- Modern Indian Banking has its origin in British rule as it is introduced by the British rulers for their own convenience. Since then, Indian Banking system has developed itself and Indian banking system is considered one of the competitive bank among different countries.
- Bank: Bank is a financial institution which accepts deposits in different form and lends the deposit to borrowers on different interest rates. Bank also allows the depositors to withdraw their money anytime from their accounts through cheque. This provisions of bank according to which a depositors withdraw his deposits anytime from his account through cheque differs it from Non Banking institutions.
- Non bank institutions: These institutions have all the same function except one function in which a non banking institution doesn’t allow his depositors to withdraw their deposited money through cheque.
- Difference between Bank and Non Banking institutions: NBFCs are akin to bank, as there principle business is attracting deposits from the public under any scheme and giving loans in any manner. However they are different from the Bank as they cannot accept demand deposits which are payable on demands like commercial bank do. Deposit insurance facility is also not available for NBFC customers which is available in case of a commercial bank. Moreover they are not governed according to the provisions of Banking Regulation Act, 1949.
- Some facts about banking history of India:
- Bank of Hindustan was the first bank in India which was started in 1877 however it was failed.
- Bank of Bengal which was set up in 1806 was the first successful bank in India.
- Awadh Commercial bank was the first commercial bank in country which was set up in 1881.
- Punjab National Bank was established in Lahore in 1895 which functions till date and is also one of the largest bank of India.
- Imperial Bank of India which was set up in 1921 was renamed as State Bank of India (SBI) after its nationalisation in 1955. In 1959 seven associates of SBI was established.
- On july 1969 nationalisation of 14 commercial banks takes place. Again on 15th August 1980 six more banks were nationalised. Nationalisation of bank was a great leap towards social banking in India as the private banks never give there service to poors and new entrepreneurs they always cherry pick good customers and discards others.
- Nationalisation of Reserve Bank of India (RBI) and Introduction of Banking Regulation Act, which gives power to RBI to regulate banking sector in Country in 1949 is the two great steps taken by the governments for the development of banking in India.
- Reserve bank of India: Reserve Bank of India was setup on the recommendation of Hilton Young Commission in April, 1935 according to the RBI Act, 1934. In 1949 it is nationalised and CD Deshmukh was appointed as its first Governor.
- Role of RBI: RBI is the central bank of the country and it is armed with monetary policy to fulfil its three under mentioned objectives:
- Controlling Inflation
- Accelerating growth
- Financial Stability
- Role of RBI: RBI is the central bank of the country and it is armed with monetary policy to fulfil its three under mentioned objectives:
- Monetary Policy Instruments: In India monetary policy instruments consists of Repo rate, the Cash Reserve Ratio, SLR etc.
- Main Functions of RBI:
- Regulation of Credit or Credit Control: It is the major tool of the RBI to control the demand and supply of money in the economy to accelerate economic development with stability.
- Issue of notes and coins: Minting of coin is under the sole right of GOI. Coins are minted at mints of Government of India. These minted coins are received by RBI for its circulation.
- Regulation of foreign exchange: RBI is the manager and custodian of the forex reserves of the country. However it operates within the policy guidelines of GOI.
- Banker to the government and Commercial bank: Banker to the government means it undertakes the banking service of government i.e., it receives and pays on behalf of the government. For the banks RBI acts as a banker as it holds part of cash reserves of banks, it provides cheap and fast centralised clearing facilities.
- Lender of last resort: Whenever a banks fail, in order to protect the interest of shareholders and customers of that bank, RBI lends to that bank for recovering from losses. Hence RBI is also called as lender of the last resort.
- Financial Inclusion: it is the providing of banking service at a reasonable cost to large sections of disadvantage and low income groups. Government has taken several steps since independence to achieve the goal of financial inclusion few of which are given below:
- Establishment of a wide network of cooperative Banks.
- Nationalisation of banks
- Increase in number of bank branches especially in rural areas.
- Priority Sector lending in which commercial banks have to provide a specified portion of lending to disadvantaged sectors like agriculture, micro and small enterprises, poor people for building their house and for students for education and other low income groups and weaker section.
- Base rate: Base rate is the floor rate of interest below which scheduled Commercial banks will not lend any loans to its customer. It is introduced to replace the existing idea of BPLR (Benchmark Prime Lending rate). BPLR was introduced in 2003 with the objective of bringing transparency in lending rates. However under this BPLR system a bank can lend below the interest rate set by BPLR. Due to which interest rates of customers vary in which one have to pay more and another who have bargaining power pay less. Base Rate System was introduced for bringing transparency in the lending rate of bank and also for better assessment of transmission of monetary policy.
- Emergence of regional Rural Banks (RRBs): Five Regional Rural Banks were set up on 2nd October 1975. Main aim of their set up is to give banking services at the doorstep of the rural masses where banking services are not accessible. RRBs are setup for fulfilling twin duties:
- To provide loans to the weaker section of the society and free them from the shackles of private lenders.
- To bring rural savings into main stream of economy and again channelize those savings for supporting productive activities in the rural areas.
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