The History of Banking System in India.
The banking system in India has taken tremendous revolutions in the past years. Trade and commerce have been part of the Indian social organization since the times of civilization. The trading organizations were initially organized into social systems that mostly based their relationships on the exchange of goods and services. Banking is important for the economy of a country to grow at the global pace. The changes that these institutions have made for the Indian commerce are quite significant.
Trading activities were formerly held by various social groups and run by the wealthy merchants of the time. Trade and commerce were based on the factors of business trade. There was initially the exchange of goods and services, for other products and services. The process of business was originally faced with a lot of challenges that later led to the introduction of other measurements of value. Various mechanisms came to the place that was used to measure the value of goods and services.
The presentation of money, which was the standard and accepted measure of value for different goods and commodities, was a breakthrough in the trading activities. Sea shells were used as the measurement of value. The traders would exchange their goods and services for a certain number of sea shells. Initially, the sea shells would be used to measure the wealth of a person, the more sea shells one had, the richer they were, and the more the society respected them (Khanna & Kaushal 2).
However, due to the various complications that arose in the process of the trade activities, such as victimization by the wealthy who owned the money and the factors of production, there was the introduction of the banking system.
Banks, which are the institutions mandated with the task of offering banking services, as well as the financial service to its customers were introduced. The banks played a significant role in the management of the cash as well as the other clients’ portfolio. Over the period of over three decades, the banking system in India has been able to achieve a lot. The performances of the Indian banking system, together with its tremendous transformations and revolutions cannot be ignored.
Banks in India were started due to various reasons. Some if the reasons include the misuse of the financial policies by the money lenders who used to charge very high interest rates to those people who came to borrow money from them. In most cases, there was even no security for the money that people had. The government, therefore, came to rescue the people by establishing banking organizations. The banks were set up majorly to discourage the act of having the financial strengths concentrated in the hands of a few individuals or even institutions.
The banks were also used to provide financial security to the people for their money and property. The control of the money supply and credit transfers was crucial, in a process to control the inflation rates in the country. The banks also served as the standard measure for equity in money allocation regarding the interest rates and the lending policies. The banking system in India has therefore been able to undergo through tremendous revolutions and changes that have seen the system achieve its current success.
Revolution in the Indian Banking System
The banking system in India has been able to undergo various changes, since the establishment of the first bank in India, in the year 1786. The banking system has been able to be grouped into three major phases that explain the transitions that have been experienced in the banking system in India.
The first step is the early phase of Indian banks, which constitutes of the business systems, ranging from the years 1786 to 1969. This period covers the first bank to be introduced in India, which was the “General Bank of India,” set up in the year 1786 by the British colonialists. The phase also covers the introduction of two other banks, namely, the Bank of Hindustan” and the “Bengal Bank” (Khanna & Kaushal 2). The first phase also covered the introduction of the first their independent banks, namely, Bank of Bengal, set up in the year 1809, the Bank of Bombay, established in the year 1840, and lastly the Bank of Madras, started in the year 1843.
The second phase, which was named as the nationalization of banks and the introduction of the banking sector reforms, a process that took place between the years 1969 to 1991. This phase covers the period from the time of independence, where the Indian government introduced the reforms process, initially to the Imperial Bank of India. The bank was mandated with the task of offering banking services to the rural and semi-urban areas.
The government then gave the State Bank of India, the order to act as the Reserve Bank of India (RBI), with the powers to carry out any financial transactions with the Union government and the state governments, in India. The process of nationalizing the banks and the banking systems in India was a major drive far the government. By the year 1980, over 80%of the banks in India were under the direct authority, ownership as well as supervision by the national government.
The third stage, also known as the new phase of Indian banking system, which carries all the reforms from the year 1991, has been able to see the success and the current transformations in the Indian banking system. After the year 1991, the government set up a committee that was headed by M. Narasimham. The committee was mandated with the task of liberalizing all the banking practices. The work of the committee has seen to the success that is currently experienced in the Indian banking system (Roland 4).
Indian Banking Revolution: Policies Applied.
The Indian banking system has been able to use various policies that have seen to the advancements in the banking system. Different decision makers had to come together and decide the way forward for the banking system. Individual policies were implemented and saw to the success if the whole sector (Sahoo & Mishra 2).
a) Nationalization of the Banks
The government involvement throughout the process of banking systems has brought a lot of changes in the way business is done. The introduction of various nationalization policies in the Indian banking system saw the conversion of over 80% of the banks in India become national banks, whose management and policy arrangement relied on the government. The nationalization process saw the rise of the state Public Sector Banks' (PSB), from the tune of 31% to 86%.
The major objective of the government involvement in the nationalization process of the banks was to have a prompt branch expansion in the banking system. The government also had the purpose of directing the tribute, about its five-year manifesto plan. For the government to achieve such goals, there was the need for the national government to nationalize the banks and give those targets, which each bank had to attain in the set time frame.
b) Introduction of the Statutory Pre-Emptions
There was a high level of loss-making and financial subjugation in the whole Indian banking sector. The government came up with the policy of introducing the statutory pre-emptions, whose main aim was to reduce the financial repression, by lowering the CRR and SLR. The reduction in the CRR and SLR levels, allowed banks to exercise freedom in the banking, and the lending process in the economy. The banks were faced with the challenge of ensuring that the inflationary pressures remained low and did not exceed the set limits.
c) Priority Sector Lending
Priority sector lending was a policy that was adopted by the national government with the aim of reducing the problems of low profitability in the banking sector. The problem was identified by the Narasimham Committee, and designed to reduce the priority sector advances, from its 40% borrowing rate to a 10% loan rate.
d) Interest Rate Liberalization
Before the introduction of the banking reforms, the interest rates were usually controlled by individual business organizations. The saving and the lending charges were very high which made the borrowing and deposit of money very expensive. The government in a bit to control this problem introduced the policy of Interest rate liberalization. There was the introduction of the prime lending rate (PLR), which was usually guided by the RBI, and whose main aim was to control and promote the financial savings, as well as the growth of the organized financial Systems.
e) Abolition of The Entry Barriers
The reforms that saw to the success of the banking system included the process of lowering the barriers to entry for the banking systems in the Indian economy. Initially, the barriers to entry were very high and constituted of various procedures for one to enter the market.
The government lowered the entry barriers and so, it enhanced the competition in the banking systems. Due to the reduction in the entry barriers, there has been an increase in the number of banks in the Indian economy since the year 1994 to 2000. There has been an increase in the asset ownership by the private banks from the year 1994, which has been able to rise to a tune of 20%.
f) Strengthening of the Commonsensical Norms and the Supervisory Framework.
The committee that had been set to investigate the development of the Indian banking system, headed by Narasimham, came up with the policy of enhancing transparency and accountability in the banking sector. The openness and the accountability were to be based on the ability to report on the asset ownership, income distribution, capital adequacy as well as its provision policies. The banks were supposed to come up with ways to which the government was able to establish how many assets each bank had. The banks were supposed to deliver the documents for annual analysis, upon which a decision was to be made on whether to hold the people responsible for their actions or not.
Achievements of the Indian Policies on Banking Systems.
The systems that were given in the Indian banking system were able to transform the Indian banking system to what it is to the present day. The achievements have been able to show a significant change and development in the banking systems in the Indian community (Dhingra 1).
The banking sector has been able to transform from the year 1991 to the present. Various aspects have been put in place with the aim of enhancing convenience and transparency in the banking systems. Some of the transformations include the introduction of technology in the banking system. Various aspects have been able to be incorporated into the trading systems that have enhanced convenience to the customers (Gupta & Dingwani, para 6).
The introduction of technology has been able to strengthen the efficiency of the banking system, as well as cutting down the operational costs by various banks. The banks have been able to introduce different technologies such as the Core Banking Solution (CBS). The CBS is a system that allows banks to cut down on their costs and have convenience when conducting their businesses.
The introduction of the Automated Teller Machines (ATMs) was a significant achievement for the banking sector in India. It was a strategy that saw the success of various businesses, which included the formal and informal businesses since people did not have to cue so that they withdraw cash.
The introduction of the Magnetic ink character recognition (MICR) and the automated cheque clearing, was a significant boost to the banking system in the Indian economy. The Magnetic ink character recognition (MICR), allows computer machines to read the numbers that are written in the cheque, and this eliminates any human errors in the transaction process. The introduction of the automated check clearing and check truncation system (CTS), have been able to eradicate the need for physical and paper cheques.
Other developments in the Indian banking system include the Smart Cards, Internet Banking, Mobile banking, the introduction of the RFID in Banks, Banking the unbanked, among achievements. The banking sector in India can, therefore, can be said to have undergone a significant transformation in the banking system (Malik 3).
Effectiveness of The Policies Employed in The Indian Banking System
The policies that were introduced in the Indian banking system have been able to transform the sector into its present level. The steps taken by his Indian government to control the economy through the various monetary and fiscal policies, through the application of contractionary and expansionary monetary policies have been able to move the economy and the banking system to where it is today.
The Indian government has been able to achieve its set goals and objectives in the banking sector, due to the introduction of the various policies that revolutionaries the Indian banking system.
Conclusion
The Indian banking system has been able to undergo a lot of transformation in the past years. The process of the banking system revolutionization and change started with the introduction of the banking policies, together with the introduction of the nationalization policy for the personal banks. The process of transformation can be attributed to the success in the technological development and advancement in the governmental regulatory policies.
Works cited
Dhingra, Sanjay. “Measuring IT Effectiveness in Banks of India for Sustainable Development.” BIJIT - BVICAM’s International Journal of Information Technology. July – December 2011; Vol. 3 No. 2; (http://bvicam.ac.in/bijit/downloads/pdf/issue6/04.pdf)
Dingwani, Harsh, and Gupta, Nitin. “Revolution in Indian Banking Industry Transforming Life Of Millions.” Finance Articles, 25 July 2012. (http://www.mbaskool.com/business-articles/finance/4169-revolution-in-indian-banking-industry-transforming-life-of-millions.html)
Khanna, Manish, and Kaushal, Saurabh “Growth of Banking Sector in India: A Collective Study of History and its Operations”, Asian J. of Adv. Basic Sci.: 2(1), 36-45, 30 Nov, 2013. (http://ajabs.org/ajabs/5%20Manish%20Khanna.pdf)
Malik, Seema. “Technological Innovations in Indian Banking Sector: The Changed face of Banking.” Hindu Institute of Management and Technology, Volume 2, Issue 6, June 2014. (http://www.ijarcsms.com/docs/paper/volume2/issue6/V2I6-0062.pdf)
Roland, Christian, “BANKING SECTOR: LIBERALIZATION IN INDIA”, European Business School, Oestrich-Winkel, Germany, Web 7th April 2016 (http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN024227.pdf)
Sahoo, Deepti and Mishra, Pulak, “Structure, Conduct and Performance of Indian Banking Sector”, VOL. 12, ISSUE 4, 2012, (http://is.muni.cz/do/econ/soubory/aktivity/obzor/6182612/37711507/2012_4_3_SahooMishra.pdf)
