India’s Banking Sector a brief Timeline – UPSC PRELIMS

GS Paper-3 Banking system – Prelims and Personality test

Banking is considered to be the “Backbone of a Nation’s Economy”. It is the most leading part of the financial sector of the country as it is responsible for more than 70 % of the funds that flow through the financial sector in the country.

The advancement of the Indian Banking System can be classified into 3distinct Phases:

1. The Pre-Independence Phase, i.e. before 1947

2. Second Phase from 1947 to 1991

3. Third Phase 1991 and beyond

First Phase - The Pre-Independence Phase

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.

Originally it was a shareholder’s bank which was taken over by the Central Govt. under the Reserve Bank (Transfer of Public Ownership) Act1948 (paid up capital Rs.5cr).

This phase is characterized by the presence of a large number of banks most of them were small in size and suffered from a high rate of failures. While some others like the Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), and Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India (later renamed in 1955 as the State Bank of India).

The Second Phase- from 1947 to 1991

The banking Structure of today evolved in this phase.

• Fourteen commercial banks were nationalized in July 1969.
• On the recommendation of the Narasimham Committee, Regional Rural Banks (RRBs) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large unserved population of rural areas and to promote financial inclusion.
• Six more commercial banks were nationalized in April 1980.
• With a view to meet the specific requirement of the different sectors (i.e. agriculture, housing, foreign trade, and industry) some apex-level banking institutions were also set up like:
  1. NABARD (est. 1982)
  2. EXIM (est. 1982)
  3. NHB (est. 1988)
  4. SIDBI (est. 1990)

Third phase 1991 and beyond-

• This period saw remarkable growth in the process of development of banks with the liberalization of economic policies.
• Even after nationalization and the subsequent regulations that followed, a large portion of the masses is untouched by the banking services.
• In 1991, the Narasimham committee gave its recommendation i.e. to allow the entry of private sector players into the banking system. Therefore licenses were given to ICICI, HDFC, Axis Bank, IndusInd Bank, and DCB.
• In 1998 Narsimham committee recommendation led to licensing of:

(a) Kotak Mahindra Bank (2001)

(b) Yes Bank (2004)

• In 2013-14, the third round of bank licensing took place and in 2015, IDFC bank and Bandhan Bank emerged.
• In order to further Financial Inclusion, RBI also proposed to set up 2 new kinds of banks i.e. Payment Banks and Small Banks.

In 2015, RBI gave in-principle licenses to 11 entities to launch Payments Bank and granted 'in-principle' approval to the 10 applicants to set up Small Finance Banks.

Series of Mergers

• The SBI has merged its Associate banks and Bharatiya Mahila Bank into itself to create the largest Bank in India in 2017. With this merger SBI has a global ranking of 236 on Fortune 500 index.
• Government of India proposed the amalgamation of Dena Bank and Vijaya Bank with erstwhile Bank of Baroda in April 2019

The government amalgamated three Regional Rural Banks -- Punjab Gramin Bank, Malwa Gramin Bank and Sutlej Gramin Bank -- into a single RRB with effect from January 1, 2019. New Gramin Bank is known as -Punjab Gramin Bank.

Why Merger?

• To increase the global competitiveness of the Indian banks.
• To protect them from losses and Slowdown

Pros and Cons of Merger:

• By 2010, the supply, product range and reach of banking in India was generally fairly mature-even though reach in rural India still remains a challenge for the private sector and foreign banks.
• Banks will be licensed as Small and Payments banks under Section 22 of the Banking Regulation Act, 1949, and will be registered as public limited company under the Companies Act, 2013.

Timeline of Structural and Technological Developments in Banking Sector

Expansion of banking infrastructure: Physical as well as virtual expansion of banking through mobile banking, internet banking, tele-banking, bio-metric and mobile ATMs etc. is taking place since last decade and has gained momentum in last few years.