The banking sector is one of the growingsectors in India, the reason being an increase in disposable income of thepeople. There has been an increase in large number of digital transaction inIndia post demonetization. Official data indicates an 80% rise in digitaltransactions in 2017-18, with the total amount expected to touch Rs.1800 crore.So banks are investing a lot to increase their banking network so that they canreach to more and more customers. The Indian banking industry has a potentialof becoming the fifth largest banking industry in the world by 2020 and thirdlargest by 2025 according to KPMG CII report. India’s banking and financialsector is expanding rapidly by adopting various technologies and skills to makethem future ready. Banks have withstood the initial hurdles hence becoming moreadaptive to today’s dynamic environment.
In the complex and rapidly changing environment,the only way for the banks to survive is to provide customer service through advancedtechnology. The Indian banking sector has been strong throughout the lastdecade and has supported the economic growth of India. Indian banking systemcould withstand multiple challenges including the following:Great DepressionThe 1997 Asian Financial crisis The 2008 sub-prime meltdownRBI has acted as a vigil body keeping a closeeye on banking system so that the banks are never allowed to take excessiverisk.
The Indian banking system has majorly revamped itself. The newinfrastructure adopted by the Indian banking system is mainly comprised ofinformation technology (IT) products and servicesHISTORYBanking in India has existed since the Vedicperiod but due to informal system of banking, most of the bank dealing wasbased on mutual trust and dishonouring of the hundis (Hundi is a financialinstrument that developed in Medieval India for use in trade and credittransactions) was a rare event. First joint stock banking was introduced inIndia in early 18th century under which Bank of Bombay wasestablished in 1720 by English house Agency. The first presidency bank withgovernment shareholding was established in 1806 which undertook the tasks ofissuing currency notes and discounting of treasury bills to provide monetaryaccommodation to the Government.
Formal regulations were introduced in themid-19th century with the enactment of the Companies Act in 1850 which was thefirst regulation covering banks. Banks were also allowed to be organised asprivate shareholding companies with limited liability whereby majority ofshareholding were held by Europeans. However Indian owned private bank cameinto existence in 1865 with Establishment of Allahabad Bank and followed bymany other banks such as Punjab National Bank and Bank of India.
The individualborrowers were still juggling with the money lenders who charged extortionaterates of interest because these banks were only available to the industrialsector. Due to this, co-operative credit movement started, which addressed theneed of lower income population and resulted in several urban cooperative banksand giving legal recognition to credit societies.Fraudulent activities began rising (such asactivities by directors on one hand and gross mismanagement on account ofmanagement inexperience on the other) which resulted in Bank failures in India.There was a strong need of regulatory framework, even the establishment ofImperial Bank of India via amalgamation of three Presidency Banks had created aconflict of interest with the Imperial Bank acting as Central Bank and Bankerto the Government as well as engaging in commercial banking activities. Finallyan Act was passed in 1934 for the establishment of Reserve Bank of India withthe dual objective of addressing the issue of bank failures and promoting reachof credit to the agricultural sector. TheReserve Bank of India took over several responsibilities including(a) Issuing currency notes and acting asbanker to the Government(b) Acting as lender of last resort for thebanking system whereby it required banks to maintain cash reserves,(c) Encouraging the co-operative creditmovement to enhance the reach of agricultural credit.(d) Supervisory role with the power toconduct audit and inspection to detect fraudulent activities (e) Strengthening the banking regulatoryframework by proposing new banking regulations to the Government.
High level of bank failures continued withReserve Bank of India, even after the enactment of the Banking Companies Act in1949, RBI tried to protect its depositor’s interest through forcedincorporation of concerned banks with stronger banks by cancelling the licenseof unviable banks and transferring their assets and liabilities to other banks.To promote depositor’s trust in the banking system deposit insurance was introducedin India in 1961. Post-Independence, the flow of credit to the agriculturesector was extremely limited and agricultural sector accounted to just 2percent of banking credit. To solve the problem of under penetration of bankingin rural areas, RBI took the approach of giving targets for branch opening.With the establishment of Imperial Bank ofIndia in 1955 nationalization of banks was started and it was followed byenactment of State Bank of India Act also in 1955. To operate free frompolitical interference, Government vested the ownership of the new entity toReserve Bank of India. Encouraging results were achieved in the initial perioddue to nationalization as State Bank of India was able to compete with postoffice and physical assets. RBI allowed the entry of new private sector banksto encourage more competitive environment in the banking sector.
UniversalBanking model was adopted by new private sector banks and they entered intovarious segments of the financial sector through various subsidiaries. The mainreason behind this was to leverage the opportunity of under penetration ofvarious financial products.STRUCTURE OF BANKING IN INDIA As per Section 5(b) of the Banking RegulationAct 1949 “Banking” means accepting, for the purpose of lending or investment,of deposits of money from the public, repayable on demand or otherwise, andwithdrawal by cheque, draft, order or otherwise.”. All banks which are includedin the Second Schedule to the Reserve Bank of India Act, 1934 are scheduledbanks. These banks comprise Scheduled Commercial Banks and ScheduledCooperative Banks.
Scheduled Commercial Banks in India are categorised intofour different groups according to their ownership and nature of operation.These bank groups are:Public Sector BanksPrivate Sector BanksRegional Rural BanksForeign Banks Besides the Nationalized banks (majorityequity holding is with the Government), the State Bank of India (majorityequity holding being with the Reserve Bank of India) and the associate banks ofSBI (majority holding being with State Bank of India), the commercial bankscomprise foreign and Indian private banks. While the State bank of India andits associates, nationalized banks and Regional Rural Banks are constituted underrespective enactments of the Parliament, the private sector banks are bankingcompanies as defined in the Banking Regulation Act. These banks, along with regionalrural banks, constitute the public sector (state owned) banking system inIndia. The Public Sector Banks in India are back bone of the Indian financialsystem. Scheduled Co-operative Banks consist of Scheduled State Co-operativeBanks and Scheduled Urban Co-operative Banks. Regional Rural Banks (RRB’s) arestate sponsored, regionally based and rural oriented commercial banks.
TheGovernment of India promulgated the Regional Rural Banks Ordinance on 26thSeptember 1975, which was later replaced by the Regional Rural Bank Act 1976.The preamble to the Act states the objective to develop rural economy byproviding credit and facilities for the development of agriculture, trade,commerce, industry and other productive activities in the rural areas,particularly to small and marginal farmers, agricultural labourers, artisansand small entrepreneurs.