Presidency Banks and Rise of Modern Banking

The period between 1770 and 1920 marks a decisive phase in the history of Indian banking, during which modern, western-style banking institutions were introduced under British colonial rule. This era witnessed the transition from indigenous, community-based banking to organised joint-stock banks operating under formal structures. The emergence of presidency banks, followed by Indian-managed commercial banks, laid the institutional foundation of the modern banking system in India.

Early Western-Style Banks in India

The earliest attempts at modern banking in India were made by European interests in the late 18th century. These banks were established primarily to support colonial trade and administration rather than indigenous economic needs.
The Bank of Hindustan, established in 1770 in Calcutta, is regarded as the first modern bank in India. Managed by European agency houses, it introduced joint-stock banking practices but had a limited lifespan and ceased operations in 1832. Although short-lived, it marked the beginning of institutional banking in India.
Soon after, the General Bank of India was founded in 1786. This bank also failed within a few years, highlighting the challenges faced by early banking institutions due to limited public trust, weak capital base, and lack of regulation. Nevertheless, these early experiments paved the way for more stable banking institutions in the 19th century.

Presidency Banks and Colonial Banking Structure

A major milestone in Indian banking history was the establishment of the Presidency Banks by the East India Company. These banks were created to serve the three presidency regions of British India and formed the backbone of colonial banking.
The first of these was the Bank of Bengal, originally established as the Bank of Calcutta in 1806 and renamed in 1809. It was followed by the Bank of Bombay in 1840 and the Bank of Madras in 1843.
These banks were jointly owned by the government and private shareholders and enjoyed special privileges, including the right to issue currency within their respective regions until the enactment of the Paper Currency Act of 1861, which centralised note issuance. The presidency banks primarily financed foreign trade in commodities such as cotton, indigo, and opium and acted as bankers to the colonial government. Their operations were largely urban-centric and catered mainly to British commercial and administrative interests.

Rise of Indian-Managed Commercial Banks

Towards the latter half of the 19th century, Indian entrepreneurship in banking began to emerge. This development was partly influenced by growing nationalist sentiment and the Swadeshi movement, which encouraged indigenous enterprise and reduced dependence on European institutions.
One of the earliest such institutions was the Allahabad Bank, established in 1865. Although initially promoted by Europeans, it later came under Indian management and became one of the oldest surviving Indian banks.
The Oudh Commercial Bank, founded in 1881 in Faizabad, is often regarded as the first fully Indian-owned commercial bank. It represented a significant step towards indigenous control of banking, although it eventually closed in 1958.
A landmark institution was the Punjab National Bank, established in 1894 in Lahore. Founded by Indian nationalist leaders including Lala Lajpat Rai, it was managed and staffed entirely by Indians from its inception and aimed to serve Indian traders, industries, and households.
The early 20th century saw the establishment of several prominent Indian banks such as the Bank of India and Canara Bank in 1906, the Bank of Baroda in 1908, and the Central Bank of India in 1911. These institutions were founded by Indian business leaders to provide credit to sectors neglected by European banks, particularly Indian industry, agriculture, and small traders.

Consolidation and the Imperial Bank of India

Despite the growing number of banks, the period was marked by instability. Many early banks failed due to inadequate capital, poor management, and frequent bank runs. Although more than 600 banks were registered before Independence, only a small number survived.
A major consolidation took place in 1921 with the merger of the three presidency banks to form the Imperial Bank of India. This institution became the largest bank in British India, inheriting the extensive branch network and government business of the presidency banks. While remaining a shareholder-owned commercial bank, it performed several quasi-central banking functions, such as managing government accounts and currency chests, until the establishment of a central bank.
By 1920, India had developed the basic framework of modern banking, consisting of the Imperial Bank, a few large Indian joint-stock banks, and numerous smaller private and cooperative banks. However, banking facilities remained largely confined to urban areas, with rural regions still dependent on moneylenders and indigenous bankers for credit. This imbalance would later become a major focus of banking reforms in independent India.