A Brief Overview of the Banking and Finance sector of India

Know the Evolution and Terms Related to Banking and Finance sector

The article aims to highlight the banking and finance sector of India, History of Banking in India, RBI and its functions, Terms Related To RBI and the Commercial banks.

History of Banking in India

Bank of Hindustan (1770) – The 1st bank was established in India at Calcutta.

State Bank of India (1806) is the largest and oldest bank of India which is currently functioning. It is an amalgamation of 3 presidency banks under the British rule namely: 

1. a) Bank of Bengal (1806)                                  
2. b) Bank of Madras (1843)
3. c) Bank of Bombay (1840)

These presidency banks performed the functions of the Central Bank until the Reserve Bank of India was established in 1935.

In 1960, the State Bank of India (S.B.I) was given control of 8 state associated banks 

In 1969 the Indian government nationalized 14 major private banks.

All nationalized banks are the major lenders of our economy.

Punjab National Bank (PNB) is the first purely managed bank by Indians. 

Reserve Bank of India (RBI)

It is the central bank of our Nation which controls the money supply.

It was established on 1st April 1935

It was nationalized on 1st January 1949

Structure: It has 14 Directors, 4 Deputy Governors, 1 Government official,  and 1 governor. The governor is the chairman of the Reserve Bank of India.

Governors of the RBI: 1st Governor – Sir Osborne A. Smith (1935-1937) 1st Indian Governor – Sir Chintaman D. Deshmukh (1943-1949)

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Functions of the RBI

1. 1. Issuance of Currency: The RBI is the sole body responsible for printing currency in the country except the 1 Rupee coin that is minted by the Ministry of Finance.
   2. Banker to the Government: The RBI performs the function of banker, agent, and advisor to the government of India. It performs all the banking functions of the state and Central government.
   3. Banker’s Bank: The Reserve Bank of India is the supreme authority that oversees banking in India and hence it is responsible to help out commercial banks when they require money at a special interest rate.

• Controller of credit: The central bank administers control over the credit granted by commercial banks. The money supply of the economy is controlled by the Reserve bank through instruments such as controlling the bank rate, changing the marginal requirement, etc.

1. 1. Custodian of foreign reserves:  To keep the foreign exchange rates from fluctuating in the market, the reserve bank trades foreign currency to maintain the stability of the currency. Currently, India has foreign exchange reserves of nearly $360 billion. 
   2. Custodian of Cash reserves: Commercial banks hold deposits in the Reserve bank of India and in return, the Reserve Bank holds custody of the cash reserves of these commercial banks. 

• The Organized Sector

There are various types of formal institutions that finance the Indian economy. They are directly supervised by the Reserve Bank of India. Let us look at them:

• Scheduled and non -scheduled banks:  To be a scheduled bank, a minimum of Rs.5 Lakh paid-up capital is required on the bank’s behalf. The RBI lends money to these banks at the prevailing bank rate. Scheduled banks don’t comply with the stringent requirements of the RBI.

• Commercial banks: Commercial banks are profit-making banks that are based on a business model.

• Co-operative banks: They are banks that are set up with a no-profit no-loss motive and mainly serve industries, small businesses, and self-employment.

Various commercial banks with reserves greater than Rs.50 Crore were nationalized starting from 1969. They are as follows:

The Central Bank of India, Bank of India, Punjab National Bank, Canara Bank, United Commercial Bank, Syndicate Bank, Bank of Baroda, United Bank of India, Union Bank of India, Dena Bank, Allahabad Bank, Indian Bank, Indian Overseas Bank, Bank of Maharashtra, Andhra Bank, Punjab & Sind Bank, New Bank of India, Vijay Bank, Corporation Bank, Oriental Bank of Commerce etc.

• The Unorganized Sector

The Unorganized sector of Finance and microcredit is still popular amongst the people residing in rural and sub-urban areas, especially for non-productive purposes. The Unorganized Sector consists of:

• Local money lenders: Local money lenders are a major part of the Indian Finance sector even though they charge an exorbitant sum of interest on loans given by them but they require few formal guarantees and offer hassle-free services and are unregulated by the RBI.

• Non-Banking Financial Companies (NBFC): They are the companies which are regulated by the RBI engaged in the business of loans, shares, stock, bonds, hire-purchase insurance business, agriculture, industrial activity and sale, purchase and of immovable property.

Terms Related To RBI and the Commercial banks

The RBI establishes control over the commercial banks by manipulating the following rates to maintain cash flow in the economy:

Repo Rate: When the RBI provides a loan to commercial banks for tenure less than 90 days. It charges an interest rate which is called repo rate that is set at 5.40% currently.

Reverse Repo Rate: When bank’s deposit excess money to the RBI, the RBI gives them interest on the money which is the Reverse Repo Rate that is set at 5.15% respectively.

Statutory Liquidity Ratio: Every bank has to maintain a certain percentage of their total deposits in (Gold + Cash+ bonds+ securities) with themselves. This rate is called the Statutory Liquidity Ratio which is currently set at 18.75%.

Cash Reserve Ratio (CRR): Every bank has to maintain a certain percentage of their deposits with the RBI. This rate is called the Cash Reserve Ratio that is currently set at 4%.

Bank Rate: The rate at which the RBI provides cash loans to commercial banks for a period of more than 90 days. This rate is currently 6.75%.

Margin Requirements: Margin requirements refers to the difference between the securities offered and the amount of money borrowed by the commercial banks.

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