Notes on History of Banking in India ( Pre and Post Independence)

History of Banking in India ( Pre and Post Independence)

Banking is an integral part of the modern economy. But the nature and functions of modern banks have evolved over  period of time. The idea of banking evolved with the idea of money.Banking business is mainly linked to lending. Moneylender is to be found in every society-ancient or modern; advanced or backward.

The word ‘Bank’ has been derived from the Latin word ‘bancus’ or ‘banque’. The meaning of it in English is a bench. The early bankers transacted their business at benches in a market place. According to some authorities, the word bank was originally derived from German word bank. It means a joint stock fund. This word later on was called as ‘banco’ in Italy when a great part of Italy was ruled by the Germans.

1) F.E. Perry :
“The bank is an establishment which deals in money, receiving it on deposit from customers, hounouring customer’s drawings against such deposits on demand, collecting cheques for customes and lending or investing surplus deposits until they are required for repayment.”

2) Walter Leaf :
“A banker is an institution or individual who is always ready to receive money on deposits to be returned against the cheques of their depositors.”

3) Dr. Herbert L. Hart :
“A banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current accounts.”

5) The Indian Banking Companies Act, 1949 :
“Banking means the acceptance for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”

The origin of the Indian banking industry may be traced to the establishment of bank of Bengal in Calcutta (now Kolkata) in 1786. The growth of banking industry in India may be studied in terms of two broad phases.

Pre-independence (1786-1947) and

Post-independence (1947 till date).

The Post-independence phase may be further divided into three sub phases such as

pre-nationalization period (1947-1969).

Post nationalization period (1969 to 1991) and

Post-liberalization period (1991 till date).

Bank of Hindustan: Banking Concept in India was brought by Europeans. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. Bank of Hindustan was established in 1770 and it was the first bank at Calcutta under European management but due to the financial crisis, it was closed in 1832.

Presidency Banks:  The most significant achievement of this period was emergence of the Presidency Banks. On June 2, 1806 the Bank of Calcutta established in Calcutta mainly to fund General Wellesley’s wars against Tipu Sultan and the Marathas. It was the first Presidency Bank during the British Raj which was later renamed as Bank of Bengal in 1809. On 15th April, 1840 the second presidency Bank was established in Bombay – Bank of Bombay. On 1 July 1843 the Bank of Madras was established in Madras, now Chennai. It was the third Presidency Bank during the British Raj.

• The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh. 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.
• The Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh.

Allahabad Bank: Allahabad Bank also known as one of India’s Oldest Joint Stock Bank was established in 1865 is the oldest Public Sector Bank in India having branches all over India and serving the customers for the last 150 years.

Oudh Commercial Bank: In 1881, Oudh Commercial Bank was established at Faizabad. It was the first Bank of India with Limited Liability to be managed by Indian Board but collapsed after independence in 1958.

Punjab National Bank: In 1895 Punjab National Bank, the 4th largest Bank in India, 2nd Largest in Public Sector was established in Lahore in Punjab province of Undivided India founded by Lala Lajpat Rai. It was the first bank purely managed by Indian. First CMD of PNB was Sardar Dayal Singh.

Central Bank of India: Central Bank of India also called India’s First Truly Swadeshi bank was established in 1911 was the first Indian commercial bank which was wholly owned and managed by Indians.

At least 94 banks in India failed between 1913 and 1918 due to economic crisis during World War I.  Many of those banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

State Bank of India: on 27th January, 1921 Bank of Calcutta, Bank of Madras and Bank of Bombay were amalgamated to form Imperial Bank of India which was subsequently transformed into State Bank of India in July 1955 under State bank of India act 1955. So State bank of India is the oldest Bank of India. In 1926 Hilton-Young Commission submitted its report.

Reserve Bank of India: In 1934 Reserve Bank of India act was passed. On the recommendation of Hilton-Young Commission, on 1st April 1935 Reserve Bank of India was established. RBI was established with initial share capital worth Rs. 5 crore with 5 Lakh Rs. 100 share dividend.

With the end of British rule, India’s independence marked the end of a regime of the Laissez-faire i.e policy of minimum government interference for the Indian banking. 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 lead to a mixed economy with greater involvement of the state in banking and finance.

Key points:

The Reserve Bank of India, India’s central banking authority, was nationalized on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 vested with major powers for supervision of banking in India.

In order to organise the functioning and activities of banking, the Banking Regulation Act was enacted in 1949 by government of India which empowered the Reserve Bank of India (RBI) to regulate, control, and inspect the banks in India. The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Nationalisation of Banks

Even after the provisions and regulations of RBI, the banking sector was not working rapidly enough in spreading credit availability across the country. It was considered that banks were controlled by business houses and thus failed in catering to the credit needs of poor sections such as cottage industry, village industry, farmers, craft men, etc. Nationalisation of banks led to more government control over credit delivery.

Imperial Bank had been nationalised in 1955, making it the State Bank of India (SBI). SBI subsidiaries (associates) were nationalised in 1959.

When expressed by the then prime minister Indira Gandhi, the government of India issued an ordinance ‘Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969’ and nationalised the 14 largest commercial banks (with deposits over 50 cr.) w.e.f 19 July 1969 under which Banks had to reserve as much as 40 percent of credit to the priority sectors (agriculture and small and medium industries). These 14 banks controlled 70 percent of the country’s deposit namely:

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

A second phase of nationalisation took place in 1980 when 6 more commercial banks (with deposits over 200 cr.) were nationalised namely:

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

On the recommendation of M.Narsimhan committee, RRBs (Regional Rural Banks) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve 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 setup like

→ NABARD (est. 1982)

→ EXIM (est. 1982)

→ NHB (est. 1988)

→ SIDBI (est. 1990)

In 1991, the Narsimhan 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, of which 6 are survived, which are- ICICI, HDFC, Axis Bank, IDBI, Indus, DCB. In 1998, the Narsimhan committee again recommended entry of more private players. As a result RBI gave license to

→ Kotak Mahindra Bank (2003)

→ Yes Bank (2004)

In 2013-14, 3rd round of bank licensing took place. And in 2014 IDFC bank and Bandhan Bank emerged. In order to further financial inclusion, RBI also proposed to set up 2 kind of banks i.e. Payment Banks and Small Banks.