The Indian financial system has gone through various phases of development over the years. Phase I, which covers the period before 1951, was marked by the establishment of several important institutions and the introduction of various measures to regulate the financial system. Here is a detailed overview of the pre-1951 organization of the Indian financial system:
- Reserve Bank of India (RBI):
The RBI was established in 1935 as the central bank of India. Its primary objective was to regulate the issue of banknotes and to maintain the monetary stability of the country. The RBI was also responsible for promoting the development of the banking system and for regulating the credit and currency markets.
- Commercial Banks:
Commercial banks in India can be divided into three categories: Presidency Banks, Exchange Banks, and Indian Joint Stock Banks. The three Presidency Banks, located in Calcutta, Bombay, and Madras, were established by the British government to finance trade and commerce. Exchange Banks, such as the Hong Kong and Shanghai Banking Corporation (HSBC) and the Chartered Bank of India, Australia and China, were foreign banks that operated in India. Indian Joint Stock Banks, such as the Punjab National Bank and the Bank of India, were established by Indians and were primarily focused on financing agriculture and small-scale industries.
- Cooperative Banks:
Cooperative banks were established to provide credit to small and marginal farmers and to promote rural development. These banks were organized at the village, district, and state levels and were regulated by the Reserve Bank of India.
- Capital Market:
The capital market in India was relatively underdeveloped during the pre-1951 period. The Bombay Stock Exchange, which was established in 1875, was the only stock exchange in the country. However, the government introduced various measures to promote the development of the capital market, such as the Securities Contracts (Regulation) Act of 1956.
- Money Market:
The money market in India was dominated by the call money market, which was used for short-term borrowing and lending. The discount and finance houses in Bombay and Calcutta played a key role in the call money market.
- Insurance:
The insurance industry in India was dominated by foreign companies such as the British India Assurance Company, the New India Assurance Company, and the Oriental Insurance Company. The Life Insurance Corporation of India (LIC) was established in 1956 to provide life insurance to Indians.
- Regulatory Bodies:
The Reserve Bank of India was the primary regulatory body for the financial system during the pre-1951 period. The RBI was responsible for regulating the banking system, controlling the money supply, and maintaining monetary stability. The Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority of India (IRDAI) were established much later, in 1988 and 2000, respectively.
In conclusion, the pre-1951 organization of the Indian financial system was marked by the establishment of several important institutions and the introduction of various measures to regulate the financial system. The Reserve Bank of India played a key role in regulating the banking system and promoting the development of the financial system. However, the capital market and the insurance industry were relatively underdeveloped during this period.