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STUDY OF INDIAN BANKING SYSTEM.do

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Summary
Introduction

To understand about Indian Banking system, we need first understand “the term banking. Banking
according to section 5(b) The Banking Regulation Act, 1949 is” “The acceptance for the purpose
of lending as investment of deposits from the public, repayable on demand or otherwise and
withdrawal by cheque, draft, order or otherwise”

Indian Banking system is always governed and regulated by the government through the
governance of Reserve Bank of India (RBI). India has a large and very well-regulated banking
system, before liberalization enjoyed very little competition, particularly in retail area. The sector
exhibits a clear divide due to its distinct operational structure. On one side there, are national and
international bank that operates for profit and on the other, there are RRB’s which aim to develop
the rural economy. Despite this divide, all banks are unified in that they must adhere to the
guidelines set by RBI. This is the most unique features of the Indian banking system.

History of Indian banking system

The banking sector has undergone significant deal of evolution. Banks has been around for a long
period of time, even before the country’s independence they exit. Over several decades, has
become well-established for serving the country’s credit and banking needs for a long period of
time. Over the period the rules and regulation, government oversight, and accessibility of banks
has changed. Banking history of India can be divided into these stages

 Pre Independence
 Post Independence (1947-1991)
 Liberalizations (1991- present)
 History of Banks in India

Pre-Independence Post- Independence

Pre-Nationalisation

Post-Nationalisation

Liberlization

 Pre Independence
1
The first bank of India was the “Bank of Hindustan” established in 1770 and it was located
in then capital Calcutta it later shut down its operation 1832.

When East Indian Company used to rule, it established three banks i.e., Bank of Bombay,
Bank of Madras, Bank of Calcutta which were collectively known as presidential bank.
Later, during British Raj in 1922 these banks were merged into one single bank knows as
1
“Imperial bank of India” which was later nationalized in 1955 under the name of State
Bank of India which remains largest public sector bank in India even today.

During this period, around 600 banks were registered, but only few manage to survive. The
major reason why banks failed during this phase is mainly because of depositor in the has
become fraud prone

 Post Independence
When India gained independence, most banks were owned by the private individual, which
led a serious concern. The majority of population were below poverty line and resides in
rural part of India while bank branches were only in major urban cities. Additionally, they
 charge a hefty interest rate which lead people living in rural areas still dependent on the
money lenders.
“With the aim to solve this problem, then government decided to nationalize the Banks.
These banks were nationalized under the Banking Regulation Act, 1949. Whereas, the
Reserve Bank of India was nationalized in 1949.”

“Impact of Nationalization
There were various reasons why the Government chose to nationalize the banks. Given
below is the impact of Nationalizing Banks in India:
 This led to an increase in funds and thereby increasing the economic condition of the
country
 Increased efficiency
 Helped in boosting the rural and agricultural sector of the country
 It opened up a major employment opportunity for the people
 The Government used profit gained by Banks for the betterment of the people
 The competition decreased, which resulted in increased work efficiency”

 Liberalization
The introduction of the economic reforms in 1991 led to a new era in Indian Banking
system. The reform aimed to deregulate and decentralized the economy and provide more
opportunities for the private sector this will increase competitiveness and efficiency of the
banking sector.
The reform by government was effective as it increases in the competition within the bank,
leading to faster technological advancement, greater efficiency and improved customer
services.
Impact of liberalization that a large number of nationalized banks were shut down as they
can’t compete to the services given by the private banks

Structure of Indian Banking System

 RBI

Unscheduled
Scheduled bank
bank

Co-orporative
Commercial Bank
bank

Private bank Public Bank Forgein Bank

 RBI
5
The Reserve Bank of India (RBI) is the country’s apex bank severs as the backbone of the
nation’s economy. It acts as a regulatory body and is responsible for the regulation of the
Indian banking system.
It monitors the banking system to ensure the financial stability and public confidence. It
also supervises the interest rates charged and more things to ensure a stable financing
environment.
 Scheduled bank
“By Definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India
Act, 1934 is considered as a schedule bank”
Schedule banks are further divided into 2 sub-parts:
 Commercial Bank
 Co-operative Bank
 Commercial banks
These banks operate as the intermediaries between depositors and borrowers mobilizing
the surplus funds. There main moto is to offer services and earn profit. They usually earn
profit by charging hefty interest rate on loans and giving nominal interest rate on deposit.
Commercial Bank are further divided into 4 sub-banks:
  Public Bank
 Private bank
 Foreign Bank
 RRB’s
 Public Bank
In these banks majority of shares are owned by the government and their main aim is to
work in the public interest through welfare scheme
Though they work for the profit but the main moto is only public welfare.
 Private banks
In these banks shares are own by the private individual.
These banks solely run to earn profits and they aren’t much inclined towards public welfare
 Foreign Bank
These banks are those whose headquarters and registration is another country and they have
branch in India e.g. Citibank, Standard Chartered Bank, etc.
Their existence came into picture after the liberalization happened in 1991. After that they
were allowed to run their bank in India.
 Co-operative bank
Co-operative Bank on the contrary to the commercial bank are member-owned financial
group they target specific group of people typically in same occupation or community they
have something in common.
Their primarily objective is to provide best services to their consumer not profit
maximization.
4
 Non- schedule banks
These banks are not listed in the second schedule of the RBI Act,1934. They are generally
small banks catering to niche population.
For e.g. The Andaman and Nicobar State Cooperative Bank Ltd., The Manipur State
Cooperative Bank Ltd., The Sikkim State Cooperative Bank Ltd

Regulatory Framework of Indian Banking System

 Once banks were established need to regularly monitor and regulations need to be followed to
continue the welfare of the people and profits. Therefore, numerous rules and regulation are
been implemented:
3
 The Reserve bank of India Act, 1934
 The Banking Regulation Act, 1949
 The Foreign Exchange Management Act, 1999

Banking Regulation Act, 1949: This acts main objective is to regulate the banking business from
the time they are established till closed, defines permissible and prohibitory activities of bank.

The Reserve bank of India Act, 1934: This act establishes the authority of the RBI as the central
bank that regulates and monitor over other banks and mandates all the other banks to comply with
2
its guidelines. It is the primary regulatory authority in the banking sector. It issues guidelines,
regulation and notification to regulate the banking sector.

Foreign Exchange Management Act, 1999: This act regulates cross-border exchange transactions
involving Indian banks

Key Features and Function

 Deals with money

The main function of the bank is to handle the financial transaction. For e.g. depositing
Money, providing loans, keeping consumer money safe etc.
 Provides Loan
Bank has two major function one is keeping money from the people who have surplus and
providing it to the people who are in need of money as a form of loan. In this process they
earn their profits also as they are not a NGO’s who is going to work for people, they are
doing business. Henceforth, they give nominal interest to depositor and charges hefty
interest on the loan.
 Withdrawal and payment facilities
A depositor can withdrawal his/her money anytime easily from bank and can make
payments from his/her money. For this bank has provided some tools such as DD, Cheque,
ATM, Cards, etc.
 Internet services
 Present phase is totally a digital era all the things are on internet. So, your bank is also now,
bank stared to provide E banking facilities like UPI, there apps, Net banking.
One can do all of his bank work on the internet from his/her rather than going to the bank
itself.

Conclusion

Indian Banking system is a complex system with a hierarchy of bank and their complex history
with various regulatory framework and keeping up the technological advanced time. While Indian
Banking sector shown a significant growth but there are some challenges also such NPA’s,
cybersecurity, adapting to rapid technology changes. Even though there are a lot of challenges the
future of Indian lies into adaptability and harness the opportunities for future growth and stability.
 Similarity Report

7% Overall Similarity
Top sources found in the following databases:
4% Internet database 1% Publications database
Crossref database Crossref Posted Content database
6% Submitted Works database

TOP SOURCES
The sources with the highest number of matches within the submission. Overlapping sources will not be
displayed.

amity.edu
1 2%
Internet

National Law School of India University, Bangalore on 2019-01-02

2 1%
Submitted works

website.rbi.org.in
3 1%
Internet

Savitribai Phule Pune University on 2017-01-19

4 1%
Submitted works

allindialegalforum.files.wordpress.com
5 <1%
Internet

Sources overview