Indian banking system, like most banking systems in the developing countries, is characterized by the coexistence of different ownership groups—public and private. Public sector banks have passed through several stages of existence.
The first stage was nationalisation of Imperial Bank of India and seven banks of princely states in fifties. This led to emergence of State Bank of India and its seven associate banks. The second stage comprised the two phases of nationalisation of major private banks in 1969 and 1980. Non-nationalized private and foreign banks were allowed to coexist with public sector banks.
Their activities were, however, restricted through entry regulation and strict branch licensing policies. As a result, public sector banks dominated banking business, accounting for nearly 90% of the total deposits and advances in 1990-91.
Image Source: news.manikarthik.com
ADVERTISEMENTS:
Non-nationalised private and foreign banks shared the residual of 10%. There were 27 public sector banks, 23 private banks and 23 foreign banks in operation in India in 1990-91. They were all subject to the central bank (RBI) regulation.
In 1991-92, RBI launched major banking sector reforms aiming at creating a more profitable, efficient and sound banking system. Based on the recommendations of the Narasimham committee on financial sector reforms, these reforms sought to make the banking system more responsive to changes in market conditions.
As a result, the era of deregulation of entry, branch licensing and interest rates dawned upon Indian banking industry in the form of privatisation and modernisation. This led to the following:
ADVERTISEMENTS:
1. Permission to the public sector banks to raise 49% of their equity in the capital market.
2. Entry of 6 private banks, mostly promoted by government owned institutions, and 3 foreign banks in the Indian banking industry in 1994-95.
3. Higher profitability to banks through gradual reduction in cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
4. Strengthening of banking system through the institution of the Bank of International Settlements (BIS) norm of 8% capital adequacy ratio in addition to stringent income recognition and provisioning norms.
ADVERTISEMENTS:
5. Creation of level playing field between domestic and foreign banks.
6. Requirement, from the foreign banks, to earmark 32% of their total credit to the priority sector in India with effect from 1993. Prior to the reforms, they were exempted from such requirement while all the domestic banks, whether public or private, were, by contrast, required to earmark 40% of their total credit in this fashion.
Disinvestment in public sector banks and deregulation of Indian banking industry as a whole have increased competition in the banking industry through increased private participation.
Privatisation of Indian banking industry coupled with information technology revolution in India in general has modernized Indian banking with higher competitiveness. RBI’s Monetary and Credit Policy (2003-04) provides an insight into the current developments and prospective technology upgradation in Indian financial sector.
The Central Bank has assigned priority to upgradation of technology in the financial sector. Substantial progress has been made for developing a modern, efficient, integrated and secure payment and settlement system in financial sector. Modernisation of clearing and settlement through MICR (Magnetic Ink Character Recognition) based cheque clearing, popularisation of electronic clearing services (ECS) and integration of RBI-EFT scheme with electronic funds transfer (EFT) schemes, introduction of centralised funds management system (CFMS) are significant milestones in this regard.
Real Time Gross Settlement (RTGS) environments improve the effectiveness of asset- liability management. Core Banking System (CBS) and Cheque Truncation System (CTS) are two recent most developments in multicity banking that replace the existing system of remittances that cost time and money both.