History of Indian Banking

BANKING

A bank is a financial institution that provides banking and other financial service to their customers. A bank can accept deposits that can be withdrawn on demand. It also lends money to those who need it, like individuals and business houses. Bank plays a significant role in the economy of a nation.

Functions of Bank.

• To provide the security to the savings of customers.

• To provide loans and advances to businessmen for short term and long term purposes.

• It facilitates business transactions through receipts and payments by cheques instead of currency.

• It encourages public confidence in the working of the financial system increase savings speedily and efficiently.

HISTORY OF INDIAN BANKING

The growth of banking industry in India may be studied in terms of two phases. Pre-independence (1770-1947) and Post-independence (1947-till date).

Pre-independence Phase 

• The first bank in India was the Bank of Hindustan was set-up in 1770. The General Bank of India 1786 and Bengal of Calcutta 1806(immediately became the Bank of Bengal) followed.

• At that time there were very small banks operated by Indians and most of them were owned and operated by particular community. The banking in India was controlled and dominated by the presidency banks, namely The Bank of Bombay, The Bank of Bengal and The Bank of Madras which later on merged to form the Imperial Bank of India - 21 January 1921(the oldest bank of India and still exist with the name of State Bank of India).

• Allahabad Bank was established, exclusively by Indians in 1865 and still functioning today is the oldest joint stock bank in India.

• Punjab National Bank was set-up in 1894 with headquarters in Lahore, which has survived to the present and is now one of the largest banks in India.

• Between 1906 and 1913, Bank of India, Bank of Baroda, Central Bank of India, Canara Bank, Indian Bank and Bank of Mysore were set-up.

• The Reserve Bank of India began operation in 1935.

Post-Independence Phase 

At the time of Independence in 1947, the banking system in India was fairly well developed with over 600 commercial banks operating in the country. And Government took major steps in this Indian Banking Sector Reform after Independence.

• First major step in this direction was nationalization of Reserve Bank of India in 1949.

• Enactment of Banking Regulation Act in 1949.

• Government of India nationalized the Imperial Bank which was established in 1921 and transformed it into the State Bank of India with effect from 01 July 1955 with extensive banking facilities on a large scale especially in rural and semi-urban areas.

The period from 1967 to 1991 was characterized by major developments in other words social control on banks in 1967 and in 1969 the Government of India issued an ordinance and nationalized the 14 largest commercial banks (Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank and United Bank of India)  and 6 more Banks (Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sindh Bank and Vijaya Bank) were nationalized in 1980 with this 91% of the banking sector in India came under the government ownership.

New Phase of Indian Banking system, Reforms after 1991

This phase has introduced many more products and facilities in the banking sector as part of the reforms process. The economic and financial sector reforms has strengthened the India economy and transformed the operating environment of banks and financial institutions in the country. 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, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized 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.

• In 1991, under the Chairmanship of M Narasimham, a committee was set-up, which worked for the liberalization (a relaxation of government restrictions) of banking practices.

• In this phase, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers.

• Phone banking and net banking are introduced. The entire system became more convenient and swift. Time has given importance in all money transactions.