Indian Financial System – An Overview | MODULE C: INDIAN FINANCIAL ARCHITECTURE
MODULE C: INDIAN FINANCIAL ARCHITECTURE
Indian Financial System – An Overview
What is a Financial System?
The financial system is a network of institutions, markets, instruments, and services that facilitate the transfer and allocation of funds. It enables savings mobilization, investment, and economic growth by linking lenders and borrowers efficiently.
Phase I: Pre-1951 Organisation
This period saw the dominance of informal financial systems with minimal regulation. The Reserve Bank of India (RBI) was established in 1935, but the banking system remained fragmented, with a few large private banks and cooperative institutions.
Phase II: 1951 to Mid-Eighties Organisation
This era focused on planned economic development. Key developments included nationalization of the RBI (1949), the State Bank of India Act (1955), and the nationalization of 14 major banks in 1969. The financial system was characterized by government control and directed lending.
Phase III: Post-Nineties Organisation
The post-1991 period introduced liberalization, privatization, and globalization (LPG reforms). Reforms led to increased efficiency, competition, and technological advancement in the financial system.
Narasimham Committee (1991) on the Banking System
The Narasimham Committee recommended reduced SLR/CRR ratios, phased reduction of priority sector lending, introduction of capital adequacy norms, and restructuring of weak banks. Its report laid the foundation for modern banking reforms.
Reform of the Banking Sector (1992–2008)
- Adoption of Basel I norms for capital adequacy.
- Entry of new private banks (e.g., HDFC, ICICI).
- Technological improvements – Core Banking Solutions (CBS).
- Improved transparency and prudential regulations.
Present Status of the Banking System
India’s banking sector includes public sector banks, private sector banks, foreign banks, regional rural banks (RRBs), and cooperative banks. The focus has shifted to digital banking, financial inclusion, and non-performing asset (NPA) management.
Mathematical Analysis: Capital Adequacy Ratio (CAR)
The Capital Adequacy Ratio (CAR) is a measure of a bank’s capital. It is expressed as a percentage of a bank's risk-weighted credit exposures:
CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets
Example: If Tier 1 Capital = ₹10,000 Cr, Tier 2 Capital = ₹5,000 Cr, and Risk Weighted Assets = ₹100,000 Cr, then:
CAR = (10,000 + 5,000) / 100,000 = 0.15 or 15%
This is above the Basel III minimum requirement of 8% (India requires 9% plus buffer), indicating financial health.
- Indian Financial System – An Overview
- Indian Banking Structure
- Banking Regulation Act, 1949 and RBI Act, 1934
- Development Financial Institutions
- Micro Finance Institutions
- Non-Banking Financial Companies
- Insurance Companies
- Indian Financial System - Regulators & their roles
- Reforms & Developments in the Banking sector
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