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Banking in India : development and structure. Upal, Swarn Singh


In spite of the fact that Indian civilization was at the height of its glory when Western civilization had not yet seen the light of day, and India was once far more advanced industrially than any one of the present industrialized nations, the Country until very recently had long been the forgotten Nation of the East because her affairs were controlled for some two hundred years by a foreign colonial power. It' was only as recently as 1947 that India finally got her independence and the national Government was able to take steps to improve the economic condition of its people. This was to be accomplished through a broad developmental program, consisting of a succession of Five Year plans. In this herculean undertaking the Country's banking system has played and continues to play a leading role. It provides the Country's currency, finances its current output and mobilizes in one form or another the savings so desperately needed for the industrial expansion program now underway in India. In view of its importance in the expanding Indian economy the author undertook, as a thesis, the task of setting forth both historically and analytically the structure and development of the Indian banking system. The System itself consists of two large non-competing, though not completely dis-associated, parts usually referred to as the "organized" and "unorganized" sectors of the Indian money market. The link between the two sectors is so weak and tenuous that changes in one are seldom reflected in the other. The unorganized sector consists of a large number of Indigenous bankers and money lenders who, since time immemorial, have catered to the banking and credit needs of the Indian economy. With the institution of the European banks in India the activities of these bankers were mainly restricted to financing the internal trade of the Country and to providing for the credit needs of agriculturists, artisans, small tradesmen, etc., and save for local trade associations, national trade organizations and such correspondents as outside collections and remittances make necessary, these bankers operate independently without any direction or control by the Reserve Bank. So far all attempts of the Reserve Bank to bring them within its province and thus regulate their banking business have borne no fruit. It has long been held, with some element of truth that the members of the unorganized sector of Indian money market tend to charge exhorbitant rates of interest on their loans, and have long stood in the way of the economic progress of the Country. Moreover it is contended that they have further complicated and compounded the problems of their usually impoverished borrowers. However, this extremely one-sided view seems to overlook their real contribution to Indian banking needs and the important role they play in financing the internal trade of the Country. They provide credit facilities to those who can provide no tangible security and thus finance many undertakings which could not otherwise be carried out. The so called organized sector of the Indian money market consists of: i) a substantial number of privately owned Joint Stock banks incorporated under Indian laws and manned primarily by Indian nationals; ii) a number of branches of foreign banks popularly known as Exchange Banks which are managed almost entirely by foreigners; iii) a State sponsored System of Cooperative and Land Mortgage banks designed ultimately to support the Indigenous bankers and money lenders; iv) a rather unique postal savings system which provides savings facilities to the lower income group of the Indian population and channel these savings into productive enterprises through the purchase of Government securities; v) the now publicly owned State Bank of India which even as a foreign owned and operated institution, serving an immense private banking clientele, functioned for many years as a semi-central bank of India, and still retains many of its central banking functions; and finally, vi) the recently established and now nationalized Reserve Bank of India around which have been arranged a number of public and semi-public financial institutions which in one way or another are designed to help fulfil the twin goals of the National Government - i.e., a modern self-sustaining industrial economy based on a socialistic pattern. In addition to the Reserve Bank itself the latter group includes among others the aforementioned State Bank of India, the Industrial Finance Corporation, the National Industrial Development Corporation and the Life Insurance Corporation of India. The latter has been given a monopoly of all life insurance business within India and thus collects and makes available to the Government a large part of the voluntary savings of the Indian people. The author's task in this thesis is a large yet unpretentious one. By tracing the growth and development of each of the above classes of institutions he has sought to bring before a Western audience not only the nature of the banking structure and banking practices in India but the related problems still to be solved if the Country is to achieve the ultimate goal of a higher standard of living in a self sustaining and dynamic economy. Each of the several classes of banks has been analysed with a view to establish its past contribution to the development of India and the role it is designed to play for the future growth of Indian economy. Most of the Country's financial planning and planning instrumentalities originate in the joint action of the Government and the Reserve Bank with the latter in the role of a consultant advisor and finally that of a servant to carry out the planned programme. In an overall sense the expanding role of the Reserve Bank provides the most revealing part of this thesis. This institution has developed into a strong, all embracing central bank employing the most modern credit control and direction measures. The bank has used these measures not only to check any undue increase in bank credit but to channel it into various planned productive enterprises. Moreover it functions as a regulatory authority over all public and private, scheduled and non-scheduled banking institutions. In this capacity the Bank has strengthened the Indian banking structure by encouraging and insisting on the consolidation of small banks and has improved their operations by a system of regular inspections. Its achievements since its nationalization both in the field of monetary management and the development of a sound and efficient banking system provide a new chapter in the history of Central banks.

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