An efficient banking system is regarded as a necessary pre-condition for growth. The banking system plays an important role in promoting economic growth not only by channelling savings into investments but also by improving the allocative efficiency of resources. The Banking system in India has been segregated into various categories, with each group having its function, benefits, and role to play in the banking sector. Each group has a role to perform in their focussed target market, which could be aimed at rural, urban, or both sectors. There are mainly three financial regulators in India, namely
- Reserve bank of India – Banking Sector
- Securities Exchange Board of India (SEBI) – Capital Markets/Mutual funds
- Insurance Regulatory and Development Authority (IRDA) – Insurance
The Indian banking system consists of a central bank (Reserve Bank of India), commercial and cooperative banks, and development banks. The RBI does not have a direct dealing with citizens, and it is the banking regulator for all commercial banks. They form the core of the financial sector and mobilize resources and look at better allocation for the development process. The structure of the banking system in India can be categorised as follows:
- Public Sector Banks
- Scheduled Banks
The public sector banks in India are the nationalized banks and they have the largest number of branches across the nation. Statistically, they account for around 75% of all deposits and contribute about 70% of the total advances of all commercial banks. They perform all kinds of core and modern banking functions.
The Scheduled banks are banks listed in the second schedule of RBI and are required to maintain a certain amount of their funds with RBI. In return, they enjoy the facility of financial accommodation and remittance facilities at a concessionary rate from RBI. They include the state cooperative banks and few private commercial banks.
Before 1991 (pre-Liberalization), banking development was purely a state-run activity. Many operational banks in India were nationalized in either 1969 or the 1980s. Thus, there was a near-monopoly of the Government of India in the banking sector. With the liberalization in 1991, the banks were encouraged to promote economic growth and private banks were allowed to be set up, to ensure the availability of credit at a reasonable rate. Since then, the financial markets of India have seen a positive transformation with the adoption of technology and transparency in operation.
The Indian banking sector has witnessed changes under the influence of the financial sector reforms which have been one of gradual and non-disruptive progress through a consultative process. The emphasis has been on deregulation and opening up the banking sector to market forces. Sustained efforts have been made towards the adoption of international benchmarks to meet global standards. Due to this, private banks are steadily displacing nationalized banks from their positions of pre-eminence. Although State Bank of India continues to be the largest bank in the country, private lenders such as ICICI Bank, Kotak Mahindra, HDFC Bank, Axis Bank, etc have developed as key players in the retail banking domain. Private banks have been the first to adopt technology for better consumer experience and introduced hassle free banking services.
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