History of Banking in India

Banking system of a nation is the shadow of nations economy. A healthy and profitable banking system is just like the backbone of n a t i o n s e c o n o m y . I t i s necessary for a nation to achieve growth and remain stable in this global world and g l o b a l e c o n o m y . Th e I n d i a n b a n k i n g s y s t e m , w i t h o n e o f t h e l a r g e s t b a n k i n g networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs) and the increased participation of private sector banks.

The English traders that came to India in the 17th century could not make much use of the indigenous bankers, owing to their ignorance of the language as well the inexperience indigenous people of the European trade. Therefore, the English Agency Houses in Calcutta and Bombay began to conduct banking business, besides their commercial business, based on unlimited liability. The Europeans with aptitude of commercial pursuit, who resigned from civil and military, organized these agency houses. A type of business organization recognizable as managing agency took form in a period from 1834 to 1847. The primary concern of these agency houses was trade, but they branched out into banking as a sideline to facilitate the operations of their main business. The English agency houses, that began to serve as bankers to the East India Company had no capital of their own, and depended on deposits for their funds. They financed movements of crops, issued paper money and established joint stock banks. Earliest of these was Hindustan Bank, established by one of the agency houses in Kolkata in 1770. Banking in India originated in the last decades of the 18th century. The first bank in India, though conservative, was established in 1786 in Calcutta by the name of Bank of Bengal. Indian banking system, over the years has gone through various phases. For ease of study and understanding it can be broken into four phases

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History of Banking in India

These phases are based upon personal study and understanding and many experts may not agree this chronological segmentation. Prof K.V. Bhanu Murthy has also segregates the Indian banking periods into four eras. These are 1. Early historical and formative era: 1770-1905 2. Pre-independence era: 1906-1946 3. Post-independence regulated era: 1947-1993 4. Post-independence deregulated era from 1993 onwards

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History of Banking in India

Phases of evolution of Banking Industry

Banking in originated in the last decades of the 18th India

Early Phase (1786 to 1935)

century. The

The General Bank of India, which started in 1786, and the Bank of

first banks were

Hindustan, both of now dysfunctional. The oldest bank in existence in India is the State Bank which of India, which originated in the Bank of Calcutta in June 1806, almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted
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which

are

History of Banking in India as quasi-central banks, as did their successors. The East India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as independent units and called it Presidency Banks. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire dEscompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 because of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. Joint Stock Banks

American Civil War played a major role in the development of banking in India. The next big thing unfolded in the early phase of banking was formation of joint stock companies, with limited liability. The American Civil War cut off the supply of

American cotton to England caused an unprecedented boom in Indias cotton trade with England. The first joint stock bank was Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Shimla. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

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History of Banking in India

Pre Nationalization Phase (1935 to 1969)

Organized banking in India is more than two centuries old. Until 1935 all, the banks were in private sector and were set up by individuals and/or industrial houses, which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent. For many years the Presidency banks acted as quasicentral banks, as did their successors. Bank of Bengal, Bank of Bombay and Bank of Madras merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Even though consolidation in banking was building trust among the investors but a central regulatory, authority was much needed. British Government in India passed many trade and commerce laws but acted little on regulating the banking industry. Reserve Bank of India

Another breakthrough happened in this phase, which was Reserve Bank of India. The Reserve Bank of India was set up on the recommendations Royal Commission on Indian Currency and Finance also known as the Hilton-Young Commission. The commission

submitted its report in the year 1926, though the bank was not set up for nine years. Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in India. The Government on December 20, 1934 issued a notification and on January 14,1935, the RBI came into existence, though it was formally inaugurated only on April 1, 1935. Main functions of RBI were:

1. Regulate the issue of banknotes

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History of Banking in India 2. Maintain reserves with a view to securing monetary stability 3. To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India. Reserve Bank continued to act as the Central Bank for Burma until Japanese Occupation of Burma and later unto April 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. India Wins Freedom The second milestone in history of Indian banking was India becoming a sovereign republic. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. With extensive banking facilities on a large scale especially in rural and semi-urban areas nationalization of Imperial Bank of India in 1955 took place. Nationalization of SBI

subsidiaries in 1959 Government of India were aimed to provide banking coverage to all section of the society and every sector of the economy. 1955 The Industrial Credit and Investment Corporation of India Limited (ICICI) was incorporated at the initiative of World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses. Industrial Development Bank of India Limited (IDBI) was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. Some of the institutions built
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History of Banking in India by IDBI are The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL) IDBI BANK, as a private bank after government policy for new generation private banks. Post Nationalization Phase (1969 to 1990)

Nationalization of banks in India was an important phenomenon. On July 19, 1969 - the erstwhile government of India nationalized 14 major private banks. Nationalization of bank in India was not new or happening first time. From 1955 to 1960, State Bank of India and other seven subsidiaries were nationalized under the SBI Act of 1955. Modern Phase from 1991 till date

This is the phase of New Generation tech-savvy banks. This phase can be called as The Reforms Phase. Starting of the modern and current phase of Indian Banking is marked by two important events. Impact of Economic Liberalization on Finance & Banking Post nationalization now Indian banking sector was unshackled, and along with the government banks a thick layer of private and foreign banks was taking shape. The first

of such new generation banks to be set up was Global Trust Bank, which later amalgamated with Oriental Bank of Commerce, ICICI Bank, HDFC Bank and Axis Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights, which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.
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History of Banking in India

Current Banking Structure Banks in India can be categorized into Scheduled and Non-scheduled Banks a) Scheduled Banks Scheduled Banks in India constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), cooperative banks and regional rural banks

b) Non-Schedule Banks Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". Banks in India can also be classified in a different way: Public Sector Banks, Private Sector Banks, Foreign Banks &

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History of Banking in India Regional Rural Banks (RRBs). The above mentioned classification overlaps with the previous one. Public Sector, Private Sector and Foreign Banks fall the category of scheduled banks. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Structure of the organized banking sector in India

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History of Banking in India

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