The banking system in India is fundamental to economic strength and smooth monetary transactions. Ever since the establishment of the banking system, all monetary functions have become transparent, streamlined and smooth. The Indian banking system can be divided into two broad phases:
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Indian banking history can be divided into two tenors: pre-independence and post-independence. The post-independence period is further divided into the pre-nationalization and post-nationalization period.
The Bank of Hindustan was established in 1770, giving a start to the Indian banking system, headquartered in Calcutta (now Kolkata). The bank was functional until the year 1832 along with several other banks like Allahabad Bank, Punjab National Bank, Bank of India and so on, which are operational to date.
The pre-independence phase marked the significant and grand merger of various small banks like Bank of Bombay, Bank of Madras and Bank of Bengal into the giant Imperial Bank of India which is now known as the State Bank of India (SBI).
It was during the pre-independence period that the concept of Reserve Bank of India was planned in the year 1935 after the Hilton Young Commission recommendations observing the low confidence of people in the failing banking system.
The second tenor or the post-independence phase marks the nationalization of several banks. The post-independence period served as the foundation of today’s economic system and several economic reforms that the banking system has gone through for a more refined version that functions today.
See Also: Understanding The Indian Banking Sector
Initially, banks catered only to large businesses.
Looking at all these factors, the need to nationalize the banking system was a must. Later, in the year 1949, the Reserve Bank of India got nationalized followed by the nationalization of 14 commercial banks under the leadership of the then Prime Minister, Mrs Indira Gandhi. These banks were:
The nationalization movement saw another achievement in the following year 1975, where Regional Rural Banks were conceived in order to promote the financial inclusion of the underprivileged and the rural population. The specialized banks like NABARD, SIDBI, EXIM Bank, National housing bank were introduced taking care of agriculture, small industries, import & export, and housing needs respectively.
The nationalization movement was a big hit leading to more and more people turning towards banks for financial needs. People and businesses across all levels were able to gain easy access to money in a more transparent and equitable manner. This also led to India’s recognition across the Globe as a mature economy backed by a stable banking system.
The year 1991 stands as a huge milestone in the history of the banking system in India. With the introduction of LPG reforms that stand for Liberalization, Privatization and Globalization, banking has gone to the next level. Global and domestic investors were allowed to make investments in India; shaping the economy in a more refined way and bringing it to the level it stands today.
The most significant and apparent introduction of this reform was the entry of private banks into the banking system. 10 private banks were given the license to conduct business in India under the RBI including ICICI bank, HDFC bank, Axis bank, IndusInd bank and DCB.
Seeing the success and reliability of private banks, newer banks were allowed to enter the system and licenses were given to two more players; Kotak Mahindra bank in 2001 and Yes bank in 2004. By the end of the year 2015, 11 payments banks and 10 small finance banks were given ‘in-principal’ approval to set up these entities.
See Also: Consolidation in Indian Banking Sector
Payments banks are allowed to accept a nominal cash deposit from investors which currently stands at Rs 1 Lakh. These banks do not sanction loans and credit cards. They offer debits cards, mobile banking and net banking.
Small finance banks take care of the small financing needs of customers allowing them gain easy access to money for business needs.
The banking system has seen several reforms and milestones in its journey to becoming a robust and reliable system. The support it provides to the economy is unmatchable and is the reason for the economic success of the country.
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