Development of Indian Financial System 1947 Present Day

Recently on August 15, 2011, we celebrated 64 years of our freedom. Although 64 years in the history of a nation is not much, still the amount of development which has taken place in our country compared to other countries that got independence during or around the same time is not what it should have been. Further take for example the degree of development in those countries like Germany, Japan etc.which were devastated by the World War II. In comparison, our growth is not that what should have been if we consider the potential of our people, leaders and the economy. However, it is not that we have not developed at all. Post independence the country faced multiple problems which have been tackled successfully and the country has marched ahead. 1. Post Independence Problems Immediately after independence, India faced the pangs of partition which resulted in violence, loss of life and property After the pains of partition were over we faced the problem of merger of the then independent kingdoms some of which resisted merger with the Indian Union. Army action had to be initiated in some states like Hyderabad In 1948 war was imposed on the country. Jammu & Kashmir was attacked by Pakistani Razakars. Accession treaty signed with Maharaja Hari Singh and India intervened. Issue taken to UN which is still a bone of contention India followed a Socialistic Pattern of Society resulting in License Raj, powers to the bureaucracy and red-tapism. Three more wars imposed on India 1962 Chinese Aggression. War with Pakistan in 1965 and 1971 which took a toll on the economy. The Five Year Plans gave emphasis on Industrialisation and Agriculture was neglected 2. Banking in pre & post Independence Era. In 1770 first bank named Industan was started by M/s. Alexandura & Co. 1773: General Bank of Bihar & Bengal was established 1806:First Presidency Bank Bank of Bengal was established 1840: Second Presidency Bank Bank of Bombay was established 1843: Third Presidency Bank Bank of Madras was established Presidency Banks were acting as Central Banks : Government business, issuing notes 1921: All the 3 Presidency Banks were amalgamated to form Imperial Bank of India

 Imperial Bank was the sole Banker to the Government of India, Banker to banks, Managing Public Debt, conduct clearing 1926: Royal Commission on Indian Currency & Finance (HiltonYoung Commission) suggested the creation of Reserve Bank of India 1934: RBI Act was passed 1935:1st April, RBI was inaugurated 1949: RBI was Nationalised 1955: SBI Act was passed Purpose of converting Imperial Bank to State Bank of India was The extension of Banking facilities on a large scale, more particularly in the rural and semi-urban areas and for diverse other public purposes 1967: Government considered far-reaching changes to the banking Industry 1968: Banking Laws (Amendment) Act was passed to bring about Social Control Not less than 51% of Board of Directors of a bank had to be persons with special knowledge/experience in matters such as Accounting, Agriculture, Rural Economy, Banking, Co-operation, Economics, Finance, Law and Small Scale Industry 19th July 1969: By an ordinance nationalised 14 major Indian Commercial Banks having deposits of Rs. 50 crore and more Objective: To sub serve national priorities like ensuring rapid growth in Agriculture, Small Scale Industry, Exports, Raising of employment levels, encouraging new entrepreneurs, development of backward areas Concept of Social Banking started with a view to establish socialist pattern of society by reducing inequalities of income and wealth in the country Requirements of economically weaker sections were considered by relaxing criteria for margin/security/profitability to achieve social and national objectives Branch Expansion 3. Banking & Economy Post-Nationalisation 1969 HISTORICAL DECISION RESULTED IN BANKS BECOMING SICK GOVERNMENT SCHEMES, LOAN MELAS HUGE NPAs IN BANKS NO COMPETITION BY 1980 GROWTH RATE WAS HARDLY 3.5% DUE TO SOCIAL CONTROL MARKETS WERE FUNCTIONING IN ISOLATION

 DUE TO STRTEGIC ALLIANCE WITH USSR POLICY WAS INFLUENCED BY IT MAIN MARKET FOR EXPORTS HUGE INTERNATIONAL DEBT SEVERE EXCHANGE CONTROL FERA 1973 LIMITED FLOW OF FOREIGN INVESTMENT 4. 1990- The Liberalisation of Indian Financial System 1990 USSR collapsed Exports suffered Balance of Payment Crisis Mortgage of gold with Bank of England Industrial Policy Statement Prior to 1990 any foreign investment to India to be accompanied by transfer of latest technology by the investor Foreign investment up to 49% - FERA Companies FIPB was the sole authority to allow foreign investment into India Industrial Policy segregated foreign investment and technology transfer For the first time RBI was delegated with power to approve foreign investment Annexure III to Industrial Policy Automatic Route RBI was empowered to approve foreign investment in the form of equity up to 51% in 35 industries listed in Annexure III RBI could also approve technology transfer in any industry up to US$ 2 million Beyond 51% in the 35 industries and foreign investment in any other industry including technology transfer above US$ 2 million was to be approved by FIPB Immediate reaction FDI started flowing into India resulting in augmentation of Forex Reserves Banking Industry was not opened immediately for FDI Banking not included within the 35 industries nor FDI could be approved by FIPB in Banking 1994 Guidelines issued for entry of FIIs into India to invest in the secondary market 1995 FDI in banking was allowed up to 40 % out of which 20% could be FDI and 20% NRI investment Subsequently the insurance sector was opened to FDI up to 27%. A number of international insurance companies started having their presence in India.- Concept of Bancassurance took shape in India Banking reforms initiated by Government & RBI through Narasimham Committee I in 1990 and Narasimham Committee II in 1998 and Verma Committee in 1999 Most of the recommendations of these committees have been implemented Basel II guidelines have been implemented by RBI for the banking sector.

5. Present Scenario Presence of new generation private sector banks and the foreign banks have induced the Public Sector Banks to reorient and brace themselves to face the competition Rupee has been made floating and the exchange rate of rupee visa-vis other currencies determined by market as per supply and demand. However, RBI like other Central banks intervene in the market periodically if the rupee unusually appreciates or depreciates Financial System and Markets have been integrated with other markets of the world Any turmoil in the international markets influences our markets Foreign Exchange Reserves have reached more than US$ 300 Billion. In 1996 India achieved Article VIII status or Current Account Convertibility of IMF So far as the Capital Account Convertibility is concerned, India is moving ahead very cautiously which has saved Indian Financial System from various International Financial Crises in the past At present, no prior permission for FDI into India is required except FDI in certain sensitive industries like defense where FIPB approval is required All FDI inflow in to the country has to be through the banking system and the banks have to report the inflow to RBI FDI in banking sector has been raised to 74% from earlier 40% However, FDI inflow into India has not been at par with China although China opened up after India Reason being poor infrastructure like power, roads and ports as also non-availability of single window clearance for various approvals