Brief history of banking in India

Brief history of banking in India

Origin of banking activities in India can be traced back to ancient times. In the Indian historical perspective, the presence of institutional lending had its presence in Arthshastra of Kautilya during the Maurya period. There were financial instruments like “Adesha” which were equivalent to Bill of Exchange. There is a lot of references which are available in ancient Indian literature regarding the existence of an indigenous banking system that financed the trade and commerce in that period. The businessman like Shroff, Seth, Sahukars, and Mahajans, etc used to carry the activities of banking in ancient times.

The first bank of India is Hindustan bank which was established at Calcutta in 1770 by European management. It was liquidated in 1830. In 1687, East India Company moved its headquarters from Surat to Mumbai. Three presidency banks were set up under charter of East India Company as  Bank of Bombay, Bank of Madras, and Bank of Calcutta as follows.

  • 2nd June 1806: Bank of Calcutta was established, it was a bank of Bengal in 1809.
  • 15th April 1840: Bank of Bombay was established.
  • 1st July 1843: Bank of Madras was established.

In 1921, the three presidency banks were amalgamated to form Imperial Banks of India. In 1955 Imperial Bank of India was nationalized and renamed as State Bank of India. Thus state Bank of India is the oldest Bank in India that still exists today.

The oldest join stock bank, which has multiple shareholders, was Bank of upper India was established in 1863. This bank failed in 1913. The oldest joint stock bank which still exists is Allahabad Bank. It was established in 1865. The first bank with limited liability and managed with Indian management board was a bunch commercial bank, which was established in 1881 at Faizabad. This bank failed in 1958. The first bank solely managed by Indians was Punjab National Bank established in Lahore in 1895. The period between 1906-1911 the activities of banking were inspired by the Swadeshi movement. This movement inspired the businessmen and political activists to form banks for the India community.

As a result, a number of Banks which were set up and still functioning, are Catholic Syrian Bank, the south Indian bank, Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank, Central Bank of India. The period of the first world war (1914-1918) witnessed the indirect boost to the Indian economy due to war-related economic activities, but its turbulence caused a collapse of at least 94 banks between the period 1913-1918.

In the post-independence period, Govt. of India played an active role in the economic life of the nation. It envisaged a mixed economy by adopting the industrial policy resolution in 1948. The major steps in this regard included.

  • Indian central Banking Authority was established in as Reserve Bank of India in 1935, which was nationalized on 1st 1949 under the RBI transfer of public ownership Act 1948.
  • Enactment of RBI Act 1949 to regulate, control and inspect the banking operation in India.
  • The RBI all 1949, provided that every branch of the existing bank shall be opened with the permission of RBI and no two banks will have common directors.

    The Govt. constituted SBI to act as the principal agent of RBI and to handle banking transaction of Union Govt. and State Govt. all over the country. The banks owned by the princely states like, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, State Bank of Bikaner and Jaipur and State Bank of Saurashtra were nationalized and made as subsidiaries of State Bank of India.

    The Govt. of India issued the Banking companies (acquisition and transfer of undertaking) ordinance 1969 and nationalized 14 largest commercial Banks with effect from 19th July 1969. The second round of nationalization of six more banks was followed in 1980 for the purpose of more control over credit delivery. With this, the Govt. controlled our 91% of the banking business of India. Later on in the year 1993, Govt. Merged. New Bank of India with Punjab National Bank.
    Liberalization in 1990 In early 1990, Govt. gave license to a number of private sector financial institution for retail banking. These banks came up as a new generation Tech-Savy Banks including Global Trust Bank, Indus Ind Bank, UTI Bank (renamed as Axis Bank), ICICI Bank and HDFC Bank. The Global Trust Bank was later amalgamated with Oriental Bank of Commerce with the rapid growth of the Indian economy revitalized the banking sector in India. As a second step, foreign banks which had a 10% cap in voting rights for foreign direct investors (FDI), were allowed up to 74% with some restrictions. By 2010, the range and reach of banking products were rapidly grown along the Indian cross-section of society.

    However, the presence of private and foreign Banks in rural areas still remains fairly a subject challenge. Indian Banks in general, have quality of assets, strong and transparent balance sheets as compared other Banks in comparable economies in the region.
    Due to the growth of Indian economy in the service sector, the demand for Banking services like retail banking, mortgage, and investment services are expected to be very strong. There may also be an encouraging environment for mergers and Acquisitions (M & A), takeovers and asset sales.

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