Commercial Banking
Indigenous banks have been in existence for centuries, some trace their presence to the Vedic times of 2000 to 1400 B.C. Indigenous banking in India is a system that admirably fulfilled her needs in the past. However, with the coming of the British, their decline set in. But despite the fast growth of modern commercial banks since then indigenous banks continue to hold on even in present times.
Indigenous banks vary in their forms. And despite many shortcomings, attempts at regulating them and competition from modern banks, these continue to follow old practices which no longer fit well with the emerging new requirements of economic life. According to the Indian Central Banking Enquiry Committee (1931), an indigenous banker is any individual or private firm receiving deposits and dealing in hundreds of lending money. Although the deposit side is emphasized, these banks do not necessarily depend upon this source entirely, like modern commercial banks. Many among them also use large funds of their own. As against this, money lenders are those whose primary business is money lending; such essential banking functions as receiving deposits or/and dealing in hundis are outside their operations.
Taken together, moneylenders and indigenous bankers function to lend money to various categories of borrowers and under varying conditions. Moneylenders, though also found in urban areas, predominate in villages and themselves conduct agriculture, trade and retail business. Loans are extended to villagers of small means, etc. Loans, if small, are given based on a mere entry in their account books or even on a verbal promise. However, if the loans asked for are large, promissory notes or mortgage of crops or land, or ornaments, etc., are insisted upon. Interest rates are generally high. While moneylenders have no future and their activities have to be increasingly restricted, indigenous bankers have a definite place even now and their working has to be so regulated as to enhance their usefulness. Numbering around 2500 according to the Banking Commission of 1972, these bankers have a definite standing in India’s banking system. Such a placing of this system is based on three reasons:
First, these continue to serve where modern banking has so far been inadequate. For example, they are very popular with retailers for whom modern commercial banking has been inadequate and cumbersome. In almost all the rural areas and some small towns, these bankers supply a substantial part of finance to agriculturists, traders, merchants and small industrialists.
Second, the operation of these banks is simple and flexible. This is because these banks are free from formalities and the consequent delays to which modern banks are subject. Thirdly, these banks provide hundis to commercial banks which are useful money market instruments, possessing a high degree of liquidity and yielding a good return.
Development of Commercial Banking
At the time of Independence, the Indian banking system was not sound. There were hundreds of small banks under unscrupulous management, hence, in 1949 two major actions were taken which were very important from the point of view of structural reforms in the banking sector. First, the Banking Regulation Act was passed. It gave extensively. regulatory powers to the Reserve Bank of India over the commercial banks. Another development of no less importance was the nationalisation of the Reserve Bank. These two major developments in the immediate post-Independence period proved to be the turning points in India’s commercial banking.
In the two decades following the enactment of the Banking Regulation Act, 1949, the Indian banking system developed in many respects. It not only grew geographically but also structurally · and functionally. The number of scheduled banks, however, decreased from 94 to 76 over the period. A significant change that occurred in this period was a steady decline in the importance of the non-scheduled commercial banks. The Banking Regulation Act provided extensive regulatory powers to the RBI and with that, it became possible for it to carry out various structural reforms in the banking system, The establishment of the State Bank of India in 1955 and the creation of the State Bank group by nationalising eight regional banks in 1960 allowed scope for a new experiment in the Indian banking. Under a statutory obligation, these banks opened new offices in semi-urban and rural areas and approached those sections of people which were hitherto never served by the modern banks. This attempt bore fruits and their relative share in total deposits received by the 1969 commercial banks increased.
In order to provide some protection to the depositors, an important step in the form of establishment of the Deposit Insurance Corporation was undertaken on January 1, 1962. Deposit insurance is very helpful in mobilisation of deposits, as it enhances the confidence of the people in banks.
Check out these notes on the Nationalisation Of Banks.