INDIAN FINANCIAL SYSTEM

PRE 1951

PRESENTED BY:
 AYUSHI NAGAR
 AAKASH RATHORE
 ABHIJEET SINGH CHAUHAN
 SALONI PITLIYA
 Indian Financial System
The Indian Financial System
It is one of the most important aspects of the economic development of our country. This
system manages the flow of funds between the people (household savings) of the country and
the ones who may invest it wisely (investors/businessmen) for the betterment of both the
parties.

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including
banks, insurance companies, pensions, funds, etc. constitute the financial system.

Features of the Indian Financial system:

 It plays a vital role in the economic development of the country as it encourages both
savings and investment.
 It helps in mobilising and allocating one’s savings.
 It facilitates the expansion of financial institutions and markets
 It plays a key role in capital formation.
 It helps form a link between the investor and the one saving
 It is also concerned with the Provision of funds
Evolution of Indian Financial System

History of Indian financial system dates back even before the period when
India got independence in the Year 1947.

Evolution of Indian Financial system can be classified into 3 phases: –

1.Pre 1951.

2.Post (1951-1991).

3.The Liberalization era (1991 and beyond).

Pre Independence Phase (Before 1947).

 During this Phase around 600 Banks was present.

 Bank of Hindustan was established in the year 1770 in Calcutta marks the starting of the Indian
financial system.

 The bank discontinued its services in 1832. There were various banks that evolved post to Hindustan
banks such as General Bank of India (1786-1791) and Oudh commercial bank (1881-1958).
However, these banks were not able to continue for a long.

 Few banks of the 19th century are existing even today such as Punjab National bank formed in 1894
and Allahabad bank formed in 1865.

 Three major banks of that time like Bank of Bengal, Bank of Madras and Bank of Bombay were
merged as one body which was termed as Imperial Bank of India. This Imperial bank was later on
renamed to State Bank of India.
 During this phase, The Bombay Stock Exchange(BSE) also established in 1875.

 Hilton Young Commission in year 1935 recommended the establishment of
Reserve bank of India. 

 People were more involved with money lenders and unregulated players.

John Mathai:
 John Mathai (1948-1950 )was an economist who served as India's first
Railway Minister.

 He then subsequently as Finance Minister, took office shortly after the

presentation of India's first Budget, in 1948.

 He presented two budgets for 1949-50 and 1950-51.

 He resigned after presenting the 1950 Budget following protests against

vesting large powers with the Planning Commission and P C Mahalanobis.
Phase-I : PRE-1951

During the first phase, the organization of the financial system was immature and
rudimentary, reflecting the underdeveloped nature of the industrial economy of the
country. It was incapable of sustaining a high level of capital formation and accelerated pace
for industrial Development.

The organization of the Indian financial system before 1951 had a close resemblance with
the theoretical model of a financial organization in a traditional economy.

A traditional economy, according to R. L. Bennett, “is one in which the per capital output is
low and constant.”

The principal features of the pre-1951 financial system were aptly described by L.C. Gupta
as: “The principal features of the pre-independence industrial financing organizations are the
closed-circle character of industrial entrepreneurship; a semi organized and narrow industrial
securities market, devoid of issuing institutions and the virtual absence of participation by
intermediary financial institutions in the long term financing of the industry.
As a result, the industry had very restricted access to outside savings. It simply
means that the financial system was not responsive to opportunities for industrial
investment. Such a financial system was clearly incapable of sustaining a high rate
of industrial growth, particularly growth of new and innovating enterprises.

Majority of banks in India were privately owned at the time of independence and
were serving only the big corporates. Rural population, small-scale industries and
agriculture sector were still dependent on local money lenders.

This was a phase in which majority of small-sized banks failed to function properly
and were unable to gain people’s confidence. People were more involved with
money lenders and unregulated players.

The government in order to overcome this situation decided to nationalize the banks
under the Banking regulation act, 1949.