The Banking Sector is a foundational concept and institution in the Indian economy, defined by the Banking Regulation Act, 1949, as the business of "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise". Its modern history began with the establishment of the Bank of Hindustan in 1770. A major consolidation occurred in 1921 with the merger of the three Presidency Banks into the Imperial Bank of India.
The sector is primarily governed by the Reserve Bank of India (RBI), which was established in 1935 under the Reserve Bank of India Act, 1934. The Banking Regulation Act, 1949, which came into force on March 16, 1949, gave the RBI extensive powers to license, regulate, and supervise banks to protect depositors' interests and ensure financial stability. The mechanism of control involves mandatory Capital Requirements, adherence to Prudential Norms, and the requirement under Section 24 to maintain the Statutory Liquidity Ratio (SLR), which is a percentage of liabilities held as liquid assets.
A significant historical shift was the nationalization of the Imperial Bank to form the State Bank of India (SBI) in 1955, followed by the nationalization of 14 major commercial banks in 1969 and six more in 1980, making Public Sector Banks (PSBs) dominant. The sector connects to other key institutions like the National Bank for Agriculture and Rural Development (NABARD) for rural credit and the Securities and Exchange Board of India (SEBI) for capital market regulation.
Recently, the sector has seen improvements in asset quality, with Gross Non-Performing Assets (NPAs) falling from a peak of 11.46% in 2018 to 2.31% in 2025. Furthermore, the proposed Banking Laws (Amendment) Bill, 2024, aims to modernize regulations, including increasing the number of nominees allowed per bank account from one to four. The introduction of new categories like Small Finance Banks (SFBs) and Payment Banks under the Banking Regulation Act, 1949, reflects the ongoing focus on financial inclusion and diversification.