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Indian Banking System: An Overview of its Structure and Functions

Table of Contents

Indian Banking System in India: Banks and banking in India have been classified into various groups. In its activities, each group has its own set of advantages and disadvantages. They have their distinct target audience. Some work exclusively in the rural sector, while others work in both rural and urban settings. The majority of them only serve cities and major towns.

Financial Regulators in India

There are mainly three financial regulators in India:

  • Reserve Bank of India (RBI) – Banking Sector
  • Securities Exchange Board of India (SEBI) – Capital Markets /Mutual Funds
  • Insurance Regulatory and Development Authority (IRDA) – Insurance Companies

Indian Banking System in India Structure

Banks can be divided into the following sub-categories:

1. Public Sector Banks

Nationalized banks and the State Bank Group:

  • Is a collection of 27 banks.
  • Has the most branches in metro, urban, and rural locations around the country.
  • About 75% of the total deposits come from this source.
  • It accounts for over 70% of all commercial bank advances in India.
  • Most have a substantial branch network that reaches across the country.
  • Have a large deposit and asset base
  • Perform all kinds of core and modern banking functions

2. Scheduled Banks

  • These are banks that are mentioned in the Reserve Bank of India Act, 1934’s second schedule.
  • These banks are mandated to keep specific sums with RBI in exchange for financial accommodations and remittance facilities from RBI at reduced rates.
  • State Co-operative Banks
  • Commercial banks

Not only does the banking system play a crucial role in encouraging economic growth by channeling savings into investments, but it also improves resource allocative efficiency. Recent empirical evidence suggests that the banking system contributes to economic growth more by boosting resource allocative efficiency than by directing savings to investors. A well-functioning banking system is now often viewed as a prerequisite for economic development.

The Reserve Bank of India (RBI), commercial banks, cooperative banks, and development banks are all part of India’s banking system (development finance institutions). The core of India’s financial sector is made up of these institutions, which serve as a meeting point for savers and investors. Banks play a vital role in the development of poor countries by mobilizing resources and allocating them more efficiently.

India’s Bank Nationalization & Banking Development

In India, banking development has mostly been a result of government intervention. The Reserve Bank of India was nationalized in 1949, and the Imperial Bank of India (now the State Bank of India – SBI) was nationalized in 1955. 14 major commercial banks were nationalized in 1969, and the process was repeated in 1980 with the nationalization of six additional commercial banks. Before the early 1990s economic reforms, the government of India had a near-monopoly on the banking business in India.

The fundamental principle of this method was to promote growth by making appropriate credit available at reasonable/concessional interest rates in places where commercial factors prevented loan disbursement.

Also Read: What are Public and Private Sector Banks?

India’s Financial Sector

Financial markets in India have undergone a fundamental upheaval in the years following liberalization, maybe even more so than the rest of the economy. Although things haven’t always gone well, the overall consequences have been very beneficial.

Commercial bank nationalization was a mixed blessing. Following nationalization, the focus shifted from industry to agriculture. Even in remote areas, the country saw a tremendous proliferation of bank branches. However, bank nationalization brought with it its own set of issues, such as excessive bureaucratization, red tape, and the use of disruptive methods by bank employee trade unions. In this context, broad banking sector changes were undertaken as an integral element of the economic reforms program that began in the early 1990s and is still underway.

Today, private banks are gradually displacing nationalized institutions from their leadership roles. Private banks such as ICICI Bank, Axis Bank, and HDFC Bank have emerged as key players in the retail banking sector, even though the nationalized State Bank of India (SBI) is the country’s largest bank by far. They are profit-driven professional firms while being created by government-backed financial institutions in each case.

India’s financial sector is divided into three categories:

  • Financial institutions -banks, mutual funds, insurance companies
  • Financial markets -money market, debt market, capital market, forex market
  • Financial products -loans, deposits, bonds, equities

FAQs (Frequently Asked Questions)

What is the banking system of India?

Indian Banking System is the cornerstone of the nation’s economic framework.

Which banking system is popular in India?

State Bank in India (SBI).

Who controls the Indian banking system?

Reserve Bank of India.

Who is the father of banking?

M. Narasimham is known as the Father of Banking in India.