Indian Banking History from 1921 to 1969
The period from 1921 to 1969 represents the most transformative phase in Indian banking history. During these decades, the banking system evolved from a colonial, urban-oriented commercial structure into a state-guided and development-oriented framework. This transition was shaped by bank failures, weak regulation, Independence, economic planning, rural exclusion from credit, and successive policy experiments. The cumulative experience of this period ultimately led to the nationalisation of major banks in 1969.
Formation of the Imperial Bank of India (1921)
In 1921, the Imperial Bank of India was formed through the merger of the Bank of Bengal, Bank of Bombay, and Bank of Madras. It became the largest commercial bank in British India and handled government treasury operations. Until the establishment of a central bank, it also performed several de facto central banking functions, such as managing government balances and currency chests.
Despite its size and influence, the Imperial Bank remained largely urban- and elite-focused. Its lending was concentrated on foreign trade, urban commerce, and large business houses. Rural areas, agriculture, and small borrowers were almost entirely excluded from institutional banking, reinforcing regional and sectoral imbalances.
Weak Banking Regulation in the Early 20th Century
In the early decades of the 20th century, banking regulation in India was extremely weak. There was no uniform banking law governing entry, capital adequacy, management standards, or lending practices. Except for the presidency banks and a few large institutions, most banks operated with minimal supervision. This regulatory vacuum encouraged speculative and risky banking practices, significantly increasing systemic vulnerability.
Collapse of Small Private Banks
The absence of effective regulation led to the failure of numerous small private banks. Institutions such as People’s Bank of India (1920) and Alliance Bank of Simla (1923) collapsed due to poor capital bases, mismanagement, and speculative lending. These failures were not isolated events but reflected deep structural weaknesses within the banking system. Many local banks failed after incurring heavy losses in speculative trade finance.
Impact on Depositors and Public Confidence
Bank failures had devastating consequences for depositors. There was no deposit insurance or government guarantee, so bank collapse often resulted in the total loss of life savings. Middle-class savers and small traders were the worst affected. Repeated failures severely eroded public trust in formal banking, leading many households to hoard cash or depend on informal moneylenders. As a result, financial intermediation weakened and economic growth remained constrained.
Policy Lessons from Early Bank Failures
These repeated failures convinced policymakers that unregulated banking posed serious risks to the economy. The experience laid the intellectual foundation for future reforms, including the establishment of a central bank, enactment of a uniform banking law, and introduction of depositor protection mechanisms.
Establishment of the Reserve Bank of India (1935)
The Reserve Bank of India was established in 1935 under the Reserve Bank of India Act, 1934. It became the central monetary authority responsible for currency issuance, monetary management, and supervision of the banking system. With its creation, the central banking functions previously performed by the Imperial Bank were institutionally separated, marking a major step towards a modern monetary framework.
RBI Regulation without Structural Change (1935–1947)
Although the establishment of the RBI introduced centralised regulation, the basic commercial orientation of banks remained unchanged. Ownership patterns, profit motives, and lending behaviour continued to be market-driven. Banks focused on low-risk, high-return activities rather than developmental priorities. As a result, the RBI’s early regulatory role had limited impact on altering credit allocation patterns.
Urban and Port-Centric Banking Structure
During this phase, bank branches were heavily concentrated in port cities such as Bombay, Calcutta, and Madras. Banking activity primarily supported export–import trade, shipping, jute, and cotton. Interior districts and rural regions remained largely unbanked, reinforcing regional inequalities in access to finance.
Industrial and Trade Dominance in Lending
Banks preferred lending to large trading houses and established industries, as these borrowers were perceived as safer and more profitable. Short-term trade finance, export bills, and working capital loans dominated bank portfolios. Small producers, artisans, and peasants were systematically excluded from institutional credit due to perceived risks and lack of collateral.
Near-Exclusion of Agriculture from Bank Credit
Agriculture received negligible support from banks during this period. Seasonal risks, monsoon dependence, and absence of formal collateral discouraged lending. Even in agriculturally prosperous regions, farmers relied overwhelmingly on moneylenders. Institutional banking failed to develop crop-based or area-specific credit models.
Consequences for the Rural Economy
The lack of institutional credit resulted in chronic rural indebtedness, exploitative interest rates, land alienation, and stagnant rural development. Despite the presence of the RBI, the urban–elite bias of commercial banking remained largely intact.
Independence and the Shift to a Planned Economy (1947)
After Independence, India adopted a state-led planned development model. Banking was re-envisioned as an instrument for mobilising savings, financing investment, and supporting national development goals. Profit maximisation alone was no longer seen as sufficient justification for banking activity.
Major Banking Reforms of 1948–1949
In 1949, the RBI was nationalised, bringing monetary authority under public ownership. In the same year, the Banking Regulation Act, 1949 was enacted, granting the RBI powers over bank licensing, inspection, management control, and corrective action. These reforms aimed to improve banking stability and depositor protection.
Limits of Regulatory Reform
While the Banking Regulation Act strengthened supervision and reduced failures, it did not fundamentally alter private ownership or profit-driven credit allocation. Agriculture, small industries, and rural areas remained underserved. These limitations later justified stronger state intervention.
Planned Development and Credit Mismatch (1951–1956)
The First and Second Five-Year Plans generated massive demand for credit in agriculture, infrastructure, and industry. However, private banks continued to favour urban and industrial borrowers, exposing a widening gap between planning priorities and banking behaviour.
Nationalisation of the Imperial Bank and Creation of SBI (1955)
In 1955, the Imperial Bank was nationalised and transformed into the State Bank of India. SBI was mandated to expand rural and semi-urban banking, finance agriculture and small borrowers, and handle government banking operations. This marked the first major step towards public sector banking.
Princely State Banks and Their Integration
Several princely states had their own banks, such as those of Travancore, Mysore, Patiala, and Bikaner. These institutions mainly served royal treasuries and local trade and operated within limited regions. Banking standards varied widely, necessitating post-Independence integration.
Integration into the SBI System (1959)
The SBI Subsidiary Banks Act, 1959 merged major princely banks into the SBI group. This integration strengthened regional banking, promoted uniform standards, and expanded banking reach in rural and semi-urban areas, laying the groundwork for mass banking.
Ownership Pattern and Industrial Control (1950s–60s)
Most large banks remained privately owned and were often controlled by industrial houses. Preferential lending to promoter groups led to concentration of economic power, while social sectors remained neglected.
Rural Credit Reality by the Early 1960s
By the mid-1960s, rural branches constituted only about 22% of total bank branches, and agriculture received less than 2% of total bank credit. Dependence on moneylenders continued, severely constraining rural development.
Bank Failures and Deposit Insurance
The failure of Laxmi Bank and Palai Central Bank in 1960 once again shook public confidence. In response, the Deposit Insurance Corporation Act, 1961 was enacted, and deposit insurance became operational in 1962, making India the first Asian country to introduce depositor protection.
Social Control of Banks (1967)
The policy of social control aimed to align banking with public welfare objectives through government representation on bank boards and credit planning. However, private ownership limited its effectiveness.
Bank Nationalisation as the Logical Outcome (1969)
The cumulative experience of 1921–1969 demonstrated that regulated private banking alone could not meet India’s developmental needs. Persistent rural exclusion, industrial concentration, repeated bank failures, and planning imperatives made decisive reform unavoidable. These factors culminated in the nationalisation of major commercial banks in 1969, marking a decisive shift towards inclusive and development-oriented banking.