Source- Courting The Law
The foundation of Indian banking sector can be traced back to the 18th century, and has vastly developed since then. The initial banks in India comprised of traders’ banks that indulged only in financing activities. Banking industry during the pre-independence timeevolved with the Presidency Banks, which then transformed into the Imperial Bank of India and eventually into the State Bank of India.In the initial years of the industry, there existed a highly volatile work environmentand banks were majorlyowned by private individuals. It was only after the Nationalisation in 1969 and 1980 which transformed the face of banking in India and public sector banks were set up.The importance of private and foreign players has recently been recognised in a competitive scenario which has pushed the industry to move towards greater liberalisation.
Structure of banking sector in India
Reserve bank of India-
RBI is the Central Bank of India. It is owned by the government of our country and is also known as the banker’s bank. It was established under the Reserve Bank of India Act, 1934on 1st April 1935. It holds the top position in the banking structure and is responsible for various developmental and promotional functions.It has wide range of powers to supervise and control the banking structure of India. It plays a pivotal roleto formulate and implement monetary and credit policies in India and has the monopoly power to issue coins and currency notes.
Commercial Banks-
Commercial bank are institutions that accept deposits, lending loans and advances to general public and offer other allied services to its customers.The sole purpose of these institutions is to profit making. They are owned by government or private of both and cater to the financial needs of industries and various sectors like agriculture, rural development, etc.
Commercial bank includes public sector, private sector, foreign banks and regional rural banks:
Public Sector Banks: The public sector contributes to 75 % of total banking business in India. There are 21 Nationalised banks in India, State Bank of India being the largest commercial bank in terms of volume of all commercial banks.
Private Sector Banks: The private-sector banks are institutions where greater partsi.e. 51% of stake or equity are held by the private shareholders and not by government.
Foreign Banks:A foreign bank established on Indian land have their head offices abroad.They are obligatedto follow the regulations of their home country as well astheir host country. Loan limits for these banks are based on the capital of the parent bank, which allows these foreign banks to give more loans than other subsidiary banks.These banks are CITI bank, HSBC, and Standard Chartered etc. India has 36 foreign banks at present.
Regional Rural Bank (RRB):The government of India initiated with theRRBs in October, 1975 to provide credit to the weaker sections of the rural areas, particularly to the small and marginal farmers, agricultural labourers, and small entrepreneurs. There are 82 RRBs in the country NABARD being the apex institution in the agricultural and rural development sector.
Co-operative Banks
Co-operative banks ware set up underCo-operative Act in 1904 with the main objective of providing rural credit to the members of the society. They are organised and managed on the principal of co-operation and mutual help and play a vital role today in rural co-operative financing.The Cooperative Credit Societies Act, 1904 was amended in 1912, with the aim to enable organisation of non-credit societies.
Scheduled and Non-Scheduled Banks
The scheduled banks are those which are mentioned in the second schedule of the RBI Act, 1934. These banks have a paid-up capital and reserves of value of not less than Rs. 5 lakhs, and have to satisfy RBI about their affairs which are carried out in the interest of their depositors.All commercial banks; Indian and foreign, regional rural banks, and state cooperative banks are listed as scheduled banks.
Regulatory Bodies: paradigm in regulation of financial markets
The Indian financial system is regulated by five major regulatory bodies:
RBI - the apex monetary institution:
RBI was Established in April, 1935 in Calcutta, and later shifted to Mumbai in 1937 which after its nationalization in 1949, is owned by the Government of India. It has 19 regional offices and 9 sub-offices. It is the sole official issuer of the Indian coin and currency notes. RBI is responsible to regulatethe banking and financial system of the country by issuing guidelines and instructions to all the commercial banks and financing institutions throughout India.
Role of RBI
Controlling money supply
Monitoring indicators like GDP and inflation
Maintaining people’s confidence in the banking and financial system by providing tools such as ‘Ombudsman’
Formulating monetary policies such as inflation control, bank credit and interest rate control
SEBI- the regulator for the securities market:
Securities Exchange Board of India (SEBI) was established in 1988 and was legally recognised in 1992 as asupervising authority to regulate the functions of securities market to preventany malpractices and protect the interests of the investors. Its Headquarters are situatedat Mumbai, with its regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.
Role of SEBI
Protecting the interests of investors by providing them with adequate education and guidance
Regulating and controlling the business of stock exchanges and other security markets
Preventing capital market frauds
Supervising the performance and auditing the work of stock market
Insurance Regulatory and Development Authority of India (IRDAI)
IRDAI was established in 1999 through an act passed by the Parliament of India. It is an autonomous statutory body set up for regulating and development of the insurance sector in India. It is headquartered in Hyderabad and is responsible for promoting insurance business in India.
Forward Market Commission of India (FMC)
Forward Market Commission of India is a statutory body, established in Mumbai under the Forward Contracts (Regulation) Act, 1952. It is a regulatory authority governed by the Ministry of Finance. The commission allows commodity trading in 22 exchanges in India and is now merged with SEBI.
Pension Fund Regulatory and Development Authority (PFRDA)
PFRDA was established in October 2003 by the Government of India with an aim to provide retirement income to all the citizens. It is responsible for the developmentof the pension sector in India. The National Pension System (NPS) was launched in January 2004 with theobjective to bring pension reforms and instil the habit of saving for retirement amongst the government employees.
Key Banking Regulations
The principal governmental and regulatory policies that govern the banking sector areregulated by the Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation Act 1949 (BR Act). The Reserve Bank of India (RBI), India’s Apex banking institution, issues various guidelines, notifications and policies regularly to regulate the banking and finance industry. In addition to this, the Foreign Exchange Management Act 1999 (FEMA) regulates inter-country exchange transactions by Indian entities, including banks.
The key statutes and regulations that rule the banking sector and scheduled commercial banks in India are as follows: