B.Com Banking and Finance - Financial Institutions

Study Notes

Finance involves the management, creation, and study of money and investments.
A financial system is composed of financial institutions, markets, regulators, transactions, agencies, and fund managers, which can be formal or informal.
It facilitates the exchange of funds between lenders and borrowers.

Colonial Banking System:
- The first bank in India, the Bank of Hindostan, was established in 1770.
- The General Bank of India followed in 1786, and later, three Presidency Banks were created by the British East India Company: Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843).
- These banks merged to form the Imperial Bank of India in 1921, precursor to the State Bank of India (SBI).
Indigenous Banking:
- Indigenous bankers, called "Shroffs," "Seths," or "Sahukars," provided credit to small traders and agriculturists.
Cooperative Banking Development:
- The Cooperative Credit Societies Act of 1904 initiated the cooperative banking movement to serve rural and semi-urban populations.
Legislation and Regulation:
- The Reserve Bank of India (RBI) was established in 1935, responsible for regulating the banking sector and managing currency.

Nationalization and Expansion:
- The Banking Regulation Act of 1949 provided a framework for the regulation of commercial banks.
- The Imperial Bank of India was nationalized in 1955, creating the State Bank of India (SBI) to expand rural banking services.
- In 1969, 14 major commercial banks were nationalized, with another 6 in 1980 to extend services to underserved socio-economic sectors.
Development Financial Institutions (DFIs):
- The Industrial Finance Corporation of India (IFCI) was established in 1948 for industrial project financing.
- Other DFIs include IDBI (1964), NABARD (1982), and SIDBI (1990) focusing on specific sectors.
Insurance Sector:
- The Life Insurance Corporation of India (LIC) was formed in 1956 by nationalizing the life insurance sector, consolidating 245 private companies.
- Nationalization of the general insurance sector occurred in 1972, leading to the establishment of four GIC subsidiaries.

Economic Reforms and Deregulation:
- The 1991 economic liberalization initiated a shift towards a market-oriented economy, focusing on improving efficiency and global market integration.
- Reforms included interest rate deregulation, reduced statutory liquidity ratio (SLR) and cash reserve ratio (CRR), and facilitating more private and foreign bank operations.
New Financial Institutions:
- The National Stock Exchange (NSE) was established in 1992, introducing electronic trading that improved market efficiency.
- The Securities and Exchange Board of India (SEBI) gained statutory powers in 1992 to regulate the securities market actively.
Expansion of Non-Banking Financial Companies (NBFCs):
- Growth of NBFCs during the liberalization era provided diverse financial services, including leasing, hire purchase, and investment.
Mutual Fund and Insurance Reforms:
- The mutual fund industry was opened to private and foreign entities, enhancing competition and service offerings in the sector.