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Indian Economy / Banking and Insurance

Importance of Banking Sector in India


    Banking sector plays a substantial role in the economy of a country. The banking system is key to India's economy as it caters credit to all the sections of the society and at the same time receives deposits from them. Bank of Hindustan was the first and foremost bank in India which was founded in the year 1770. State Bank of India ( SBI ), which is the largest commercial bank in India, was started as Imperial Bank of India and later got transformed into SBI. The Indian banking system comprises of public sector banks, rural cooperative banks, regional rural banks, private sector banks, urban cooperative banks and foreign banks.

    Important Functions of Banking System

    • Economic development in a country is impossible if there is an insufficient capital formation. It is in this juncture, commercial banks encourage people to save their money and mobilize that money for investing in productive purposes.
    • The credit creation greatly enhances the production activities and thus promoting economic growth and which in turn helps in producing huge employment opportunities.
    • By providing necessary financial infrastructure and funds for backward areas, commercial banks push for balanced regional development in India.
    • Commercial banks help in promoting the primary sector by giving timely credit to agricultural farmers.
    • They provide advance loans to the customers for purchasing items like houses, consumer goods, furniture, etc. and encourage people for higher standard of living.
    • Commercial banks assist the Government of India to accomplish each goal of the planned economic development of the country.
    • The commercial banks provide the required financial support and infrastructure for both internal and external trade.

    Banking Sector Reforms

    • The Reserve Bank of India ( RBI ) constituted two committees one after the other under the chairmanship of Dr. M. Narasimham, former governor of RBI.
    • The following are the important reforms suggested by both the committees headed by him.
      • Reducing the Statutory Liquidity Ratio as that will ensure more resources for public debt.
      • Reducing the Cash Reserve Ratio to increase the credit.
      • Reducing the Government share in the Nationalized banks to 33%.
      • Reduction of the NPAs ( Non Performing assets ).
      • Freedom to banks to offer the differential rates of interest to offer.
      • Allowing banks in Insurance business through joint ventures up to 49% holding.