Banking Industry: Backbone of the Indian Economy

Posted in Financial by Adolf on Oct 16,2012 4204

The word ‘Bank’ came from an Italian word meaning ‘Banco’. In Italy, benches were kept in the market place to transact the business. Such banco arrangements were used to be made for smooth exchange of money and other bills of the business. A Bank is nothing but a financial institution and a financial intermediary that accepts deposits and directs those deposits into lending activities, either directly or through capital markets. In a way, bank connects patrons that have capital deficits to patrons with capital surpluses.


The origin of Indian banks dates back to the 18th century i.e. in the British rule. The General Bank of India and The Hindustan Bank were the first banks which came into existence during the British rule, however now these banks no more exist. The State Bank of India or SBI is the oldest bank existing in India. It was called the Imperial Bank of India (a merger of three banks, namely, the Bank of Calcutta, the Bank of Bombay and the Bank of Madras). After the independence, the Imperial Bank of India was owned by the Government of India and was named as the State Bank of India.

The Reserve Bank of India, established in 1934 and nationalized in 1949, under the Reserve Bank of India Act, is the Central Bank of India. It is the apex of the Indian Banking System. Also in1949, the banking regulation act was passed which empowered the Reserve Bank of India (RBI) “to regulate, control, and inspect the banks in India.”

By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. A need was felt to nationalize the banks. So, the Government of India issued an ordinance and nationalized the 14 largest commercial banks in 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The Government of India controlled around 91% of the banking business of India. Merger of New Bank of India with Punjab National Bank within the nationalized banks reduced the number of nationalized banks from 20 to 19. And so presently we have 19 nationalized banks in India.

Nationalization was followed by Liberalization i.e. licensing a small number of private banks. Hence some private banks also came into function in the 1990s. These banks also contribute to the growth of Indian economy as they have higher efficiency, sophistication as compared to the Public sector banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.

The Indian Banking Industry can be categorized into Scheduled banks and Non-scheduled banks. Scheduled banks constitute of scheduled commercial banks and scheduled co-operative banks. The Scheduled Commercial banks can be divided into Public sector banks, Private sector banks, foreign banks and Regional Rural Banks. The Scheduled Co-operative banks can be divided into Urban Co-operative and Rural Co-operative banks.

In the Indian Banking Industry some of the Private Sector Banks operating are ING Vyasa Bank, IDBI Bank, Bank of Rajasthan Ltd, SBI Commercial and International Bank Ltd. and banks from the Public Sector include Allahabad Bank, Oriental Bank, Punjab National bank, Vijaya Bank, UCO Bank among others. American Express Bank Ltd, ABN-AMRO Bank, ANZ Grindlays Bank, Citibank are some of the foreign banks operating in the Indian Banking Industry.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

Now-a-days, banking sector acts as the backbone of modern business as Finance is the life blood of trade, commerce and industry. Development of any country mainly depends upon the banking system. That’s the reason why there was adoption of technology and computerization in the banking industry, too.

Adoption of technology enabled the Indian banks to offer products like Debit cards, credit cards, ATM, Internet banking, mobile banking, etc. Services like Core Banking Solutions (CBS), Electronic Fund transfer (EFT), Electronic Clearing System (ECS), Real Time Gross Settlement (RTGS) are possible due to technology and computerization. In addition to this, the Modern Indian banking industry has also entered into Merchant banking, Asset management, infrastructure management, legacy maintenance and migration services, etc. resulting in greater customer satisfaction.

All through this, the Reserve Bank of India (RBI) remained the controller of every move of the banks. The use of the modern innovation and computerization has increased many folds and the country's banking sector has been out in the open to the world's market. Today, Indian banks can compete with modern banks of the world with poise.

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