History of Banking in India

The history of banking in India is a crucial concept for practical purposes and competitive exams, as it serves as a foundation for the nation’s economic development. Over time, the banking system and management have undergone significant changes to meet the evolving banking needs of the people.

Banking Services in Ancient India

Banking services have existed in India since ancient times, but the organized banking system we know today traces its roots back to 1947, when India gained independence. Before the arrival of the British, various banking activities were carried out, albeit in an unorganized manner.

The British Era and the Decline of Foreign Banking

With the advent of the British in the 17th century, the foreign banking structure began to decline. Mayer’s Alexander and Company established the first European bank, the Bank of Hindostan, in 1770.

Stages of Evolution of Banking in India

To better understand the development and history of banking in India for bank exams, let’s explore the following stages of evolution:

1. Early Phase (1786-1913)

• The General Bank of India was established in 1786, followed by the Bank of Bengal, the Bank of Bombay, and the Bank of Madras.
• These banks were known as the Presidency Banks and were established under the charters of the British East India Company.

2. Swadeshi Movement and Banking (1906-1913)

• The Swadeshi Movement led to the establishment of several indigenous banks, such as the Punjab National Bank, the Bank of India, and the Central Bank of India.

3. Imperial Bank of India (1921-1955)

• The Imperial Bank of India was formed by the amalgamation of the three Presidency Banks.
• It acted as the central bank of India until the establishment of the Reserve Bank of India (RBI) in 1935.

4. Nationalization of Banks (1969-1980)

• In 1969, 14 major commercial banks were nationalized, bringing them under government control.
• This marked a significant shift in the Indian banking sector.

5. Liberalization and Reforms (1991-Present)

• The 1991 economic reforms led to the liberalization of the banking sector, allowing private banks and foreign banks to enter the market.
• This phase brought about increased competition and innovation in the banking industry.

What is a Bank?

According to the Banking Companies Act of 1949, a bank is a financial institution that provides banking and other financial services to its customers. Banks offer fundamental banking services such as providing loans and accepting deposits.

The history of banking in India is a rich and complex subject that has shaped the nation’s economic landscape. By understanding the evolution of banking in India, we gain insights into the current banking system and its role in the country’s development.

Evolution of Banking in India

The banking sector in India has undergone significant evolution over time. Banks have existed in India even before the country’s independence. Here’s a clear overview of the banking history and its evolution:

Banking History in India

Banking history in India can be broadly divided into three stages:

1. Pre-Independence (Before 1947)
2. Post-Independence Phase (Between 1947 to 1991)
3. Liberalization (1991 - Until Now)

Pre-Independence (Before 1947)

• The pre-independence stage saw the presence of over 600 banks.
• The banking system in India began with the establishment of the Bank of Hindustan in 1771, which ceased operations by 1832.
• Three major banks, the Bank of Bengal, Bank of Bombay, and Bank of Madras, merged to form the Imperial Bank. The State Bank of India (SBI) later took over the Imperial Bank in 1955.

Banks Established During Pre-Independence

History of Banking Post-Independence Phase - (Between 1947 to 1991)

• Nationalization of banks was a significant event during this phase.
• The Reserve Bank of India (RBI) was nationalized on January 1, 1949.
• In addition to bank nationalization, various Regional Rural Banks (RRBs) were formed on October 2, 1975.

Nationalization & Its Impacts

Nationalization involves the transfer of public sector assets to be operated or owned by the central or state government. In India, previously private sector banks were transferred to the public sector through nationalization, leading to the creation of nationalized banks. This brought several benefits to the banking industry and the country’s economic growth:

• Increased efficiency in the banking system
• Boosted public confidence in banks
• Growth in small-scale industries, leading to increased funds and economic growth
• Enhanced bank penetration, transitioning from profit-driven to service-oriented, especially in rural areas
• Stabilization of costs due to increased supply of essential goods
• Reduced competition and improved working efficiency and performance of banks

The following banks were nationalized during this phase:

Nationalization of Banks in India

On April 15, 1980, several banks in India with reserves exceeding INR 200 crore were nationalized. These banks included:

• Andhra Bank
• Corporation Bank
• New Bank of India
• Oriental Bank of Commerce
• Punjab and Sind Bank
• Vijaya Bank

In addition to these banks, seven subsidiaries of the State Bank of India (SBI) were also nationalized in 1959. These subsidiaries included:

• State Bank of Patiala
• State Bank of Hyderabad
• State Bank of Bikaner & Jaipur
• State Bank of Mysore
• State Bank of Travancore
• State Bank of Saurashtra
• State Bank of Indore

With the exception of the State Bank of Saurashtra, which merged in 2008, and the State Bank of Indore, which merged in 2010, all of these banks were later merged with the SBI in 2017.

Structure of Banking in India

The banking system in India is broadly divided into two sectors: the organized sector and the unorganized sector. The organized sector comprises the Reserve Bank of India (RBI), commercial banks, cooperative banks, and specialized financial institutions such as ICICI and IFC. The unorganized sector, on the other hand, is not regulated by the government or the RBI and is therefore more vulnerable to fraud and instability.

Scheduled Banks

Scheduled banks are those that are included in the second schedule of the RBI Act of 1934. To be registered as a scheduled bank, a bank must meet the following conditions:

• Paid-up capital and collected funds must not be less than INR 5 lakhs
• No activity of the bank should be detrimental or adversely affect the customers’ interests

There are four types of scheduled commercial banks:

• Public Sector Banks
• Private sector banks
• Foreign banks
• Regional Rural Banks

Non-Scheduled Banks

• Non-scheduled banks are defined as banking companies under clause C of section 5 of the Banking Regulation Act, 1949 (10 of 1949) that are not scheduled banks.
• The Reserve Bank of India (RBI) is the central bank of India, and all banks in India must follow its guidelines.

History of Banking in India - Reforms

• After the successful establishment of banks in India, they required regular monitoring and regulations to maximize profits within the banking sector.
• The government formed a committee led by Shri M. Narasimham to manage reforms in the Indian banking sector.
• The committee aimed to provide stability and profitability to nationalized public sector banks.
• The introduction of private sector banks was a significant development in Indian banking.
• Subsequently, the RBI issued licenses to ten private sector banks for establishment:

Other Important Measures

• Setting up new branches of several foreign banks in India
• Halt in the nationalization of banks
• Equal treatment of public and private sector banks by the RBI and the government
• Permission for foreign banks to start joint ventures with Indian banks
• Introduction of payments banks with the advent of digital banking
• Small finance banks allowed to set up branches anywhere in India
• Increased prominence of digital banking with various banking apps for funds transfer

Important Points to Note

• The banking sector in India is a crucial part of the Indian financial system.
• The banking sector has been a significant driver of business promotion in urban and rural areas in recent years.
• The Indian economy would struggle to survive without the banking sector.
• The banking system in India has had several outstanding achievements over the past three decades.
• NPAs (Non-Performing Assets) increased since 2011 after a steady decline in the 2000s.