The banking sector is one of the growing sectors

The banking sector is one of the growing
sectors in India, the reason being an increase in disposable income of the
people. There has been an increase in large number of digital transaction in
India post demonetization. Official data indicates an 80% rise in digital
transactions 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 can
reach to more and more customers. The Indian banking industry has a potential
of becoming the fifth largest banking industry in the world by 2020 and third
largest by 2025 according to KPMG CII report. India’s banking and financial
sector is expanding rapidly by adopting various technologies and skills to make
them future ready. Banks have withstood the initial hurdles hence becoming more
adaptive 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 advanced
technology. The Indian banking sector has been strong throughout the last
decade and has supported the economic growth of India. Indian banking system
could withstand multiple challenges including the following:

Great Depression

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The 1997 Asian Financial crisis

The 2008 sub-prime meltdown

RBI has acted as a vigil body keeping a close
eye on banking system so that the banks are never allowed to take excessive
risk. The Indian banking system has majorly revamped itself. The new
infrastructure adopted by the Indian banking system is mainly comprised of
information technology (IT) products and services

HISTORY

Banking in India has existed since the Vedic
period but due to informal system of banking, most of the bank dealing was
based on mutual trust and dishonouring of the hundis (Hundi is a financial
instrument that developed in Medieval India for use in trade and credit
transactions) was a rare event. First joint stock banking was introduced in
India in early 18th century under which Bank of Bombay was
established in 1720 by English house Agency. The first presidency bank with
government shareholding was established in 1806 which undertook the tasks of
issuing currency notes and discounting of treasury bills to provide monetary
accommodation to the Government. Formal regulations were introduced in the
mid-19th century with the enactment of the Companies Act in 1850 which was the
first regulation covering banks. Banks were also allowed to be organised as
private shareholding companies with limited liability whereby majority of
shareholding were held by Europeans. However Indian owned private bank came
into existence in 1865 with Establishment of Allahabad Bank and followed by
many other banks such as Punjab National Bank and Bank of India. The individual
borrowers were still juggling with the money lenders who charged extortionate
rates of interest because these banks were only available to the industrial
sector. Due to this, co-operative credit movement started, which addressed the
need of lower income population and resulted in several urban cooperative banks
and giving legal recognition to credit societies.

Fraudulent activities began rising (such as
activities by directors on one hand and gross mismanagement on account of
management inexperience on the other) which resulted in Bank failures in India.
There was a strong need of regulatory framework, even the establishment of
Imperial Bank of India via amalgamation of three Presidency Banks had created a
conflict of interest with the Imperial Bank acting as Central Bank and Banker
to the Government as well as engaging in commercial banking activities. Finally
an Act was passed in 1934 for the establishment of Reserve Bank of India with
the dual objective of addressing the issue of bank failures and promoting reach
of credit to the agricultural sector.

 The
Reserve Bank of India took over several responsibilities including

(a) Issuing currency notes and acting as
banker to the Government

(b) Acting as lender of last resort for the
banking system whereby it required banks to maintain cash reserves,

(c) Encouraging the co-operative credit
movement to enhance the reach of agricultural credit.

(d) Supervisory role with the power to
conduct audit and inspection to detect fraudulent activities

(e) Strengthening the banking regulatory
framework by proposing new banking regulations to the Government.

High level of bank failures continued with
Reserve Bank of India, even after the enactment of the Banking Companies Act in
1949, RBI tried to protect its depositor’s interest through forced
incorporation of concerned banks with stronger banks by cancelling the license
of unviable banks and transferring their assets and liabilities to other banks.
To promote depositor’s trust in the banking system deposit insurance was introduced
in India in 1961. Post-Independence, the flow of credit to the agriculture
sector was extremely limited and agricultural sector accounted to just 2
percent of banking credit. To solve the problem of under penetration of banking
in rural areas, RBI took the approach of giving targets for branch opening.

With the establishment of Imperial Bank of
India in 1955 nationalization of banks was started and it was followed by
enactment of State Bank of India Act also in 1955. To operate free from
political interference, Government vested the ownership of the new entity to
Reserve Bank of India. Encouraging results were achieved in the initial period
due to nationalization as State Bank of India was able to compete with post
office and physical assets. RBI allowed the entry of new private sector banks
to encourage more competitive environment in the banking sector. Universal
Banking model was adopted by new private sector banks and they entered into
various segments of the financial sector through various subsidiaries. The main
reason behind this was to leverage the opportunity of under penetration of
various financial products.

STRUCTURE OF BANKING IN INDIA

 

 

As per Section 5(b) of the Banking Regulation
Act 1949 “Banking” means accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise.”. All banks which are included
in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled
banks. These banks comprise Scheduled Commercial Banks and Scheduled
Cooperative Banks. Scheduled Commercial Banks in India are categorised into
four different groups according to their ownership and nature of operation.
These bank groups are:

Public Sector Banks

Private Sector Banks

Regional Rural Banks

Foreign Banks

Besides the Nationalized banks (majority
equity holding is with the Government), the State Bank of India (majority
equity holding being with the Reserve Bank of India) and the associate banks of
SBI (majority holding being with State Bank of India), the commercial banks
comprise foreign and Indian private banks. While the State bank of India and
its associates, nationalized banks and Regional Rural Banks are constituted under
respective enactments of the Parliament, the private sector banks are banking
companies as defined in the Banking Regulation Act. These banks, along with regional
rural banks, constitute the public sector (state owned) banking system in
India. The Public Sector Banks in India are back bone of the Indian financial
system. Scheduled Co-operative Banks consist of Scheduled State Co-operative
Banks and Scheduled Urban Co-operative Banks. Regional Rural Banks (RRB’s) are
state sponsored, regionally based and rural oriented commercial banks. The
Government of India promulgated the Regional Rural Banks Ordinance on 26th
September 1975, which was later replaced by the Regional Rural Bank Act 1976.
The preamble to the Act states the objective to develop rural economy by
providing 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, artisans
and small entrepreneurs.