Evolution of the Indian banking system

There are three distinct phases in the history of Indian Banking system. Early phase from 1786 to 1969. Nationalization of Banks and up to 1991 prior to banking sector reforms. New phase of Indian Banking with the advent of Financial & Banking Sector Reforms after 1991.

Establishment of banks in India

The advent of the Indian banking system started with the establishment of the first joint stock bank, the General Bank of India in the year 1786. After this first bank, Bank of Hindustan and Bengal Bank came to existence.

In the mid of 19th century, East India Company established three banks The Bank of Bengal in 1809, The Bank of Bombay in 1840, and bank of Madras in 1843. These banks were independent units and called Presidency banks. These three banks were amalgamated in 1920 and a new bank, Imperial Bank of India was established. All these institutions started as private shareholders banks and the shareholders were mostly Europeans. The Allahabad Bank was established in 1865.

The next bank to be set up was the Punjab National Bank Ltd. which was established with its headquarters at Lahore in 1894 for the first time exclusively by Indians. Most of the Indian commercial banks, however, owe their origin to the 20th century. Bank of India, Central Bank of India, Bank of Baroda, the Canara Bank, the Indian Bank, and the Bank of Mysore were established between 1906 and 1913. The last major commercial bank to be set up in this phase was the United Commercial Bank in 1943. Earlier the establishment of Reserve Bank of India in 1935 as the central bank of the country was an important step in the development of commercial banking in India. The history of joint stock banking in this first phase was characterized by slow growth and periodic failures. There were as many as 1100 banks, mostly small banks, failed during the period from 1913 to 1948.

The Government of India concerned by the frequent bank failures in the country causing miseries to innumerable small depositors and others enacted The Banking Companies Act, 1949. The title of the Act was changed as “Banking Regulation Act 1949”, as per amending Act of 1965 (Act No.23 of 1965).
Reserve Bank of India as the Central Banking Authority of the country was vested with extensive powers for banking supervision.

Deficiencies of Indian banking system before nationalization

Commercial banks, as they were privately owned, on regional or sectarian basis resulted in development of banking on ethnic and provincial basis with parochial outlook. These Institutions did not play their due role in the planned development of the country. Deposit mobilisation was slow. Public had less confidence in the banks on account of frequent bank failures. The savings bank facility provided by the Postal department was viewed a comparatively safer field of investment of savings by the public. Even the deficient savings thus mobilised by commercial banks were not channeled for the development of the economy of the country. Funds were largely given to traders, who hoarded agricultural produce after harvest, creating an artificial scarcity, to make a good fortune in selling them at a later period, when prices were soaring. The Reserve Bank of India had to step in at these occasions to introduce selective credit controls on several commodities to remedy this situation.

Initial phase of nationalization

When the country attained independence Indian Banking was exclusively in the private sector. In addition to the Imperial Bank, there were five big banks each holding public deposits aggregating Rs.100 Crores and more, viz. the Central Bank of India Ltd., the Punjab National Bank Ltd., the Bank of India Ltd., the Bank of Baroda Ltd. and the United Commercial Bank Ltd. Rest of the banks were exclusively regional in character holding deposits of less than Rs.50 Crores. Government first implemented the exercise of nationalisation of a significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalised in that year. But the major process of nationalisation was carried out on 19th July 1969, when the then Prime Minister of India, Mrs.Indira Gandhi announced the nationalisation of 14 major commercial banks in the country. One more phase of nationalisation was carried out in the year 1980, when seven more banks were nationalised. This brought 80% of the banking segment in India under Government ownership.