Overview of the Indian Banking Sector

Topics: Bank, Central bank, Foreign exchange market Pages: 12 (3337 words) Published: February 17, 2013


Chan Yuen On Alice | 2010070314

1 2 3 Introduction History Mundell’s Holy Trinity 3.1 3.2 3.3 4 5 Floating Exchange Rate Free Capital Flow Limited Independence of Monetary Policy 3 3 4 4 4 4 4 5 5 5 6

Distinctive Characteristics Financial Structure 5.1 Central bank — Reserve Bank of India (RBI) 5.1.1 Background 5.1.2 Function and Roles 5.2 Commercial Banks 5.2.1 5.2.2 5.2.3 5.3 Public Sector Banks Private Banks Foreign Banks

6 6 6 7 7 7 7 7 8 8 8 9 9 9 9 9 10 10 10 10 10 10 11 12 2

Co-operative Banks 5.3.1 Short-term Credit Co-operatives Primary Agricultural Credit Societies (PACS) Central Co-operative Banks (CCBs) State Co-operative Banks (SCBs) 5.3.2 Long-term Credit Co-operatives

5.4 5.5 5.6

Regional Rural Banks (RRBs) Development Banks Financial institutions 5.6.1 All-India Financial Institutions (AIFIs) Development Finance Institutions (DFI) Specialized Banks 5.6.2 State Financial Corporations (SFCs) 5.6.3 State Industrial Development Corporations (SIDCs)


Regulatory Bodies 6.1 6.2 6.3 Reserve Bank of India (RBI) Indian Banks’ Association (IBA) Ministry of Finance (MoF)

7 8 9

Conclusion References Appendix

1 Introduction
According to the International Monetary Fund, as of 2011, the Indian economy is the ninth-largest economy by market exchange rates. Behind the mysteriously rapid growth of this newly industrialized country, few know that its banking system, tracing back to the last decades of the 18 century, started off to be unprosperous, though later enhanced. This paper provides an overview of the banking sector in India, including its various categories of financial institutions and their respective functions. th

2 History
The earliest banks in the banking history were The General Bank of India, started in 1786, and the Bank of Hindustan, started in 1790 (IBO), both of which no longer exist today. The oldest bank in existence in India is the State Bank of India. Together with The Bank of Bombay and the Bank of Madaras, they were the three Presidency banks established under charters from the British East India Company. For many years, these Presidency banks acted as India’s quasi-central banks.

In 1848-49, there was an economic crisis in India, leading to the failure of many banks. Coupled with the outbreak of the American civil war, bank failures prevailed; depositors lost money in keeping deposits in the bank; it was a dark era of the Indian banking history. As Lord Curzon, the then Viceroy of India puts it, “In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments.”

Around the turn of the 20th Century, the Indian economy brightened up and entered into a relative period of stability. As a result of the Swadeshi movement, many more banks were established. A number of banks which have survived to the present include the Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. Many private Indian banks were later established in the Dakshina Kannada and Udupi district, making the district known as the “Cradle of Indian Banking”.

In 1935, the Reserve Bank of India formally took over the responsibilities from the then Imperial Bank of India (the three Presidency banks). After India’s independence in 1947, the Reserve Bank was nationalized and given more extensive powers, making it the central bank of India.


3 Mundell’s Holy Trinity
3.1 Floating Exchange Rate
The Indian Rupee (INR or ) is the official currency of India. From 1950 to mid-December 1973, India followed an exchange rate regime with the Rupee linked to the Pound Sterling. In 1975, the Rupee's broke its ties with the Pound Sterling and established a floating exchange regime, with the Rupee's effective rate being linked to a basket of...
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