Chapter 3

The Indian Financial System on the Eve of Planning

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 To describe the financial system as it stood on the eve
of economic planning (1950).

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 Currency & Money Supply
 Banking Sector
 Small Savings
 Insurance Funds
 Stock Market
 Public Deposits
 Government securities & Treasury bills (TBs)

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 contd...
 Currency & Money Supply
Year Money supply in % of currency in
 Total money supply
crore money supply
(currency & demand deposits) 1935 Rs.285 57.22
1939 Rs 384
1945 Rs 2052
1948 Rs. 1970
1950 Rs. 1833 65.61

 Banking Sector

• Prominence of modern banks & indigenous bankers

• Before 1950 supply side constraint in long term Industrial
finance

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 contd...

 The number of commercial banks in 1950 was small ( a 77%

of deposits of the entire banking system)

 The proportion of fixed deposits with the banks appears to

have declined significantly over the period 1921-1950
 Most popular form of bank credit was cash credit

 Money market was characterised by sharp imbalances between

the supply & demand of funds

 Sectoral distribution of advances in 1948:

Commerce(46%,industry ( 31%) and agriculture (2%)

 Emergence of Co-operative banking : supply of short term &

long term fund to agriculture

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 contd...

 Public Deposits
 Emergence of public deposit as a sources of finance to
finance fixed assets

 Interest Rates
 The interest rates on the same type deposit & advances
differed for different banks.

 There was much variation in interest rates in different

reasons

 High level of interest rates even in the organised sector

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 contd...
 Stock Market

• The first stock exchange in India was established at Bombay

in 1887.
• Paid up capital of Govt. & private sector increased from mere
Rs 24 cr. in 1980 to Rs. 570 cr. in 1948.
• The per year average amount of capital issues applied for &
sanctioned during 1950 to 1952 was Rs.193 cr. & Rs. 141 cr.
respectively

 Small Savings

• Post office savings Banks(POSBs) monopolised the small

savings business since 1896 with the total volume of small
savings was Rs.17,687 lakh in 1950

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 contd...

 Insurance Funds

 Life insurance business in India: Indian Life insurance

Companies Act, 1912.

 Apart from their activity as mobiliser of savings a key

player in capital market funding

 Government Securities & TBs

 India in October 1917 and subsequent years shown a uplift in the

market for the demand of TBs

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An Overview Financial Structure in India, 1890-1948
Year Private Small Paid-up Premium Gross
deposits of Savings capital of income of issue of
all banks deposits & Joint stock Insurance Govt.
certificates companies Cos. Securities

1890 25 6 24 0.11 2.0

1900 31 10 36 .52 ---
1910 82 16 63 2.0 2.50
1920 220 27 164 8.0 21.35
1930 221 75 282 25.0 37.25
1939 261 135 090 --- 28.42
1941 364 95 302 59.0 147.36
1943 719 18 339 --- 146.53
1945 109 221 389 --- 221.79
1947 799 268 479 47.7 382.37
1948 957 247 570 47.5 ---
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