Not a single doubt about the fact that banks are literally a super essential part of the economy. It is not just us common people, they also help businesses and companies manage their money as well as give out loans and keep the overall financial system running in the country so that the economy never collapses. But have you ever stopped to think like how it all started, like, how the banking system started in India, and who actually introduced it and when exactly? Well, it appears that you’re a curious mind and you want to dig a little deeper into this topic, and that is precisely why we have come up with a post where we’ll talk about the Banking system in India by going a bit in-depth. Like, covering things like its history, types, structure, functions and much more. So, here we go then.
History of Banking in India
Alright, before anything else, it would be a great idea to just start with the history of it all, like how or when it all began and why. So, here:
See, if we talk about the very early stage of the banking system, well that was literally in the ancient times when there used to be some people called the Jagat Seths, who used to lend money to the people, and all of this is actually mentioned in ancient Indian texts like Vedas and all.
But then came the actual or traditional way of banking, which was in the Colonial and Pre-Independence periods of the country. To be specific, it was actually The Bank of Hindustan that was the first-ever bank in India, established way back in 1770. Though, you won’t see it now because it was closed in 1832. Between this period, we saw the rise of another big bank which was known by the name of Bank of Calcutta, set up back in 1806, and then turned into Imperial Bank of India back in 1921, yes, more than a century later. Another interesting fact about this one is that this bank still exists, but by the name of State Bank Of India, and this change happened back in 1955.
But when did RBI (Reserve Bank Of India) come into the picture? Oh, that was back in 1935, and the sole goal of this bank was to control the overall banking scene in the country.
Structure of the Banking System in India (Aka Types Of Banks)
See, if we talk about the overall structure, then all the banks in India can be divided into 6 different types. Here:
1. The Reserve Bank of India (RBI) (The Central Bank)
Sure enough, it had to be on the very top because it is literally the central bank in India that controls all the other banks. Just to give you perspective on things, this is the bank that controls the supply of money, controls the interest rates and makes rules for other banks to follow right here in India.
2. Scheduled and Non-Scheduled Banks
These are the banks that come under the Second Schedule of the RBI Act of 1934, which function more like a regular bank but under very specific rules. Then there are Non-Scheduled Banks, which aren’t listed under the RBI Act, and the thing with these is that they do not get loans from RBI so easily.
3. Commercial Banks
Here come the most common types of banks in India, which we know as commercial banks. Like, all the major banks that you know today (such as SBI, PNB, Bank of Baroda, HDFC Bank, ICICI Bank, Axis, Kotak, etc) are commercial banks. No matter private, public, foreign, or even Regional Rural Banks, all come under this category.
4. Cooperative Banks
What are these then? Oh, well, these aren’t full-fledged banks, but they’re kinda operated by their members instead of the shareholders. They offer basic banking services, just know that.
5. Development Banks and Non-Banking Financial Companies (NBFCs)
See, if there is some huge project in India that needs some funding like the roads, bridges, and industries projects, then there are Development Banks to help out with those. And then there are NBFCs that are there to offer basic banking services but do not have a full banking license.
6. Specialized Banks
Specialized? Oh yes, then there are some special categories of banks that are kinda new ones like Payment Banks and Small Finance Banks.
Functions of the Indian Banking System
Well, you have to be a little more focused on this one because it is a little complex, so just stay with us for a moment. Here:
1. Core Banking Functions
Let’s first talk about the most basic and core banking functions, shall we?
- Accepting Deposits: Of course, any bank out there can accept money deposits, and they keep the money safe and also offer interest on the deposited amount. For this, there are common account types like Savings Accounts, Current Accounts, and Fixed Deposits.
- Providing Loans and Advances: This is another common reason why banks exist, you know, they give out loans to people and businesses. And sure enough, there are many different types of loan options.
- Payment and Settlement Services: Do you know anything about online payment systems like UPI, NEFT, RTGS, and IMPS? Oh, that is another major function that has become super important these days.
- Foreign Exchange and Trade Services: It is not just the money circulating in the Indian economy itself, banks also help with sending and receiving foreign currency.
2. Economic and Developmental Functions
Other than just basic stuff, there are economic as well as developmental functions of the banking systems that exist for very specific reasons. Like:
- Financial Inclusion: The name pretty much gives it off, and sure enough, there are schemes like Jan Dhan Yojana that come under this segment. On top of that, you can include mobile banking as well as microfinance in this one too.
- Support for Businesses and Farmers: We already talked about loans, and yes, banks provide loans to Micro, Small, and Medium Enterprises (MSMEs).
- Infrastructure and Industrial Financing: When it comes to funding projects like highways, railways, and power plants, banking has a very specific role in that too. Even in industrial financing.
3. Digital Banking and Financial Innovation
Under this one, there come the newer things like:
- Online and Mobile Banking
- Fintech and AI in Banking
- Rise of Neo-Banks
