Banks, credit and financial inclusion

Banks sit at the centre of India's financial system because they take deposits from households and lend to farms, firms and governments. The Reserve Bank of India regulates them, sets key interest rates and acts as lender of last resort. Commercial banks include public sector banks, private banks and foreign banks, alongside cooperative banks and regional rural banks that serve rural areas. The State Bank of India, created in 1955 from the former Imperial Bank, is the largest bank, and the nationalisations of 1969 and 1980 put most of commercial banking in public hands.

A distinctive feature of Indian banking is priority sector lending: banks must direct a share of their lending to agriculture, small enterprises, weaker sections and other designated areas. The aim is to correct a market failure — left alone, banks prefer large, safe borrowers — but the record is mixed, since directed lending has also produced bad loans when appraisal was weak or politically influenced. Non-performing assets, loans on which borrowers have stopped paying, became a major problem in the 2010s, especially in public sector banks, and the Insolvency and Bankruptcy Code, 2016, was created to resolve failed firms faster and recover value for creditors.

Financial inclusion means giving every household access to a bank account, payments, credit and insurance. The Pradhan Mantri Jan Dhan Yojana, launched in 2014, opened basic bank accounts on a massive scale, and the spread of mobile phones and the Unified Payments Interface (UPI), launched in 2016, made digital payments cheap and instant for small transactions. The combination of Jan Dhan accounts, Aadhaar identity and mobile phones is often called the JAM trinity, and it underpins direct benefit transfers that send subsidies straight to beneficiaries' accounts.

Inclusion is not the same as usage. Accounts can lie dormant, small borrowers may still depend on moneylenders, and digital fraud is a growing risk. The deeper question is whether the financial system serves productive purposes — lending to farmers, small firms and first-time entrepreneurs at reasonable cost — rather than merely counting accounts. On that test, India has made real progress on access, while credit quality and last-mile delivery remain works in progress.