History of Banking in India

Banking during pre-independence period

India had centuries old tradition of indigenous Banking. There existed many evidences showing that the concept of Banking was not new to India. As Chanakya’s Arthashashtra about 3000 B.C. showed facts that Banking was already there in powerful existence in India. The origin of modern Banking in India dates back to the 18th century. History of Banking in India began with the foundation of the Agency houses in Calcutta and Bombay in 18 century. In early periods, the lending money was simple and easy as it was Seths, Sahukars, Mahajans who financed clients whom they closely knew. Moneylenders used to be known as people who fulfilled urgent needs of people but later they were known for malpractices. As they charged extra rates of interests and made illiterate people fool. With the arrival of the British rule, indigenous Banking received a setback.

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.

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.

Banking during post-independence period

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

With this, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. So the current number of nationalised banks is 26 including SBI and its 5 associates.

Read next article: Banking Structure in India ››

Read previous article: « Credit market in India

« Back to banking material page