Phase II of the Indian financial system covers the period from 1951 to the mid-eighties. During this period, the Indian government undertook several measures to promote economic growth and development, which had a significant impact on the financial system. Here is a detailed overview of the organization of the Indian financial system during this period:
- Nationalization of Banks:
One of the most significant developments during this period was the nationalization of banks. In 1969, the government nationalized 14 major commercial banks, which accounted for 85% of the banking sector’s deposits. In 1980, six more banks were nationalized. This move was aimed at promoting the development of the banking sector and increasing credit availability to key sectors such as agriculture and small-scale industries.
- Establishment of Regional Rural Banks:
In 1975, the government established Regional Rural Banks (RRBs) to provide credit to rural areas and promote rural development. RRBs were established on a state-level basis and were jointly owned by the Central government, the concerned state government, and the sponsoring bank.
- Establishment of Development Financial Institutions:
Several Development Financial Institutions (DFIs) were established during this period to provide long-term financing for infrastructure projects and other key sectors. These included institutions such as the Industrial Development Bank of India (IDBI), the National Bank for Agriculture and Rural Development (NABARD), and the Export-Import Bank of India (EXIM Bank).
- Introduction of Controlled Interest Rates:
The government introduced controlled interest rates during this period to promote credit availability and to direct credit to priority sectors. Interest rates were fixed by the government and were not allowed to vary based on market forces.
- Expansion of Capital Markets:
The capital markets in India saw significant expansion during this period. The government established several institutions, such as the Unit Trust of India (UTI) and the Industrial Finance Corporation of India (IFCI), to promote the development of the capital markets. The Securities and Exchange Board of India (SEBI) was also established in 1988 to regulate the securities markets.
- Establishment of Insurance Regulatory and Development Authority:
The Insurance Regulatory and Development Authority (IRDA) was established in 2000 to regulate the insurance industry and promote the development of the sector.
- Cooperative Banking Reforms:
The government introduced several reforms to the cooperative banking sector during this period, such as the Cooperative Credit Societies Act of 1904 and the Multi-State Cooperative Societies Act of 1984. These reforms were aimed at promoting the development of the cooperative banking sector and increasing credit availability to small-scale industries and agriculture.
In conclusion, Phase II of the Indian financial system was marked by several significant developments, such as the nationalization of banks, the establishment of DFIs, and the expansion of the capital markets. The government played a key role in regulating the financial system and promoting economic growth and development.