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During the pre-1951
phase, the organization of the financial system was immature, unorganized and
rudimentary, reflecting the under developed nature of the industrial economy of
the nation. It was not capable of sustaining a high level of capital formation
and accelerated pace for industrial development. Some important features of our
country’s financial system during pre 1951 phase:-

Control of Money Lenders Main

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Industry had limited access to outside saving/resources

concentration on Traditional Agriculture 

Narrow industrial securities market (i.e. Gold/Bullion/Metal but largely
linked to London Market)

No Laws / Total Private Sector

Absence of inter-mediatory institutions in long-term financing of

No Regulatory Bodies

Hardly any industrialization

Banks – Traditional lenders for Trade and that too short term


story of the post-independent (i.e., post-1947) Indian financial sector can
perhaps be portrayed in terms of three different phases

over the 1950s and 1960s exhibited some elements of instability associated with
laissez faire but underdeveloped banking;

covering the 1970s and 1980s began the process of financial development across
the country under government auspices but which was accompanied by a degree of
financial repression;

phase since the 1990s has been characterized by gradual and calibrated
financial deepening and liberalization.

Financial Sector: 1950-1990 -: From Laissez Faire to Government Control

The Reserve Bank of India (RBI) was
founded in 1935 under the Reserve Bank of India Act

regulate the issue of Bank Notes and to keep the reserves with a view to secure
monetary stability in India and generally to operate the credit and currency
system of the country to its advantage.”

At the time of independence in 1947,
India had 97 scheduled4 private banks, 557 “non-scheduled” (small) private
banks organized as joint stock companies, and 395 cooperative banks.

Thus, at the time of India’s independence,
the organized banking sector comprised three major types of players,

Imperial Bank of India


foreign owned exchange banks.

decade of 1950s and 1960s was characterized by limited access to finance of the
productive sector and a large number of banking failure. This led to the
government of left-leaning Prime Minister (and then Finance Minister) Mrs
Indira Gandhi to nationalize fourteen private sector banks on 20 July 1969; and
later six more commercial banks in 1980.

Thus, by the early 1980’s the Indian
banking sector was substantially nationalized, and exhibited high pre-emption
of banks’ investible resources  subject
to an intricate cobweb of administered interest rates, and accompanied by
quantitative ceilings on sectoral credit, as governed by the Reserve Bank of

Besides the commercial banks, there were
four other types of financial institutions in the Indian financial sector:

finance institutions (DFIs),


rural banks


Over the 1950s and 1960, in the absence
of effective capital markets, a network of DFIs was established over much of
the developing world, usually encouraged by external aid agencies such as RBI
and World Bank. But by the 1990s, with stoppage of refinance from the RBI and
government budgetary provisions, and accumulation of nonperforming assets, it
became clear that the DFIs would not be viable in the long run.

Consequently, the ICICI and IDBI have
been converted into commercial banks, and the IFCI is effectively
non-functional. . NABARD, NHB and SIDBI are continuing largely as refinance
institutions with support from the government.

As of 2015, there are 1,579 urban
co-operative and 94,178 rural cooperative banks. There has been dual control of
regulation and supervision of co-operative banks between the state-specific
Registrars of Cooperative Societies (RCSs) and the RBI, which has mostly  been problematical.

Regional Rural Banks (RRBs) were
established in 1975 as local level banks in different states of India. They are
co-owned by the Central and State Governments, and by sponsoring public sector
banks. There have been substantial mergers within this sector and the number of
RRBs has come down from 196 in 1990 to 56 in 2015.

The Post Office Savings Bank (POSB) has
a customer base of about 330 million account holders as on March 2015
(Government of India, 2016) thereby contributing significantly to financial
inclusion on the deposit side. The POSB offers only deposit and remittance
facilities but not any credit to account holders.

The Bombay Stock Exchange, the first
stock exchange in India, was founded in 1875. However, by modern standards, the
Indian equity market was still quite underdeveloped till about the late 1980s
under the control of Controller of Capital Issues (CCI) in the Finance

Insurance in India also has a long
history. The life insurance business was nationalized in 1956 giving birth to
the Life Insurance Corporation of India (LIC), which then had had a monopoly in
the insurance business till the late 1990s when the Insurance sector was opened
to the private sector. The general insurance business was nationalized in 1972 when
107 insurance companies were merged into just four government companies.

Thus, by the end of the 1980s, the
financial sector in India was virtually owned by the government with
nationalized banks and insurance companies and a single public sector mutual

in India since the 1990s: Towards Modern Competitive Banking  

The initial foundation of the banking
sector reforms in India was under the supervision of a Narasimham Committee
1991. The committee was primarily devoted in improving the   operational freedom in the commercial
banking sector and recommended measures like reduction of pre-emption of banks
investible resources and gradual elimination of the inbuilt interest rate
structure via a reduction of cash reserve ratio (CRR) and statutory liquidity
ratio (SLR). Narasimham Committee 1998 recommended further measures for
modernising the banking sector through better regulation and supervision, and
introduction of prudential norms.

Illustratively, gradual reduction of CRR
from 15 percent to about 4 percent, and reduction in the SLR  from nearly 40 percent to 21.5 percent
between the early 1990s and the mid-2010s have made a huge improvement to the
availability of lendable resources to the banking sector.

A bunch of new private sector commercial
banks were licensed in the mid-1990s, the first time since bank
nationalisation, in order to introduce competition, enhance efficiency and
induce innovation in the banking sector.

In the recent past a number of measures
have been taken to  inculcate a credit
culture through enforcement of creditors’ rights, and hastening the process of
credit recovery.  The Securitization and
Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act was passed in 2002, enabling the setting up of debt-recovery
tribunals and asset-reconstruction companies

Credit Information Bureaus have been
given legal status through passing of the Credit Information Bureau Act in
2005, but these agencies are still in their beginning stage.

Most recently, the Bankruptcy Act was
passed by the Indian parliament in May 2016.

Technology has enabled cost effective
and real-time delivery of financial services, through the establishment of a
modern payments system. Setting up of the Indian Financial Network (INFINET) as
the communication backbone for the financial sector, introduction of a Real
Time Gross Settlement System (RTGS) and core banking solutions across banks
encompassing most of their branches across India, are some of the major
technological initiatives implemented in the recent years.

Establishment of the Institute for
Development and Research in Banking Technology (IDRBT) by the Reserve Bank in
1996 has helped greatly in promoting connectivity among all the banks through
development of common IT standards throughout the system.

Select Outcomes: Over the past
years there has been a increase in the extent of financialization of the Indian
economy. This was evident in upward trend of aggregate deposit and credit as a
percentage of GDP. Post 1990s, all the reforms of financial sector  led to the emergence of a modern banking
sector in India and resulted in improvement in many of the profitability,
efficiency and stability indicators of commercial banking in India.

The new private sector banks, along with
the housing finance company HDFC, started in the era of retail lending and
housing finance in India, starting in the late 1990s.

This change helped greatly in increasing
the demand for automobiles, two wheelers and other consumer durables, and promoted
overall economic growth in the country, while also helping in diversifying the
asset base of banks.

While improved capitalisation of public
sector banks was initially brought through infusion of funds by government to
recapitalise these banks, subsequently, public sector banks were allowed to
raise funds from the market through equity issuance subject to the maintenance
of 51 % public ownership. Consequently, the share of public sector banks
continued to decline gradually in banking business and a private sector bank
emerged as the second largest bank in India over the last ten years or so. In
terms of adoption of technology, the share of electronic payments has been
continuously increasing.

Money Market: With a ceiling on the over-night
interbank money market is a key component of the banking sector and monetary
policy in India. RBI’s policy rate is effectively the repo rate now, which acts
as the anchor of the money market through operation of its liquidity adjustment
facility (LAF). Since years, the money market has become diverse and deep with
emergence of several segments like Collateralized borrowing and lending
obligations (CBLO); it experienced significant increasing trends in the level
of activity in its many segments.

An important institutional reform was
the foundation of the Clearing Corporation of India Limited (CCIL) as a central
counterparty to provide clearing and guaranteed settlement functions for
transactions in money, G-Secs, foreign exchange and derivative markets. The
Clearing Corporation of India Limited also provides nonguaranteed settlement
for cross currency transactions and Rupee interest rate derivatives through the
CLS Bank. This led to significant development in the market efficiency,
transparency, liquidity and risk management/measurement practices in these
markets along with added benefits like reduced settlement and operational risk,
savings on settlement costs.

Furthermore, two new innovative
instruments, like collateralized borrowing and lending obligations (CBLO; a tripartite
repo between any two financial entities along with CCIL) and market repo were
introduced for deepening the money market. These instruments provided pathway
for non-banks to manage their short-term liquidity mismatches and facilitated
the transformation of the call money market into a pure inter-bank market.
Furthermore, issuance of norms of instruments such as commercial paper (CP) and
certificate of deposits (CDs) have been modified over time to encourage

Financial inclusion has been a concern
in India since the early part of the last century. The setting up of bank rural
and urban co-operative banks, postal savings, the nationalisation of banks and
setting of regional rural banks were all done at different points in time to
promote financial inclusion. In-spite all the decades of social sector banking
and success in spreading the banking network, there has been evidence that
poorer sections of the society have not been able to access financial services
adequately from the organized financial system.

India’s approach to
financial inclusion has been multi-pronged. One of its corner-stones is the
presence of stipulations on “priority sector lending” by the commercial banks.

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