Banking Development in India

Rimple Saini, S.L. Lodha


India has a long history of financial intermediation. The first bank in India was set up in 1770 and named as Bank of Hindustan. The earliest attempt to establish a Central Bank was in 1773. India was also a fore runner in terms of development of financial markets. By independence, India had a fairly well developed commercial banking system in existence. In 1951, there were 566 private commercial banks in India with 4151 branches, the majority of which were confined to large towns and cities. The Reserve Bank of India (the Central Bank of the Country) was established in 1935 as a shareholders institution like the Bank of England. The Reserve Bank of India became a state owned institution from January 1, 1949. It was only in this year that the Banking Regulation Act was enacted to provide a framework for regulation and supervision of commercial banking system. The institution building and development of the financial system was propelled by the planners after independence. The vision was to ensure that sectoral needs of credit to agriculture and industry were met in an organised manner. The RBI was vested with the major, responsibility of developing the institutional infrastructure in the financial system. The commercial banking system was expanded to take care of the general banking needs of accepting deposits and extension of loans. In July 1969, 14 biggest commercial banks were nationalised as a major step to ensure adequate credit flow into genuine productive areas in conformity with plan priorities. Two significant aspects of nationalisation were (1) rapid branch expansion and its channelling of credit according to plan priorities. In April 1980, 6 more commercial banks were further nationalised, thus, extending the domain of public sector over the banking system. The reforms in banking sector were introduced in June 1991 in the wake of balance of payments crisis, which was certainly severe. Reforms have altered the organisational structure, ownership pattern and domain of operation of banks. The main thrust of reforms in the financial sector was the creation of efficient and stable financial institutions and markets. Reforms in the banking sectors focused on creating a deregulated environment, strengthening the prudential norms and the supervisory system changing the ownership pattern, and increasing competition. The objective of reform was also to create an environment where existing banks could respond to changing circumstances and compete with new domestic private and foreign institutions that were permitted to operate. Competition has been infused into the financial system by licensing new private banks since 1993. Foreign banks have also been given more liberal entry. The presence of these banks have increased their share in the financial system and has improved the efficiency of the system.

As a part of central banking activities and the overall economic perspective of the banking system of the country, RBI collects a vast amount of information on the banking system through various statutory and control (non-statutory) returns. Control returns cover various aspects of banking information like spatial distribution of deposits and credit, international banking, priority sectors, etc. Each aspect is again defined by its own separate statistical system. Against this background, the information based on statutory returns and those of control or special returns are available separately.


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