India is the second largest country in the world with population just a little less than China. India is a country with great diversity of cultures, geographic conditions and also disparities in citizens’ income. Developed areas in India have a very advanced technology and telecom skills with highly educated citizens which also leads all other industries ahead in the country, including the banking industry, however only 30-35 percent of the population resides in these areas. Nowadays India has a well-developed banking system and has been through three main phases of reform. Policy makers including the Reserve Bank of India, Ministry of Finance and other government and financial sector regulator entities. The country’s banking system started in 1786 with the first bank established, called The General Bank of India which is obsolete already. Nationalization of Indian Banks happened since 1969 due to independence of the country and a total of 21 banks were nationalized at that time. The main aim of nationalization is to spread banking infrastructure in rural areas so even farmers are available to enjoy banking and finance services. Since 1991, liberalization of banking practices in India made phone and net banking possible and also made the system more convenient and time saving. Till now oldest and largest commercial bank in India is the State Bank of India and is ranked one of the top five banks in the world.
The Reserve Bank of India (RBI) was established in 1935 and nationalized in 1949. It serves as the monetary authority of the country and monitors and controls the monetary policy of the country’s banking system. It plays an important role in maintaining the monetary stability in India and manages the foreign exchange policy. The RBI also supervises and regulates the financial system of the country at the same time creates and destroys circulatory currencies around the country. It centralizes and maintains the banking accounts of scheduled banks in India. The above functions of RBI are governed by a central board of directors of 20 members from different levels of citizens which is appointed by the Government of India.
The commercial banking system consists of two types of banks: Scheduled Commercial Banks Unscheduled Commercial Banks However only the Scheduled Commercial Banks operate under the Banking Regulation Act of India. Unscheduled Commercial Banks are not controlled by RBI, so below will only be focusing on Scheduled Commercial Banks in India only.
Public Sector Banks are also called government owned banks which are listed in National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). There are totally 27 banks listed under Public Sector Banks. And the largest bank with seven subsidiaries in the list is the State Bank of India (SBI) mentioned above. SBI provides different baking services and also home loan services to customers. SBI also offers a credit card which is acceptable in India and Nepal. SBI also has 52 offices in 34 countries and serves international customers who focuses on India-related business. SBI now serves more than 90 million customers through a network of 9,000 branches. Another major bank is the United Bank of India, in 1969, which is the period of nationalization, United Bank of India was one of the major banks that underwent nationalization. Because of the expansion of the bank after nationalization, especially into rural and semi-urban regions, it helped a lot in the growth and development of the banking system in India. United Bank of India acts as a Lead Bank in several districts in India such as the States of West Bengel and Assam.
Private banks are banks that do not have government stakes. Induslnd Bank was the first private bank in India. It is one of the fastest growing banks in the Private Sector Banks. IDBI ranked the tenth largest global development bank and is regarded as one of the finest financial institutions. The top private bank in India is the Housing Development Finance Corporation (HDFC) Bank and is the first private bank to receive an in principle approval from RBI. HDFC Bank provides loan services like personal loans, education loans, new car loans, etc. It also provides credit, debit, and prepaid cards for customers and supports facilities like insurance, mutual funds and even financial planning. Private Banks in India is different from Public Banks because of several reasons. First of all, private banks make more use of technology to support and provide more convenient and time saving banking services. The banks are using state of art technology with fully computerized systems in the business process. While public banks still stick to a more traditional way in performing their banking services. Online banking is also brought to the industry by private banks. However customers may choose public banks over private ones because government banks can be more reliable than private banks.
Foreign Banks such as Standard Chartered Bank, Citi Bank and Hong Kong and Shanghai Banking Corporation have been starting their branches in India since 1858. The moving in of foreign banks brought new banking practices and latest technologies into India’s banking industry. Due to the mature and satisfactory banking and financial services provided by these banks, they are able to capture and keep a large customer base. Foreign banks have also brought up the foreign exchange market. Between 2005-2006, foreign banks registered a turnover of 41% while in 2007-2008 their shares raised to 51%. The introduction of foreign banks have greatly increased the competition between banks in public and private sectors and this indirectly changed the banking practices of different banks even in public sector. Because of the competition, public banks are starting to introduce different types of technology in order to boost the performance of the banking services for their customers. They also streamlined their operation and started to apply better banking practices in order to survive in the increasingly competitive banking industry in India.
Cooperative banks play an important role in the Indian Financial System. They function on the basis of “no-profit, no-loss” and they do not aim at providing services to maximize their profit, theoretically. Their services focuses on both banking in rural areas and finance under several aspects such as farming, hatchery, cattle, etc and also banking services in urban areas like basic loans and financing services, however, the focus is usually in rural areas. As a result their customers are usually form the middle class population. These banks have much more interaction and contact with citizens as a result the growth of cooperative banks is actually faster than that of private banks. These banks are highly supported by the central government, state government and also the RBI. Though cooperative banks might not have facilities as latest as private banks, their business process is less strict which allow clients to apply loans more quickly and also the interest rates provided are more competitive comparing to that of other banks in other sectors. However, some of the cooperative banks have political stance, so customers should be careful when choosing a cooperative bank.
The Indian Banks Association (IBA) was formed in 1946 and till now there are already more than 156 members including banks from public, private, foreign, cooperative banks and other financial institutions. The IBA aims at promoting sound and progressive banking principles and practices. It also evaluates the appropriateness, effectiveness and efficiency of banking practices. They are even responsible to hold social gatherings and promote healthy lifestyle to employees within the banking industry. As a result, promoting a healthy and good image to the public about the banking industry of India.
Being a large country with great diversification within the region in different aspects. It is lucky that India can make it through and develop a mature and comprehensive banking system. However if the government still wants the country to keep moving on, they should not let the gap between two extremes of living situation continue to widen. The government should also start focusing on managing different problems in the banking system separately, such as the problem of helping banks in public sectors to keep up with private and foreign banks. Competitiveness of banks should be kept close in order to maximize the development pace of the banking industry. Introducing technology that public banks don’t have can already improve the situation of banks. Policy makers should also minimize the effect of political factors of cooperative banks affecting customers, though the factors are impossible to rule out, but someone should be responsible for teaching customers the best way to choose banks to rely on. If problems in the industry can be eliminated one by one, eventually India can also have the great chance of having one of the best banking system in the world.
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