History of Banking in India

Beginning of Banking in India

The phase leading up to independence laid the foundations of the Indian banking system. The beginning of commercial banking of the joint stock variety that prevailed elsewhere in the world could be traced back to the early 18th century.

The story of banking starts from Bank of Hindustan established in 1770 and it was first bank at Calcutta under European management. It was liquidated in 1832 The General Bank of Bengal and Bihar, which came into existence in 1773, after a proposal by Governor (later Governor General) Warren Hastings, proved to be a short lived experiment.

In 1786 General Bank of India was set up. Trade was concentrated in Calcutta after the growth of East India Company’s trading and administration. With this grew the requirement for modern banking services, uniform currency to finance foreign trade and remittances by British army personnel and civil servants.

The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh. The Government subscribed to 20 per cent of its share capital and shared the privilege of appointing directors with voting rights. The bank had the task of discounting the Treasury Bills to provide accommodation to the Government. The bank was given powers to issue notes in 1823.

The Bank of Bombay was the second Presidency bank set up in 1840 with a capital of Rs.52 lakh, and the Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh. They were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters. The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.

Next came Allahabad Bank which was established in 1865 and working even today. The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 150 years is Allahabad Bank. Allahabad bank is also known as one of India’s Oldest Joint Stock Bank. However, the Oldest Joint Stock bank of India was Bank of Upper India established in 1863 and failed in 1913.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. This bank failed in 1958.

The first bank purely managed by Indians was Punjab National Bank, established in Lahore in 1895. The Punjab national Bank has not only survived till date but also is one of the largest banks in India.The Bank of India was set up in 1906 in Mumbai.The Swadeshi Movement of 1906 provided a great impetus to joint stock banks of Indian ownership and many more Indian commercial banks such as Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were established between 1906 and 1913. By the end of December 1913, the total number of reporting commercial banks in the country reached 56 comprising 3 Presidency banks.

In 1921,the three Presidency Banks i.e., Bank of Bengal,Bank of Bombay and Bank of Madras were merged with each other and Imperial Bank of India got birth. Imperial Bank of India was later renamed in 1955 as the State Bank of India.





As so many banks existed that time so the need of one monitoring authority for the Banks arises i.e. central Bank of the country .So there came the establishment of Reserve Bank of India which is currently central bank of our country. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.

The Reserve Bank was constituted to Regulate the issue of banknotes Maintain reserves with a view to securing monetary stability and 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, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.

With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.

NATIONALISATION OF BANKS 

Indian Banking history can be traced to 19th century. During the colonial era many Indian banks were founded either by the Presley States or by wealthy individuals.The primary aim of most of the banks was to cater financial needs of trade and industry in that locality. During this period the banking services became the privilege of big business firms and wealthy individuals. Masses were denied easy credit and banking services. Agriculture and rural small scale industries did not have access to credit facilities and banking services. They depended on village money lenders and other private financiers to fund their activities. These local financial prodders exploited the rural population by charging enormous interest rates and harsh repayment conditions.

Nationalization of banks in India was done in two phases. The first phase of nationalization started in 1955 when the erstwhile Imperial Bank of India became State Bank of India with an Act of parliament. During 1959, seven subsidiaries were nationalized and associated with State Bank of India one by one.The list of seven subsidiaries of SBI were as follows :

1.State Bank of Bikaner and Jaipur

2. State Bank of Hyderabad

3. State Bank of Mysore

4. State Bank of Patiala

5. State Bank of Travancore

6. State Bank of Indore – It was merged with SBI in the year 2010

7. State Bank of Saurashtra – – It was merged with SBI in the year 2008

The second phase of Nationalization of banks in India was introduced by then Indian Prime Minister Indira Gandhi who expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." 

The meeting received the paper with enthusiasm.Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalised the 14 largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in the country. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. the list of 14 commercial Banks that were nationalised are as follows :

1. Allahabad Bank
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Canara Bank
6. Central Bank of India
7. Dena Bank
8. Indian Bank
9. Indian Overseas Bank
10. Punjab National Bank
11. Syndicate Bank
12. UCO Bank
13. Union Bank of India
14. United Bank of India

In 1980, 6 more commercial banks were nationalized and became public sector banks.These are as follows :

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6. Vijaya Bank

Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank .It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Objectives behind Bank Nationalisation in India
The nationalisation of commercial banks took place with an aim to achieve following major objectives.

Social Welfare : It was the need of the hour to direct the funds for the needy and required sectors of the indian economy. Sector such as agriculture, small and village industries were in need of funds for their expansion and further economic development.

Controlling Private Monopolies : Prior to nationalisation many banks were controlled by private business houses and corporate families. It was necessary to check these monopolies in order to ensure a smooth supply of credit to socially desirable sections.

Expansion of Banking : In a large country like India the numbers of banks existing those days were certainly inadequate. It was necessary to spread banking across the country. It could be done through expanding banking network (by opening new bank branches) in the un-banked areas.

Reducing Regional Imbalance : In a country like India where we have a urban-rural divide; it was necessary for banks to go in the rural areas where the banking facilities were not available. In order to reduce this regional imbalance nationalisation was justified.

Priority Sector Lending : In India, the agriculture sector and its allied activities were the largest contributor to the national income. Thus these were labeled as the priority sectors. But unfortunately they were deprived of their due share in the credit. Nationalisation was urgently needed for catering funds to them.

Developing Banking Habits : In India more than 70% population used to stay in rural areas. It was necessary to develop the banking habit among such a large population.


EMERGENCE OF REGIONAL RURAL BANKS

The nationalisation of the banks in 1969 boosted the confidence of the public in the Banking system of the country. However, in the early 1970s, there was a feeling that even after nationalisation, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. This issue was taken up by the government and it set up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
Regional Rural Banks popularly known as 'Gramin Bank' came into existence on Gandhi Jayanti in 1975 with the formation of first Regional Rural Bank named as Prathama Grameen Bank. The rural banks had the legislative backing of the Regional Rural Banks Act 1976 . This act allowed the government to set up banks from time to time wherever it considered necessary. The RRBs were owned by three entities with their respective shares as follows:

Central Government → 50%

State government → 15%

Sponsor bank → 35%

NABARD (National bank for Agricultura and Rural Development) is the regulatory authority of the Regional Rural Banks.

The total number of RRBs functioning in the country as on 31st March 2015 is 56.