Indian Banking Sector: Overview
After the independence Government of India took major steps in Indian Banking Sector Reform. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India were nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. But the feature of this period was very high interest rate, limited services and no competition to name a few. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. This committee introduced many reforms in the banking sector such as delinking the entire issue of concessional credit from the issue of banking operations, reducing the SLR limits, strengthening the capital base of banks, and bringing about a general freeing of interest rates. The reforms proposed aimed at aligning the working of banks with the growth objectives of the economy. The country post 1991 is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Competition among banks is at an all time high. Banks are not only rated in terms of the interest rates and default rates but also in terms of the quality of service they provide to the consumer. At present the size of the banking sector is Rs. 36,105 billion.
Role of Banks
For each of the challenge to be met a sound Banking system is necessary. With the liberalisation of banks in India, banks have are more independent in formulating their strategy. As a part of growth in India banks are providing credits to productive sectors which are in need of investments. Also banks help the institutes in having hassle free payments, collection and remittances. This has really enhanced the efficiency of the companies as very little time is spent in taking care of financial transactions. As the companies are getting globalised, the need for foreign exchange services increases. This need is being fulfilled by the banks. Along with this banks offer several customized product for target groups which really help in solving the cash problem of a particular segment. Options like variable rate of interest and fixed rate of interest, or flexibility in payment of principal are a few examples. An important role which banks these days are playing is the role as an advisor. Investment Banks usually are the banks which act as intermediate between the investors and the corporates. They advise the company about the way in which the capital can be raised, when to raise it, mergers and acquisitions, Mezzanine financing etc. Further banks have been providing the industry with technology support like SBI has introduced Project Uptech. Further credit delivery mechanism of banks has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. Banks have come out with special policies to step up credit to SMEs.
Future of Banking Systems in India
Consumer finance, robust industrial investment outlook, increasing internationalization of India and rural banking will drive growth in the economy in the future. Upward migration of incomes, demographic patterns and access to finance will act as change agents.
The banking sector will have to gearing itself to support growth. Competition, consolidation and convergence will transform banking. Technology will be the key and drive the change. With the advent of new technologies, the banks need to be proactive in adopting the change in technology so as to serve its customers better and have a competitive advantage. Banks will have to strengthen its capital base, risk management techniques & overall skills. Also the banks need to diversify into products like insurance and mutual funds in order to gain from the booming economy.
After the independence Government of India took major steps in Indian Banking Sector Reform. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India were nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. But the feature of this period was very high interest rate, limited services and no competition to name a few. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. This committee introduced many reforms in the banking sector such as delinking the entire issue of concessional credit from the issue of banking operations, reducing the SLR limits, strengthening the capital base of banks, and bringing about a general freeing of interest rates. The reforms proposed aimed at aligning the working of banks with the growth objectives of the economy. The country post 1991 is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Competition among banks is at an all time high. Banks are not only rated in terms of the interest rates and default rates but also in terms of the quality of service they provide to the consumer. At present the size of the banking sector is Rs. 36,105 billion.
Role of Banks
For each of the challenge to be met a sound Banking system is necessary. With the liberalisation of banks in India, banks have are more independent in formulating their strategy. As a part of growth in India banks are providing credits to productive sectors which are in need of investments. Also banks help the institutes in having hassle free payments, collection and remittances. This has really enhanced the efficiency of the companies as very little time is spent in taking care of financial transactions. As the companies are getting globalised, the need for foreign exchange services increases. This need is being fulfilled by the banks. Along with this banks offer several customized product for target groups which really help in solving the cash problem of a particular segment. Options like variable rate of interest and fixed rate of interest, or flexibility in payment of principal are a few examples. An important role which banks these days are playing is the role as an advisor. Investment Banks usually are the banks which act as intermediate between the investors and the corporates. They advise the company about the way in which the capital can be raised, when to raise it, mergers and acquisitions, Mezzanine financing etc. Further banks have been providing the industry with technology support like SBI has introduced Project Uptech. Further credit delivery mechanism of banks has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. Banks have come out with special policies to step up credit to SMEs.
Future of Banking Systems in India
Consumer finance, robust industrial investment outlook, increasing internationalization of India and rural banking will drive growth in the economy in the future. Upward migration of incomes, demographic patterns and access to finance will act as change agents.
The banking sector will have to gearing itself to support growth. Competition, consolidation and convergence will transform banking. Technology will be the key and drive the change. With the advent of new technologies, the banks need to be proactive in adopting the change in technology so as to serve its customers better and have a competitive advantage. Banks will have to strengthen its capital base, risk management techniques & overall skills. Also the banks need to diversify into products like insurance and mutual funds in order to gain from the booming economy.
Written By: Abhishek Anand, IIM Indore
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