought under public ownership. Thus, till the initiation of economic reforms in early 1990s, banking business in India was a near-monopoly of the Government of India. Setting up of regional rural banks (RRBs) in the mid-1970s was a major initiative to meet credit requirements of the rural people. The co-operative banking system forms an integral part of the Indian financial system. It comprises urban co-operative banks and rural co-operative credit institutions. Urban co-operative banks (UCBs) have a single-tier structure whereas rural co-operatives have a two- or three-tier structure. On 27 November 2014, the RBI released the final guidelines for a new category of banks called payments bank. Bank-related financial intermediaries in India include development finance institutions (DFIs), non-banking financial companies (NBFCs), mutual funds, pension funds and insurance organisations. As a result of state domination, Indias banking system till the early 1990s was characterised by barriers to entry, control over pricing of financial assets, high transaction costs and restrictions on movement of funds from one market segment to another. It was in this backdrop that wide-ranging banking sector reforms were introduced as an integral part of the economic reforms programme started in 1991. These reforms have paved the way for integration among various segments of the financial system. It is widely accepted that reduction/removal of financial repression has enhanced the efficiency and potential growth of the banking sector in India. Banking sector has been a major beneficiary of the inroads made by information technology (IT). Banking services and products being delivered through electronic channels include e-banking, internet banking, mobile banking, automated teller machines (ATMs), and satellite banking. Banks are also offering payment services on behalf of their customers who shop in different e-shops, e-malls etc. Banking sector reforms have supported the transition of the Indian economy to a higher growth path, while significantly improving the stability of the financial system. In comparison to the pre-reforms period, the Indian banking system today is more stable and efficient. The present book explains and examines at length the changes which have swept Indias banking sector since Independence in 1947, with focus on post-1991 period.