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Indian Financial System

Notes The course of development of financial institutions and markets during the post-Independence
period was largely guided by the process of planned development pursued in India with emphasis
on mobilisation of savings and channelising investment to meet Plan priorities. At the time of
Independence in 1947, India had a fairly well-developed banking system. The adoption of bank
dominated financial development strategy was aimed at meeting the sectoral credit needs,
particularly of agriculture and industry. Towards this end, the Reserve Bank concentrated on
regulating and developing mechanisms for institution building. The commercial banking
network was expanded to cater to the requirements of general banking and for meeting the
short-term working capital requirements of industry and agriculture. Specialised development
financial institutions (Development banks) such as the IDBI, NABARD, NHB and SIDBI, etc.,
with majority ownership of the Reserve Bank were set up to meet the long-term financing
requirements of industry and agriculture. To facilitate the growth of these institutions, a
mechanism to provide concessional finance to these institutions was also put in place by the
Reserve Bank.
The first development bank In India incorporated immediately after independence in 1948
under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional
credit to medium and large-scale. Then after in regular intervals the government started new
and different development financial institutions to attain the different objectives and helpful to
five-year plans.

The early history of Indian banking and finance was marked by strong governmental regulation
and control. The roots of the national system were in the State Bank of India Act of 1955, which
nationalized the former Imperial Bank of India and its seven associate banks. In the early days,
this national system operated alongside of a large private banking system. Banks were limited
in their operational flexibility by the government's desire to maintain employment in the
banking system and were often drawn into troublesome loans in order to further the
government's social goals.
The financial institutions in India were set up under the strong control of both central and state
Governments, and the Government utilized these institutions for the achievements in planning
and development of the nation as a whole. The all India financial institutions can be classified
under four heads according to their economic importance that are:

1. All-India Development Banks
2. Specialized Financial Institutions
3. Investment Institutions
4. State-level institutions

5. Other Institutions

Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of
Parliament as a wholly owned subsidiary of the Reserve Bank of India. In February 1976, the
ownership of IDBI was transferred to the Government of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting
and developing industry in the country. Although Government shareholding in the Bank came
down below 100% following IDBI's public issue in July 1995, the former continues to be the
major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI
has been instrumental not only in establishing a well-developed, diversified and efficient
industrial and institutional structure but also adding a qualitative dimension to the process of
industrial development in the country. IDBI has played a pioneering role in fulfilling its mission

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