Until independence in the year 1947, there was no strong financial system in India. Private sector and unorganized financial intermediaries were playing the key role of financing the industry. They were not following any justifiable way in financing the trade and commerce. On the whole, the financial system was facing a chaotic condition.
The growth of financial system in India since independence is discussed below: Nationalization of Financial Institutions – After independence, with the adoption of mixed economy, the government started creating new financial institutions for the supply of finance for both industrial and agricultural purposes. For this purpose, some important financial institutions of those days were nationalized. The financial institutions that were nationalized over the years are as under: o In the year 1948, Reserve Bank of India (which was established in the year 1935 as a private sector central bank) was nationalized o In the year 1955, the then Imperial Bank of India was nationalized and renamed as State Bank of India o In the year 1956, 245 life insurance business entities (consisting of 154 life insurance companies, 16 foreign companies and 75 provident companies) were nationalized and merged to form Life Insurance Corporation of India.
o In the year 1969, 14 Commercial Banks were nationalized o In the year 1972, 107 general insurance business entities (consisting of 55 Indian insurance companies and 52 other general insurance operations of other companies) were nationalized and merged to form General Insurance Corporation of India o In the year 1980 another 6 Commercial Banks were nationalized Establishment of Unit Trust of India – The Unit Trust of India (UTI) was established in the year 1964 to strengthen the Indian financial system and supply institutional credit to industries. It was entrusted with the work of mobilization of the savings of the public and provision of credit facility to institutions for productive purposes. In recent years, it has established the following subsidiaries: o The UTI Bank Ltd., o The UTI Investor Service Ltd., 7 | I n d i a n F i n a n c i a l S y s t e m D r . R . K .
S r e e k a n t h o The UTI Security Exchange Ltd., Establishment of Development Banks – Development banks are the institutions that provide medium and long term finance for agriculture and industrial development purposes. These are established to provide not only credit facility but also assist in discovering investment projects, preparing project reports, arranging technical advice, managing industrial units, etc. Basically they are intended to develop backward regions as well as small and new entrepreneurs. The development banks that were established over the years are as under: o The Industrial Finance Corporation of India (IFCI) at the central level established in the year 1948 to provide medium and long term finance to industrial concerns o The State Financial Corporation (SFCs) at the state level established under the State Financial Corporation Act, 1951 to provide medium and long term finance to medium and small industries in the respective states. o The Industrial Credit and Investment Corporation of India (ICICI) established in the year 1955 to develop large and medium industries in private sector. (Now this is merged with ICICI Bank) o The Refinance Corporation of India (RCI) established in the year 1958 with a view to provide refinance facilities to banks against term loans granted by them to medium and small units. (Now this is merged with Industrial Development Bank of India.
o The Industrial Development Bank of India (IDBI) established in the year 1964 as a wholly owned subsidiary of the Reserve Bank of India to act as the apex institution in the area of development banking and coordinate the activities of all the other financial institutions. (Now the ownership of IDBI is with the central government) o The State Industrial Development Corporation (SIDBI) / State Industrial Investment Corporation (SIIC) established in the year 1990 under Small Industries Development Bank of India Act, as the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Coordination of the functions of the institutions engaged in similar activities. Establishment of Agriculture Financing Institutions – Agricultural Refinance and Development Corporation (ARDC) was established in the year 1963 to finance major development projects like minor irrigation, farm mechanization, land development, horticulture, dairy development, etc. However, National Bank for Agriculture and Rural Development (NABARD) was established in the year 1982 and the ARDC was merged with it.
Now the whole sphere of agricultural finance has been entrusted with NABARD Establishment of Export and Import Bank of India (EXIM Bank) – The Export and Import Bank of India (EXIM Bank) was established in the year 1982 to take over the operations of the International Finance Wing of IDBI. Its primary objective is to provide finance to exporters and importers. It also functions as the principal financial institution for coordinating the working of other institutions engaged in the financing of foreign trade.
Establishment of National Housing Bank (NHB) – The National Housing Bank was established in the year 1988 as an apex institution to mobilize resources for the housing sector and to promote housing finance institutions both at regional and local levels. It provides refinancing, underwriting and guaranteeing facilities to housing finance institutions and coordinates the working of all agencies connected with housing finance. Establishment of Stock Holding Corporation of India Ltd., (SHCIL) – The Stock Holding Corporation of India Ltd., (SHCIL) was established in the year 1987 to tone up the stock and capital markets in India. It provides quick share transfer facilities, clearing services, depository services, management information services and development services to both individual and corporate investors. Encouraging Mutual Funds Industry – Both private and public sector financial institutions are being encouraged to float mutual funds. 8 | I n d i a n F i n a n c i a l S y s t e m D r .
R . K . S r e e k a n t h Encouraging Venture Capital Industry – Both private and public sector financial institutions are being encouraged to finance through venture capital. Establishment of Credit Rating Agencies – Credit rating agencies like Credit Rating and Information Services of India Ltd., (CRISIL), Investment Information and Credit Rating Agency of India Ltd., (ICRA) and Credit Analysis and Research Ltd., (CARE) are being established to help investors make decision of their investment and also to protect them from risky ventures. Introduction of new financial instruments – New and different types of financial instruments like public sector bonds, national savings certificates, post office savings scheme, different variety of shares and debentures, different schemes of insurance, different types of bank deposits, are being introduced to cater to the needs of different investors.
Legislative support – Over a period of time many legislative measures were taken up to protect the interests of investors and streamline the financial functioning of various institutions. Capital Issues Control Act, 1947; The Companies Act, 1956; Securities Contracts (Regulation) Act, 1956; Monopolies and Restrictive Trade Practices Act, 1970; Foreign Exchange Regulation Act, 1973 etc., are a few examples of legislations that support the smooth functioning and growth of effective financial system in India.