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3PhasesofIndianBankingSystem

3PhasesofIndianBankingSystem
BySmritiChand
PhasesofIndianBankingSystemaresummarizedbelow:
WithoutasoundandeffectivebankingsysteminIndiaitcannothaveahealthyeconomy.Thebanking
systemofIndiashouldnotonlybehasslefreebutitshouldbeabletomeetnewchallengesposedbythe
technologyandanyotherexternalandinternalfactors.
ForthepastthreedecadesIndiasbankingsystemhasseveraloutstandingachievementstoitscredit.The
moststrikingisitsextensivereachitisnolongerconfinedtoonlymetropolitansorcosmopolitansinIndia.In
fact,Indianbankingsystemhasreachedeventheremotecomersofthecountry.Thisisoneofthemain
reasonsofIndiasgrowthprocess.
ThegovernmentsregularpolicyforIndianbanksince1969haspaidrichdividendswiththenationalisation
of14majorprivatebanksofIndia.
Notlongago,anaccountholderhadtowaitforhoursatthebankcountersforgettingadraftorfor
withdrawinghisownmoney.Today,hehasachoice,Gonearedayswhenthemostefficientbank
transferredmoneyfromonebranchtootherintwodays.Nowitissimpleasinstantmessagingordiala
pizza.Moneyhavebecometheorderoftheday.
ThefirstbankinIndia,thoughconservative,wasestablishedin1786.From1786tilltoday,thejourneyof
IndianBankingSystemcanbesegregatedintothreedistinctphases.
Theyareasmentionedbelow:
i.Earlyphasefrom1786to1969ofIndianbanks.
ii.NationalisationofIndianBanksandupto1991priortoIndianbankingsectorReforms.
iii.NewphaseofIndianBankingSystemwiththeadventofIndianFinancialandBankingSectorReforms
after1991.
Tomakethiswriteupmoreexplanatory,IprefixthescenarioasPhaseI,PhaseIIandPhaseIII.
PhaseI:
TheGeneraBankofIndiawassetupintheyear1786.NextcameBankofHindustanandBengalBank.
TheEastIndiaCompanyestablishedBankofBengal(1806),BankofBombay(1840)andBankofMadras
(1843)asindependentunitsandcalledthemPresidencyBanks.Thesethreebankswereamalgamatedm
1921andimperialBankofIndiawasestablishedwhichstartedasprivateshareholdersbanks,mostly
Europeansshareholders.
In1865AllahabadBankwasestablishedandfirsttimeexclusivelybyIndians,PunjabNationalBankLtd.was
setupin1894withheadquartersatLahore.Between1885and1913,BankofIndiaCentralBankofIndia,
BankofBaroda,CanaraBank,IndianBank,andBankofMysoreweresetupReserveBankofIndiacamein
1935.

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3PhasesofIndianBankingSystem

Duringthefirstphasethegrowthwasveryslowandbanksalsoexperiencedperiodicfailuresbetween1913
and1948.Therewereapproximately1100banks,mostlysmall.Tostreamlinethefunctioningandactivities
ofcommercialbanks,theGovernmentofIndiacameupwiththeBankingCompaniesAct,1949whichwas
laterchangedtoBankingRegulationAct,1949asperamendingActof1965(ActNo.23of1965).Reserve
BankofIndiawasvestedwithextensivepowerforthesupervisionofbankinginIndiaastheCentralBanking
Authority.
Duringthosedayspublichaslesserconfidenceinthebanks.Asanaftermathdepositmobilisationwasslow.
AbreastofitthesavingsbankfacilityprovidedbythePostaldepartmentwascomparativelysafer.Moreover,
fundswerelargelygiventotraders.
PhaseII:
GovernmenttookmajorstepsintheIndianBankingSectorReformafterindependence.In1955,it
nationalisedImperialBankofIndiawithextensivebankingfacilitiesonalargescalespeciallyinruraland
semiurbanareas.ItformedStateBankofIndiatoactastheprincipalagentofRBIandtohandlebanking
transactionsoftheUnionandStateGovernmentsalloverthecountry.
SevenbanksformingsubsidiaryofStateBankofIndiawerenationalisedon19thJuly1959.In1969,major
processofnationalisationwascarriedout.ItwastheeffortofthethenPrimeMinisterofIndia,Mrs.Indira
Gandhi14majorcommercialbanksinthecountrywasnationalised.
SecondphaseofnationalisationinIndianBankingSectorReformwascarriedoutin1980withsixmore
banks.Thisstepbrought80%ofthebankingsegmentinIndiaunderGovernmentownership.
ThefollowingarethestepstakenbytheGovernmentofIndiatoRegulateBankingInstitutionsinthecountry.
i.1949:EnactmentofBankingRegulationAct.
ii.1955:NationalisationofStateBankofIndia.
iii.1959:NationalisationofSBIsubsidiaries.
iv.1961:Insurancecoverextendedtodeposits.
v.1969:Nationalisationof14majorbanks.
vi.1971:Creationofcreditguaranteecorporation.
vii.1975:Creationofregionalruralbanks.
viii.1980:Nationalisationof6bankswithdepositsover200crore.
AfterthenationalisationthebranchesofthepublicsectorbanksinIndiarosetoapproximately800%and
depositsandadvancestookahugejumpby11,000%.
BankinginthesunshineofGovernmentownershipgavethepublicimplicitfaithandimmenseconfidence
aboutthesustainabilityoftheseinstitutions.
PhaseIII:

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Thisphasehasintroducedmanymoreproductsandfacilitiesinthebankingsectorinitsreformsmeasure.
In1991,underthechairmanshipofMNarasimham,acommitteewassetupbyhisnamewhichworkedfor
theliberalisationofbankingpractices.
ThecountryisfloodedwithforeignbanksandtheirATMstations.Effortsarebeingmadetogivea
satisfactoryservicetocustomers.Phonebankingandnetbankingisintroduced.Theentiresystembecame
moreconvenientandswift.Timeisgivenmoreimportancethanmoney.
ThefinancialsystemofIndiahasshownagreatdealofresilience.Itisshelteredfromanycrisistriggeredby
anyexternalmacroeconomicsshockasotherEastAsianCountriessuffered.Thisisallduetoaflexible
exchangerateregime,theforeignreservesarehigh,thecapitalaccountisnotyetfullyconvertible,and
banksandtheircustomershavelimitedforeignexchangeexposure.
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