Functions of the Reserve Bank of India

1. Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes
except one rupee notes which are issued by the Ministry of Finance.
Currency notes issued by the Reserve Bank are declared unlimited
legal tender throughout the country. This concentration of notes issue
function with the Reserve Bank has a number of advantages: (i) it
brings uniformity in notes issue; (ii) it makes possible effective state
supervision; (iii) it is easier to control and regulate credit in
accordance with the requirements in the economy; and (iv) it keeps
faith of the public in the paper currency.
2. Banker to Government:
As banker to the government the Reserve Bank manages the banking
needs of the government. It has to-maintain and operate the
governments deposit accounts. It collects receipts of funds and makes
payments on behalf of the government. It represents the Government
of India as the member of the IMF and the World Bank.
3. Custodian of Cash Reserves of Commercial Banks:
The commercial banks hold deposits in the Reserve Bank and the
latter has the custody of the cash reserves of the commercial banks.
4. Custodian of Countrys Foreign Currency Reserves:
The Reserve Bank has the custody of the countrys reserves of
international currency, and this enables the Reserve Bank to deal
with crisis connected with adverse balance of payments position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of
emergency to tide over financial difficulties, and the Reserve bank
comes to their rescue though it might charge a higher rate of interest.
6. Central Clearance and Accounts Settlement:
Since commercial banks have their surplus cash reserves deposited in
the Reserve Bank, it is easier to deal with each other and settle the
claim of each on the other through book keeping entries in the books
of the Reserve Bank. The clearing of accounts has now become an
essential function of the Reserve Bank.
7. Controller of Credit:
Since credit money forms the most important part of supply of
money, and since the supply of money has important implications for
economic stability, the importance of control of credit becomes
obvious. Credit is controlled by the Reserve Bank in accordance with
the economic priorities of the government.

Departments of the Reserve Bank of India

1. Banking Department:
The Banking Department is responsible for rendering the banks
services as a banker to the Government and to the banks.

It consists of four sub-divisions: (i) Public Accounts Department; (ii)

Public Debt Department; (iii) Deposit Accounts Department; and (iv)
Securities Department.
There are 14 branches of the Banking Department, each headed by a
Joint/Deputy Manager.

2. Issue Department:
The Issue Department is concerned with the proper and efficient
management of the note issue. For the conduct of monetary
transactions, the country has been divided into 14 circles of issue,
each having an Office of Issue the branch of the Issue Department.
Each branch of the Issue Department consists of: (i) the General
Department and (ii) the Cash Department controlled by the currency
officer. The General Department deals with resource operations, i.e.,
arrangement of supply of notes and coins from the presses and
Government Mints. The Cash Department deals with the cash
transactions.

3. Exchange Control Department:

The Exchange Control department is responsible for controlling
foreign exchange transactions and maintaining exchange rate
stability.

4. Department of Banking Operations and Development:

This Department was entrusted with the responsibility of the
supervision, control and development of the commercial bank system
in the country. Till July 1982, it was also concerned with the Lead
Bank Scheme and bank credit to the priority sectors.

5. Industrial Finance/Credit Department:

The Industrial Finance Department is basically concerned with the

administration of the Credit Guarantee Scheme for small scale
industries or as agent of the Government of India, with the
operational and organisational aspects of the State Financial
Corporations (SFCs), work connected with the Industrial
Development Bank of India (IDBI), data collection about financing of
small-scale industries and other relevant problems.

6. Department of Statistical Analysis and Computer

Services:
Its main function involves the generation, collection, processing and
compilation of statistical data relating to the banking and financial
sectors from the operational as well as research point of view.

7. Legal Department:
It tenders legal advice on various matters referred to it by the Bank.

8. Department of Administration and Personnel:

It looks after the general administration and personnel policy, such as
recruitment, training, placements, promotions, transfers, discipline,
appeals, service conditions, wage structure, etc.

9. Inspection Department:
It carries out internal inspections of the offices and departments of
the bank.

10. Secretarys Department:

It attends to the secretarial work connected with the meetings of the
Central Board and its committee and of the Administrators of the RBI
Employees Provident Fund and RBI Employees Co-operative
Guarantee Fund.

11. Department of Government and Bank Accounts:

This department is concerned with the maintenance and supervision
of the banks accounts
in the Issue and the Banking Departments and the compilation of
weekly statements of affairs and the Annual Profits & Loss Account
and Balance Sheet. It is headed by the Chief Accountant.

Instruments of Monetory Policy

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides short-term
(overnight) liquidity to banks against the collateral of government and other approved
securities under the liquidity adjustment facility (LAF). The LAF consists of
overnight and term repo auctions. Progressively, the Reserve Bank has increased the
proportion of liquidity injected in the LAF through term-repos (of up to 56 days) at
variable rates. The aim of term repo is to help develop inter-bank term money market,
which in turn can set market based benchmarks for pricing of loans and deposits, and
through that improve transmission of monetary policy.
Reverse Repo Rate: The (fixed) interest rate (currently 50 bps below the repo rate) at
which the Reserve Bank absorbs short-term liquidity, generally on an overnight basis,
from banks against the collateral of government and other approved securities under
the LAF. The Reserve Bank also conducts variable interest rate reverse repo auctions,
as necessary.
Marginal Standing Facility (MSF): A facility under which scheduled commercial
banks can borrow additional amount of overnight money from the Reserve Bank by
dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit (currently
two per cent of their net demand and time liabilities deposits) at a penal rate of
interest, currently 50 basis points above the repo rate. This provides a safety valve
against unanticipated liquidity shocks to the banking system. MSF rate and reverse
repo rate determine the corridor for the daily movement in the weighted average call
money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers. This rate has been aligned to the MSF rate
and, therefore, changes automatically as and when the MSF rate changes alongside
policy repo rate changes.
Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks
must maintain as cash balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that
banks must maintain in safe and liquid assets, such as, unencumbered government
securities, cash and gold. Changes in SLR often influence the availability of resources
in the banking system for lending to the private sector.
Open Market Operations (OMOs): These include both outright purchase/sale of
government securities for injection/absorption of durable liquidity, respectively.

Refinance facilities: Sector-specific refinance facilities aim at achieving sector

specific objectives through provision of liquidity at a cost linked to the policy repo
rate. The Reserve Bank has, however, been progressively de-emphasising sector
specific policies as they interfere with the transmission mechanism.
Market Stabilisation Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large
capital inflows is absorbed through sale of short-dated government securities and
treasury bills. The mobilised cash is held in a separate government account with the
Reserve Bank.
Direct regulation:
Cash Reserve Ratio (CRR): Commercial Banks are required to hold a
certain proportion of their deposits in the form of cash with RBI. CRR is the
minimum amount of cash that commercial banks have to keep with the RBI
at any given point in time. RBI uses CRR either to drain excess liquidity
from the economy or to release additional funds needed for the growth of
the economy.
For example, if the RBI reduces the CRR from 5% to 4%, it means that
commercial banks will now have to keep a lesser proportion of their total
deposits with the RBI making more money available for business. Similarly,
if RBI decides to increase the CRR, the amount available with the banks
goes down.
Statutory Liquidity Ratio (SLR): SLR is the amount that commercial
banks are required to maintain in the form of gold or government approved
securities before providing credit to the customers. SLR is stated in terms of
a percentage of total deposits available with a commercial bank and is
determined and maintained by the RBI in order to control the expansion of
bank credit. For example, currently, commercial banks have to keep gold or
government approved securities of a value equal to 23% of their total
deposits.
Indirect regulation:
Repo Rate: The rate at which the RBI is willing to lend to commercial banks
is called Repo Rate. Whenever commercial banks have any shortage of
funds they can borrow from the RBI, against securities. If the RBI increases
the Repo Rate, it makes borrowing expensive for commercial banks and
vice versa. As a tool to control inflation, RBI increases the Repo Rate,
making it more expensive for the banks to borrow from the RBI with a view
to restrict the availability of money. The RBI will do the exact opposite in a
deflationary environment when it wants to encourage growth.
Reverse Repo Rate: The rate at which the RBI is willing to borrow from the
commercial banks is called reverse repo rate. If the RBI increases the
reverse repo rate, it means that the RBI is willing to offer lucrative interest
rate to commercial banks to park their money with the RBI. This results in a

reduction in the amount of money available for the banks customers as

banks prefer to park their money with the RBI as it involves higher safety.
This naturally leads to a higher rate of interest which the banks will demand
from their customers for lending money to them.
The RBI issues annual and quarterly policy review statements to control the
availability and the supply of money in the economy. The Repo Rate has
traditionally been the key instrument of monetary policy used by the RBI
to fight inflation and to stimulate growth.

Policy Repo Rate

Reverse Repo Rate
Marginal Standing Facility Rate
Bank Rate
CRR
SLR

: 6.50%
: 6.00%
: 7.00%
: 7.00%
: 4%
: 21.00%

The Structure of Banking System in India

1. Reserve Bank of India:
Reserve Bank of India is the Central Bank of our country. It was
established on 1st April 1935 under the RBI Act of 1934. It holds the
apex position in the banking structure. RBI performs various
developmental and promotional functions.
It has given wide powers to supervise and control the banking
structure. It occupies the pivotal position in the monetary and
banking structure of the country. In many countries central bank is
known by different names.
For example, Federal Reserve Bank of U.S.A, Bank of England in U.K.
and Reserve Bank of India in India. Central bank is known as a
bankers bank. They have the authority to formulate and implement
monetary and credit policies. It is owned by the government of a
country and has the monopoly power of issuing notes.

2. Commercial Banks:
Commercial bank is an institution that accepts deposit, makes
business loans and offer related services to various like accepting
deposits and lending loans and advances to general customers and
business man.
These institutions run to make profit. They cater to the financial
requirements of industries and various sectors like agriculture, rural
development, etc. it is a profit making institution owned by
government or private of both.
Commercial bank includes public sector, private sector, foreign
banks and regional rural banks:
a. Public sector banks:
It includes SBI, seven (7) associate banks and nineteen (19)
nationalised banks. Altogether there are 27 public sector banks. The
public sector accounts for 90 percent of total banking business in
India and State Bank of India is the largest commercial bank in terms
of volume of all commercial banks.
b. Private sector banks:
Private sector banks are those whose equity is held by private
shareholders. For example, ICICI, HDFC etc. Private sector bank plays
a major role in the development of Indian banking industry.
c. Foreign Banks:

Foreign banks are those banks, which have their head offices abroad.
CITI bank, HSBC, Standard Chartered etc. are the examples of foreign
bank in India.
d. Regional Rural Bank (RRB):
These are state sponsored regional rural oriented banks. They
provide credit for agricultural and rural development. The main
objective of RRB is to develop rural economy. Their borrowers include
small and marginal farmers, agricultural labourers, artisans etc.
NABARD holds the apex position in the agricultural and rural
development.

3. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904.
They are organised and managed on the principal of co-operation and
mutual help. The main objective of co-operative bank is to provide
rural credit.
The cooperative banks in India play an important role even today in
rural co-operative financing. The enactment of Co-operative Credit
Societies Act, 1904, however, gave the real impetus to the movement.
The Cooperative Credit Societies Act, 1904 was amended in 1912, with
a view to broad basing it to enable organisation of non-credit
societies.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.

iii. Primary cooperative banks and the base or local level.

4. Scheduled and Non-Scheduled banks:

A bank is said to be a scheduled bank when it has a paid up capital
and reserves as per the prescription of RBI and included in the second
schedule of RBI Act 1934. Non-scheduled bank are those commercial
banks, which are not included in the second schedule of RBI Act 1934.

5. Development banks and other financial institutions:

A development bank is a financial institution, which provides a long
term funds to the industries for development purpose. This
organisation includes banks like IDBI, ICICI, IFCI etc. State level
institutions like SFCs SIDCs etc. It also includes investment
institutions like UTI, LIC, and GIC etc.

Structure of Organised Indian Banking System:

The organised banking system in India can be classified as given
below:

Reserve Bank of India (RBI):

The country had no central bank prior to the establishment of the
RBI. The RBI is the supreme monetary and banking authority in the
country and controls the banking system in India. It is called the
Reserve Bank as it keeps the reserves of all commercial banks.

Commercial Banks:
Commercial banks mobilise savings of general public and make them
available to large and small industrial and trading units mainly for
working capital requirements.
Commercial banks in India are largely Indian-public sector and
private sector with a few foreign banks. The public sector banks

account for more than 92 percent of the entire banking business in

Indiaoccupying a dominant position in the commercial banking.
The State Bank of India and its 7 associate banks along with another
19 banks are the public sector banks.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second
schedule of the RBI Act, 1934. These banks have a paid-up capital and
reserves of an aggregate value of not less than Rs. 5 lakhs, hey have to
satisfy the RBI that their affairs are carried out in the interest of their
depositors.
All commercial banks (Indian and foreign), regional rural banks, and
state cooperative banks are scheduled banks. Non- scheduled banks
are those which are not included in the second schedule of the RBI
Act, 1934. At present these are only three such banks in the country.

Regional Rural Banks:

The Regional Rural Banks (RRBs) the newest form of banks, came into
existence in the middle of 1970s (sponsored by individual
nationalised commercial banks) with the objective of developing
rural economy by providing credit and deposit facilities for
agriculture and other productive activities of al kinds in rural areas.
The emphasis is on providing such facilities to small and marginal
farmers, agricultural labourers, rural artisans and other small
entrepreneurs in rural areas.
Other special features of these banks are:

(i) their area of operation is limited to a specified region, comprising

one or more districts in any state; (ii) their lending rates cannot be
higher than the prevailing lending rates of cooperative credit societies
in any particular state; (iii) the paid-up capital of each rural bank is
Rs. 25 lakh, 50 percent of which has been contributed by the Central
Government, 15 percent by State Government and 35 percent by
sponsoring public sector commercial banks which are also
responsible for actual setting up of the RRBs.
These banks are helped by higher-level agencies: the sponsoring
banks lend them funds and advise and train their senior staff, the
NABARD (National Bank for Agriculture and Rural Development)
gives them short-term and medium, term loans: the RBI has kept CRR
(Cash Reserve Requirements) of them at 3% and SLR (Statutory
Liquidity Requirement) at 25% of their total net liabilities, whereas
for other commercial banks the required minimum ratios have been
varied over time.

Cooperative Banks:
Cooperative banks are so-called because they are organised under the
provisions of the Cooperative Credit Societies Act of the states. The
major beneficiary of the Cooperative Banking is the agricultural
sector in particular and the rural sector in general.
The cooperative credit institutions operating in the country are
mainly of two kinds: agricultural (dominant) and non-agricultural.
There are two separate cooperative agencies for the provision of
agricultural credit: one for short and medium-term credit, and the
other for long-term credit. The former has three tier and federal
structure.

At the apex is the State Co-operative Bank (SCB) (cooperation being a

state subject in India), at the intermediate (district) level are the
Central Cooperative Banks (CCBs) and at the village level are Primary
Agricultural Credit Societies (PACs).
Long-term agriculture credit is provided by the Land Development
Banks. The funds of the RBI meant for the agriculture sector actually
pass through SCBs and CCBs. Originally based in rural sector, the
cooperative credit movement has now spread to urban areas also and
there are many urban cooperative banks coming under SCBs

Structure of Banking Sector in

India
Indian Banks are classified into commercial banks and co-operative banks. Commercial
banks comprise: 1) schedule commercial banks (SCBs) and non-scheduled commercial
banks. SCBs are further classified into private, public, foreign banks and regional rural banks
(RRBs); and 2) co-operative banks which include urban and rural co-operative banks.
The Indian banking industry has its foundations in the 18th century, and has had a varied
evolutionary experience since then. The initial banks in India were primarily traders banks
engaged only in financing activities. Banking industry in the pre-independence era
developed with the Presidency Banks, which were transformed into the Imperial Bank of
India and subsequently into the State Bank of India. The initial days of the industry saw a
majority private ownership and a highly volatile work environment. Major strides towards
public ownership and accountability were made with Nationalisation in 1969 and 1980
which transformed the face of banking in India. The industry in recent times has recognised
the importance of private and foreign players in a competitive scenario and has moved
towards greater liberalisation.
Structure of Indian Banking System is as Follows:

In the evolution of this strategic industry spanning over two centuries, immense
developments have been made in terms of the regulations governing it, the ownership
structure, products and services offered and the technology deployed. The entire evolution
can be classified into four distinct phases.
1. Phase I- Pre-Nationalisation Phase (prior to 1955)
2. Phase II- Era of Nationalisation and Consolidation (1955-1990)
3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalisation (1990-2004)
4. Phase IV- Period of Increased Liberalisation (2004 onwards)
Organisational Structure
1. Reserve Bank of India:
Reserve Bank of India is the Central Bank of our country. It was established on 1 st April 1935
accordance with the provisions of the Reserve Bank of India Act, 1934. It holds the apex
position in the banking structure. RBI performs various developmental and promotional
functions.
It has given wide powers to supervise and control the banking structure. It occupies the
pivotal position in the monetary and banking structure of the country. In many countries
central bank is known by different names.
For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and Reserve Bank of
India in India. Central bank is known as a bankers bank. They have the authority to
formulate and implement monetary and credit policies. It is owned by the government of a
country and has the monopoly power of issuing notes.
2. Commercial Banks:

Commercial bank is an institution that accepts deposit, makes business loans and offer
related services to various like accepting deposits and lending loans and advances to
general customers and business man.
These institutions run to make profit. They cater to the financial requirements of industries
and various sectors like agriculture, rural development, etc. it is a profit making institution
owned by government or private of both.
Commercial bank includes public sector, private sector, foreign banks and regional
rural banks:
3. Public sector banks:
It includes SBI plus 5 associate banks and nineteen (21) Nationalised banks. Altogether there
are 27 public sector banks. The public sector accounts for 75 percent of total banking
business in India and State Bank of India is the largest commercial bank in terms of volume
of all commercial banks.

4. Private sector banks:

The private-sector banks in India represent part of the Indian banking sector that is
made up of both private and public sector banks. The "private-sector banks" are banks
where greater parts of stake or equity are held by the private shareholders and not by
government.
List of Private Sector Banks is:
Banks

Established

1. Axis Bank (earlier UTI Bank)

2. Bank of Punjab (actually an old generation
private bank since it was not founded under post1993 new bank licensing regime)
3. Centurion Bank Ltd. (Merged Bank of Punjab in
late 2005 to become Centurion Bank of Punjab,

1994

acquired by HDFC Bank Ltd. in 2008)

Development Credit Bank (Converted from Cooperative Bank, now DCB Bank Ltd.)
6. ICICI Bank (previously ICICI and then both
merged;total merger SCICI+ICICI+ICICI Bank Ltd)

1995

1996

7. IndusInd Bank

1994

8. Kotak Mahindra Bank

2003

9. Yes Bank

2005

12. Balaji Corporation Bank Limited

2010

13. HDFC bank

1994

14. Bandhan bank

2015

15. IDFC Bank

2015

5. Foreign Banks:
A foreign bank with the obligation of following the regulations of both its home and its host
countries. Loan limits for these banks are based on the capital of the parent bank, thus
allowing foreign banks to provide more loans than other subsidiary banks.
Foreign banks are those banks, which have their head offices abroad. CITI bank, HSBC,
Standard Chartered etc. are the examples of foreign bank in India. Currently India has 36
foreign banks.

6. Regional Rural Bank (RRB):

The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks
provide credit to the weaker sections of the rural areas, particularly the small and marginal
farmers, agricultural labourers, and small entrepreneurs. There are 82 RRBs in the country.
NABARD holds the apex position in the agricultural and rural development. List of some
RRBs is given below:

7. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904. They are organised and
managed on the principal of co-operation and mutual help. The main objective of cooperative bank is to provide rural credit.
The cooperative banks in India play an important role even today in rural co-operative
financing. The enactment of Co-operative Credit Societies Act, 1904, however, gave the real

impetus to the movement. The Cooperative Credit Societies Act, 1904 was amended in 1912,
with a view to broad basing it to enable organisation of non-credit societies.

Name of some co-operative banks India are:

1. Andhra Pradesh State Co-operative Bank Ltd
2. The Bihar State Co- operative Bank Ltd.
3. Chhatisgarh Rajya Sahakari Bank Maryadit
4. The Gujarat State Co-operative Bank Ltd.
5. Haryana Rajya Sahakari Bank Ltd.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
iii. Primary cooperative banks and the base or local level.
Scheduled and Non-Scheduled Banks:
The scheduled banks are those which are enshrined in the second schedule of the RBI Act,
1934. These banks have a paid-up capital and reserves of an aggregate value of not less
than Rs. 5 lakhs, they have to satisfy the RBI that their affairs are carried out in the interest
of their depositors.
All commercial banks (Indian and foreign), regional rural banks, and state cooperative banks
are scheduled banks. Non- scheduled banks are those which are not included in the second
schedule of the RBI Act, 1934. At present these are only three such banks in the country

Indian Banking System: 3 Phases of Indian

Banking System
Phases of Indian Banking System are summarized below:
Without a sound and effective banking system in India it cannot have
a healthy economy. The banking system of India should not only be
hassle free but it should be able to meet new challenges posed by the
technology and any other external and internal factors.
For the past three decades Indias banking system has several
outstanding achievements to its credit. The most striking is its
extensive reach; it is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached
even the remote comers of the country. This is one of the main
reasons of Indias growth process.
The governments regular policy for Indian bank since 1969 has paid
rich dividends with the nationalisation of 14 major private banks of
India.
Not long ago, an account holder had to wait for hours at the bank
counters for getting a draft or for withdrawing his own money. Today,
he has a choice, Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is
simple as instant messaging or dial a pizza. Money have become the
order of the day.
The first bank in India, though conservative, was established in 1786.
From 1786 till today, the journey of Indian Banking System can be
segregated into three distinct phases.

They are as mentioned below:

i. Early phase from 1786 to 1969 of Indian banks.
ii. Nationalisation of Indian Banks and up to 1991 prior to Indian
banking sector Reforms.
iii. New phase of Indian Banking System with the advent of Indian
Financial and Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as
Phase I, Phase II and Phase III.

Phase I:
The Genera; Bank of India was set up in the year 1786. Next came
Bank of Hindustan and Bengal Bank. The East India Company
established Bank of Bengal (1806), Bank of Bombay (1840) and Bank
of Madras (1843) as independent units and called them Presidency
Banks. These three banks were amalgamated m 1921 and imperial
Bank of India was established which started as private shareholders
banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with
headquarters at Lahore. Between 1885 and 1913, Bank of India
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1100 banks, mostly small. To streamline the

functioning and activities of commercial banks, the Government of

India came up with the Banking Companies Act, 1949 which was later
changed to Banking Regulation Act, 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive
power for the supervision of banking in India as the Central Banking
Authority.
During those days public has lesser confidence in the banks. As an
aftermath deposit mobilisation was slow. Abreast of it the savings
bank facility provided by the Postal department was comparatively
safer. Moreover, funds were largely given to traders.

Phase II:
Government took major steps in the Indian Banking Sector Reform
after independence. In 1955, it nationalised Imperial Bank of India
with extensive banking facilities on a large scale specially in rural and
semi urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and
State Governments all over the country.
Seven banks forming subsidiary of State Bank of India were
nationalised on 19th July 1959. In 1969, major process of
nationalisation was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi 14 major commercial banks in
the country was nationalised.
Second phase of nationalisation in Indian Banking Sector Reform was
carried out in 1980 with six more banks. This step brought 80% of the
banking segment in India under Government ownership.

The following are the steps taken by the Government of India to

Regulate Banking Institutions in the country.
i. 1949: Enactment of Banking Regulation Act.
ii. 1955: Nationalisation of State Bank of India.
iii. 1959: Nationalisation of SBI subsidiaries.
iv. 1961: Insurance cover extended to deposits.
v. 1969: Nationalisation of 14 major banks.
vi. 1971: Creation of credit guarantee corporation.
vii. 1975: Creation of regional rural banks.
viii. 1980: Nationalisation of 6 banks with deposits over 200 crore.
After the nationalisation the branches of the public sector banks in
India rose to approximately 800% and deposits and advances took a
huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public
implicit faith and immense confidence about the sustainability of
these institutions.

Phase III:
This phase has introduced many more products and facilities in the
banking sector in its reforms measure. In 1991, under the
chairmanship of M Narasimham, a committee was setup by his name
which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations.
Efforts are being made to give a satisfactory service to customers.
Phone banking and net banking is introduced. The entire system
became more convenient and swift. Time is given more importance
than money.
The financial system of India has shown a great deal of resilience. It is
sheltered from any crisis triggered by any external macro-economics
shock as other East Asian Countries suffered. This is all due to a
flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

First Phase: 1948 -1968

Banking before nationalization
After Independence
Plan Era
On the Eve of nationalization

Features of First Phase

Conversion of Imperial bank to SBI in 1955
Five year plans were started for economic development of nation in
1951
No banking for rural population

 IFCI was set up in 1948

Failure of Palai central bank in Kerela in 1960
Co Op Banking was started
Indian banks established overseas branches for foreign exchange
transactions
Lead bank system started
More emphasis on sectors like agriculture, exports, etc.

Second phase: 1969 -1991

nationalisation and after
Nationalization and After
Branch Expansion
Resource Mobilization
Credit Operations
Social banking
Problems and Consolidation

Features of Second Phase

Nationalization of 14 banks on 19th July 1969 which was having deposits
of 50cr and above
Nationalization of 6 banks on 15th April 1980 which was having deposits
of 200cr and above

 Rapid branch expansion

Priority sectors were agriculture and SSI
40% of total advances under priority sector

Third phase: 1992 -2002

regime of reforms

The Reform Process

Banking Reforms

Major Components of Reforms

1. Modifying the policy framework

2. Improving the financial soundness
3. Strengthening the institutional framework
4. Strengthening of supervisory mechanism

Narasimhan Committee : 1998

Reforms and Response

fourth phase: Beyond 2002 -2011 new challenges

New Dimension

HRD: Rigidities

Corporate Governance

Features of fourth phase

Asset liability mismatch

Development of relationship banking

HRD

Training to employees: Generalist / Specialist

Need for economic capital

Corporate Governance

New capital adequacy norms

Banking reforms

Financial Crisis