Backdrop

India had a fairly well developed commercial banking system in existence at the time of independence in 1947. The Reserve Bank of India (RBI) was established in 1935. While RBI became a State-owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity. The first step towards the nationalisation of commercial banks was the result of a report (under the aegis of RBI) by the Committee of Direction of All India Rural Credit Survey (1951). The Committee recommended one strong integrated state-partnered commercial banking institution to stimulate banking development in general and rural credit in particular. Thus, the Imperial Bank of India was taken over by the government and renamed as the State Bank of India (SBI) on July 1, 1955, with RBI acquiring a substantial overriding holding of shares. A number of erstwhile banks owned by princely states were made subsidiaries of SBI in 1959. Thus, the beginning of the Plan era also saw the emergence of public ownership of one of the most prominent of the commercial banks. There was a feeling that though the Indian banking system had made considerable progress in the ‘50s’ and ‘60s’, it established close links between commercial and industry houses, resulting in cornering of bank credit by these segments to the exclusion of agriculture and small industries.

To meet these concerns, in 1969 Government of India had nationalised 14 major scheduled commercial banks which had deposits above a cut-off size. The objective was to serve better the needs of development of the economy in conformity with national priorities and objectives. In a somewhat repeat of the same experience, 11 years after nationalisation, the government announced the nationalisation of 6 more scheduled commercial banks above the cut-off size. Further, in 1991 the government has adopted liberalisation policies to suit the requirements of a liberalised economy. The banking sector reform became inevitable to accelerate the pace of reforms to usher in a vibrant and competitive economy. An expert Committee under the Chairmanship of M Narasimham was set up for spearheading the financial sector reforms in India. The Narasimham Committee (Committee on Financial Sector Reforms 1991) inter alia, recommended opening up of the banking sector to the private entrepreneurs to bring in competition and efficiency, thereby paving the way for licensing of new commercial banks in the private sector. Consequently, RBI has licensed ten banks in the private sector in 1993-94, and two more in 2003-04 under the guidelines framed in 1993 and 2001 respectively. Again, in 2014, two more banks, ten small finance banks (SFBs) and 11 Payment Banks allowed with the aim of promoting financial inclusion. Further, the Nachiket Mor committee recommended that it is not just more banks but banks with a differentiated licence are need of the hour.



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