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December 11, 2016

Banking Sector in India - Quick Review

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Overview
  • Definition and types of bank.
  • The origin of banks in the eighteenth century. 
  • SBI, the Reserve Bank of India and other banks in India.
  • Nationalisation of banks.
  • Liberalisation of banking sector after 1990.
  • RBI and its role.
  • Reforms suggested by the committees under the chairmanship of M Narsimhan. 
  • Recent various schemes and issues of banking sector in India. 
  • Introduction of MUDRA Bank and Banking Boards Bureau (BBB) and its main functions.
Banks are financial institutions which are licensed to take deposits from public and grant them loans. In that sense they differ from the traditional money lenders. There are two types of Banks: Retail or commercial banks and investment banks. The latter differs from the former by its modus operandi. Investment banks do not deal with public.


They are engaged with business clients and they invest their capital in wide range of assets. The origin of banks in India dates back to 18th century, when the Bank of Hindustan was established in modern sense. Banks in India have passed through different phases and have adopted itself to ever-changing the economic conditions of the country. The largest and the oldest bank, State Bank of India (SBI) came into being in 1921 after the merger of bank of Madras and Bank of Bombay. SBI commands the largest number of banks in India along with a clutch of eight associated banks called its subsidiary banks or associated banks.

The Central Bank, known as the Reserve Bank of India was established in 1935. Under the Second Schedule of RBI Act, Indian Banks are classified as scheduled and non-scheduled banks. Scheduled banks finds a mention in the RBI Act schedule. The scheduled banks are further classified as: Nationalised Banks, SBI and Associates, Private Sector Banks, Foreign Banks and Regional Rural Banks.

In the year 1969, government with banking companies (Acquisition and transfer of undertakings) ordinance nationalised 14 banks. The second nationalisation process of commercial banks took place in 1980s. These banks hitherto were privately owned and had almost 85% of deposits at their disposal. The nationalisation process transitioned them from class banking to mass banking. In this way, these banks were aligned with the fiscal policy of government.

Another watershed reform in banking sector came in 1990s. In order to align with the new economic policy of government, the banking sector was liberalised. Licenses were given to private banks which changed the outlook of banking sector. Banks were now offering best practices available across the globe with the help of technology and management practices. ICICI, HDFC, Axis Banks were and still are pioneers of private sectors bank.

The Central Bank of India

Reserve Bank of India is the Central Bank which looks after the monetary policy. Monetary policy is the process wherein the concerned authority, RBI in India's case controls the supply of money in the economy. The major purpose of monetary policy is to check inflation and regulate interest rates with liquidity infusion or quantitative squeeze.

RBI with its various policy measures CRR (Cash Reserve Ratio-For banks to hold a certain form of deposits in cash), SLR (Statutory Liquidity Ratio-For banks to keep a portion of their demand and time liabilities in the form of government security); RR (Repo Rate-Rate at which RBI lends to scheduled commercial banks); RRR (Reverse Repo Rate-Rate at which RBI borrows from the banks) etc controls the flow of money in market.

After the economic crisis on 1991 two committees under the chairmanship of M Narsimhan were formed. It recommended wide ranging reform measures for the banking sector. In recent times, banking sector in India has met through various opportunities. Various schemes and issues convening banking in India are given below

Pradhan Mantri Jan Dhan Yajana (PMJDY) was launched in 2014 as a national mission of financial inclusion to provide universal and clear access to banking facilities. PMJDY provides various benefits like zero balance account, LIC cover of 30000, overdraft of 7 5000, mobile banking and Rupay debit card. 

Nachiket Mor Committee gave its recommendations in 2014. Under this, every adult holding on Adhaar number will be given an option to open an account for transfer of benefits or subsidies to this account. Which will ensure financial inclusion. This account will be called Universal Electronic Bank Account. 

Urjit Patel Committee working on monetary policy framework gave its recommendation in 2014. It suggested to establish Monetary Policy Committee (MPC) to be headed by RBI Governor in order to adopt new consumer price index for anchoring monetary policy and set the inflation target at 4% ± 2%. MPC has the potential to bring transparency and predictability in the system.

Non-Performing Asset (NPA) is another area of concern for banking sector. NPA is that loan where the borrower has failed to make interest or principal payments for 90 days after the maturity period. The Gross NPA of Public Sector Bank (PSB) rose to 6% in 2015.

Bank Board Bureau (BBB) Bank Boards Bureau (BBB) was established under the Chairmanship of Vinod Rai. BBB will ensure two major things: i.e. the appointment of Directors and Chairman of Public Sector Bank thereby setting aside government interference and ways to address bad loans.

The crisis has provided an opportunity to address the long impending reform of removing government interference in management of Public Sector Bank. The BBB will also provide a roadmap for mergers of Public Sector Bank, which will consolidate the banking sector and will make it more robust. Another area with a promising future is Micro Units Development and Refinance Agency (MUDRA). MUDRA Bank was unveiled by the new government to provide credit to Micro, Small and Medium Enterprise (MSME). A specialised bank for this sector will go a long way ensuring smooth flow of credit.

Although, Small Industries Development Bank of India (SIDBI) has existed, but the viability of MUDRA will depend on its range of customers and loan recovery. Small banks under differentiated license is expected to provide a whole suite of banking but in a limited area The objective is to increase penetration of bank in the untouched areas. RBI has provided for CRR and SLR norms for these bank's prudent operation.

But the real cause of concern is loans becoming NPA. As they will mostly deal with priority sector lending i.e. agriculture. Know Your Customer (KYC) norms for opening bank account is an innovative concept and will keep a check on flow of black money. Therefore, it can be seen that under the stewardship of RBI, the Public Sector Banks (PSBs) of India withstood the 2008 economic crisis. RBI has been a friend, philosopher and guide for PSBs of India with a tight monetary policy. RBI has struck a fine balance between profligacy and thrift thereby moderating inflation and propulsing investment.

Banking sector for the time being is stressed only due to its rising NPA, but with the introduction of BBB and the autonomy of RBI in monetary policy the sector will sail through the storm and will become another brick in the wall of growth and development for India.

Difficult Words with Meanings :
  • Modus Operandi mode of operating or working
  • Ordinance an authoritative rule or law
  • Hitherto upto this time, until now
  • Transitioned change from one position, stage, subject, concept etc to another
  • Inflation a persistent, substantial rise in general level of prices related to an increase in volume of money and resulting in loss of value of currency
  • Autonomy independence or freedom or a self governing community
  • Consolidation strengthening; unification
  • Convening to come together or assemble
  • Anchoring any device that can be relied or for support stability or security
  • Scrutinised to examine in detail with careful or critical attention
  • Unveiled bare judicial, revealed in public or manifested
  • Prudent wise or judicial in practical affairs
  • Stewardship the responsible overseeing and protection of something considered worth caring for and preserving
  • Profligacy shameless dissoluteness; great abundance
  • Thrift economical management
  • Propulsing the act of propelling with force 
shared by Nisheeta Mirchandani
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