History of Banks In India
Published on Aug 22, 2020
Indian banking is a basic need for the economic development of the country. Banking system in India has changed a lot with the advancement of technology and needs of the people. The History of Indian banks starts before the independence.
The banking system is the most prominent part of the financial sector of our country as it is responsible for the flow of more than 70% of its flow.
The banking system in the country has three main functions:
(a) Operation of the payment system
(b) Depositor and protector of people's savings
(c) Issuance of loans to individuals and companies
The banking system in India is divided into two phases.
(a) Pre-independence phase (1786-1947)
(b) 1947 to date
The post-independence period can again be divided into three phases-
• Pre-nationalization period (1947 to 1969)
• Post nationalization period (1969 to 1991)
• Liberalisation Period (1991 to present day)
(A) Pre-independence phase (1786-1947)
The Indian Banking started from the establishment of Bank of Hindustan in 1770. More than 6000 banks registered were registered in India during Pre-Independence phase but only few of them survived. Presidential Banks- Bank of Bengal, Bank of Bombay and Bank of Madras were then established in the nineteenth century under the British East India Company. In 1921, the Presidency Banks were abolished and replaced by a new one called the Imperial Bank of India. Later, this Imperial Bank of India was made State Bank of India.
Indian-owned banks were established between 1865 and 1908.
- 1865 Allahabad Bank was established.
- 1895, Punjab National Bank was established.
- Bank of India was established in Mumbai in 1906.
- Central Bank Of India , 1911
- Canara Bank, 1906
- Bank of Baroda, 1908
The central bank of India, RBI was established in 1935 on the recommendation of the Hilton-Young Commission. At that time, the banking system was confined only to the urban sector and the need of the rural and agricultural sector was completely neglected.
Reason for the Failure of Many banks:
- Indian Accounts holders become fraud
- No machinery and technology
- Time consuming process and Human errors
- No facilities
- No management skills
(B) After independence phase (1947 to present day)
The Government of India nationalized the Reserve Bank of India in 1949. Because at that time, the entire banking sector was privately owned. Hence the rural population of our country had to depend on small lenders for their needs. The Reserve Bank of India was nationalized to improve and grow the country's economy. In 1949, the Banking Regulation Act 1949 was also enacted. In 1955 the Imperial Bank of India was nationalized and named as State Bank of India.
Nationalization period (1969 to 1991)
In 1969, 14 major banks which were nationalized by the Government of India. Their deposits were more than 50 crores. The list of those banks is presented below.
1. Allahabad Bank
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. Bank of Maharashtra
6. Central Bank of India
7. Canara Bank
8. Dena Bank
9. Indian Overseas Bank
10. Indian Bank
11. United Bank
12. Syndicate Bank
13. Union Bank of India
14. UCO Bank
After the nationalization, the Indian banking system improved a lot and it developed immensely but it was still not fully covered by the rural, weaker section of the society and agriculture.
In order to resolve these issues, in 1974 the Narasimham committee recommended the establishment of Regional Rural Banks (RRBs). On 2 October 1975, RRB was established with the objective of increasing the quantum of credit for rural and agricultural development
Six more banks were further nationalized in 1980. With the second wave of nationalization, the priority sector lending target was also raised to 40%.
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sind Bank
6. Vijaya Bank
Impact of Nationalisation
- Funds increased and the economic condition of country increased a lot.
- Efficiency was increased.
- Rural and Agriculture sector of the country was boosted.
- Major employment opportunities were made.
- Banks started gaining profit and it was used by the government for the betterment of the people.
- Competition was decreased and work efficiency was increased
Liberalization phase (1990 onwards)
The Government of India set up a committee under the chairmanship of Shri M Narasimham to improve the financial stability and profitability of the entire public sector banks. The Sri M. Narasimham Committee had also made several recommendations to improve and strengthen the banking system in the country. Some of the major recommendations are as follows:
- The major thrust of the recommendations was to make banks competitive and strong and conducive to the stability of the financial system.
- Foreign banks in India were allowed to open offices as branches and subsidiaries.
- The committee suggested that to make banks more competitive, and public sector banks and private sector banks should be treated equally by the government and the Reserve Bank of India.
- Banks should be encouraged to abandon the conservative and traditional system of banking and adopt progressive functions such as merchant banking and underwriting, retail banking.
- The committee suggested not to further nationalize banks.
- Now, foreign banks and Indian banks were allowed to set up joint ventures in these and other new types of financial services.
10 private banks which got license from RBI to enter banking sector. These were banks.
- Global Trust Bank
- ICICI Bank
- HDFC Bank
- Bank of Punjab
- IndusInd Bank
- Centurion Bank
- IDBI Bank
- Times Bank
- Development Credit Bank.
- Axis Bank
The Government of India accepted all the major recommendations given by the committee.
Modern Development in Indian Banking Sector:
In the years 2003 and 2004, Kotak Mahindra Bank and Yes Bank got license from RBI for entry into the system.
In 2014, the Reserve Bank of India approved IDFC and Bandhan Financial Services in principle to set up banks.
Today, our Indian banking industry is one of the most highly developed industries. The banking system of any country should be effective as it plays an active role in the economic development of the country.