Banking System of India

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of country and forms the core of the money market in an advanced country.

In India, though the money market is still characterized by the existence of both the organized and the unorganized segments, institutions in the organized money market have grown significantly and are playing an increasingly important role. The unorganized sector, comprising the money lenders and indigenous bankers, caters to the credit needs of a large number of persons especially in the country side. Amongst the institutions in the organized sector of the money market, commercial banks and co-operative banks have been in existence for the past several decades. The Regional Rural Bank came into existence since the middle of seventies. Thus, with the phenomenal geographical expansion of the commercial banks and setting up of the Regional Rural Banks during the recent past, the organized sector of money market has penetrated into rural areas as well.

Besides the aforesaid institutions, which manly serve as sources of short term credit to industry, trade commerce and agriculture, a variety of specialized financial institutions have been set up in the country to cater to the specific needs of industry, agriculture and foreign trade.

In the field of industrial finance, the Industrial Development Bank of India (IDBI), set up in 1964, is the apex bank, which undertakes, besides direct financing of big industrial projects, refinancing of term loans granted by other financial institutions including the commercial banks. There are two prominent all-India institutions in this field namely, the Industrial Finance Corporation of India Ltd. (IFCI) and the Industrial credit and investment Corporation of India (ICICI). Besides, the State Financial Corporations (SFCs) ad State industrial Development Corporations (SIDCs) have been set up to meet the requirements of small and medium scale industries in the respective State. Industrial Reconstruction Bank of India (IRBI) was set up to bring back to normalcy the industrial units which fall sick. In March 1997 it was re-named as Industrial investment bank of India and joined the ranks of full fledged development financial institutions. Small industries Development Bank of India was set up in 1990 as a subsidiary of industrial Development Bank of India to cater exclusively to the requirements of the small scale sector in the country. It was de-linked from IDBI in March 1997, and acquired the status as the apex bank the field of financing small scale industries. All these institutions, engaged as they are in the task of development, are now designated as development banks which are distinct from the traditional commercial banks. Development baking has had its genesis in the post independence period in India and has contributed significantly to the industrial growth of the country during this period. A few specialized development financial institutions have also been set up in India e.g. Indian Railways Finance Corporation, Power Finance Corporation of India, Tourism Finance Corporation.

For financing agriculture and allied activities in to rural areas, tough co-co-operative credit societies and central co-operative banks have been participating since long, commercial banks began their active participation after the nationalisation of major banks in 1969. Long and medium term credit to the agriculturists is being provided by another specialized institution namely, the land development banks which have a two tier structure – Primary Land Development Banks at the district level and State Land Development Banks at the State level. National Bank for agricultural and Rural development (NABARD) is the full fledged apex institution in the field of agriculture and rural development.

During 1988 two important financial institutions were established. National Housing Bank was set up in July 1988 as the apex banking institution in the field of housing finance. Discount and Finance House of India Ltd, was established to deal in money market instruments in order to provide liquidity in the money market.

Besides these institutions which are mainly engaged in meetings the credit needs of various segments of the economy, there are a few other institutions, which are essentially engaged in the business of investing in the corporate, government and semi-government securities and other instruments. They are the insurance institutions – LIfe Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and the Unit Trust of India (UTI). These institutions mobilize the savings of the people and channel them into desirable securities. Hence they are called the investing institutions or institutional investors.

To facilitate the banking business and to foster the growth of banking habit, to other institutions have been set up. The Deposit Insurance and Credit Guarantee Corporation of India undertakes the twin functions of extending the insurance cover to the depositors in banks and protect the interests of banks by providing guarantees in respect of advances granted by them to small scale industries and the priority and neglected sectors of the economy. The Export Credit Guarantee Corporation (ECGC) provides protection to the banks in respect of risks inherent in financing the export trade. With the setting up and growth of all these institutions, Indian banking and financial system may be claimed to have the finest set-up comparable to any advanced country as shown.

Commercial Banks:

The commercial banks operating in India fall under a number of sub-categories on the basis of ownership and control of management as is evident.

Foreign commercial banks are the branches in India of the joint stock banks incorporated abroad. These banks, besides financing the foreign trade of the country, undertake banking business within the country as well.

Public Sector Banks:

Public sector in Indian banking reached its present position in three stages – first, the conversion of the then existing Imperial bank of India into the Sate Bank of India in 1995 followed by the establishment of its seven subsidiary banks; second the nationalization of 6 more commercial banks on April 15, 1980. One of them – New Bank of India – was later on merged with Punjab National Bank. Thus 27 Banks constitute Public Sector in Indian Commercial Banking. J