Overview of the Indian Banking Sector Essay Sample
Harmonizing to the International Monetary Fund. as of 2011. the Indian economic system is the ninth-largest economic system by market exchange rates. Behind the cryptically rapid growing of this freshly industrialised state. few know that its banking system. following back to the last decennaries of the 18 century. started off to be unprosperous. though subsequently enhanced. This paper provides an overview of the banking sector in India. including its assorted classs of fiscal establishments and their several maps. Thursday
The earliest Bankss in the banking history were The General Bank of India. started in 1786. and the Bank of Hindustan. started in 1790 ( IBO ) . both of which no longer exist today. The oldest bank in being in India is the State Bank of India. Together with The Bank of Bombay and the Bank of Madaras. they were the three Presidency Bankss established under charters from the British East India Company. For many old ages. these Presidency Bankss acted as India’s quasi-central Bankss.
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In 1848-49. there was an economic crisis in India. taking to the failure of many Bankss. Coupled with the eruption of the American civil war. bank failures prevailed ; depositors lost money in maintaining sedimentations in the bank ; it was a dark epoch of the Indian banking history. As Lord Curzon. the so Viceroy of India puts it. “In regard of banking it seems we are behind the times. We are like some old fashioned sailing ship. divided by solid wooden bulkheads into separate and cumbrous compartments. ”
Around the bend of the twentieth Century. the Indian economic system brightened up and entered into a comparative period of stableness. As a consequence of the Swadeshi motion. many more Bankss were established. A figure of Bankss which have survived to the present include the Bank of India. Corporation Bank. Indian Bank. Bank of Baroda. Canara Bank and Central Bank of India. Many private Indian Bankss were subsequently established in the Dakshina Kannada and Udupi territory. doing the territory known as the “Cradle of Indian Banking” .
In 1935. the Reserve Bank of India officially took over the duties from the so Imperial Bank of India ( the three Presidency Bankss ) . After India’s independency in 1947. the Reserve Bank was nationalized and given more extended powers. doing it the cardinal bank of India.
3 Mundell’s Holy Trinity
3. 1 Floating Exchange Rate
The Indian Rupee ( INR or ) is the official currency of India. From 1950 to mid-December 1973. India followed an exchange rate government with the Rupee linked to the Pound Sterling. In 1975. the Rupee’s broke its ties with the Pound Sterling and established a floating exchange government. with the Rupee’s effectual rate being linked to a basket of currencies dwelling of India’s major trading spouses ( Go Currency. 2011 ) . The 2011 USD vs INR graph is shown in Table 3. 1 ( See Appendix ) .
3. 2 Free Capital Flow
Since the early 1990s. the macro-economic environment in India has been sing gradual deregulating and liberalisation. and is no longer tightly regulated. There is a free motion of capital.
3. 3 Limited Independence of Monetary Policy
The floating exchange rate and free capital flow make India lose some of its pecuniary policy independency. However. India is presently trying to keep some control over its pecuniary policy by actively pull offing its exchange rate. edifice up its international militias by step ining in the foreign exchange market ( from US $ 5. 8 billion at end-March 1991 to US $ 304. 8 billion as on March 31. 2011. see Table 3. 3 ) . so as to restrict exchange rate volatility ( Hutchison & A ; Sengupta. 2010 ) .
4 Distinctive Features
India’s alone geographical. societal. and economic features make its banking system significantly different from that of other Asiatic states. With its big population of 1. 210. 193. 422 and relatively low literacy rate of 74. 04 % ( Maps of India ) . the country’s economic policy model is to a great extent biased towards public sector investing.
As a consequence. the banking industry serves as an instrument of province policy. subjected to assorted nationalisation strategies in different stages ( 1955. 1969 and 1980 ) . Indian’s banking sector therefore remained internationally isolated. due to its high preoccupations with domestic precedences ( Deolalka ) .
To day of the month. the Big Four Bankss of India are: HDFC Bank. State Bank of India. ICICI Bank and Punjab National Bank. 4
5 Fiscal Structure
5. 1 Central bank — Reserve Bank of India ( RBI )
5. 1. 1 Background The Reserve Bank of India was established on April 1. 1935 in conformity with the commissariats of the Reserve Bank of India Act. 1934. It was originally in private owned. but became nationalized in 1949 ( Reserve Bank of India: India’s Central Bank ) .
5. 1. 2 Function and Roles The Preamble of the Reserve Bank of India outlines the cardinal maps of the Reserve Bank:
“…to modulate the issue of Bank Notes and maintaining of militias with a position to procuring pecuniary stableness in India and by and large to run the currency and recognition system of the state to its advantage. ”
The Reserve Bank has 6 major functions: 1. Monetary Authority RBI formulates pecuniary policies so as to keep fiscal stableness and a sustainable flow of recognition to investors and productive sectors. 2. Regulator and Supervisor of the Banking System RBI prescribes wide regulations and parametric quantities of banking operations. so as to protect depositors’ and investors’ involvements and maintain public assurance in the banking system. 3. Note Issuer Apart from Rupee notes and coins. or other subordinate coins. RBI issues currency to keep an equal money supply and currency-note quality for public circulation. 4. Manager of Foreign Exchange RBI manages the Foreign Exchange Management Act. 1999. supervises trade payments and promotes orderly development of the foreign exchange market. 5. Developmental Role RBI performs a broad scope of maps in line with province policies and helps recognize national aims as respects the banking system.
5. 2 Commercial Banks
Commercial Bankss are the oldest and fastest turning Bankss in India. They attract the idle nest eggs of the people in the signifier of sedimentations and are the most of import depositories and loaners.
Profitableness. liquidness. safety and societal public assistance are the primary rules of commercial Bankss. Secondary maps include publishing letters of recognition. set abouting safe detention of valuables by supplying safe sedimentation vaults. standing warrant on behalf of its clients. supply credit-worthiness statements with respect to clients etc.
As of March 2011. India has 167 commercial Bankss ( see Table 5 ) . the figure has declined by around 43 % as compared to that of 293 in March 2003 ( Reserve Bank of India ) .
5. 2. 1 Public Sector Banks Public sector Bankss are 1s which the Government of India holds the major interest. The United Bank of India was the first public sector bank in India. after being nationalized in July 19. 1969. The State Bank of India used to be the biggest bank on all parametric quantities of size and net incomes. but merely on November 16. 2011. the HDFC Bank overtook the State Bank of India in market
capitalisation and became the largest alternatively ( Business: HDFC Bank overtakes SBI in market cap ) .
Other illustrations of public sector Bankss include Bank of India. Punjab National Bank and the Allahabad Bank.
5. 2. 2 Private Banks Private Banks refers to Bankss which are non incorporated. IndusInd Bank was the first pivate bank in India to be set up. Till now. it is still one of the fastest turning private Bankss in India. As portion of RBI’s liberalisation of the Indian banking industry. Housing Development Finance Corporation Limited was the first Private Bank in India to have a rule.
Examples of private Bankss include ING Vyasya Bank. SBI Commercial Bank and the ICIC bank.
5. 2. 3 Foreign Banks The entry of foreign Bankss into the Indian banking sector has brought the latest engineering and banking patterns into India. in bend doing the Indian banking system more competitory and efficient ( Foreign Banks in India ) .
Examples of foreign Bankss include BNP Paribas. HSBC Ltd and Deutsche Bank.
5. 3 Co-operative Banks
Co-operative Bankss are engaged in production. processing. selling. service. distribution and banking in India. They are engaged in funding rural and agricultural development and face stiff competition from commercial Bankss and other fiscal establishments. Compared to commercial Bankss. co-operative Bankss offer a much narrower grade of merchandises.
Co-operative Bankss are fiscal entities which belong to their members. who are at the same clip the proprietors and clients of the bank. They play a peculiarly of import function in rural and agricultural funding. The Anyonya Co-operative Bank in India is the first concerted bank in Asia. In recent old ages. there is a crisp addition in the figure of primary co-operative Bankss ( India Finance and Investment Guide ) .
To day of the month. there are 1926 co-operative Bankss in India ( Reserve Bank of India ) .
5. 3. 1 Short-run Credit Co-operatives 5. 3. 1. 1 Primary Agricultural Credit Societies ( PACS ) PACS trade straight with single borrowers. Since members have unlimited liability. in instance of failure. each member is to the full responsible for the full loan. Loans are given for short periods. usually for the crop season. on a fixed involvement rate ( Jeevitha ) .
5. 3. 1. 2 Cardinal Co-operative Banks ( CCBs ) District Central Cooperative Banks ( DCCB ) map as a span between primary societies and the 3rd tier—State Cooperative Apex Banks ( SCB ) . Their chief map is to impart to primary recognition societies. Apart from that. more and more of these Bankss are now prosecuting in commercial banking concern by pulling sedimentations from the general populace and doing secured loans ( Jeevitha ) .
5. 3. 1. 3 State Co-operative Banks ( SCBs ) SCBs serve as a nexus between the RBI and the general money market on the one side and the cardinal co-operative and primary societies on the other. They obtain their financess chiefly from the general populace by manner of sedimentations. loans and progresss from the Reserve Bank ( Jeevitha ) . Under the Banking Regulation Act 1949. merely State Cooperative Apex Banks. District Central Cooperative Banks and choice Urban Credit Cooperatives are qualified to be regarded as Bankss in the co-op sector for the lawful and fully fledged conductivity of banking concern.
5. 3. 2 Long-run Credit Co-operatives There are 2 grades for long-run recognition co-operative Bankss in India. The Primary Concerted Agribusiness and Rural Development Banks ( PCARDB ) is at the primary degree while the State Cooperative Agriculture and Rural Development Bank is at the province degree.
Short-run Credit Co-operatives
Long-run Credit Co-operatives
District Central Cooperative Banks State Agriculture & A ; Rural Development Banks
State Co-operative Banks
Primary Agriculture Credit Co-operative Societies
Primary Agriculture & A ; Rural Development Banks
5. 4 Regional Rural Banks ( RRBs )
The chief aim of RRBs was to supply recognition to little and fringy husbandmans. agricultural laborers and the similar. for the development of agribusiness. trade and commercialism in the rural countries.
In 1976. the Regional Rural Banks Act was passed. Its intent was to supply for the incorporation. ordinance and weaving up of Regional Rural Banks in a command to further develop the rural economic system.
For illustration. NABARD is a Regional Rural Banks in India. It provides and regulates recognition in rural sectors. and promotes development chiefly in agribusiness. handcrafts and small town industries.
5. 5 Development Banks
Development Bankss are intervened by the authorities to advance economic growing. They provide aid to concerns which require medium and long-run capital for the purchase of machinery and equipment. They aim to assist companies spread out and overhaul through supplying them with the needed financess. They act as an mortician in the portions and unsecured bonds issued by their clients in instance of under subscription of the issue by the populace.
Examples include the Industrial Finance Corporation of India ( IFCI ) and State Financial Corporations ( SFCs ) .
5. 6 Fiscal establishments
Financial establishments act as an mediator between the creditors and debitors. They assist resource allotment and maintain liquidness in the fiscal market.
5. 6. 1 All-India fiscal establishments ( AIFIs ) 5. 6. 1. 1 Development Finance
Institutions ( DFI ) DFIs were established to impart financess and decide market failures in developing economic systems where there is a deficiency of long-run investings. The first DFI to be established was the Industrial Finance Corporation of India ( IFCI ) in 1948.
Other illustrations include the Industrial Credit and Investment Corporation of India ( ICICI ) which chiefly focused on foreign equity. every bit good as the Industrial Development Bank of India ( IDBI ) . which was set up as a subordinate of RBI.
5. 6. 1. 2 Specialized Banks These Bankss support the puting up of concern in a specific country or activity which they are specialized in.
The Export-Import Bank of India ( EXIM ) . with the intent of funding. facilitating. and advancing foreign trade of India. is a specialised bank. The Small Industries Development Bank of India ( SIDBI ) . which is specialized in assisting small-to-medium sized endeavors in puting up their concern ( India in Business ) . is another. There are two chief channels of funding for SIDBIs: Direct funding and indirect funding. Direct funding involves refinancing and rediscounting measures through 894 primary loaning establishments holding 65. 000 mercantile establishments across the state. Indirect funding involves making the specific mark groups through SIDBI’s 38 offices through bespoke strategies.
5. 6. 2 State Financial Corporations ( SFCs ) SFCs. operating as development Bankss. play an of import function in the development of little and average endeavors. with the aim of funding and advancing these endeavors to widen the ownership base and accomplish balanced regional growing ( Garg & A ; Gupta. 2011 ) . SFCs provide fiscal aid by term loans. direct subscription to bonds and equity. warrants. discounting of measures of exchange etc.
Examples include the Punjab Fianancial Corporation ( PFC ) . and the Haryana Financial Corporation ( HFC ) .
5. 6. 3 State Industrial Development Corporations ( SIDCs ) SIDCs are chiefly independent organic structures controlled or owned by the State authorities. At present. there are about 28 SIDCs in India. Their chief maps include the publicity of rapid industrialisation and development in the backward and undiscovered topographic points. Like commercial Bankss. they give loans. rental finance and warrants. yet their mark clients are normally those from the grass-root degree. A outstanding illustration is the Himachal Pradesh State Industrial Development Corporation ( India ) .
6 Regulative Bodies
6. 1 Reserve Bank of India ( RBI )
RBI’s regulative duties can be seen in 5. 1. 2 Function and Roles in the above.
6. 2 Indian Banks’ Association ( IBA )
The IBA is an consultative organisation. It is responsible for the coevals and exchange of thoughts on banking policies and patterns and Acts of the Apostless as a glade house for the airing of statistical informations ( Indian Banks’ Association. 2011 ) . It besides handles pay dialogues between labour brotherhoods and bank directions ( Deolalka ) .
6. 3 Ministry of Finance ( MoF )
MoF is responsible for oversing the legislative. policies. regulations and ordinances regulating the banking and securities market ( Ministry of Finance. Government of India ) .
The long history of the banking system in India gives it the advantage of stableness and soundness in footings of growing and plus quality. However. in visible radiation of the intense competition from foreign Bankss. the growing of Indian Bankss is confronting the menace of being stagnated. To increase the Indian banking sector’s competitory border. more development attempts could be placed in progressing the banking engineering to increase proficiency and efficiency. India could besides farther use its established rural subdivision webs to
enlarge its client base. thereby increasing microfinance activities and other banking activities for the agribusiness sector. 10
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