Indian Financial System: An Overview & Indian Banking Structure for JAIIB – IEIFS Aspirants by Ashish Jain

India’s financial system is the lifeline of its economic growth. From ancient indigenous banking practices to the modern digital payment ecosystem, it has continuously evolved under changing economic, social, and technological conditions.

1. Understanding the Indian Financial System

The Indian Financial System (IFS) refers to the framework that facilitates the transfer of funds between savers and investors. It acts as a bridge that channels financial resources from surplus units (households) to deficit units (businesses, government, etc.), thereby promoting economic development.

1.1 Key Objectives of the IFS

• Mobilize domestic savings and channel them into productive investments.
• Provide liquidity and capital for economic expansion.
• Ensure financial stability through regulation and supervision.
• Encourage innovation through FinTech and digital inclusion.

1.2 Components of the Indian Financial System

The IFS consists of four main components that together form its structural base:

• Financial Institutions: These include banks, NBFCs, insurance companies, and mutual funds that mobilize and allocate funds.
• Financial Markets: Platforms for borrowing and lending — such as the money market and capital market.
• Financial Instruments: Various tools like shares, debentures, bonds, and deposits that represent financial claims.
• Financial Services: Services like payment transfers, underwriting, and fund management that facilitate transactions.

1.3 Evolution of the Indian Financial System

India’s financial system has undergone several transformative phases:

• Pre-Independence Era: Dominated by informal and indigenous systems like moneylenders and hundis.
• Post-Independence Nationalization (1947–1991): Focus shifted to state control — nationalization of RBI (1949), SBI (1955), and commercial banks (1969 & 1980).
• Post-Liberalization (1991–2010): Economic reforms and Narasimham Committee recommendations brought competition, deregulation, and technology adoption.
• Digital & FinTech Era (2010–Present): Introduction of UPI, payment banks, DBUs, and digital lending transformed access and inclusion.

2. Structure of the Indian Financial System

The structure of the Indian Financial System is a combination of organized and unorganized sectors, each playing a distinct role.

2.1 Organised Sector

• Regulated by government and statutory authorities like the RBI, SEBI, IRDAI, and PFRDA.
• Includes banking institutions, financial intermediaries, insurance companies, mutual funds, and development financial institutions.

2.2 Unorganised Sector

• Comprises informal moneylenders, indigenous bankers, chit funds, and private financiers.
• Still important in rural and semi-urban areas due to lack of access to formal banking.

2.3 Major Regulatory Institutions

• RBI: Central bank regulating monetary policy and credit flow.
• SEBI: Regulates capital markets and investor protection.
• IRDAI: Supervises insurance sector operations.
• PFRDA: Regulates pension funds.

3. Indian Banking Structure – Detailed Overview

The Indian banking structure is multi-layered and dynamic, comprising various institutions catering to different economic needs.
It ensures smooth credit flow, promotes inclusion, and supports the government’s developmental policies.

3.1 Classification of Banks

• Scheduled Banks: Listed under the Second Schedule of the RBI Act, 1934. Must maintain CRR with RBI and meet financial soundness norms.
• Non-Scheduled Banks: Smaller banks not included in the Second Schedule; play a limited regional role.

3.2 Types of Banks in India

• Public Sector Banks (PSBs): Majority government ownership (e.g., SBI, PNB).
• Private Sector Banks: Controlled by private entities (e.g., HDFC, ICICI).
• Foreign Banks: Operate in India through branches (e.g., HSBC, Citi).
• Regional Rural Banks (RRBs): Focused on rural lending and inclusion.
• Cooperative Banks: Based on cooperative principles, serving local credit needs.
• Development Banks: Provide long-term industrial and agricultural financing (e.g., NABARD, SIDBI).
• Small Finance Banks & Payment Banks: New-age institutions driving inclusion and digital access.

3.3 Key Reforms and Trends

• Implementation of Core Banking Solutions (CBS) across all PSBs.
• Launch of Digital Banking Units (DBUs) in 2023 for 24×7 customer access.
• Integration of FinTech platforms with banks for micro-lending, UPI, and AI-based KYC.

4. Narasimham Committee Reforms – The Turning Point

4.1 Narasimham Committee I (1991)

This committee was formed to restructure India’s financial sector in the post-liberalization period. Key recommendations included:

• Reduction of CRR and SLR to release funds for lending.
• Creation of an Asset Reconstruction Fund (ARF) for cleaning NPAs.
• Phasing out directed lending and branch licensing restrictions.
• Enhancing autonomy and professionalism in public sector banks.

4.2 Narasimham Committee II (1998)

• Suggested capital adequacy ratio of 9% under Basel norms.
• Recommended merging strong banks and allowing weak banks to follow Narrow Banking.
• Strengthened prudential norms for income recognition and provisioning.
• Encouraged greater competition and private sector participation.

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4.3 Impact of Reforms

The recommendations transformed India’s banking from a state-controlled system into a competitive and efficient one. NPAs reduced significantly, CRR/SLR rationalized, and the focus shifted towards profitability and technology.

5. Lead Bank Scheme & Financial Inclusion

Introduced in 1969, the Lead Bank Scheme was designed to bridge the gap between banks and rural development.

• Each district was assigned a lead bank responsible for credit planning.
• Institutions like DCC, DLRC, and BLBC coordinate financial inclusion activities.
• The scheme contributed to rural industrialization, SHG linkage, and agricultural credit expansion.

5.1 Rural Credit and Inclusive Growth

Rural credit delivery through cooperative banks, RRBs, and NABARD remains a cornerstone for equitable economic growth. Today, initiatives like PMJDY, PMFBY, and KCC ensure that credit reaches the grassroots level.

6. Emerging Trends in Indian Banking System

• TechFin vs FinTech: Tech giants entering financial services (TechFin) versus financial startups leveraging technology (FinTech).
• Digital Currency: Introduction of CBDC (Central Bank Digital Currency) under RBI.
• Green Finance: Financing sustainable and eco-friendly projects.
• NARCL: National Asset Reconstruction Company to manage stressed assets with government guarantee.
• RTGS for Corporates & NEFT for Individuals: 24×7 real-time payments improving liquidity and convenience.

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7. Importance for JAIIB IEIFS Exam

Most questions in IEIFS revolve around the evolution, structure, committees, and reforms discussed here. Focus especially on:

• Distinguishing between Scheduled & Non-Scheduled Banks.
• Understanding CRR, SLR, PSL, and Narrow Banking concepts.
• Memorizing key recommendations of Narasimham Committees.
• Grasping the working of DLC, DLRC, and BLBC under Lead Bank Scheme.

8. Conclusion

The Indian Financial System and Banking Structure together represent the backbone of the nation’s economy. Over the years, through reforms, digital transformation, and regulatory evolution, the system has become more inclusive, resilient, and globally integrated.

As an aspirant of JAIIB IEIFS, mastering this topic ensures conceptual clarity and higher marks in both objective and case-study-based questions.