The Indian financial system comprises a large number of commercial and cooperative banks, specialized developmental banks for industry, agriculture, external trade and housing, social security institutions, collective investment institutions, etc. The banking system is at the heart of the financial system.
The Indian banking system has the RBI at the apex. It is the central bank of the country under which there are the commercial banks including public sector and private sector banks, foreign banks and local area banks. It also includes regional rural banks as well as cooperative banks.
Reserve Bank of India
The central bank plays an important role in the monetary and banking structure of nation. It supervises controls and regulates the activities of the banking sector. It has been assigned to handle and control the currency and credit of a country. In older days, the central banks were empowered to issue the currency notes and bankers to the Union governments. The first central bank in the world was Riks Banks of Sweden which was established in 1656. The Reserve Bank of India, the central bank of our country, was established in 1935 under the aegis of Reserve Bank of India Act, 1934. It was a private shareholders institution till January 1949, after which it became a state-owned institution under the Reserve Bank of India Act, 1948. It is the oldest central bank among the developing countries. As the apex bank, it has been guiding, monitoring, regulating and promoting the destiny of the Indian financial system.
Commercial Banks
Amongst the banking institutions in the organized sector, commercial banks are the oldest institutions, some of them having their genesis in the nineteenth century. Initially, they were set up in large numbers, mostly as corporate bodies with shareholdings by private individuals. In the sixties of the twentieth century, a large number of weaker and smaller banks were merged with other banks. As a consequence, a stronger banking system emerged in the country. Subsequently, there has been a drift towards state ownership and control. Today 27 banks constitute strong public sector in Indian commercial banking. Commercial banks operating in India fall under different sub-categories on the basis of their ownership and control over management.
Public Sector Banks
Public sector in Indian banking emerged to its present position in three stages. First, the conversion of the then existing Imperial Bank of India into the State Bank of India in 1955, followed by the taking over of the seven state associated banks as its subsidiary banks, second the nationalization of 14 major commercial banks on July 19, 1969 and last, the nationalization of 6 more commercial banks on April 15, 1980. Thus 27 banks constitute the Public sector in Indian Commercial Banking.
Private Sector Banks
After the nationalization of major banks in the private sector in 1969 and 1980, no new bank could be set up in India for about two decades, though there was no legal bar to that effect. The Narasimham Committee on Financial Sector Reforms recommended the establishment of new banks in India. Reserve Bank of India, thereafter, issued guidelines for the setting up of new private sector banks in India in January 1993.
These guidelines aim at ensuring that the new banks are financially viable and technologically up-to-date from the start. They have to function in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public.
In January 2001 Reserve Bank of India issued new rules for the licensing of new banks in the private sector. The salient features are as follows:
1. A new bank may be started with a capital of Rs. 200 crore. The net worth is to be raised to Rs. 300 crore in three years.
2. The promoter’s minimum holding in the capital shall be 40 per cent with a lock-in-period of 5 years. Excess holding over 40 per cent will have to be diluted within a year.
3. Non-resident Indians can pick up 40 per cent equity share in the new bank. Any foreign bank or finance company may join as technical collaborators or as co-promoter, but their equity participation will be restricted to 20 per cent, which will be within the ceiling of 40 per cent allowed to Non –resident Indians.
Local Area Bank
In 1996, Government decided to allow new local area banks with the twin objectives of Providing an institutional mechanism for promoting rural and semi-urban savings, and For providing credit for viable, economic activities in the local areas.
Such banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be Rs. 5 crore with promoter’s contribution at least Rs. 2 crore. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 geographically contiguous districts. At present, five Local Area Banks are functional, one each in Punjab, Gujrat, Maharashtra and two in Andhra Pradesh.
Foreign Bank
Foreign Commercial Banks are the branches in India of the joint stock banks incorporated abroad. Their number has increased to forty as on 31st March, 2002. These banks, besides financing the foreign trade of the country, undertake normal banking business in the country as well.
Licensing of Foreign Bank: In order to operate in India, the foreign banks have to obtain a license from the Reserve Bank of India. For granting this license, the following factors are considered:
1. Financial soundness of the bank.
2. International and home country rating.
3. Economic and political relations between home country and India.
4. The bank should be under consolidated supervision of the home country regulator.
5. The minimum capital requirement is US $ 25 million spread over three branches - $ 10 million each for the first and second branch and $5 million for the third branch
Co-operative Banks
Besides the commercial banks, there exist in India another set of banking institutions called co-operative credit institutions. These have been in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of co-operation. They have served a useful role in spreading the banking habit throughout the country. Yet, their financial position is not sound and a majority of co-operative banks has yet to achieve financial viability on a sustainable basis.
The cooperative banks have been set up under the various Co-operative Societies Acts enacted by the State Governments. Hence the State Governments regulate these banks. In 1966, need was felt to regulate their activities to ensure their soundness and to protect the interests of depositors. Consequently, certain provisions of the Banking Regulation Act 1949 were made applicable to co-operative banks as well. These banks have thus fallen under dual control viz., that of the State Govt. and that of the Reserve Bank of India which exercises control over them so far as their banking operations are concerned.
Regional Rural Banks
Regional Rural Banks are relatively new banking institutions which supplement the efforts of the cooperative and commercial banks in catering to the credit requirements of the rural sector. These banks have been set up in India since October 1975, under the Regional Rural Banks Act, 1976. At present there are 196 RRBs functioning in 484 districts. The distinctive feature of a Regional Rural Bank is that though it is a separate body corporate with perpetual succession and a common seal. It is very closely linked with the commercial bank which sponsors the proposal to establish it and is called the sponsor bank. The central government establishes a RRB, at the request of the sponsor bank and specifies the local limits within which it shall establish its branches and agencies.
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