Brief History of Banking in India
Earliest evidence of Banking in India is found from the period of Vedic Civilization. During those days, loan deeds called rnapatra or rnalekhya were prevalent. Interest rates as well as usury (Sood Khori in Hindi) was prevalent in Vedic India. The Vedic word Kusidin refers to an usurer (Soodkhor in Hindi) .This term is also found in Manusmriti. Various types of instruments were found in Buddhist, Mauryan and Mughal periods. The Arthashastra of Kautilya mentions presence of bankers during Maurya era. There were instruments in Maurya Era known as “Adesha” which are equivalent to Bill of exchange of current times.
Origin of Modern Banking Industry in India
Who were the indigenous bankers of India?
Since ancient times, businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been carrying on the business of banking. These indigenous bankers included very small money lenders to shroffs with huge businesses, who carried on the large and specialized business even greater than the business of banks.
Which is the first bank of India?
The first bank of India is Bank of Hindustan established in 1770. This bank was established at Calcutta under European management. It was liquidated in 1830-32.
What were the three Presidency Banks? When they were established?
From 1612 onwards, British East India Company had set up various factories or trading posts in India with the permission of the local Mughal emperors. In this process, they had established three presidency towns viz. Madras in 1640, Bombay in 1687 and Bengal Presidency in 1690. East India Company’s headquarters moved from Surat to Bombay (Mumbai) in 1687. Three Presidency banks were set up under charters from the British East India Company- Bank of Calcutta, Bank of Bombay and the Bank of Madras. The dates of their establishment were as follows:
- 2 June 1806: Bank of Calcutta was established in 1806; it was renamed in 1809 as Bank of Bengal
- 15 April 1840: Bank of Bombay established
- 1 July 1843: Bank of Madras established
These worked as quasi central banks in India for many years. Since Calcutta was the most active trading port in India, mainly due to the trade of the British Empire; it became a banking center.
What happened with Presidency banks later on?
In 1921, the presidency banks viz. Bank of Bengal, Bank of Bombay and Bank of Madras were amalgamated to form Imperial Bank of India. It was a private entity till that time. In 1955, this Imperial Bank of India was nationalized and renamed as State Bank of India. Thus, State bank of India is oldest Bank of India among the banks that exist today.
Which is the oldest joint stock bank of India?
A bank that has multiple shareholders is called joint-stock bank. Oldest Joint Stock bank of India was Bank of Upper India that was established in 1863. But this bank failed in 1913. India’s Oldest Joint Stock Bank which is still working is Allahabad Bank. It is also known as India’s oldest public sector bank. It was established in 1865.
Which were the first banks owned / managed by Indians?
The first Bank with Limited Liability to be managed by Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad. This bank failed in 1958. The first bank purely managed by Indians was Punjab National Bank, established in Lahore in 1895. The Punjab national Bank has not only survived till date but also is one of the largest banks in India. However, the first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911. So, Central Bank of India is called India’s First Truly Swadeshi bank. Its founder was Sir Sorabji Pochkhanawala and its first chairman was Sir Pherozeshah Mehta.
Which was the first bank to open a branch at foreign soil?
Bank of India was the first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974. Bank of India was founded in September 1906 as a private entity and was nationalized in July 1969. Since the logo of this Bank is a star, its head office in Mumbai is located in Star House, Bandra East, Mumbai.
Origin of Reserve Bank of India
Prior to establishment of RBI, the functions of a central bank were virtually being done by the Imperial Bank of India . RBI started its operations from April 1, 1935. It was established via the RBI act 1934, so it is also known as a statutory body. Similarly, SBI is also a statutory body deriving its legality from SBI Act 1955.
RBI did not start as a Government owned bank but as a privately held bank without major government ownership. It started with a Share Capital of Rs. 5 Crore, divided into shares of Rs. 100 each fully paid up. In the beginning, this entire capital was owned by private shareholders. Out of this Rs. 5 Crore, the amount of Rs. 4,97,8000 was subscribed by the private shareholders while Rs. 2,20,000 was subscribed by central government.
After independence, the government passed Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI from private shareholders after paying appropriate compensation. Thus, nationalization of RBI took place in 1949 and from January 1, 1949, RBI started working as a government owned bank.
What was Hilton Young Commission?
Hilton-Young Commission was the Royal Commission on Indian Currency and Finance set up by British Government of India in 1920s. In 1926, this commission had recommended to the government to create a central bank in the country. On the basis of mainly this commission, the RBI act was passed.
Where were the original headquarters of RBI?
Original headquarters of RBI were in Kolkata, but in 1937, it was shifted to Shahid Bhagat Singh Marg, Mumbai.
In which year, Banking Regulation Act was passed ?
Immediately after the independence, the Government of India came up with the Banking Companies Act 1949. This act was later changed to Banking Regulation (Amendment) Act 1949. Further, the Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank of India as India’s central banking authority.
Beginning of Banking Reforms and Nationalization of the Banks
The banking sector reforms started immediately after the independence. These reforms were basically aimed at improving the confidence level of the public because in those days, most banks were not trusted by the majority of the people. Instead, the deposits with the Postal department were considered rather safe. Banking sector and Financial sector reforms are not static events but continuous processes happening even today and will keep continuing. Nationalization of Banks, consolidation, diversification and liberalization of the banking industry in the 1980s and 1990s were part of this ongoing process. A few recent events as part of banking sector reforms include:
- Deregulation of interest rates
- Payment banks
- Increased autonomy to banks
- Basel III compatibility of banks
- Regulation of Non-banking Finance Companies etc.
The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act. State Bank of India was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments.
After that, in a major process of nationalization, seven subsidiaries of the State Bank of India were nationalized via the State Bank of India (Subsidiary Banks) Act, 1959. In 1969, fourteen major private commercial banks were nationalized. These 14 banks Nationalized in 1969 are shown in the below table.
|List of 14 Banks Nationalized in 1969|
|1.||Central Bank of India|
|2.||Bank of Maharashtra|
|4.||Punjab National Bank|
|8.||Indian Overseas Bank|
|9.||Bank of Baroda|
|12.||United Bank of India|
|14.||Bank of India|
The above was followed by a second phase of nationalization in 1980, when Government of India acquired the ownership of 6 more banks, thus bringing the total number of Nationalized Banks to 20. The private banks at that time were allowed to function side by side with nationalized banks and the foreign banks were allowed to work under strict regulation.
What was the impact of Nationalization of Banks?
Nationalization of the Banks brought the public confidence in the banking system of India. After the two major phases of nationalization in India, the 80% of the banking sector came under the public sector / government ownership. After the nationalization of banks, the branches of the public sector banks in India rose to approximately 800 per cent in deposits, and advances took a huge jump by 11,000 per cent. Government ownership gave the public implicit faith and immense confidence in the sustainability of public sector banks.
What are financial sector reforms ? Why they are needed?
The financial sector reforms are one of the most important policy agenda of the authorities around the world. There are several reasons for the same.
- Firstly, the reforms are needed to increase the efficiency of financial resource mobilizations and generate higher levels of growth.
- Secondly, financial sector reforms are utmost necessary for the macro-economic stability. India saw its worst economic crisis in the decade of 1980s.
In 1991, India embarked into an era of Economic Reforms which led to liberalization, privatization and globalization of the Indian Economy. The financial sector reforms were an integral part to these reforms.
The financial sector reforms got momentum with the recommendations of various committees such as Chakravarty Committee (1985), Vaghul Committee (1987) and most notably by Narasimham Committee (1991), which is also known as first Narasimham Committee.
What is the importance of year 1991 in banking of India?
Prior to 1991, India was more or less an isolated economy, loosely integrated with the economy of rest of the world. The public sector was born out of a planned economy model, which was underpinned by a Nehruvian-Fabian socialist philosophy.
In 1991, India embarked on the path of liberalization, privatization and globalization. This injected new energy into the slow growing Indian Economy. With reference to Banking sector, it was in this year that the first Narasimham Committee gave a blueprint of banking sector reforms. On the basis of these recommendations, the government launched a comprehensive financial sector liberalization programme which included interest rates liberalization, reduction of reserved rations, reduced government control in banking operations and establishment of a market regulatory framework. Another outcome of liberalization was the dismantling of prohibitions against foreign direct investment.
Some more outcomes of reforms that impacted the banking sector were:-
- Steps were taken to move to a market determined exchange rate system, and a unified exchange rate was achieved in the 1990s itself
- The government also released a slew of norms pertaining to asset classification, income recognitions, capital adequacy etc which the banks had to comply with
- Current account convertibility was allowed for the Rupee in accordance with IMF conditions
- Nationalized banks were allowed to raise funds from the capital markets to strengthen their capital base
- The lending rates for commercial banks was deregulated, thereby freeing them to lend more or as they saw fit
- Also, banks were allowed to fix their own interest rates on domestic term deposits that matures within two years
- Customers were encouraged to move away from physical cash, as RBI issued guidelines to the banks pertaining to the issuance of debit cards and smart cards
- The process of introducing computerization in all branches of banks began in 1993 in line with the Committee on Computerization in Banks’ recommendations, which had been submitted in 1989
- FII (Foreign Institutional Investors) were allowed to invest in dated Government Securities
- The Foreign Exchange Management Act (FEMA) was enacted in 1999 and effectively repudiated the Foreign Exchange Regulation Act (FERA) of 1973. FEMA enabled the development and maintenance of the Indian foreign exchange markets and facilitated external trade and payments
- The NSE (National Stock Exchange) began its operations in 1994
- RBI began the practice of auctioning Treasury Bills spanning 14 days and 28 days
Capital index bonds were introduced in India for the first time. The newly adopted policy of liberalization led the RBI to provide licenses to conduct banking operations to some private banks such as ICICI Bank, HDFC Bank etc. The growth of industries and expansion of economic operations also revitalized banking operations, which had to keep up with the demand for various banking operations by the flourishing and even nascent enterprises.
Bankers also responded to the renewed demand from the industrial sector and regular customers. New technology and customer-friendly measures were adopted by bankers to attract and retain customers. The Banking Ombudsman was established, so that consumers could have a forum to address their grievances against banks and the services they provided.
Important Dates in Banking History of India
|1770||First bank was established at Cacutta under European Management.|
|1786||General Bank of India was set up.|
|2 June 1806||Bank of Calcutta was established in 1806; it was renamed in 1809 as Bank of Bengal|
|15 April 1840||Bank of Bombay established|
|1 July 1843||Bank of Madras established|
|1861||Paper Currency Act was enacted by British Government of India|
|1863||Oldest Joint Stock bank of India named Bank of Upper India was established.|
|1865||Allahabad Bank was established.|
|1881||Oudh Commercial Bank, the first Bank of India with Limited Liability to be managed by Indian Board was established at Faizabad|
|1895||Punjab National Bank was established. It was first bank purely managed by Indians.|
|1911||Central Bank of India, first Indian commercial bank which was wholly owned and managed by Indians, was established. It was called First Truly Swadeshi bank|
|1921||Three presidency banks viz. Bank of Calcutta, Bank of Bombay and Bank of Madras amalgamated to form Imperial Bank of India|
|1935||Creation of Reserve bank of India|
|1949 (January )||Nationalization of Reserve Bank of India|
|1949 (March)||Enactment of Banking Regulation Act|
|1955||Nationalization of Imperial Bank of India, which now became State Bank of India|
|1959||Nationalization of SBI Subsidiaries|
|1969||Nationalization of 14 major Banks|
|1971||Creation of Credit Guarantee Corporation|
|1975||Creation of Regional Rural Banks|
|1980||Nationalization of 7 more banks with deposits over Rs. 200 Crore|
Dates of Establishment of various Banks
|Year / Date||Bank|
|1786||General Bank of India (First bank established in India)|
|1790||Bank Of Hindustan which lasted until. 1832.|
|02 June 1806||Bank of Calcutta|
|15th April 1840||Bank of Bombay|
|01st July 1843||Bank of Madras|
|1863||Bank of Upper India|
|1881||Oudh Commercial Bank|
|19th May 1894||Punjab National Bank|
|1895||Punjab National Bank In Lahore|
|1904||City Union Bank|
|1906||Bank of India|
|15th August 1907||Indian Bank|
|1908||Bank of Baroda|
|01st July 1906||Canara Hindu Permanent Fund (Renamed as Canara Bank in 1910)|
|21st December 1911||Central Bank of India|
|1916||Karur Vysya Bank|
|11-Nov-19||Union Bank of India|
|26th November 1920||Catholic Syrian Bank|
|1921||Imperial Bank of India by merger of three presidency banks.|
|11th May 1921||Tamilnad Mercantile Bank Limited|
|1924||Karnataka Bank Limited|
|1926||Lakshmi Vilas Bank Limited|
|1927||Dhanlaxmi Bank Ltd|
|1929||South Indian Bank Limited|
|23rd October, 1931||Vijaya Bank|
|1934||Reserve Bank of India|
|16th Sept 1935||Bank of Maharashtra|
|1937||Indian Overseas Bank|
|1938||Jammu & Kashmir Bank|
|26th May 1938||Dena Bank|
|19th February 1943||Oriental Bank of Commerce|
|1943||United Bank of India|
|1945||Federal Bank Limited|
|1954||Nainital Bank Limited|
|1955||State Bank of India (Imperial Bank of India renamed as SBI)|
|1985||Kotak Mahindra Bank|
|1994||UTI Bank (Now Axis Bank)|
|2013||Bhartiya Mahila Bank|
Key Landmarks in the journey of RBI
- In 1926, the Royal Commission on Indian Currency and Finance recommended creation of a central bank for India.
- In 1927, a bill to give effect to the above recommendation was introduced in the Legislative Assembly, but was later withdrawn due to lack of agreement among various sections of people.
- In 1933, the White Paper on Indian Constitutional Reforms recommended the creation of a Reserve Bank. A fresh bill was introduced in the Legislative Assembly.
- In 1934, the Bill was passed and received the Governor General’s assent
- In 1935, Reserve Bank commenced operations as India’s central bank on April 1 as a private shareholders’ bank with a paid up capital of rupees five crore.
- In 1942 Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar).
- In 1947, Reserve Bank stopped acting as banker to the Government of Burma.
- In 1948, Reserve Bank stopped rendering central banking services to Pakistan.
- In 1949, the Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
- In 1949, Banking Regulation Act was enacted.
- In 1951, India embarked in the Planning Era.
- In 1966, the Cooperative Banks came within the regulations of the RBI.
- In 1966, Rupee was devaluated for the first time.
- In 1969, Nationalization of 14 Banks was a Turning point in the history of Indian Banking.
- In 1973, the Foreign Exchange Regulation act was amended and exchange control was strengthened.
- In 1974, the Priority Sector Advance Targets started getting fixed.
- In 1975, Regional Rural Banks started
- In 1985, the Sukhamoy Chakravarty and Vaghul Committee reports embarked the era of Financial Market Reforms in India.
- In 1991, India came under the Balance of Payment crisis and RBI pledged Gold to shore up reserves. Rupee was devaluated.
- In 1991-92, Economic Reforms started in India.
- In 1993, Exchange Rate became Market determined.
- In 1994, Board for Financial Supervision was set up.
- In 1997, the regulation of the Non Banking Financial Companies (NBFC) got strengthened.
- In 1998, Multiple Indicator Approach for monetary policy was adopted for the first time.
- In 2000, the Foreign Exchange Management Act (FEMA) replaced the erstwhile FERA.
- In 2002, The Clearing Corporation of India Ltd Started operation.
- In 2003, Fiscal Responsibility and Budget Management Act (FRBMA) enacted.
- In 2004, Liquidity Adjustment Facility (LAF) started working fully.
- In 2004, Market Stabilization Scheme (MSS) was launched.
- In 2004 Real Time Gross Settlement (RTGS) started working.
- In 2006, Reserve Bank of India was empowered to regulate the money, forex, G-Sec and Gold related security markets.
- In 2007, Reserve bank of India was empowered to regulate the Payment systems.