Indian Banking Industry

Topics: Bank, Basel II, Banking in India Pages: 10 (3619 words) Published: December 15, 2012
Banking forms the back bone of the country. Banks are special as they not only accept and deploy large amounts of uncollateralized public funds in fiduciary capacity, but also leverage such funds through credit creation. They directly or indirectly affect the growth of the country.

Banking in India has gone through different phases of nationalization and liberalization. In confront of American crisis, evolving technology, growing Indian economy and further liberalization of Indian government has made the banking industry the most dynamic industry in the country. How this industry evolves through these challenges determines the fate of many other industries and the country. History:

Post independence, banking system has been very weak in India. Banking was restricted mainly to urban areas and neglected in the rural and semi-urban areas. Large industries and big business houses enjoyed major portion of the credit facilities. Agriculture, small-scale industries and exports did not receive the deserved attention. Therefore, inspired by a larger social purpose, 14 major banks were nationalised in 1969 and six more in 1980. Since then the banking system in India has played a pivotal role in the Indian economy, acting as an instrument of social and economic change. Post nationalisation, the Indian banking system registered tremendous growth in volume. Despite multi-fold gains of bank nationalization, it may be noted that the important financial institutions were all state owned and were subject to central control. Banks enjoyed little autonomy as both lending and deposit rates were controlled until the end of the 1980s. Though, nationalisation of banks helped in the spread of banking to the rural and uncovered areas, the monopoly granted to the public sector and lack of competition led to overall inefficiency and low productivity. To overcome this series of reforms have been introduced in the post-liberalisation era. Few of these reforms include: 1. Interest rates on deposits and lending have been deregulated and banks have been given greater freedom in choosing interest rates. 2. New private sector banks have been set up and foreign banks are allowed to expand in India. The limit for FDI in private banks has been increased from 49% to 74%. In addition, the limit for FII in private banks has been increased to 49%. 3. Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital. 4. Banks were given greater operational freedom in terms of opening and swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment. 5. Limits for investment in overseas markets by banks, mutual funds and corporates have been liberalised. The overseas investment limit for corporates has been raised to 100% of net worth and the ceiling of $100 million on prepayment of external commercial borrowings has been removed. Full convertibility for deposit schemes of NRIs introduced. 6. Universal Banking has been introduced: Banks are permitted to diversify into long-term finance and direct foreign investment is into working capital, guidelines have been put in place for the evolution of universal banks in an orderly fashion. 7. New areas have been opened up for bank financing: Insurance, credit cards, infrastructure financing, leasing, gold banking, besides of course investment banking, asset management, factoring, etc. 8. Technology infrastructure for the payments and settlement system in the country has been strengthened with electronic funds transfer, Centralised Funds Management System, Negotiated Dealing System and move towards Real Time Gross Settlement. 9. Adoption of global standards: Prudential norms for capital adequacy, asset classification, income recognition and provisioning are now close to global standards. RBI has introduced Risk Based Supervision of banks...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Indian Banking Industry Essay
  • Industry Trends in Indian Banking Essay
  • Banking Industry Analysis Essay
  • Indian Banking Sector Essay
  • Technology in Indian Banking Industry Essay
  • Essay about Introduction to Indian banking industry
  • Banking Industry Essay

Become a StudyMode Member

Sign Up - It's Free