The banking sector is one of the growing sectors in India, the reason being the increase in disposable income of the people. There has been a large no of increase in a digital transaction in India post demonetization, official data indicate an 80% rise in digital transactions in 2017-18, with the total amount expected to touch Rs.1800 crore. So banks are investing a lot to increase their banking network so that they can reach to more and more customers. The Indian banking industry has the potential to become the fifth largest banking industry in the world by 2020 and third largest by 2025 according to KPMG CII report, India’s banking and financial sector is expanding rapidly. Indian banks are adopting various technologies and skills to make them future ready. Banks have withstood the initial hurdles hence becoming more adaptive to the dynamic environment. In the complex and rapidly environment, the only way for the banks to survive is to give the customer service is through technology. The Indian banking sector has been strong throughout the last decade and has supported the economic growth of India. Indian banking system could withstand multiple challenges including the following:
· Great Depression
· The 1997 Asian Financial crisis and
· The 2008 sub-prime meltdown.
RBI has acted as a vigil body keeping a close eye on banking system so that the banks are never allowed to take excessive risk.
Indian banking system has majorly revamped itself. The new infrastructure adopted by the Indian banking system is mainly comprised of information technology (IT) products and services
Banking in India has existed in India since the Vedic period but due to the informal system of banking, most of the bank dealing was based on mutual trust and dishonoring of the hundis (A Hundi is a financial instrument that developed in Medieval India for use in trade and credit transactions) was a rare event. First joint stock banking was introduced in India in early 18th century under which Bank of Bombay was established in 1720 by English house Agency. The first presidency bank with government shareholding was established in 1806 which undertook the tasks of issuing currency notes and discounting of treasury bills to provide monetary accommodation to the Government. Formal regulations were introduced in the mid-19th century with the enactment of the Companies Act in 1850 which was the first regulation covering banks. Banks were also allowed to be organized as private shareholding companies with limited liability whereby the majority of shareholding was held by Europeans. However Indian owned private bank came into existence in 1865 with Establishment of Allahabad Bank then followed by many other banks such as Punjab National Bank and Bank of India. The individual borrowers were still juggling with the money lenders who charged extortionate rates of interest because these banks were only available to the industrial sector. Due to this, co-operative credit movement started, which addressed the need of lower income population and resulted in several urban cooperative banks and giving legal recognition to credit societies.
Fraudulent activities began rising such as activities by directors on one hand and gross mismanagement on account of management inexperience on the other, which resulted in Bank failures in India. There was a strong need of regulatory framework, even the establishment of Imperial Bank of India via an amalgamation of three Presidency Banks had created a conflict of interest with the Imperial Bank acting as Central Bank and Banker to the Government as well as engaging in commercial banking activities. Finally, an Act was passed in 1934 for the establishment of Reserve Bank of India with the dual objective of addressing the issue of bank failures and promoting reach of credit to the agricultural sector.
The Reserve Bank of India took over several responsibilities including
(a) Issuing currency notes and acting as banker to the Government
(b) Acting as lender of last resort for the banking system whereby it required banks to maintain cash reserves,
(c) Encouraging the co-operative credit movement to enhance the reach of agricultural credit.
(d) Supervisory role with the power to conduct audit and inspection to detect fraudulent activities
(e) Strengthening the banking regulatory framework by proposing new banking regulations to the Government.
High level of bank failures continued with Reserve Bank of India, even after the enactment of the Banking Companies Act in 1949, RBI tried to protect its depositor’s interest through the forced incorporation of concerned banks with stronger banks by canceling the license of unviable banks and transferring their assets and liabilities to other banks. To promote depositor’s trust in the banking system deposit insurance was introduced in India in 1961.Post Independence the flow of credit to the agriculture sector was extremely limited and agricultural sector accounted just 2 percent of banking credit. To solve the problem of under penetration of banking in rural areas, RBI took the approach of giving targets for branch opening.
With the establishment of Imperial Bank of India in 1955 nationalization of banks was started and it was followed by the enactment of State Bank of India Act also in 1955.To operate free from political interference, Government vested the ownership of the new entity to Reserve Bank of India. Encouraging results were achieved in the initial period due to nationalization as State Bank of India was able to compete with the post office and physical assets. RBI allowed the entry of new private sector banks to encourage a more competitive environment in the banking sector. Universal Banking model was adopted by new private sector banks and they entered into various segments of the financial sector through various subsidiaries. The main reason behind this was to leverage the opportunity of under penetration of various financial products.
STRUCTURE OF BANKING IN INDIA
As per Section 5(b) of the Banking Regulation Act 1949: “Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”. All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled banks. These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks. Scheduled Commercial Banks in India are categorized into four different groups according to their ownership and/or nature of the operation. These bank groups are:
1. Public Sector Banks
2. Private Sector Banks
3. Regional Rural Banks
4. Foreign Banks
Besides the Nationalized banks (majority equity holding is with the Government), the State Bank of India (SBI) (majority equity holding being with the Reserve Bank of India) and the associate banks of SBI (majority holding being with State Bank of India), the commercial banks comprise foreign and Indian private banks. While the State bank of India and its associates, nationalized banks and Regional Rural Banks are constituted under respective enactments of the Parliament, the private sector banks are banking companies as defined in the Banking Regulation Act. These banks, along with regional rural banks, constitute the public sector (state-owned) banking system in India. The Public Sector Banks in India are the backbone of the Indian financial system. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks. Regional Rural Banks (RRB’s) are state-sponsored, regionally based and rural oriented commercial banks. The Government of India promulgated the Regional Rural Banks Ordinance on 26th September 1975, which was later replaced by the Regional Rural Bank Act 1976. The preamble to the Act states the objective to develop rural economy by providing credit and facilities for the development of agriculture, trade, commerce, industry and other productive activities in the rural areas, particularly to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs.