Banking Sector in India

Banking Sector in India

Immediately after Independence, the government of India initiated measures to play an active role in the economic life of the nation. In pursuance of this policy, government adopted Industrial Policy Resolution in 1948 in which it envisaged a mixed economy. From now onwards, government decided to play an active role in different segments of an economy including banking and finance.

The Government of India, in a major step nationalized Reserve Bank of India in in 1948. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India.

Government in order to have firm grip over this sector nationalized the private banks first in 1969 and later in 1980. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

In the early 1990s the then Narsimha Rao government embarking on a policy of liberalisation, gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as Global Trust Bank, UTI Bank, (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This almost kickstarted the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

FDI in Banking Sector
The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions.

Present Situation
In the present situation, banking in India has attained fair amount of maturity in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.
Since Indian economy is witnessing strong growth the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Banking Structure in India
The commercial banking structure in India comprises :
Scheduled Commercial Banks and Unscheduled Banks. The banks which are included in the second schedule of Reserve Bank of India(RBI) Act, 1934 is called scheduled bank. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
For assessing the performance of the bank, the Reserve Bank of India categorise the bank as public sector banks, old private sector banks, new private sector banks and foreign banks