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The article highlights the evolution of the banking sector in India, the various types of banks in India, the effect of the current global meltdown and the future trends.

Banking in India

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd.

Indian Banking Sector
The Indian Banking Sector is quite different from the banking system in the rest of Asia, because of the distinctive geographic, social and economic characteristics of the country. India is the second most populated nation in the world; it has marked economic disparities and high levels of illiteracy.

The country followed a socialist approach for well over 4 decades after independence till the government initiated the economic reforms through the policy of liberalization. The banking structure in India is therefore a reflection of the countries socialistic set up. It had to meet the goals set by the five year plans, especially with regard to equitable distribution of wealth, balanced regional economic growth and removing private sector monopolies in trade and industry.

The government nationalized the banks in 2 different phases (1969 and 1980). On July 19, 1969, 14 major banks of the country were nationalized and on 15th April 1980, six more commercial private sector banks were taken over by the government. As a consequence the banking system in India concentrated on the domestic sector; very few banks in India had a presence internationally. The nationalized banks had a social obligation of taking the banking sector to the people by expanding the branches and by getting more people to open an account. It also had to play a supportive role to other sectors of the economy like agriculture, small scale industries and exports.

The Indian Financial system consists of:

1 Commercial Banks
  • Public Sector
  • Private sector
  • Foreign banks
  • Cooperative Banks
  • Development Banks
Public Sector Banks
  • State Bank of India and its associate banks called the State Bank group.
  • 20 nationalized banks.
  • Regional Rural Banks mainly sponsored by Public Sector Banks.
Private sector
  • Old generation private banks
  • New generation private banks
  • Foreign banks in India
  • Scheduled Co-operative Banks
  • Non-scheduled Banks
Cooperative Banks
  • State Co-operative Banks
  • Central Co-operative Banks
  • Primary Agriculture Credit Societies
  • Land Development Banks
  • Urban Co-operative Banks
  • Primary Agricultural Development Banks
  • Primary Land Development Banks
  • State Land Development Banks
Development Banks
  • Industrial Finance Corporation of India (IFCI).
  • Industrial Development Bank of India (IDBI).
  • Industrial Credit and Investment Corporation of India (ICICI).
  • Industrial Investment Bank of India (IIBI).
  • Small Industries Development Bank of India (SIDBI).
  • SCICI Ltd.
  • National Bank for Agriculture and Rural Development (NABARD).
  • Export Import Bank of India.
  • National Housing Bank.
Effect Of Global Crisis On Indian Banking System
  • The global economic meltdown has not had a deep impact on the banking system in India. The banks in India have a strong fundamental structure and are well protected from the economic crisis.
  • The robust economic growth in India, low defaulter ratio, non existence of complex financial products, constant monitoring by the central bank, efficient monetary policy and the non aggressive close banking culture has shielded the Indian banking sector.
Banking Sector Forecast
  • Today in India there are totally 56,640 branches, 893,356 employees and 27,088 ATMs. Public sector banks account for 87.7 per cent of the offices, 82 per cent of staff and 60.3 per cent of ATMs.
  • As of January 2, 2009, bank deposits were 21.2 per cent. Bank credit was 24 per cent against 21.4 per cent on January 4 2008.
  • The total flow of capital to the commercial sector from the banks as on January 2, 2009 stood at 6.1 per cent.

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