Indian Money Market & Development of Banking in India

May 24th, 2011

The money market is a mechanism that deals with the lending and borrowing of short term funds or debt securities (bankers acceptances, commercial paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less). Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons. Bid and ask spreads are relatively small due to the large size and high liquidity of the market.

The Indian Money Market involves a wide range of instruments. The maturities range from one day to a year, issued by banks and corporates of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates.

In India Money market is divided in 3 parts broadly:

Reserve Bank of India: It occupies the central position in Indian Money market. It regulates the control of the credit supply of the country.
Organized sector which comprises State bank of India and its 7 associate banks. , Other nationalized banks, Regional banks, rural banks and Cooperative banks.
Unorganized sector: it comprises money lenders and indigenous bankers.

Reserve Bank of India:

The Reserve Bank of India Act, 1934 was enacted on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The central bank of the country is the Reserve Bank of India (RBI).
It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission.
The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining.
The Government held shares of nominal value of Rs. 2,20,000.

With a view to have a cordinated regulation of Indian banking Indian Banking Act was passed in march 1949. To make RBI more powerful the Govt. of India nationalised RBI on January 1, 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi.

Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

State Bank of India

State Bank of India (SBI) was nationalised in July 1955 under the SBI Act of 1955. Seven banks of SBI formed subsidiary and was nationalised on 19th July, 1960.

Note :

7 Associate banks of SBI :

State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurastra
State Bank of Patiala
State Bank of Travancore

Nationalised Banks of India:
Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955.

Then on 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200 crores.

However, the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers.

The nationalised 14 major commercial banks were :

Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Dena Bank
Indian Bank
Indian Overseas Bank
Punjab National Bank (PNB)
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Allhabad Bank

On April 15, 1980, the second phase of nationalisation of Indian banks took place, in which 6 private sector banks were nationalised with deposits over 200 crores. With this, the Government of India held a control over 91% of the banking industry in India. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks.

Andhra Bank
Punjab & Sindh Bank
New Bank of India
Vijaya bank
Oriental Bank of Commerce
Corporation Bank

Latest Developments:

On September 4, 1993 Government of India merged the New Bank of India with Punjab National Bank.
On July 24, 2008 Govt. of India decided to issue an order sanctioning the Scheme of Acquisition of State Bank of Saurashtra by State Bank of India and to introduce Bill :-
1. repealing the State Bank of Saurashtra Act, 1950 in the Parliament.
2. to make consequential amendments in the State Bank of India (Subsidiary Banks) Act, 1959 to remove references to State Bank of Saurashtra wherever it occurs in the State Bank of India (Subsidiary) Banks Act, 1959. The Bill is called State Bank of India ( Subsidiary Banks) Amendment) Bill, 2008.
State Bank of Saurashtra merged on 13 August 2008
On June 20, 2009 The State Bank of India (SBI) board has approved the merger of its subsidiary, the State Bank of Indore, with itself. This would be the second acquisition by SBI of a subsidiary bank after the merger of State Bank of Saurashtra. The State Bank of Indore board, too, has approved the merger proposal. SBI holds 98.3% in the bank, and the balance 1.77% is owned by individuals, who held the shares prior to its takeover by the government.