History of Banking in India – Banking Awareness Notes

Mentor for Bank Exams
History of Banking in India – Banking Awareness Notes
Dear Aspirants,
Banking Sector is the Backbone of Indian Economy. And since the inception of First Bank in India, it has undergone major changes. For a Banking Aspirant it is essential to know about the timeline of Events in Banking Sector.
So here we are providing an article on History of Banking in India.
Money makes the mare go is an old saying which is relevant even today. So are the banks.
In India, references about banking and regulations were even found in our scriptures and ancient texts. Rna or Debt is even mentioned in our Vedic literature. Banking products are also found quoted in Chanakya’s Arthashastra (300 B.C.).Moving to Modern day banking system, the concept of banking is laid by the people of Italy under the name Banco.
The advancement in the Indian banking system is classified into 3 distinct phases:
1. The pre-independence phase i.e. before 1947
2. Second phase from 1947 to 1991
3. Third phase 1991 and beyond

Phase I:
This phase is characterized by the presence of a large number of banks (more than 600).
Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832. After that many banks came but some were not successful like –
  • General Bank of India (1786-1791)
  • Oudh Commercial Bank (1881-1958) – the first commercial bank of India.
Whereas some are successful and continue to lead even now like –
  • Allahabad Bank (est. 1865)
  • Punjab National Bank (est. 1894, with HQ in Lahore (that time))
  • Bank of India (est. 1906)
  • Bank of Baroda (est. 1908)
  • Central Bank of India (est. 1911)
While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras (est. 1843) merged into a single entity in 1921which came to be known as Imperial Bank of India.
Note: Imperial Bank of India was later renamed in 1955 as the State Bank of India.
In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young Commission (setup in 1926).
In this time period, most of the bank were small in size and suffered from high rate of failures. As a result public confidence is low in these banks and deposit mobilization was also very slow. People continued to rely on unorganized sector (moneylenders and indigenous bankers).

Phase II:
Broadly the main characteristic feature of this phase is thenationalization of bank. With the view of economic planning, nationalization emerged as the effective measure.
Need for nationalization in India:
a) The banks mostly catered to the needs of large industries, big business houses.
b) Sectors such as agriculture, small scale industries and exports were lagging behind.
c) The poor masses continued to be exploited by the moneylenders.
Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.
14 commercial banks were nationalized in 19th July, 1969. Smt. Indira Gandhi was the Prime Minister of India, during in 1969. These were –
1.    Central Bank of India
2.    Bank of India                           
3.    Punjab National Bank
4.    Bank of Baroda
5.    United Commercial Bank
6.    Canara Bank          
7.    Dena Bank
8.    United Bank                               
9.    Syndicate Bank              
10.Allahabad Bank                
11.Indian Bank
12.Union Bank of India
13.Bank of Maharashtra          
14.Indian Overseas Bank
6 more commercial banks were nationalized in April 1980. These were:
1.    Andhra Bank              
2.    Corporation Bank
3.    New Bank of India
4.    Oriental Bank of Commerce                            
5.    Punjab & Sindh Bank                
6.    Vijaya Bank.
Note: In 1993, New Bank of India got merged with Punjab National Bank.
Meanwhile on the recommendation of M.Narsimhan committee, RRBs (Regional Rural Banks) were formed on Oct 2, 1975.  The objective behind the formation of RRBs was to serve large unserved population of rural areas and promoting financial inclusion.
With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also setup like
  • NABARD (est. 1982)
  • EXIM (est. 1982)
  • NHB (est. 1988)
  • SIDBI (est. 1990)
Impact of Nationalisation:
a) Improved efficiency in the Banking system – since the public ‘s confidence got boosted.
b) Sectors such as Agriculture, small and medium industries started getting funds – led to economic growth.
c) Increased penetration of Bank branches in the rural areas.

Phase III
This period saw a remarkable growth in the process of development of banks with the liberalization of economic policiesEven after nationalization and the subsequent regulations that followed, a large portion of masses are untouched by the banking services.
Considering this, in 1991, the Narsimhan committee gave its recommendation i.e. to allow the entry of private sector players into the banking system. Following this RBI gave license to 10 private entities, of which 6 are survived, which are- ICICI, HDFC, Axis Bank, IDBI, Indus, DCB.
In 1998, the Narsimhan committee again recommended entry of more private players. As a result RBI gave license to
  • Kotak Mahindra Bank (2003)
  • Yes Bank (2004)
In 2013-14, 3rd round of bank licensing took place. And in 2014 IDFC bank and Bandhan Bank emerged.
In order to further financial inclusion, RBI also proposed to set up 2 kind of banks i.e.Payment Banks and Small Banks.

Some Important Facts:
1. Allahabad Bank, established in 1865 – Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years.
2. Imperial Bank of India was later renamed in 1955 as the State Bank of India.
3. The first Bank of India with Limited Liability to be managed by Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad.
4. Punjab National Bank is the first bank purely managed by Indians, which was established in Lahore in 1895.
5. First Truly Swadeshi bank – Central Bank of India is called India’s First Truly Swadeshi bank, which was established in 1911 and wholly owned and managed by Indians.
6.  Union Bank of India was inaugurated by Mahatma Gandhi in 1919.
7. Osborne Smith was the first governor of the Reserve Bank.
8. CD Desmukh was the first Indian to be the governor of Reserve Bank.
9. Savings account system in India was started by Presidency Bank,1833.
10. The first Indian bank to open overseas branch is Bank of India. It established a branch in London in 1946.
11. ICICI Bank was the first Indian bank to provide internet banking facility.
12. Central Bank of India was the first public bank to introduce Credit card.
13. ICICI bank is the first bank to provide mobile ATM.
14. Bank of Baroda has the maximum number of overseas branches.