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Indian Banking System

Posted in Finance Articles, Total Reads: 27677 , Published on October 30, 2010

The Indian banking system is significantly different from those prevalent in other countries due to its unique geographic, social and economic characteristics. India has a large population, different cultures in different parts of the country and also disparities in income. Also in India the population spread among rural and urban areas is also skewed in the favour of urban areas. All these features reflect in the size and structure of the Indian banking system. Further in order to fulfil the needs to the government policy it has been subjected to various nationalization schemes at different times. RBI credit policies form the guidelines for banks in India. Since they had to satisfy the domestic obligations, the banks have so far been confined within the Indian borders.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Indian Banking System

The Reserve Bank of India is the central bank of India and controls the monetary policy. The institution was established on 1 April 1935 .The main functions of RBI are
1. Monetary Authority: The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Its objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors
2. Manager of Exchange Control: The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
3. Issuer of Currency: The bank issues and exchanges or destroys currency and coins not fit for circulation. The Objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves
4. Regulator: Central Bank is also responsible for making policy to be followed by the banking system of the country.

The Indian financial system can be represented as follows
1. Commercial Banks
1.1 Public Sector Banks
1.2 Private Sector Banks
1.3 Foreign Banks
1.4 Cooperative Banks
2. Financial Institutions
2.1 All India Financial Institutions
2.2 State Financial Corporations
2.3 State Industrial Development Corporations
3. Non Banking Financial Companies
4. Capital Market Intermediaries

Around 90% of the banking system is under the government control and the rest are with the private and the foreign banks. The public sector banks can be categorized into
a) State Bank Group: It comprises of State Bank of India and its 5 associate banks. Previously there were 7 associate but after the merger of 2 of them with the parent bank only 5 of them remain. The government of India is the majority stakeholder in the largest bank of the country.
b) Nationalized Banks: There are 19 nationalized banks in the country. The process of nationalization in 1969 resulted in creation of 14 government owned banks which were followed by the nationalization of 6 more banks. However upon a merger the total number of banks in the country stands at 19 as of today. All the banks are majority owned by the government of India.
c) Regional Rural Banks: The regional rural banks were setup to provide low cost financing and credit facilities to rural people. The nationalized banks were required to setup RRBs in partnership with the individual states.

The foreign and private banks form a miniscule part of the Indian banking system which is dominated by the government owned banks. However the superior offering of the private sector banks aided by the growth in the IT has resulted in the population of the country being attracted towards these banks. This has made the public sector banks recognize the threat from these banks and improve on their services. They have given the PSBs stiff competition and this augurs well for the future of the Indian banking system.

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