History Of Banking In India: The banking system is considered as the backbone of a nation’s economy. Banking procedures were carried by informal methods in the ancient World. However, formal banking has been developed as the “LIFE BLOOD” of trade and commerce from the 20th century. In India, banking has developed from the primitive to modern stage of banking in a fashion that has no parallel in world history.
Today, the Indian banking system is divided into commercial banks (Both Public, Private Banks, schedules and non-scheduled), Regional Rural Banks, Cooperative Banks etc. In this article, we will dig deeper to make you understand different phases of Indian Banking system along with other interesting facts.
History of Banking in India in Brief
Before & After Independence
Phases of Indian Banking System
The advancement in the Indian banking system is classified into 3 distinct phases:
1. The Pre-Independence Phase i.e. before 1947
2. Second Phase from 1947 to 1991
3. Third Phase 1991 and beyond
1. The Pre-Independence Phase i.e. before 1947
- This phase is characterized by the presence of a large number of banks (more than 600).
- Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832.
- After that many banks came but were not successful like:
(1) General Bank of India (1786-1791)
(2) Oudh Commercial Bank (1881-1958) – the first commercial bank of India.
- Whereas some are successful and continue to lead even now like:
(1) Allahabad Bank (est. 1865)
(2) Punjab National Bank (est. 1894, with HQ in Lahore (that time))
(3) Bank of India (est. 1906)
(4) Bank of Baroda (est. 1908)
(5) Central Bank of India (est. 1911)
- While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India.
- Imperial Bank of India was later renamed in 1955 as the State Bank of India.
- In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young Commission (set up in 1926).
- In this time period, most of the bank was small in size and suffered from a high rate of failures. As a result, public confidence is low in these banks and deposit mobilization was also very slow. People continued to rely on the unorganized sector (moneylenders and indigenous bankers).
2. The second phase from 1947 to 1991
- Broadly the main characteristic feature of this phase is the Nationalization of the bank.
- With the view of economic planning, nationalization emerged as an effective measure.
Need for nationalization in India:
(a) The banks mostly catered to the needs of large industries, big business houses.
(b) Sectors such as agriculture, small-scale industries and exports were lagging behind.
(c) The poor masses continued to be exploited by the moneylenders.
- Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.
- Fourteen commercial banks were nationalized on 19th July 1969. Smt. Indira Gandhi was the Prime Minister of India, during in 1969. The following banks are nationalized:
1. Central Bank of India
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara Bank 7. Dena Bank
8. United Bank
9. Syndicate Bank 10. Allahabad Bank
11. Indian Bank
12. Union Bank of India
13. Bank of Maharashtra
14. Indian Overseas Bank
- Six more commercial banks were nationalized in April 1980. These are mentioned below:
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
- Meanwhile, on the recommendation of the Narasimham Committee, Regional Rural Banks (RRBs) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large unserved population of rural areas and promoting financial inclusion.
- With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also set up like:(a) NABARD (est. 1982)
(b) EXIM (est. 1982)
(c) NHB (est. 1988)
(d) SIDBI (est. 1990)
Impact of Nationalization:
- Improved efficiency in the Banking system – since the public‘s confidence got boosted.
- Sectors such as Agriculture, small and medium industries started getting funds which led to economic growth.
- Increased penetration of Bank branches in rural areas.
3. Third phase 1991 and beyond
- This period saw remarkable growth in the process of development of banks with the liberalization of economic policies.
- Even after nationalization and the subsequent regulations that followed, a large portion of masses is untouched by the banking services.
- Considering this, in 1991, the Narasimham committee gave its recommendation i.e. to allow the entry of private sector players into the banking system.
- Following this, RBI gave license to 10 private entities, out of which few survived the market demands, which are- ICICI, HDFC, Axis Bank, IndusInd Bank, DCB.
- In 1998, the Narsimham committee again recommended the entry of more private players. As a result, RBI gave a license to the following newbies:
(a) Kotak Mahindra Bank (2001)
(b)Yes Bank (2004)
- In 2013-14, the third round of bank licensing took place and in 2015, IDFC Bank and Bandhan Bank emerged.
- In order to further financial inclusion, RBI also proposed to set up 2 new kinds of banks i.e. Payment Banks and Small Banks.
- In 2015, RBI gave in-principle licence to 11 entities to launch Payments Bank and granted ‘in-principle’ approval to the 10 applicants to set up Small Finance Banks.
- The RBI issued a license to the bank under Section 22(1) of the Banking Regulation Act, 1949, to carry on the business of Small finance bank (SFB) and Payments Bank in India.
Committee on Small Banks – The applications were analyzed and evaluated by an External Advisory Committee (EAC). The EAC for small banks was chaired by Usha Thorat, former deputy governor, RBI.
Committee on Payment Banks – These applications were analyzed and evaluated by an External Advisory Committee (EAC). The EAC Committee for Payment Banks was chaired by Dr Nachiket Mor, Director, Central Board of the Reserve Bank of India.
List of Public Sector Banks & Private Sector Banks
|Bank of Baroda||Vadodara|
|Bank of India||Mumbai|
|Bank of Maharashtra||Pune|
|Central Bank of India||Mumbai|
|Citi Union Bank||Tamil Nadu|
|Indian Overseas Bank||Chennai|
|Karur Vysya Bank||Tamil Nadu|
|Kotak Mahindra Bank||Mumbai|
|Lakshmi Vilas Bank||Chennai|
|Punjab National Bank||New Delhi|
|Punjab & Sind Bank||New Delhi|
|State Bank of India||Mumbai|
|South Indian Bank||Thrissur, Kerala|
|Union Bank of India||Mumbai|
List of Small Finance Bank
|Capital Small Finance Bank||Jalandhar, Punjab|
|Equitas Small Finance Bank||Chennai, Tamil Nadu|
|Utkarsh Small Finance Bank||Varanasi, UP|
|Suryoday Small Finance Bank||Belapur, Navi Mumbai|
|Ujjivan Small Finance Bank||Bengaluru, Karnataka|
|ESAF Small Finance Bank||Thrissur, Kerala|
|Au Small Finance Bank||Jaipur, Rajasthan|
|Fincare Small Finance Bank||Bengaluru, Karnataka|
|North East Small Finance Bank||Guwahati, Assam|
|Jana Small Finance Bank||Bengaluru, Karnataka|
List of Payments Bank
|Airtel Payment bank Ltd||Nov 2016||New Delhi India|
|Paytm Payments Bank||Nov 2017||Noida, U.P.|
|Fino Payments Bank||July 2017||Mumbai, Maharashtra|
|Jio Payments Bank||April 2017||Mumbai, Maharashtra|
|Aditya Birla Idea Payments Bank||February 2018||Mumbai, Maharashtra|
|India Post Payment bank||September 2018||New Delhi India|
Points to Note:
1. Allahabad Bank, established in 1865 – Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years.
2. Imperial Bank of India was later renamed in 1955 as the State Bank of India.
3. The first Bank of India with Limited Liability to be managed by Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad.
4. Punjab National Bank is the first bank purely managed by Indians, which was established in Lahore in 1895.
5. First Truly Swadeshi bank – Central Bank of India is called India’s First Truly Swadeshi bank, which was established in 1911 and wholly owned and managed by Indians.
6. Union Bank of India was inaugurated by Mahatma Gandhi in 1919.
7.Osborne Smith was the first governor of the Reserve Bank.
8. CD Deshmukh was the first Indian to be the governor of Reserve Bank.
9. Savings account system in India was started by Presidency Bank, 1833.
10. The first Indian bank to open overseas branch is Bank of India. It established a branch in London in 1946.
11. ICICI Bank was the first Indian bank to provide internet banking facility.
12. Central Bank of India was the first public bank to introduce Credit card.
13. ICICI is the first bank to provide mobile ATM.
14. State Bank of India has the maximum number of overseas branches.
15. Capital Small Finance Bank is India’s first small finance bank started its banking operations in April 2016 in Jalandhar, Punjab.
16. Airtel Payment bank Ltd is the first payments banks in India.
17. On January 02, 2019, theCabinet approves the merger of Vijaya Bank & Dena Bank with Bank of Baroda. After this merger, Bank of Baroda will become the third biggest public sector bank.
18. On 18th December 2018,IDFC Bank and non-banking financial company (NBFC) Capital First merged to create IDFC First Bank. Its headquarter is in Mumbai.
19. The government amalgamated three Regional Rural Banks — Punjab Gramin Bank, Malwa Gramin Bank and Sutlej Gramin Bank — into a single RRB with effect from January 1, 2019. New Gramin Bank is known as -Punjab Gramin Bank.