Banking is not only basically 19th-century technology, but it is disaster-prone technology.1
The financial system plays an important role in mobilising savings, allocating capital in the economy, monitoring corporations, providing liquidity, helping individuals and firms manage risks, facilitating payments and other economic functions. There is significant evidence of the positive impact of financial development on the economy.2 Financial systems of different countries differ in terms of their institutional structure, with some being largely market-based and others more bank-based.3
India’s financial system is largely bank-based. As of 31 March 2016, about 45.5 per cent of borrowing of non-financial firms was from banks (see Figure 6.1). For private non-financial firms, the share of bank loans was 51.6 per cent, while bonds and foreign borrowing added up to less than a quarter of borrowing. As of 31 March 2016, the ratio of scheduled commercial banks’ deposits to gross domestic product (GDP) was 67.8 per cent, up from 41.4 per cent at 31 March 1996. The total deposits with banks were Rs 103.6 trillion, while the total assets under management with mutual funds and the pension system were only Rs 13.5 trillion. Given the salience of banks in the economy, regulation of banking is a crucial function of the Indian state.
1 Merton Miller, ‘Financial Markets and Economic Growth’ (2003)11(3) Journal of Applied Corporate Finance 8, 15.
2 See generally Raghuram G Rajan and Luigi Zingales, ‘Financial Dependence and Growth’ (1998)88(3) American Economic Review 559, 586.
3 Asli Demirgüç-Kunt and Ross Levine, ‘Bank-Based and Market-Based Financial Systems: Cross-country Comparisons’, World Bank, 1999, available at http://documents.worldbank.org/curated/en/259341468739463577/pdf/multi-page.pdf.