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Banking System in India: What You Need to Know? Research Team | Posted On Wednesday, May 08,2019, 01:22 PM

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Banking System in India: What You Need to Know?



Banking System in India: What You Need to Know?

The banking sector plays a major role in the development of the economy, as it mobilizes deposits and provides credit to various sectors across India. In India, the banking sector collects surplus funds from customers/depositors in the form of deposits and channelizes them to borrowers in the form of loans.

In India, the Reserve Bank or RBI is the central banking institution. The RBI regulates and operates the banking system in India. It supervises and administers exchange control and banking regulations and also administers the government's monetary policy.

RBI encompasses commercial banks, co-operative banks and development banks that function according to the guidelines imposed by the RBI. These banks provide various banking services across India from urban and metropolitan areas to the remotest rural areas.

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Banking Development and Nationalization of Banks in India:

Prior to Nationalization, majority of the banks were owned and managed by private owners and shareholders. For the betterment of the country, the government nationalized the banks. Private Banks were class-based and there were monopolies that would only benefit a few people in India.

This led to the concentration of power in the hands of a few. With the nationalization of banks, the credit scenario changed, benefitting all sections of society and contributed to overall prosperity of the Nation. The Indian Government recognized the need to bring banks under some form of government control, to be able to finance India’s growing financial needs. The RBI was the first bank to be nationalized, way back in 1949.

SEE ALSO: History of Banking in India

Structure of Banking System in India:

A bank is an institution that provides fundamental banking services like accepting deposits and providing loans. The structure of the Indian banking system is discussed below:

Public Sector Banks in India: These are the major types of banks in India, where more than 50% stake is held by the Government. At present, there are 21 public sector banks in India. Out of this, 19 are Nationalized Banks and 2 banks come under PSUs. (These are SBI and IDBI Bank).

Scheduled Banks: Scheduled Banks in India are those banks which are listed under the 2nd schedule of the Reserve Bank of India Act, 1934. These banks must maintain a certain amount with RBI and, in return, they enjoy the facility of financial accommodation and remittance facilities at concessionary rates from the RBI.

Nationalization of Commercial Banks:

In the past, banks were controlled and managed by private entrepreneurs and shareholders. The government felt the need to nationalize these commercial banks to ensure banking facilities were available to all citizens and end the monopoly in the banking sector.

The process of nationalization of banks began when the Reserve Bank of India was nationalized on 1st January 1949 with the passing of the Reserve Bank Act, 1948. The first step towards the nationalization of commercial banks was taken with the nationalization of the Imperial Bank of India as the State Bank of India on 1st July 1955. The second step was taken when 7 State-associated banks were nationalized as subsidiaries of the State Bank of India in 1959. The third major step was the nationalization of 14 major commercial banks with deposits exceeding Rs 50 crores each on 19th July 1969. The last step was the nationalization of 6 more commercial banks on 15th  April 1980. 

Nationalization of commercial banks was carried out due to the following reasons:

  • To reduce the regional imbalance of banks in rural and urban areas.
  • To subject banking activities to public regulation.
  • To end private monopoly in the banking sector.
  • To establish a regulatory framework for effective supervision of banks along with establishing technological and institutional infrastructure.
  • To meet the credit needs of all sections of society.
  • To curb the use of bank credit for speculative and other unproductive purposes.
  • To develop adequate professional management and modern managerial techniques and practices in the banking field.
  • To mobilize savings across sectors leading to economic development.

SEE ALSO: Commercial Banks in India

Financial Regulators in India:

In India, there are 3 main financial regulators. They are:

  • Reserve Bank of India that regulates the banking sector in the country.
  • Securities Exchange Board of India that regulates the capital markets.
  • Insurance regulatory and development authority, IRDA which supervises the functioning of the insurance companies in India.

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