A well-established banking system exists in India as a result of British colonialism. The Reserve Bank of India, founded in 1935 and nationalized in 1949, is the central banking and note-issuing authority. The Reserve Bank funds the Deposit Insurance and Credit Guarantee Corporation, which provides deposit insurance coverage to the banking sector. The largest public-sector bank is the State Bank of India, which, at the end of 1996, accounted for one-third of income. Banks operating in the public sector account for 75% of commercial banking, while private banks take 15% of the market and foreign banks account for the remaining 10%. In 1997, 58% of commercial banks operated regionally, extending credit to small borrowers in rural areas. Scheduled banks maintain branches, mainly in the major commercial and industrial centers of Maharashtra, West Bengal, Uttar Pradesh, and Tamil Nadu states and the Delhi territory. Over 100 branches of Indian commercial banks operate overseas as well, primarily in the United Kingdom, United States, Fiji, Mauritius, Hong Kong, and Singapore. As of July 2000, there were 45 foreign banks in India with 180 branches, as well as 26 foreign representative offices. Total deposits in commercial banks reached $206 billion in 2000-01.
The cost of borrowing remains very high, because of bad debts and non-performing assets. Most Indian banks lend approximately 30% to 40% of their capital to the government of India, and over 80% of investment is in government securities. In an attempt to regulate lending practices and interest rates, the government encouraged the formation of cooperative credit societies. Long-term credit is provided by the cooperative land development banks. Nonagricultural credit societies and employees' credit societies supply urban credit. A process of gradual liberalization is being applied to government institutions that supply most medium- and long-term credit. These term-lending institutions also control about 30% of all share capital and act as a channel for most foreign borrowing by the private sector. The main bodies are the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI), the Industrial Credit and Investment Corp. of India (ICIC), and the Export-Import Bank of India (Eximbank).The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $81.6 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $283.4 billion. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 6.5%.
The main stock exchanges are located in Calcutta, Mumbai (formerly Bombay), and Madras, and there are secondary exchanges in Ahmadabad, Delhi, Kanpur, Nagpur, and other cities. The Securities and Exchange Board of India supplies regulation of the stock market. These regulations are not strict, and at times margin trading and other questionable practices have tended to produce wild speculation. Rules favor exchange members rather than public protection or benefit. Brokerage and jobbing are commonly combined. Of India's 21 stock exchanges, the Mumbai Stock Exchange (BSE) and National Stock Exchange (NSE) are the most important. There are more than 5,000 companies listed in Mumbai (formerly Bombay), the largest on the Indian market and on this criterion the largest outside New York. Total market capitalization on the BSE's 5,795 listed companies was R 5.3 trillion as of 2001. The NSE, however, is perceived as more transparent, has faster trading cycles, more timely settlements, and is in the process of setting up a share depository. Major efforts have been made to strengthen the stock market institutionally and make it less like a casino.
In 1996-97 negative market sentiment, particularly among foreign institutional investors, took the overall price earnings ratio down from 19.6 in June 1996 to 11.3 in November. In the two years ending October 1996, all but 436 of the 2,531 most-traded shares lost over half their value; more than 1,000 lost over 80% of their value. The market continued to lose ground in 1997 and 1998 due to the Asian financial crisis. In 1999-2000, though, both the BSE and the NSE gained approximately 40% in market share value due to the growth in information technology (IT) stocks. Between 1998 and 1999 alone, the local S&P CNX Index grew 97.8%, but then dropped about 23-24% in each of the next two years. The S&P IFCG and IFCI Indexes also dropped about 20-30% in 1999 and 2000.