International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com An Analytical Study of Reforms and their Impact on Indian Banking Sector Neha Chadha Ph.D Scholar (Commerce) (2014-2017) Kalinga University, Raipur, C.G. Enrollment No. 15020108 (KU002MMXIV02010191) Abstract We are living in the fast changing world. With new emerging technologies and rapid expansion of internet e-mail etc. excess to global information and knowledge and to commodity markets worldwide is how much easier than before, in a bit to meet commitments to international institutional like world bank, IMF, WTO country after country is pulling down barriers to foreign trade and investment. The government of India has also followed suit with the result that quantitative restrictions on foreign trade are being dismantled speedily. On the domestic front there are clear signals of privatization and liberalization as licensing is being given up, controls are being dismantled, restrictive laws are being removed and the privatization is being used in almost all sectors. India is a developing economy with the low growth of GDP, low per capita income, rapid population growth existence of dualism, technological backwardness etc. At the time of independence it was a close economy with no FDI, no MNC‘s, restriction on currency movements, quota raj, permit raj, license raj and socialistic pattern of economy. 112 International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com Indian banking sector was also working in the close economy scenario. Indian banking system was not sound at the time of independence. In 1949, 2 major actions were taken with a view of structural reforms in the banking sector. Banking regulation Act, which provided extensive power to RBI over the commercial banks and another was the nationalization of RBI. Banking regulation act provided excessive power the RBI. In a free enterprise economy, commercial banks operate like any other business entity and gain private profit so at the time of independence it was viewed that the freedom of commercial bank was not in the harmony of the socialistic pattern of society, so they were nationalized in 1969 to establish the control over these banks. This study attempts to study the banking reforms in India and their impact on Indian Banking System. 1.1 Introduction Ritika Gauba (2012) 1 in her study revealed that the concept of modern banking was first traced in medieval Florence in 1397. A powerful merchant family named Medici established a network of shops that allowed patrons to place money on account and withdraw the money in another city that had a Medici representative. Many powerful families and even the Church kept their money in Medici banks. This allowed rich people to travel without the need to carry large sums of money and risk of robbery while travelling. Banking continued to gain popularity throughout Europe by 1700. Nearly every country in Europe had some form of established banking. Modern banking has come a very long way from those humble beginnings in Florence. Banking today 1 Ritika Gauba, ―The Indian Banking Industry : Evolution, Transformation & The Road Ahead‖, Pacific Business Review International, Vol 5 No 1, pp. 85-97. 113 International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com covers the entire spectrum of finance from simple savings to credit cards and home loans. Banking Regulation Act, 1949, Section 5(c), defines bank as "a banking company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able, by cheque, draft, and order or otherwise. 2 "A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai founder of Canara bank 1.2 Objectives and Research Methodology Objectives of Study 1. Examine the Evolution of Indian banking system. 2. Identify the changing structure of Indian banking sector since independence. 3. To find out the nature of banking sector reforms and its affect on functioning of banks in India. Research Methodology Research methods can be classified in different ways, the most common distinction is between the quantitative and the qualitative approaches 2 Bharathi . N. (2007), Indian Banking and Finance – A Paradigm Shift 114 International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com (Myers, 2007 3). Quantitative approaches were originally used while studying natural sciences like: laboratory experiments, survey methods and numerical methods. A qualitative study is used when the researcher wants to get a deeper understanding on a specific topic or situation. Myers (2007) 4 stated that the qualitative approach was developed in social sciences in order to support the researcher in studies including cultural and social phenomena. Sources included in the qualitative approach are interviews, questionnaires, observations, documents and the researcher‘s impression and reactions. The chosen approach is qualitative. Qualitative research typically takes the form of in-depth interviews with a small number of respondents. These interviews may be done one individual at a time, or in groups. Individual interviews have the advantages of providing very rich information and avoiding the influence of others on the opinion of any one individual. Individual interviews are very expensive and time consuming, however, and as a result, it is not likely that any one research program will interview large number of individuals. 1.3 Evolution of Banking in India Charan Singh et. al. 5 (2014) Banking sector in India dates back to 18th century with the establishment of Bank of Hindustan in 1770 followed by the General Bank of India in 1786. There were a number of Public sector 3 Myers, M. D. (2007), ―Qualitative Research in Information Systems‖, MIS Quarterly, vol. 21 No. 2, pp.241-242. 4 Ibid 5 Charan Singh, Namrata, Gaurav, ―Impact of Foreign Banks on the Indian Economy‖, working paper 451, 115 International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com banks like Bank of Bengal, Bank of Bombay which came into existence between 1800 and 1850(including State Bank of India. These banks were founded as per the charters from British East India Company. With the trade relations developing between India and various other countries there was a keen interest from banks in other countries to invest in India and grow their customer base here. The banks were following the customers in some cases while in some other banks led new customers to enter new geographies and make investments. In India, banking has developed from the primitive stage to the modern system of banking in a fashion that has no parallel in the world history. With the dawn of independence, changes of vast magnitude have taken place in India. After independence India launched a process of planned economic activity in order to overcome the multitude of problems it faced as an underdeveloped nation. The increasing tempo of economic activity lead to tremendous increase in the volume and complexity of banking activity. Therefore, the role of banks has had to expand at a fast pace. As engines of development and vehicle of silent Socio-economic revolution in the country, Indian banks have assumed new responsibilities in the fields of geographical expansion, functional diversification and personal portfolio. Indian banking transformed itself from ‗Class banking to Mass banking‘ 6. A banking sector performs three Primary functions in an economy: The operation of the payment system, the mobilization of savings and the allocation of savings to investment projects. By allocating capital to the highest value use while limiting the risk and cost involved, the banking 6 A. S. Chawla, K. K. Uppal, K. Malhotra, ‗Indian Banking Towards 21st Century‘. Deep and Deep Publications, New Delhi, 1988. 116 International Journal of Business Administration and Management. ISSN 2278-3660 Volume 7, Number 1 (2017), © Research India Publications http://www.ripublication.com sector can exert a positive influence on the overall economy, and thus of broad macro economic importance 7. The origin of the Indian banking industry may be found with the establishment of .Bank of Bengal‘ in Kolkata in 1786. The Bank of Calcutta was the first part of the golden triangle- established in June 1806, it which was renamed as Bank of Bengal in January 1809. This was followed by the establishment of the Bank of Madras in July 1843, as a joint stock company, through the reorganization and amalgamation of four banks viz., Madras Bank, Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank brought about major innovations in banking such as use of joint stock system, conferring of limited liability on shareholders, and most importantly acceptance of deposits from the general public. The last presidency bank- Bank of Bombay which was also last bank to be set up under the British Raj was established in 1868. The three Presidency Banks with their 70 branches were merged in 1921 to form the Imperial Bank of India. The new monolith took on the triple role of a commercial bank, a banker's bank and a banker to the government. Thus proving that the concept of mergers and consolidation as well as their success in the banking system of India, is not as recent a phenomenon as is often thought to be.