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Kongunadu Arts and Science College(Autonomous) KONGUNADU ARTS AND SCIENCE COLLEGE(AUTONOMOUS) DEPARTMENT OF B.COM BANKING & INSURANCE READING MATERIAL ODD SEMESTER 2019 SUBJECT: INDIAN BANKING SYSTEM UNIT: I II & III (SEMESTER I) STAFF IN CHARGE: Dr.R.MAHARAJOTHI PRIYA ASSOCIATE PROFESSOR & HEAD 1 UNIT - I Banking System in India In India the banks and banking have been divided in different groups. Each group has their own benefits and limitations in their operations. They have their own dedicated target market. Some are concentrated their work in rural sector while others in both rural as well as urban. Most of them are only catering in cities and major towns. The banking system plays an important role in promoting economic growth not only by channeling savings into investments but also by improving allocative efficiency of resources. The recent empirical evidence, in fact, suggests that banking system contributes to economic growth more by improving the allocative efficiency of resources than by channeling of resources from savers to investors. An efficient banking system is now regarded as a necessary pre- condition for growth. The banking system of India consists of the central bank (Reserve Bank of India - RBI), commercial banks, cooperative banks and development banks (development finance institutions). These institutions, which provide a meeting ground for the savers and the investors, form the core of India’s financial sector. Through mobilization of resources and their better allocation, banks play an important role in the development process of underdeveloped countries. Banking Development and Nationalization of Banks in India Banking development in India has been, by and large, a state-induced activity. The Reserve Bank of India was nationalized in 1949 followed by the nationalization of Imperial Bank of India (now the State Bank of India - SBI) in 1955. In 1969, 14 major commercial banks were nationalized and the exercise was repeated when 6 more commercial banks were nationalized in 1980. Thus, prior to economic reforms initiated in early 1990s, banking business in India was a near-monopoly of the Government of India. The underlying philosophy of this approach was to encourage growth, via availability of adequate credit at reasonable/concessional rates of interest, in areas where commercial considerations did not allow for disbursal of credit. The Financial Sector in India Along with the rest of the economy and perhaps even more than the rest, financial markets in India have witnessed a fundamental transformation in the years since liberalization. The going has not been smooth all along but the overall effects have been largely positive. Nationalization of commercial banks was a mixed blessing. After nationalization there was a shift of emphasis from industry to agriculture. The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalization created its own problems like 2 excessive bureaucratization, red-tapism and disruptive tactics of trade unions of bank employees. It was in this backdrop that wide-ranging banking sector reforms were introduced as an integral part of the economic reforms programme started in early 1990s and which is still under way. The Indian banking sector has witnessed wide ranging changes under the influence of the financial sector reforms initiated during the early 1990s. The approach to such reforms in India has been one of gradual and non-disruptive progress through a consultative process. The emphasis has been on deregulation and opening up the banking sector to market forces. The Reserve Bank has been consistently working towards the establishment of an enabling regulatory framework with prompt and effective supervision as well as the development of technological and institutional infrastructure. Persistent efforts have been made towards adoption of international benchmarks as appropriate to Indian conditions. While certain changes in the legal infrastructure are yet to be effected, the developments so far have brought the Indian financial system closer to global standards. Private Banks are today increasingly displacing nationalized banks from their positions of pre- eminence. Though the nationalized State Bank of India (SBI) remains the largest bank in the country by far, private banks like ICICI Bank, Axis Bank and HDFC Bank have emerged as important players in the retail banking sector. Though spawned by government-backed financial institutions in each case, they are profit-driven professional enterprises. Financial Sector in India consists of three main segments: 1. Financial institutions -banks, mutual funds, insurance companies 2. Financial markets -money market, debt market, capital market, forex market 3. Financial products -loans, deposits, bonds, equities Financial Regulators in India There are mainly three Financial regulators in India: 1. Reserve Bank of India (RBI) - Banking Sector 2. Securities Exchange Board of India (SEBI) - Capital Markets /Mutual Funds 3. Insurance Regulatory and Development Authority (IRDA) - Insurance Companies Structure of Banking System In India Banks can generally be classified into various sub-categories as follows: • Public Sector Banks In India o The State Bank Group and Nationalized banks: Is a group of 27 banks o Has the largest number of branches in metro/ urban/rural areas throughout the country o Contributes to about 75% of the total deposits o Contributes about 70% of total advances of all commercial banks in India. 3 o Most have a very large branch network spread over all parts of the country o Have a Large deposits and assets base o Perform all kinds of core and modern banking functions • Scheduled Banks: o These are banks which are listed in the second schedule of the Reserve Bank of India Act, 1934 o These banks are required to maintain certain amounts with RBI and, in return, they enjoy the facility of financial accommodation and remittance facilities at concessionary rates from RBI o State Co-operative Banks o Commercial Banks RESERVE BANK OF INDIA The Reserve Bank of India (RBI) is India's central banking institution, which controls the issuance and supply of the Indian rupee. Until the Monetary Policy Committee was established in 2016,[6] it also controlled monetary policy in India.[7] It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.[8] The original share capital was divided into shares of 100 each fully paid, which were initially owned entirely by private shareholders.[9] Following India's independence on 15 August 1947, the RBI was nationalised on 1 January 1949.[10] The RBI plays an important part in the Development Strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member central board of directors: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors to represent important elements of India's economy; and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the capital New Delhi. Each of these local boards consists of five members who represent regional interests, the interests of co-operative and indigenous banks. The central bank was an independent apex monetary authority which regulates banks and provides important financial services like storing of foreign exchange reserves, control of inflation, monetary policy report till August 2016. A central bank is known by different names in different countries. The functions of a central bank may vary from country to country and are autonomous or body and perform or through another agency vital monetary functions in the country. A central bank is a vital financial apex institution of an economy and the key objects of central banks may differ from country to country still they perform activities and functions with the goal of maintaining economic stability and growth of an economy.[11] 4 The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the name ''Mint Street''.[12] RBI is also known as banker's bank. Structure RBI runs a monetary museum in Mumbai The central board of directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The board consists of a governor, and not more than four deputy governors; four directors to represent the regional boards;[36] two — usually the Economic Affairs Secretary and the Financial Services Secretary — from the Ministry of Finance and ten other directors from various fields. The Reserve Bank — under Raghuram Rajan's governorship — wanted to create a post of a chief operating officer (COO), in the rank of deputy governor and wanted to re-allocate work between the five of them (four deputy governor and COO).[37][38] The bank is headed by the governor, currently Shaktikanta Das.[1] There are four deputy governors BP Kanungo,[39]N. S. Vishwanathan, Viral Acharya and Mahesh Kumar Jain.[40] Two of the four deputy governors are traditionally from RBI ranks and are selected from the bank's executive directors. One is nominated from among the chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as deputy governor of RBI and later as the governor of RBI as with the case of Y.
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