Banking system in India has progressed tremendously in the past few decades. It has recently seen new heights and moved swiftly passed the traditional notions of banking in the world. Banking according to a layman implies the borrowing and lending of money. But it is far more complex and comprehensive. In fact, banking has been defined in the Banking Regulation Act, 1949 as the acceptance of deposits of money from the public for the purpose of lending and investment. These deposits can be repayable on demand or withdrawn by cheque, drafts or orders. Further the banks are regulated by the central regulator and in India, this role has been adopted by the Reserve Bank of India. RBI acts as the chief regulator of banks and financial system in the country. It primarily controls the money supply in the system. Further, it also ensures that other factors such as inflation and GDP are within the nominal reaches to ensure smooth sailing of the banking system.
History of Banks
The modern day concept of bank is fairly a new development. There have been many other institutions in the olden days which functioned as a bank. This was done primarily by the money lenders and Sahukars who used to lend money to the people for various purposes. Further, funds were also placed with them for safekeeping in case of any emergency. They acted as a repository of assets of the people. This included the common people and the king. Later on, with the advent of the British, the present day banking structure came into force. The British wanted the money to be stored and a proper cash ratio be maintained. With the need of the hour, banks were established in the 18th Century. The first bank to be established was the General Bank of India, followed by the Hindustan Bank coming into force. Later, when the Presidency Towns were established, correspondingly, banks were established in all the three cities of Madras, Calcutta and Bombay. They acted as quasi banks and were under the control of the British authorities. Finally, the Imperial Bank was formulated after the merger of the existing Presidency Banks in 1925. This was also the age of the independence movement. Inspired by the Swadeshi and Non-cooperation movement, Indians felt the urge to formulate their own banking systems and unions. Thus, during this period, a number of Indian Banks were established, such as, Bank of Baroda, Canara Bank, Central Bank of India etc.
With the increasing number of banks in the country, a central regulating authority was to be established which had a supervisory role over the banks. With this idea, the Reserve Bank of India was established in 1935. Post-Independence era had witnessed two major changes in the Banking structure in India. The first was the nationalisation of banks in 1969. In 1969, through the Banking Companies (Acquisition and Transfer of Undertaking Ordinance), 1969, 14 commercial banks were nationalised. Apart from the above mentioned 14 banks, 4 other banks were also merged with other public sector banks. Thus, by the 1980s, almost 90% of the Indian Banking sector was dominated by the government owned banks. In the 1990s with the slew of economic programmes, came the wave of liberalisation and privatisation. This helped private sector players enter into the market and operate. To ensure that they function adequately, a whole slew of guidelines and mechanisms has been put in place.
Banking structure in India
The RBI is the central and chief baking authority in India. The banks can be divided into two primary categories Scheduled Banks and Non Scheduled Banks.
The Scheduled Banks are all the banks which has been included in the second schedule of the RBI Act, 1934. These can be either cooperative or commercial banks. The commercial banks can be owned by either government or private parties. They perform the traditional role of a bank. They issue drafts, cheques and accept money from the public. They give out loans to the creditors. They are primarily institutes which run to make a profit. In case, the scheduled commercial bank is a subsidiary of an international banks, certain other regulations need to be adhered to.
The cooperative banks are banks which have established by cooperative society which is registered under the Society Registration Act. These scheduled cooperative banks primarily have been established for the purpose of small borrowers and lenders. The RBI being the chief regulator of banks, has the power to remove any bank from the second schedule. If the bank is acting in a manner which endangers the interests of the depositors or if the cash reserves falls below Rs 5 lakh, the RBI within its inherent powers is empowered to remove the said bank.
Commercial banks can further be divided in four sub categories based on how the banks operate. They can be Public sector banks, private banks, international or foreign banks or regional rural banks. Public Sector banks are those banks which are incorporated and owned by the government of India. Many a time, the bank may not be fully owned by the government. In such a case, majority stake is held by the government of India. Such banks include, Bank of India, State Bank of India etc. These banks have a strong position in the market compared to private banks since they are owned by the government themselves. In recent times, the government has merged many public sector banks together to strengthen the balance sheets of the banks. Further it also has plans of PPP model and is aiming large scale disinvestment in this area.
Private Sector banks are those banks which have been privately held by individuals. In such banks, the majority ownership and share capital is held by the private individuals. Such banks are in fact many a times registered under as a company with limited liability which has been granted a banking license. Such banks include, ICICI Bank, Axis Bank etc.
Foreign Banks have also dominated the banking sector in recent times. There are 45 different foreign banks which have already set up shop in India. These bans are registered in India as banks and have a requisite banking license from the RBI, but have set their headquarters in a foreign country. Such banks can either be wholly owned subsidiary incorporated in India or they can operate through the branch model. The foreign banks operating in India are incentivised to operate through the wholly owned subsidiary mechanism.
Regional rural banks are those banks which are set by the government at the grass root level to ensure that credit is available at the lowest rung. These banks primarily lend to farmers and agriculturists. They were not initially a part of the banking system. They were introduced through an ordinance in 1975 which amended the RBI Act. Since these banks are established by the government, their operational boundaries are limited by the government. The same is notified in the official gazette from time to time. The first regional rural bank to be established was the Prathama Bank in Uttar Pradesh.
Apart from the above mentioned banks, there are other types of banks as well. These include small finance banks and payment banks. Small finance banks are those banks which have been set up to provide finance in areas where banks cannot reach. They undertake basic banking activities and their primary goal is provide banking services to the remote areas where traditional banks cannot operate due to geographical restraints.
Payment banks are those banks which have been set up to undertake payment and remittance related activities and they accept small amounts of deposits.
Apart from banks, there are Non-Banking Financial Companies (NBFC) and Housing Finance Companies (HFCs) which operate in the financial markets. They are also in the credit market and perform functions similar to that of a bank, but they are not regulated and registered by the Banking Regulation Act. They are incorporated as a company in the Companies Act. As compared to the banks, the regulatory regime of an NBFC is far less stringent.
Conclusion
A bank is a financial organisation which acts as a financial intermediary between lenders and creditors. It accepts deposits from the public and uses those deposits for giving credit to the lenders, either directly or indirectly. It can be done directly by way of a loan or indirectly through capital markets. A bank acts as an interface which connects customers which have excess capital with customers who have capital deficits. The Indian banking system has gone through momentous structural changes. An administered regime which was totally under the authority of state has now become open to private players and new domains such as Payment Banks and NBFCs through the financial sector reforms of the 90s. Though there have been a number of issues plaguing the banking sector in today’s day and age, the need of the hour is to revamp the banking structure and strengthen it as it the pedestal on which the entire Indian economy functions.
“The views of the authors are personal“
Frequently Asked Questions
What is banking?
Banking according to a layman implies the borrowing and lending of money. But it is far more complex and comprehensive. In fact, banking has been defined in the Banking Regulation Act, 1949 as the acceptance of deposits of money from the public for the purpose of lending and investment. These deposits can be repayable on demand or withdrawn by cheque, drafts or orders.
Who is the chief regulator of banking sector?
RBI acts as the chief regulator of banks and financial system in the country. It primarily controls the money supply in the system. Further, it also ensures that other factors such as inflation and GDP are within the nominal reaches to ensure smooth sailing of the banking system.
What are regional rural banks?
Regional rural banks are those banks which are set by the government at the grass root level to ensure that credit is available at the lowest rung. These banks primarily lend to farmers and agriculturists. They were introduced through an ordinance in 1975 which amended the RBI Act. Since these banks are established by the government, their operational boundaries are limited by the government. The same is notified in the official gazette from time to time.
What are the new developments in banking sector?
Apart from banks, there are Non-Banking Financial Companies (NBFC) and Housing Finance Companies (HFCs) which operate in the financial markets. They are also in the credit market and perform functions similar to that of a bank, but they are not regulated and registered by the Banking Regulation Act.
