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Evolution of Banking System in India

A bank is basically a financial institution whose primary functions include accepting deposits and using these deposits for lending purposes. It is basically a link between those who have surplus capital and those who are in need of capital.

  • The traces of the banking system can be noticed from the last decades of 18th century when the Bank of Hindustan was established in 1770.
  • The largest and the oldest bank which is still in existence is State Bank of India. It was originated as Bank of Calcutta in 1806 and later renamed as Bank of Bengal in 1809. It became Imperial Bank of India when it was merged with two other banks – Bank of Madras and Bank of Bombay in 1921. After independence it was again renamed and became State Bank of India in 1955.
bank of bombay

  • In 1960, the State Banks of India was given control of eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks.
  • The Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934.
Reserve Bank of India

  • The Indian Banking system can be classified into two categories – Scheduled Banks and Non Scheduled Banks.
  • The scheduled banks are those which are included under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified into: nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian private sector banks. The term commercial banks refers to both scheduled and non-scheduled commercial banks which are regulated under the Banking Regulation Act, 1949.

British Era:

During the British Rule, the merchants started Union Bank of Calcutta in 1869. It was initially started as joint stock association but later it came into partnership with others.

The Allahabad Bank was established in 1865 and still functioning today, is the oldest Joint Stock bank in India but it was not the first though. That honour goes to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1894, which has survived to the present and is now one of the largest banks in India.

In early years of 20th century, the Indian banking system was in nascent phase and was quite immature to compete with the presidency banks and foreign exchange banks which were well equipped with the technology and capital resources.

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of 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.

The undivided Dakshina Kannada district is known as “Cradle of Indian Banking”.

Post-Independence Period:
The partition of India in 1947 adversely impacted the economies of various states especially Punjab and West Bengal, paralysing banking activities for months. India’s independence marked the end of a regime of the Laissez-faire 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 envisaged a mixed economy.

Nationalisation of Banks in 1960s:
In early years of 60s , except SBI all other banks were owned and operated by private persons.
The Government of India issued an ordinance (‘Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969′) and nationalised the 14 largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in the country.


§  Second round of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second round of nationalisation, 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.[18] It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation and Globalisation of Indian Banking System:
§  In the early 1990s, the government embarked on a policy of liberalization, licensing a small number of private banks.
§  These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank.
§  This move, along with the rapid growth in the economy of India, revitalised the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

Today’s Era:
§  By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks.
§  The Reserve Bank of India is an autonomous body, with minimal pressure from the government.
§  By 2013 the Indian Banking Industry employed 1,175,149 employees and had a total of 109,811 branches in India and 171 branches abroad and manages an aggregate deposit of 54 billion (US$1.1 trillion or €1.0 trillion) and bank credit of 52604.59 billion (US$840 billion or €780 billion).
§  The net profit of the banks operating in India was 51 billion (US$16 billion or €15 billion) against a turnover of 9148.59 billion (US$150 billion or €140 billion) for the financial year 2012-13.
§  On 28 Aug, 2014,Pradhan Mantri Jan Dhan Yojana which is a scheme for comprehensive financial inclusion launched by the Prime Minister of India, Narendra Modi.
§  Run by Department of Financial Services, Ministry of Finance, on the inauguration day, 1.5 Crore (15 million) bank accounts were opened under this scheme. By 10 January 2015, 11.5 crore accounts were opened, with around 8698 crore (US$1.4 billion) were deposited under the scheme, which also has an option for opening new bank accounts with zero balance.
§  Physical as well as virtual expansion of banking through mobile banking, internet banking, tele banking, bio-metric and mobile ATMs is taking place [34] since last decade and has gained momentum in last few years.

Indian Banking System has evolved from a small group of merchant banks to a huge network of commercial banks. It has learned a lot from its mistakes and failures and gradually following the footprints of other developed countries. People are still reluctant to keep their savings in the banks rather they prefer illicit ways to save their capital. It is because of the illiteracy and conservative thoughts about tax evasions. A lot has been done and still a lot has to be done to put our Indian Economy on the driver’s seat…..

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