Banking in India | Economy of India

Table of Contents

History of Banking in India

Modern banking in India originated in the mid-18th century.
The oldest bank in India is The Madras Bank (1683). It was founded by European traders. It was finally merged with the Bank of Madras in 1843.
The Bank of Madras was one of the three Presidency Banks of British India, along with the Bank of Bengal and the Bank of Bombay. It was established in 1843 amalgamating existing regional banks. It was headquartered in Madras (now Chennai).
It was merged with the other Presidency Banks in 1921 to form the Imperial Bank of India, which later became the State Bank of India.

Banking is mentioned in the Vedas with the word Kusidin translated as “usurer”. Usury also has been mentioned in Sutras and the Jataka stories. Usury is the practice of making unethical monetary loans that enrich the lender.

Nationalisation of Banks

The nationalization of banks in India refers to the process of bringing privately owned banks under government control to promote social welfare, economic development, and financial inclusion.
The first wave of bank nationalization occurred in 1969, followed by a second wave in 1980.

First Wave of Nationalization (1969)

Date: July 19, 1969.
Number of Banks: 14 private banks were nationalized.
Objective: To prioritize social welfare, promote balanced regional development, and channelize credit to priority sectors such as agriculture, small-scale industries, and exports.

Key Banks Nationalized

Punjab National Bank
Bank of India
Canara Bank
Central Bank of India
United Bank of India

Second Wave of Nationalization (1980)

Date: April 15, 1980.
Number of Banks: 6 more private banks were nationalized.
Objective: To further strengthen the banking sector, enhance efficiency, and ensure better control over credit allocation for development purposes.
Key Banks Nationalized:
Andhra Bank
Bank of Baroda
Bank of Maharashtra
Corporation Bank
Dena Bank
Vijaya Bank

Impact of Nationalization

Financial Inclusion: Nationalization led to increased banking penetration, especially in rural and semi-urban areas, through the establishment of branch networks.
Priority Sector Lending: Banks were directed to allocate a certain percentage of their loan portfolios to priority sectors such as agriculture, small-scale industries, and exports.
Employment Generation: Nationalized banks became significant employers, creating job opportunities across various regions of the country.
Credit Allocation: Government control over banks facilitated targeted credit allocation for developmental purposes, contributing to economic growth and social welfare.

Challenges and Reforms:

NPA Management: Nationalized banks faced challenges related to Non-Performing Assets (NPAs) due to issues like loan default, inefficiencies, and external factors.
Regulatory Changes: Reforms such as the introduction of prudential norms, asset quality review, and recapitalization initiatives were implemented to strengthen the banking sector.
Liberalization: The liberalization of the Indian economy in the 1990s led to reforms aimed at improving efficiency, competitiveness, and financial stability in the banking sector.
The nationalization of banks in India played a significant role in shaping the country’s banking landscape, promoting financial inclusion, and supporting economic development.
While it brought about several benefits, nationalized banks also faced challenges that necessitated reforms to enhance their performance, governance, and resilience in a rapidly changing economic environment

Commercial Banks

Commercial banks in India are financial institutions that provide a wide range of banking services to individuals, businesses, and other entities. They play a crucial role in the country’s financial system by accepting deposits, granting loans, facilitating payments, and offering various financial products and services. Here’s an overview of commercial banks in India:
Public Sector Banks (PSBs): Public sector banks are owned and operated by the government. They play a significant role in providing banking services to the masses, especially in rural and semi-urban areas. Some prominent PSBs include State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), and Canara Bank.
Private Sector Banks: Private sector banks are owned and managed by private individuals or corporations. They are known for their customer-centric approach, innovative services, and efficient operations. Some leading private sector banks in India include ICICI Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Bank.
Foreign Banks: Foreign banks operate in India either through branches or wholly-owned subsidiaries. They bring global banking expertise, technology, and best practices to the Indian market. Examples of foreign banks operating in India include Citibank, HSBC, Standard Chartered Bank, and Deutsche Bank.
Regional Rural Banks (RRBs): As mentioned earlier, RRBs are a special category of commercial banks established with the objective of providing banking services to rural and semi-urban areas. They are jointly owned by the Government of India, the concerned State Government, and sponsoring commercial banks.
Small Finance Banks (SFBs): SFBs are another category of commercial banks focused on financial inclusion and catering to the banking needs of underserved and unbanked segments, especially in rural and semi-urban areas. They primarily target small businesses, low-income households, and individuals lacking access to formal banking channels.

Regional Rural Banks (RRBs)

Regional Rural Banks (RRBs) are financial institutions in India that were established with the objective of bringing banking services to rural and semi-urban areas. They were set up based on the recommendations of the Narasimham Working Group in 1975, and their formation was further facilitated by the Regional Rural Banks Act of 1976. RRBs are jointly owned by the Government of India, the concerned State Government, and the sponsoring commercial bank(s) operating in the region.
Here are some key features and characteristics of Regional Rural Banks:
Objective: The primary objective of RRBs is to provide credit and other banking facilities to rural and semi-urban areas to support agriculture, small-scale industries, trade, commerce, and other productive activities in these regions.
Ownership Structure: RRBs are jointly owned by the Government of India, the concerned State Government, and the sponsoring commercial bank(s). The shareholding pattern is typically divided as follows: the Government of India holds a majority stake of 50%, the concerned State Government holds a stake of 15%, and the sponsoring commercial bank(s) hold the remaining 35%.
Area of Operation: RRBs operate in specific geographic areas designated as their “area of operation.” These areas typically consist of one or more districts in a state, with a focus on rural and semi-urban regions where banking penetration is low. Each RRB is assigned a specific region to serve based on the recommendations of the National Bank for Agriculture and Rural Development (NABARD).
Products and Services: RRBs offer a range of banking products including savings accounts, current accounts, fixed deposits, agricultural loans, livestock loans, rural housing loans, small business loans, and remittance services. They also facilitate government-sponsored schemes and programs aimed at rural development and poverty alleviation.
Regulatory Framework: RRBs are regulated by the Reserve Bank of India (RBI) under the provisions of the Regional Rural Banks Act of 1976.
Financial Assistance: RRBs receive financial assistance and support from the sponsoring commercial bank(s), the Government of India, and the concerned State Government to meet their capital requirements, operational expenses, and lending activities.

Payment Banks

Payments banks are a new category of banks introduced by the Reserve Bank of India (RBI) in 2014 to promote financial inclusion.
One of the main objectives of payment banks is to enhance financial inclusion by reaching out to the unbanked and underbanked population segments especially in rural and remote areas.

Key Features

Payments banks are a subset of banks with limited functions and capabilities compared to traditional banks.
They are allowed to accept deposits, issue debit cards, and provide payment and remittance services, but they cannot issue loans or credit cards.
The maximum deposit limit for a customer in a payments bank is capped at ₹2 lakh (as of current regulations).
Ownership and Licensing: Payment banks can be owned by individuals, entities, or corporate houses, including non-banking finance companies (NBFCs), telecom companies, and others.
Regulatory Framework:
Payments banks operate under the regulatory framework set by the RBI.
Services Offered: Payments banks primarily focus on providing basic banking services such as
- savings accounts,
- current accounts, and
- money transfer services.
Challenges and Opportunities:
- Payments banks face challenges such as low profitability due to limited revenue streams, regulatory constraints, and competition from traditional banks and digital payment platforms.

Small Finance Banks

Small Finance Banks (SFBs) primarily focus on providing financial services to underserved and unbanked sections of the population, including small and marginal farmers, micro and small enterprises, low-income households, and individuals in rural and semi-urban areas.
These banks were introduced by the Reserve Bank of India (RBI) to promote financial inclusion and extend banking services to the segments of society that have limited access to formal banking.
Target Customer Base: SFBs primarily target unserved and underserved segments of the population, including-
- low-income households,
- small businesses,
- farmers, and
- individuals in rural and semi-urban areas.
Services Offered: savings accounts, fixed deposits, remittances, small loans, and insurance products.
Regulatory Framework: Small Finance Banks are regulated by the Reserve Bank of India (RBI) under the provisions of the Banking Regulation Act, 1949. They are subject to the same regulatory norms as other commercial banks, although there may be certain relaxations or exemptions provided by the RBI to facilitate their operations.
Capital Requirements: SFBs are required to maintain a minimum capital adequacy ratio (CAR) of 15%, with at least 50% of their loan portfolio comprising loans and advances of up to ₹25 lakhs.
Ownership Structure: Small Finance Banks can be promoted by a
1. individuals,
2. non-banking financial companies (NBFCs),
3. microfinance institutions (MFIs), and
4. cooperative societies, subject to approval from the RBI.