The banking sector plays a crucial role in facilitating credit, investment, and infrastructure, especially in a middle-income economy like India. The country is not only home to nearly 1.4 billion inhabitants, but also to a vast network of banks and non-banking financial companies (NBFC) to execute a diverse range of financial services for individuals, companies, and small enterprises. The Reserve bank of India is the primary regulator of banks in India.
Indian Banking landscape
The Reserve Bank of India (RBI) has been the country’s central banking institution and controls the issuance and supply of the Indian rupee. The RBI Act of 1934 broadly classified the Indian banking sector into scheduled banks and non-scheduled banks. Scheduled banks are those that have a paid-up capital and collected funds of over five lakh rupees and are eligible for loans from the RBI at the bank rate. All other banks fall under the non-scheduled category. After most banks were nationalized at the end of the 1960s, a diversification of the banking landscape took place during the 1990s, when several private and foreign banks were licensed along with the economic liberalization reforms. In recent years, the banking sector received a digital facelift, when the importance of digital payments increased in line with the economic development of the country. Innovative concepts of NBFCs led to vivid competition and an active FinTech environment.
Increasing banking outreach combined with digitalization has been one of the core targets of the Indian state. One of the biggest national schemes in recent years, the Pradhan Mantri Jan Dhan Yojana, made many financial services more accessible and affordable to financially excluded segments of society. The scheme enables the population without savings accounts to open an account without a minimum balance requirement. RBI and the government have also been stimulating the banking sector to extend its network to rural interiors of the vast country. As of 2020, the bank account penetration in India reached around 75 percent. The Union Budget of 2023 proposed the setting up of digital banking units (DBUs) across the country. DBUs are brick-and-mortar outlets that will aim to provide a variety of digital banking facilities and spread financial literacy. RBI is also set to launch its ambitious Central Bank Digital Currency (CBDC) Project soon. As a result of growing digitalization initiatives, the online banking penetration in the country is expected to reach 50 percent by 2025.
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