Banking Sector in India: History, Technology Advancement, Classification
The Indian banking system acts as a meeting ground for penny pinchers and investors. Over the years, the banking sector in India has undergone a huge transformation. Since its inception in 1970, the working of the banking sector has changed tremendously. From paper-based banking to net banking, advancement can be witnessed in every banking activity.
In the era of technology, Indian banking plays a remarkable role in building public savings and further making funds available in terms of credits and investment instruments. Additionally, they aim to escalate capital mobility and bring about demand deposits in loan disbursals and investment securities.
Considering the past scenarios, we can conclude that the banking sector around the nation has seen positive growth since its emergence. So, the current banking system led the way to a win-win situation for everyone including business organisations, individuals, and investors.
What is Banking ?
The term "banking" refers to the sector of the economy that deals with credit and cash management. Banking provides people and businesses with the necessary liquidity for upcoming investments. In addition, banking is considered as one of the key drivers of the Indian economy.
Financial institutions carry out a wide range of activities through the banking sector. These organisations are in charge of managing both individual and corporate cash deposits. The collected funds are subsequently put to use for lending, investing, and generating additional revenue.
History of Indian Banking
The banking system was introduced in India in 1770. The Bank of Hindustan was the first banking institution of India.
The History of Indian banking can be classified in seven phases. Each phase represents a revolution in itself. To understand how much Indian banking has grown over time, we need to understand every phase.
Here is how the banking system of India has evolved since 1770 to 2022.
First Phase: From 1770 to 1806
Alexander and company is responsible for the setting up of the first Indian Bank. He established the Bank of Hindustan in 1770. The key objective of Alexander and Company was to provide East India Company with the required facilities in terms of funding. But, due to several reasons they failed to raise funds, and the Bank of Hindustan was closed down in the financial year 1831-1832.
Second Phase: From 1806 to 1860
Presidency states of India i.e. Calcutta, Bombay, and Madras were already under the control of British Rule by this time. The British rulers established a banking system composed of three banks, known as the Presidency Banks. Later these banks were united with the Imperial Bank of India.
Following banks are listed as Presidency Banks in Indian Banking history:
- Bank of Calcutta (Established in 1806)
- Bank of Bombay (Established in 1840)
- Bank of Madras (Established in 1847)
Third Phase: From 1860 to 1913
The majority of the well-known banks in existence today were founded during the third era of Indian banking. The first commercial bank in India and the country's first joint stock bank was Allahabad Bank, which was founded in 1865.
Awadh Commercial Bank was founded in Faizabad in 1881 and was the first bank in India controlled by Indians.
Punjab National Bank was founded in 1894 and was the very first Indian Bank solely owned by the Indian government.
The Central Bank of India was the first indigenous bank, and all of its administration, funding, and principles were of Indian origin.
Here are a few examples of modern banks' establishments.
- Bank of India (Established in 1904)
- Bank of Baroda (Established in 1908)
- The Central Bank of India (Established in 1911)
Fourth Phase: From 1913 to 1939
This stage was crucial for the empowerment of the banking industry in India. Only during this time period did the Presidency Banks and Imperial Bank of India unite. In 1955, this bank adopted the name State Bank of India. During this stage, the Central Banking Inspection Committee was founded. On their advice, the Reserve Bank of India Act 1934 was introduced, and later, on 1 April 1935, the Reserve Bank of India was established.
Fifth Phase: From 1939 to 1946
The fifth phase led to the foundation stones of Hindustan Commercial Bank and United Commercial Bank, which was known as UCO Bank, now it is Canara Bank after Banks merger.
Sixth Phase: From 1946 to 1991
This period in Indian banking history saw the majority of economic reforms. The Banking Regulation Act of 1949 led to the nationalisation of the Reserve Bank of India on January 1st, 1949.
The Imperial Bank of India was transformed into State Bank of India during this time, and Indian State became an affiliate of State Bank of India. This took place with the commencement of the SBI Subsidiary Act 1959. The list of entities that joined State Bank of India as subsidiaries is below.
- State Bank: Bikaner
- State Bank: Travancore
- State Bank: Patiala
- State Bank: Hyderabad
- State Bank: Mysore
- State Bank: Saurashtra
- State Bank: Jaipur
- State Bank: Indore
State Bank of Bikaner and State Bank of Jaipur's financial situation deteriorated later in 1963, and as a result, these banks were combined to establish the new State Bank of Bikaner and Jaipur. Later on, these banks merged with the State Bank of India due to their dire financial circumstances.
In 1969, the then-prime minister Indira Gandhi nationalised 8 banks with capital up to 200 crores and 14 significant banks with paid-up capital up to 50 crores.
Seventh Phase: From 1991 to 2019
New economic and industrial policies were introduced in 1991 by the then-Governor of the RBI, Dr. Manmohan Singh, and the Prime Minister PV Narasimha Rao.
In 1992, private banks were founded, and foreign banks were allowed to set up operations in India.
The Reserve Bank of India issued an invitation for private bank applications in 2013, however only two banks i.e. Bandhan Financial Ltd. and IDFC were authorised out of several well-known institutions.
However, the Government of India sought to promote private banking in India to support small and medium-sized businesses, thus it was not pleased with the RBI's decision of approving just two private banking institutions.
As a result, a committee was constituted, and it made recommendations that led to the establishment of small finance banks with capital of up to 100 crores and payment banks like India Post, Paytm, and Airtel Money.
Adoption of Banking Technology
Technology development and its advantages in banking are evolving steadily in the banking system of India. Technology is viewed as the foundation of the financial system for the country's overall economic success. Everyone grows with the help of technology, whether it be in business, education, or banking. To fully utilise technology, banks invest heavily in innovative or novel banking techniques.
ATMs, electronic banking, mobile banking, CRM, and telebanking are a few examples. The central bank is consistently implementing novel technical payment methods to make banking services easily accessible.
By encouraging inclusive economic development across many industries, IT advancements significantly contribute to development and inclusion. The use of IT in banks not only strengthens administrative backend procedures, which increases competitive efficiency, but also improves front end operations and lowers customer transaction costs. The creation of cutting-edge methods for the Indian banking sector has been extensively pursued by the India Reserve Bank.
A significant technical advancement in the banking industry connects customers from all bank branches online with their accounts. The banking sector in India has quickly advanced in its shift to a more competitive business climate. The development of technology infrastructure was a significant component of the banking sector reform.
You can witness the following trends as advancement in the banking sector in India:
- Electronic Payment Services
- EFT: Electronic Fund Transfer
- Electronic Clearing Service
- Point of Sale Terminal
- Tele Banking
- Mobile Van Banking
- Lobby Banking
- Electronic Data Interchange (EDI)
Classification of Banking Sector In India
Banking services can be classified into following categories:
Compared to commercial banks, community banks are smaller. They focus on the neighborhood market. They develop bonds with their clients and offer more personalised service.
These services are offered by internet banking over the web. E-banking, online banking, and net banking are other names for the industry. Nowadays, most other banks provide online services. Numerous banks only operate online. They may pass on the cost savings to the consumer because they don't have any branches.
Savings and Loan Banking
Savings and loans are specialised financial organisations designed to support the purchase of homes at an affordable price. As they generate funds to lend for mortgages, these banks frequently give depositors a higher interest rate.
Credit unions are financial organisations that perform many of the same functions as traditional banks but have a different organisational structure. Credit unions are owned by its members. They are able to offer affordable and more specialised services just because of the ownership structure.
Investment banking finds capital for businesses through issuing bonds or initial public offerings of stock. Additionally, they make mergers and acquisitions easier.
Small businesses can access similar banking services through merchant banking. They offer business credit packages, bridge finance, and mezzanine financing.
How is the Banking Sector Regulated?
Independent regulatory organisations oversee the banking, capital markets, insurance, commodities markets, and pension funds sectors of India's financial system. However, the Indian government has a significant impact on these institutions' regulatory structure, at least to a certain level.
The Banking Regulation Act, 1949 primarily governs how banks and other financial organisations are regulated in India. The Banking Companies Act of 1949 was enacted and came into force on March 16, 1949. Additionally, beginning on March 1, 1966, the Act's name was modified to the Banking Regulation Act.
Banking Regulation Act, 1949
The Banking Regulation Act of 1949 has the following salient features:
- It oversees all Indian banking organisations. It was originally applicable to banks, but in 1965 it was revised to include cooperative banks as well. State governments create and manage cooperative banks, but the RBI is in charge of licensing and regulation.
- This Act gives the RBI the authority to licence banks, restrict shareholding, oversee board and management appointments, set auditing guidelines, issue orders in the interest of the public good, control moratoriums, mergers, liquidations, and acquisitions.
Major Banking Regulatory Bodies in India
|Reserve Bank of India (RBI)||Banking & Finance||Mumbai|
|Securities & Exchange Board of India (SEBI)||Stock & Capital Market||Mumbai|
|Insurance Regulatory & Development Authority of India (IRDA)||Insurance||Hyderabad|
|Pension Fund Regulatory & Development Authority (PFRDA)||Pension||New Delhi|
|National Bank for Agriculture & Rural Development (NABARD)||Financing Rural Development||Mumbai|
|Small Industries Development Bank of India (SIDBI)||Financing Micro, Small & Medium Enterprises (MSMEs)||Lucknow|
|National Housing Bank (NHB)||Financing Housing||New Delhi|
|Insolvency and Bankruptcy Board of India (IBBI)||Insolvency Proceedings||New Delhi|
The Reserve Bank of India (RBI)
The Reserve Bank of India is the central bank of India and was established in accordance with the RBI Act, 1934. The RBI is charged with a number of duties under the Banking Regulation Act, 1949. Some of its key duties include the following:
- Issuance of currency
- Federal government's banker
- The authority in charge of commercial banks' cash reserves
- Keeper of foreign currency reserves
- Administrator of credit
- The last-resort lender
Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India is a statutory organisation that is regulated by the Indian government. It was established on April 12, 1992, in accordance with the SEBI Act 1992. Its major task is to control the securities market and protect the interests of investors in the stock exchange. Mumbai serves as the location of SEBI's main office, while Delhi, Kolkata, as well as Chennai serve as major branch locations.
Insurance Regulatory and Development Authority of India (IRDAI)
The IRDAI was established under the Insurance Regulatory and Development Authority Act 1999. It is an independent statutory organisation tasked with regulating and advancing the insurance and reinsurance sectors in India. This regulatory 10-member organisation is headquartered in Hyderabad. The core team consists of a chairman, five full-time members, along with four part-time members. The Indian government is responsible for choosing the core team.
PFRDA under the Finance Ministry
Pension Fund Regulatory and Development Authority is referred to as PFRDA. PFRDA was created by executive order of the Indian government on 23rd August, 2003. The authority was established with the key responsibility of overseeing pension funds. Headquartered in Delhi, India, the organisational structure is made up of a chairperson, three full-time members from the fields of finance, law, and economics, as well as a chief vigilance officer.
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What is the difference between banking and a bank?
The key difference between a bank and banking is, that a bank is a physical thing, while banking represents a service offered by a tangible object. In simple words, banking is the financial service produced by the bank through its physical resources including organisation, employees, and much more.
What is the Impact of Technology on banking?
The foremost impact of technology in banking is, that it has become more easily approachable than ever before. Now, customers can access banking services from their home comfort in split seconds through the internet.
What are the challenges of banking?
The challenges of banking are increased competition, cultural shift, upgrading business models, customer retention, security breaches, and continuous innovations.
What is the role of the banking industry in the country?
The key role of the banking industry for the country includes capital formation, creation of credit, facilitating international trade and domestic trade, creation of employment, and financing small businesses.