History of Indian Banks

Banking in India forms a strong base for the economic development of the country. Significant changes in the financial framework and the management have been seen over the course of the years with the advancement of technology in the banking sector. The History of Banking in India traces all the way back to before India got its independence in 1947.

The development of banking sector can be divided into three stages:

Stage I: Pre-Independence Period

Stage II: Post Independence Period

Stage III: The Liberalization or the Banking Sector Reforms Phase which started in 1991

Pre- Independence Period

The First bank of India was the "Bank of Hindustan", which was set up in 1770 by Alexander and Co. and situated in the then Indian capital Calcutta. However, it ceased to operate in 1832. During the Pre -Independence time frame more than 600 banks had been registered in the nation but very few survived. Following the path of Bank of Hindustan, different banks were set up in India. The first joint stock bank in India was the Allahabad bank established in 1865 by a group of Europeans but the first Indian bank with Indian capital was Punjab National bank established in 1894 in Lahore, Pakistan.

During the British Rule, three presidency banks were established named bank of Bengal (1806), bank of Bombay (1840), bank of Madras (1843) which were later merged into a single bank in 1921 called the Imperial Bank of India which acted as quasi-central bank of India which was later nationalized in 1955 and was known as the State Bank of India (the largest public sector bank).

The reasons due to which many banks failed during the pre- independence period were:

1. Indian account holders had become fraud-prone

2. Lack of machines and technology

3. Human errors & time-consuming

4.Lack of proper management skills

Post- independence period

When India got independence, major banks of the nation were held by private owners with a mean to tackle this issue, the Government chose to nationalize the Banks. The banks were nationalized under the Banking Regulation Act of 1949. Firstly, Reserve Bank of India was nationalized in 1949 and after that 14 more banks were nationalized within the time frame of 1969 to 1991 (These were the banks whose public deposits were in excess of 50 crores). In the year 1980, another 6 banks were nationalized, taking the number of nationalized banks to 20 but due to the merger of New bank of India with Punjab National Bank, the total became 19.

The liberalization Phase

To give steadiness and productivity to the Nationalized Public sector Banks, the Government chose to set up a panel under the administration of Shri. M Narasimham to deal with the different changes in the Indian banking industry. The greatest reform was the introduction of Private sector banks in India. RBI offered permit to 10 Private sector banks to operate in the country.

The other measures taken include:

1. Permitting the entry of foreign banks in India.

2. No more nationalization of Bank.

3. Equal treatment to both public and private sector banks.

4. Deregulation of interest rates.

5. Establishment of Small finance banks.

7. Enabled banks to raise capital through public issue.

8. Lowering of SLR and CRR.

Conclusion 

The historical background of the banking in India shows that with time and the necessities of individuals, significant advancements have been achieved in the financial area to succeed it.

Written by Ambika Sabharwal (Guest Contributor)

References

Wikipedia