Indian Financial System is a key tool which supports the overall economic development of our country. It is the one which facilitates the smooth flow of funds between the households (savers) and businessmen (investors). The financial system of the country is one which promotes capital formation by channelizing the ideal lying resources into useful means.
This system acts as an intermediary between the savers and investors. The financial system has three major functions that are providing payment mechanism, depositing and safeguarding people’s savings and providing loans to individuals.
This system comprises of 4 major components:
- Financial Institutions
- Financial Services
- Financial Assets
- Financial Markets.
Evolution of Indian Financial System
History of Indian financial system dates back even before the period when India got independence in the Year 1947. Evolution of Indian Financial system can be classified into 3 phases: –
- Pre Independence Phase (Before 1947).
- Post-Independence Phase (1947-1991).
- The Liberalization era (1991 and beyond).
Pre- Independence Phase
During this phase, there was a large number of banks present in India which was around 600. Establishment of Bank of Hindustan in the year 1770 in Calcutta marks the starting of the Indian financial system. The bank discontinued its services in 1832. There were various banks that evolved post to Hindustan banks such as General Bank of India (1786-1791) and Oudh commercial bank (1881-1958). However, these banks were not able to continue for a long.
Few banks of the 19th century are existing even today such as Punjab National bank formed in 1894 and Allahabad bank formed in 1865. Three major banks of that time like Bank of Bengal, Bank of Madras and Bank of Bombay were merged as one body which was termed as Imperial Bank of India. This Imperial bank was later on renamed to State Bank of India.
During this phase, The Bombay Stock Exchange(BSE) also established in 1875 it is Asia’s first stock exchange. The BSE has helped develop India’s capital markets, including the retail debt market, and has helped grow the Indian corporate sector.
Hilton Young Commission in year 1935 recommended the establishment of Reserve bank of India.
This was a phase in which majority of small-sized banks failed to function properly and were unable to gain people’s confidence. People were more involved with money lenders and unregulated players.
Post-independence period is characterized by the nationalization of banks. Majority of banks in India were privately owned at the time of independence and were serving only the big corporates. Rural population, small-scale industries and agriculture sector were still dependent on local money lenders. The government in order to overcome this situation decided to nationalize the banks under the Banking regulation act, 1949. RBI was nationalized in 1949 and later on, 14 commercial banks were nationalized in July 1969 during the tenure of Indira Gandhi.
Narasimham committee in 1975 recommended the establishment of RRBs (Regional Rural Banks) for development of rural sector and providing services to unserved ones.
There were several other specialized banks which were constituted during this period to support the development of the economy. These were like NABARB in 1982 for supporting agricultural-related activities, National housing bank in 1988 for the Housing sector, SIDBI in 1990 for assisting small-scale firms.
Nationalization was a remarkable step in the banking industry of industry which boost the country growth. It was successful in gaining people’s confidence in banking services and also smaller group were easily able to access capital from financial institutions post nationalization.
The Liberalization Era
This was a phase which saw remarkable changes in the banking industry. Government of India for regulating the activities and stabilizing the profits of the banking industry set up a committee under the chairmanship of Shri M. Narasimham for bringing various reforms.
During this period, government opened up the economy the granted private player’s entry to banking industry. RBI granted license to 10 private sector banks out of which only few notables survived like Axis Bank, HDFC Bank, DCB, ICICI and IndusInd Bank. In 1992 National Stock Exchange Established to provide fully automated electronic trading.
Narasimham committee again in 1998 recommended the entry of more private entities in banking industry. Therefore, license was provided to Kotak Mahindra in 2001 and Yes Bank in 2004 by RBI. Further in 2013-2014, a license was granted to Bandhan and IDFC bank.
There are several other measures also that were taken during this phase which were allowing the establishment of foreign banks in India, equal treatment of both public and private sector bank by government and RBI, allowing joint ventures of foreign banks with Indian banks, the introduction of Payments banks, setting up small finance banks and disallowing any further nationalization of banks.
History of Indian financial system shows that there were many revolutions brought over the years as per the changing scenario and needs of peoples. Major reforms were brought in this system with the aim of prospering it.