Introduction to the financial system of India

In the development of economy of the country financial sector of a country plays a determining factor. Sound financial system induces the level of savings and investment, thus work as a stimulant for the variables responsible in the development process.

Weak financial system hinders the tempo of development process.

Thus, rapid economic development requires a sound financial system with adequate availability of finance and a strong system, of associated financial and investment institutions.

Let us understand the structure of financial system in India.

Structure of India’s Financial System

India’s financial system is broadly categorized in 4 types of banks

1)      Scheduled Banks

2)      Cooperatives

3)      Financial institution

4)      NBFC’s

The structure of banking in India looks like this.

Let us understand about each type of banks in detail.

Scheduled Bank: Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

The banks included in this schedule list should fulfill two conditions.

1. The paid capital and collected funds of bank should not be less than Rs. 5 lakh
2.Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities.

1. Such bank becomes eligible for debts/loans on bank rate from the RBI
2. Such bank automatically acquires the membership of clearing house.

Scheduled bank is further classified into the following type of banks.

1. Public sector
2. Private Sector
3. Foreign
4. Regional Rural Banks
5. Urban Cooperative Banks
6. State Cooperative Banks

Cooperative banks: The banks are so called because they have been organized under the provision of the cooperative ‘society’s’ law of the states. Under the law, societies may be organized for non credit purposes.

Cooperative bank is further classified into the following type of banks.

1. State Agriculture and Rural Development Banks
2. Primary Agriculture and Rural Development Banks

Financial Institutions: The financial institution plays a vital role in financial markets. They are also known as financial instruments. The financial institutions assist in allocation of funds by distributing to those who have surplus to those who have deficit.

It also ensures whether there is a proper circulation of money or not.

Financial institution is categorized under the following heads.

1. All India Development Banks – SIDBI, IDBI, IIBI, IFCI, IDFC
2. Refinance Institutions – NABARD, NHB
3. Specialized Financial Institutions – EXIM Bank. TFCI
4. Insurance companies
5. Mutual Funds

NBFCs: NBFC’s os the acronym of a non-banking financial company. It is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).

Evolution or History of banking system in India

In this post I will only discuss about when the banking terminology came into existence in India.

I will talk about RBI, nationalization, foundation and expansion in length in the upcoming posts.

The first bank of India, The General Bank of India, was set up in 1786.

Bank of Hindustan was set up in 1790. Then the East India Company established three banks.

Those were

1. Bank of Bengal (1809)
2. Bank of Bombay (1840) and
3. Bank of Madras (1843)

As independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders which took up the role of a commercial bank, a bankers' bank and a banker to the Government..

Allahabad Bank was established in 1865 and first time exclusively by Indians and then Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

Reserve Bank of India came into existence in 1935. Reserve bank of India is the central bank of the country.

Coming back to the point, this phase was actually the development era of Indian banking. But the banks were facing so many problems regarding working methodology, functioning and periodic failures of the banks. To overcome with the failure, government of India came up with the Banking Companies Act 1949, which was later changed into Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965).

And on 1 Jan 1949 Reserve Bank of India nationalized.

The Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the central banking authority. From here RBI became Banker’s Bank or the Centralized bank.

In 1954 the All India Rural Credit Survey Committee submitted its report recommending the creation of a strong integrated, state-sponsored, state-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to the establishment of the first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly, during 1956-59, as a result of reorganization of princely states, the associate banks came into existence of public sector banking.

What is Banking??

Whenever the term banking comes across to us the basic question arise about the banking is what is it all about? Why do we need it?

A dictionary meaning tells us ‘The business conducted or services offered by a bank’ that we all know, than what are there that we don’t know?? Rather I should say what we should know about the banking?? How does it work? How does the banks manage there funds and resources? And the basic question is how do they get the fund??

Well, this is the vast area and that is what my purpose in creating this blog.

After going through the deep research about the choosing of subjects for my blog, my search ended here in banking and finance and I am trying my best to provide the correct information regarding the subject.

I hope I will be able to work upon your expectation at the best of my level.