The History of Banking in India | Indian Banking History

We can trace the history of Banking in India to ancient times. But the modern banking system in India came with the advent of the Europeans. The History of Banking in India can be grouped into three phases-

• Pre-Independence Phase( Before 1947)
• The Second Phase comprising Pre Nationalization Period and Post Nationalization Period(1947-1991)
• The Banking Sector Reform Period (1991- till present)

PRE-INDEPENDENCE PHASE (BEFORE 1947)

In 1770, the first bank of India “Bank of Hindustan” was established in Kolkata. It ceased its operation in 1832. Around this period out of over 600 banks that were registered, only a few were successful to carry out their operation. The reasons behind the failure of such large numbers of banks were the following –

• The most obvious reason was the lack of proper management skills.
• There were very fewer facilities available for banks to thrive.
• All the transactions were done manually which were time-consuming and prone to errors. There were no machines and proper technology to manage the banking operations.
• The Indian Account holders were vulnerable to fraud and were hesitant to deposit their savings.

Despite the difficulties, some banks were successful in carrying out their operations. They were-

• General Bank of India (1786-1791)
• Bank of Bengal (1809)
• Bank of Bombay (1840)
• Bank of Madras (1843)
• Oudh Commercial Bank (1881-1958) – It was the first bank that was partially managed by the Indians.
• Allahabad Bank (1865): It became the first joint-stock commercial bank of India.
• Punjab National Bank (1894): First bank which started its operation with Indian Capital.
  Bank of India (1906) – It became the first Indian bank to open its branch in a foreign country. It opened its branch in London in 1946.
• Bank of Baroda (1908)
• Central Bank of India (1911) – It was the first fully indigenous bank of India.
• Union Bank of India (1919)

The East India Company established three banks, namely Bank of Bengal, Bank of Bombay, and Bank of Madras, collectively known as Presidency Bank. These three banks were merged in 1921 into one single bank called the “Imperial Bank of India”. It became the State Bank of India in 1955.

The Reserve Bank of India was established in 1935 to control the functioning of the banks. It was on the recommendation of the Hilton Young Commission. Initially, it started its operation as a private entity and was later nationalized in 1949.

THE SECOND PHASE COMPRISING OF PRE NATIONALIZATION PERIOD AND POST NATIONALIZATION PERIOD (1947-1991)

This is a phase when the nationalization of banks took place. Most of the banks were operating privately. The rural people were still finding it difficult to avail themselves of the banking facilities and resorted to moneylenders and indigenous bankers for their financial assistance. The banks were nationalized under the Banking Regulation Act of 1949.

First Phase of Nationalization

14 banks were included for the first phase of nationalization in 1969. The first phase of nationalization included banks with national deposits of 50 crores or more. They were:

• Allahabad Bank
• Bank of India
• Bank of Baroda
• Bank of Maharashtra
• Central Bank of India
• Canara Bank
• Dena Bank
• Indian Overseas Bank
• Indian Bank
• Punjab National Bank
• Syndicate Bank
• Union Bank of India
• United Bank
• UCO Bank

In 1959, all the subsidiaries of the State Bank of India were nationalized. They were-

• State Bank of Patiala
• State Bank of Hyderabad
• State Bank of Bikaner and Jaipur
• State Bank of Mysore
• State Bank of Travancore
• State Bank of Saurashtra
• State Bank of Indore

The State Bank of Saurashtra was merged with State Bank of India in 2008, the State Bank of Indore merged in 2010, and the rest of the subsidiaries merged with the State Bank of India in 2017.

Second Phase of Nationalization

In 1980, 6 other banks were nationalized. They were-

• Andhra Bank
• Corporation Bank
• New Bank of India
• Oriental Bank of Commerce
• Punjab and Sind Bank
• Vijaya Bank
  In 1975, Regional Rural Banks were established for having an effective financial inclusion of the country. They were established for the development of rural areas in India.

THE BANKING SECTOR REFORM PERIOD (1991- TILL PRESENT)

• It is the most significant phase that transformed the banking sector to where we are today. Some of the developments that happened in this phase were-
• The introduction of Private Sector Banks in India is one of the crucial steps during this phase. Initially, RBI gave license to 10 Private Sector Banks. At present, there are 21 private sector banks in India.
• The setting up branches of Foreign Banks in India. At present, there are 45 such banks in India. The foreign banks got permission to start joint ventures with Indian Banks.
• Restriction on Nationalization of Banks. At present, there are 21 Commercial Banks and 12 Public Sector Banks in India.
• Small Finance Banks can set up their branches all over India. At present, ten small finance banks are operating in India.
• Introduction of Payment Banks. At present, 6 Payment Banks are operating in India.

Banking sector reforms are a work in progress. They may continue to suit to the needs of time.

The article on the history of banking in India ends here.

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