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An Overview of Banking in India

An Overview of Banking in India

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Published by Jagadish Nath

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Published by: Jagadish Nath on Jun 20, 2008
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An Overview of Banking Sector in India

Till the end of late 18th century, Banks in India, in the modern sense of the term, weren\u2019t there. During the time of the American Civil War, the supply of cotton to Lancashire (The textile hub of UK) stopped from the Americas. At that time some banks were opened, which functioned as entities to finance industry, including speculative trades in cotton. Most of the banks opened in India during that period could not survive and failed because of the high risk which came with large exposure to speculative ventures. It was a disaster for depositors who lost money and therefore lost interest in keeping deposits with banks.

In the year 1786, The General Bank of India was the first bank to come into existence in India. And then, almost a century later, in the year 1870, The Bank of Hindustan became the 2nd bank in India. Unfortunately, both these banks are now defunct.1

The Bank of Bengal which later became the State Bank of India
The oldest bank to be still in existence, that too as the largest bank in India, is the State
Bank of India. Albeit, the name was not the same as today rather was "The Bank of
Bengal\u201d which started its operations in Calcutta in June, 1806. Interestingly, if people

think that the entry of foreign banks in India is only a post-reform phenomenon, they are absolutely incorrect. In fact, in as early as 1850s, foreign banks like Credit Lyonnais started their Calcutta (now Kolkata) operations. At that point of time, Calcutta was the most active trading port, thanks to the trade of the British Empire, and due to which banking activity took roots there and prospered.

The first fully Indian owned bank was the Allahabad Bank, which was established in
1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935.

At least 94 banks in India failed during the years 1913 to 1918. This was really a turbulent time for the world as a whole and the banking sector in India specially. This was the period which witnessed the First World War (1914-1918). Since then through the end

1 Wikipedia, the free encyclopedia

of the Second World War (1939-1945), and two years thereafter until India achieved independence, were very challenging period for Indian banking. The years of the First World War were turbulent, and it took toll on many banks which simply collapsed despite the Indian economy gaining indirect boost due to war-related economic activities. There were at least 106 numbers of banks which downed shutters during that period. Following is a table giving year wise closed banks\u2019 detail during the period;2

YearsNumber of banks
that failed
Authorised capital
(Rs. Lakhs)
Paid-up Capital
(Rs. Lakhs)
1913 12
274
35
1914 42
710
109
1915 11
56
5
1916 13
231
4
9
76
25
1918 7
209
1
Post-independence

The partition of India bought about a social unrest throughout India in 1947. Riot and chaos ruled. The most adversely impacted provinces were the Punjab and West Bengal. So did the economies of both these provinces. As a result, the banking activities had remained paralyzed for months. Till then the banking sector was wide open and there were almost no regulation. Most of the promoters were private players. With Independence, things started changing. Rather the independence marked the end of a regime of theLaissez-faire for the Indian banking. The new government initiated a process of playing an active role in the economy of the nation. The Industrial Policy Resolution adopted by the government in 1948 was the first step towards it. The resolution opted for a mixed economy. This resulted into greater control and involvement of the state in different segments of the economy, more so, in the sensitive sectors including banking and finance. The important banking regulatory steps were as follows:

\u2022
In 1948, India's central banking authority the Reserve Bank of India got
nationalized, and it became an institution owned by the Government of India.
2 Wikipedia, the free encyclopedia
\u2022

With the enactment of the Banking Regulation Act in 1949, the Reserve Bank of India (RBI) got empowered "to regulate, control, and inspect the banks in India."

\u2022

The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a license from the RBI, and no two banks could have common directors.

Interestingly, despite these provisions, control and regulations, almost all banks in India except the State Bank of India, continued to be owned and operated by private persons. However, the situation changed dramatically with the nationalization of major banks in India on 19th July, 1969.

Nationalisation

From Independence, it took some years for the banking sector to mature. By 1960s, the Indian banking industry did occupy an important position to facilitate the development of the Indian economy. Moreover, it did employ a quantum volume which could affect national economy. It resulted in a debate about the possibility to nationalize the banking industry. At that point, during the annual conference of the All India Congress Meeting, in a paper entitled "Stray thoughts on Bank Nationalisation", Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI favouring nationalisation. The paper was received with positive enthusiasm. Thereafter, in a swift and sudden move, the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. The decision was even termed as a "masterstroke of

political sagacity" by non other than a leader of the stature of Jaypraksh Narayan. Then,

within the next fortnight of issuing the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. The bill finally received the presidential approval on 9th August, 1969.

In 1980, there came the second phase of nationalisation of 6 more commercial banks. The reason forwarded for this was to have more control of credit delivery by the government. By the time, GOI effectively got hold of 91% control of the total banking business of India.

Till 1990s, all nationalised banks grew at a pace of around 4%, similar to the average
growth rate of the Indian economy.
Post-liberalisation

In the early 1990s, with the Narsimha Rao government embarking on a policy of liberalisation the situation started changing. Licenses were issued to a small number of private banks, such as Global Trust Bank (the first of such new generation banks to be set up)which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. These banks also came to be known asNew

Generation tech-savvy banks because of their improved service condition and their
extensive use of IT in the operations.

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short n sweet overviw of banking
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