Brief on development of banking system in India

The Reserve Bank of India is the Central Bank of India, was set up before the independence of India based on the recommendations of the Hilton Young Commission in 1935 as a private bank with the enactment of the RBI act 1934. The bank was constituted to regulate the issue of banknotes, Maintain reserves to secure monetary stability, and operate the credit and currency system of the country. The bank was nationalised with effect from 1st January 1949 based on the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation. Since nationlaisation, the Bank’s focus has shifted to core central banking functions like Monetary Policy, Bank Supervision and Regulation, Overseeing the Payments System, and developing the financial markets. The RBI has set up a Board of Financial Supervision with an advisory Council and the Board for Financial Supervision (BFS) was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994 to strengthen the supervision of banks and financial institutions.

Commercial Banks:

Banking services have been in existence in India since ancient times. Modern banking in India originated in the mid-18th century. The first organized form of bank in India was the “Bank of Hindustan”, established in 1770 and located in the then Indian capital Calcutta and liquidated in 1829–32; and the General Bank of India, established in 1786 liquidated in 1791. The East India Company had established three banks: Bank of Bengal (established on 2 June 1806), Bank of Bombay (incorporated on 15 April 1840), and Bank of Madras (incorporated on 1 July 1843). The alliance of these banks is called presidency banks. Initially operating as unit banks, they took to branch banking in 1862. Soon branches emerged at the major ports and inland trade centers of the subcontinent. On 27 January 1921, the three banks were merged to form the Imperial Bank of India, an all-India bank.

The nationalization of the banks was a major event to take place in the post-independence period. On 1 July 1955, as the premier commercial bank in the country, the Imperial Bank was nationalized to create the State Bank of India. With the passing of the State Bank of India (Subsidiary Banks) Act in 1959, eight former state-associated banks became its subsidiaries. The government further consolidated these banks by amalgamation of seven Associate banks of the State Bank of India (SBI) and Bharatiya Mahila Bank (BMB) into the SBI in 2016. These seven banks were the State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBN), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS) and State Bank of Travancore (SBT).

In 1969, the Government of India nationalised 14 major private banks. Punjab National Bank, Syndicate Bank, Allahabad Bank, Canara Bank, Central Bank of India, United Bank of India, UCO Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Indian Bank, Indian Overseas Bank, Union Bank, and Dena Bank are part of nationalisation of big commercial banks of that time. In 1980, 6 more private banks were nationalised. These nationalised banks commonly known as public sector banks are the majority of lenders under the control of the government in the Indian economy. They dominate the banking sector because of their large size and widespread networks. Further, the mega consolidation, which took effect from April 1, 2020, saw 10 PSBs consolidate into four — Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank; Syndicate Bank merged with Canara Bank; Andhra Bank and Corporation Bank merged with Union Bank of India; and Allahabad Bank with Indian Bank. Before this mega consolidation, Vijaya Bank and Dena Bank had merged with Bank of Baroda with effect from April 1, 2019. The merger of banks was expected to facilitate the creation of strong and competitive banks in the Public Sector space to meet the credit needs of a growing economy, absorb shocks, and raise resources without depending unduly on the State exchequer. There were other remarkable changes seen during this phase. The Indian government approved foreign investment, paving the way for international banks to open their branches in India. Opening of Foreign bank branches/offices is allowed. Small finance banks received permission to open branches throughout the country, and payment banks also came into existence. With these changes, important developments in technology have emerged and continue to evolve in the banking industry.

Effects of nationalization of banks on the Indian economy:

Private Banks neglected the backward areas because of poor business potential and profit opportunities. The public sector banks opened branches in rural areas where the private sector has failed. Because of such rapid branch expansion, the government was able to mobilise rural savings. An important change after the nationalisation of banks is the expansion of advances to the priority sectors. These banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade, and small business. They have also participated in the poverty alleviation Program launched by the government. Nationalisation also helped to achieve balanced inter-regional development and remove regional disparities.

Competition from New Private Sector Banks:

After India embraced economic liberalization in the 1990s, the Reserve Bank of India (RBI) gave banking licenses to 10 new private sector banks. This was a new turn in the Indian banking system. The RBI issued new policy guidelines in 1993, allowing private-sector banks to enter the Indian banking system. These new private sector banks are allowed to raise capital contributions from foreign institutional investors to 20% and from NRIs up to 40%. This has led to increased competition.  In 1996, RBI issued guidelines for setting up Local Area Banks, and it approved setting up of 7 LABs in the private sector. LABs will help in mobilizing rural savings and in channeling them into investment in local areas. Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non-viable branches other than in rural areas. The Indian government approved foreign investment, paving the way for international banks to open their branches in India. Opening of Foreign bank branches/offices is allowed. Small finance banks received permission to open branches throughout the country, and payment banks also came into existence. With these changes, important developments in technology have emerged and continue to evolve the banking industry

Present Status of Banking System in India:

Commercial banks refer to both scheduled and non-scheduled commercial banks regulated under the Banking Regulation Act, of 1949. The scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified into Nationalised banks (Public Sector banks); the State Bank of India; Regional Rural Banks (RRBs); foreign banks; and private sector banks, Small finance banks, Payment Banks, and cooperative banks some of which have been granted scheduled bank status. Banks that are not included in 2nd schedule of RBI are known as non-scheduled banks. As per the RBI website, currently, there are 12 public sector banks, 21 scheduled private sector banks, 11 scheduled small finance banks, and 4 scheduled payment banks. Also, there are 45 scheduled foreign banks in India and 43 Regional rural banks RRBs). Also, there are over 1434 Non-Scheduled Urban Cooperative Banks in India.

Modern technological developments in Banking:

Core banking can be seen as a stepping stone to modern technological developments in banking. Thanks to these developments, customers no longer need to visit their home branches for basic banking tasks. They can transact core banking facilities from the nearest bank branch instead. With the emergence of internet technology, things have now gone online, allowing customers to access banks 24/7, at their convenience, and from almost anywhere. Digital and mobile banking support this concept by letting customers access various banking products, services, and facilities from mobile devices. For banks, it means providing minimal human intervention, and for customers, it means staying on top of their finances from anywhere. The rapid developments in Payment Systems and technology have led to the implementation of major reforms of payment systems to expedite the processing of payments, reduce the risk and uncertainty associated with noncash payments, facilitate the adoption of indirect monetary policy instruments, and foster financial market development. Now there are over 45 varieties of digital payment systems, digital enablers, and payment options available to consumers in India. To know about them (Read: 45 TYPES OF DIGITAL PAYMENT OPTIONS AVAILABLE TO CONSUMERS IN INDIA)

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