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History of Banking in India

© Research Paper by - Tariq Mumtaz

The Beginning
The English traders that came to India in the 17th century could not
make much use of the indigenous bankers, owing to their ignorance
of the language as well the inexperience indigenous people of the
European trade.

Therefore, the English Agency 1 Houses in Calcutta and Bombay

began to conduct banking business, besides their commercial
business, based on unlimited liability. The Europeans with aptitude
of commercial pursuit, who resigned from civil and military,
organized these agency houses. A type of business organisation
recognizable as managing agency took form in a period from 1834 to 1847.

The primary concern of these agency houses was trade, but they branched out into banking as a
sideline to facilitate the operations of their main business. The English agency houses, that began to
serve as bankers to the East India Company had no capital of their own, and depended on deposits for
their funds. They financed movements of crops, issued paper money and established joint stock banks.
Earliest of these was Hindusthan Bank, established by one of the agency houses in Calcutta in 1770.

Banking in India originated in the last decades of the 18th century. The first bank in India, though
conservative, was established in 1786 in Calcutta by the name of bank of Bengal. Indian banking
system, over the years has gone through various phases. For ease of study and understanding it can be
broken into four phases

These phases are based upon personal study and understanding and many experts may ir may not
agree this chronological segmentation.

Prof K.V. Bhanu Murthy 2 has also segregates the Indian banking periods into four eras. These

1. Early historical and formative era: 1770-1905

2. Pre-independence era: 1906-1946

3. Post independence regulated era: 1947-1993

4. Post independence deregulated era from 1993 onwards

1 A type of business organization recognizable as managing agency took form in a period from 1834 to 1847. Managing agency system
came into existence when an agency house first promoted and acquired the management of a company. This system, with no
counterpart in any other country functioned as an Indian substitute for a well-organized capital market and an industrial banking system
of western countries.
Professor in Department of Commerce, Delhi School of Economics
Early Phase (1786 to 1935)
Banking in India originated in the last decades of the 18th
century. The first banks were The General Bank of India,
which started in 1786, and the Bank of Hindustan, both of
which are now defunct.

The oldest bank in existence in India is the State Bank of

India, which originated in the Bank of Calcutta in June 1806,
which almost immediately became the Bank of Bengal. This
was one of the three presidency banks, the other two being
the Bank of Bombay and the Bank of Madras, all three of
which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The East
India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as independent
units and called it Presidency Banks. The three banks merged in 1925 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860 and
another in Bombay in 1862; branches in Madras and Pondichery, then a French
colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most
active trading port in India, mainly due to the trade of the British Empire, and so
became a banking center.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in
1848 because of the economic crisis of 1848-49. The Allahabad Bank,
established in 1865 and still functioning today, is the oldest Joint Stock bank in

Joint Stock Banks

American Civil War played a major role in the development of banking in India. The next big thing
unfolded in the early phase of banking was formation of joint stock companies, with limited liability.
The American Civil War cut off the supply of American cotton to England caused an unprecedented
boom in India’s cotton trade with England.

The first joint stock bank was Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to the
Alliance Bank of Shimla.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881
in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest banks in India

Stability & Growth

Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most
of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a
number of Indian joint stock banks. All these banks operated in different segments of the economy.

The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian
joint stock banks were generally under capitalized and lacked the experience and maturity to compete
with the presidency and exchange banks.

This segmentation let Lord Curzon to observe,

"In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and
cumbersome compartments."

Swadeshi Movement
The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian Bank,
Bank of Baroda, Canara Bank and Central Bank of India.

Ammembal Subba Rao Pai founded “Canara Bank Hindu Permanent Fund” in
1906. Central Bank of India was established in 1911 by Sir Sorabji Pochkhanawala
and was the first commercial Indian bank completely owned and managed by
Indians. In 1923, it acquired the Tata Industrial Bank.

The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada
and Udupi district which were unified earlier and known by the name South Canara (South Kanara )

Four nationalized banks started in this district and also a leading private sector bank. Hence,
undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

Banks with Year of Start

Bank of Bengal 1809
Bank of Bombay 1840
Bank of Madras 1843
Allahabad Bank 1865
Punjab National Bank Ltd. 1894
Canara Bank 1906
Indian Bank 1907
Bank of Baroda 1908
Central Bank of India 1911
Bank of Mysore 1913
Union Bank if India 1922
Failures in Early Phase
During the first phase, the growth was very slow and banks experienced periodic failures during the
Early Phase between. There were approximately 1100 banks, mostly small which failed within the
early phase

The first major bank failure took place in 1791, when General Bank of India was voluntarily
liquidated, due to inability to earn profits following the currency difficulties in 1787. Bengal Bank
failed around 1791, due to a run on it caused by emergence of difficulties of a related firm.

A large number 14 of banks failed within a short time, and public confidence in banks was destroyed.
The currency confusion during 1873-1893 caused trade uncertainties and also played its role in
creating an atmosphere unfavorable to establishment of new banks.

Due to war and uncertainty in Europe let to speculative activity, which eventually caused bank failures.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in
India remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century.

Development of banking, during this period, was mostly because very deregulated (laissez faire
policy). This also played a major role in failures. The deficiency of capital made newly established
banks almost wholly dependent on deposits. Keen rivalry among them to attract deposits led to luring
of depositors, with rates of interest much higher than they could really afford.

During 1913, Indian Companies Act 3 was passed. It contained a few sections related to joint sector
banks. While this act is significant, being the first legislation related to banks, it was not adequate for
regulation of banking activity. Many banks were left altogether free from regulation.

The boom during the later part of World War I and after it gave another impetus to the starting of new
banks. A number of banks were established, some specially for financing industries. But from 1922,
the bank failures increased once again due to economic depression

Pre Nationalization Phase (1935 to 1969)
Organized banking in India is more than two centuries old. Until 1935 all, the banks were in private
sector and were set up by individuals and/or industrial houses, which collected deposits from
individuals and used them for their own purposes.

In the absence of any regulatory framework, these private owners of banks were at liberty to use the
funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

For many years the Presidency banks acted as quasi-

central banks, as did their successors. Bank of Bengal,
Bank of Bombay and Bank of Madras merged in 1925 to
form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

Even though consolidation in banking was building trust

among the investors but a central regulatory, authority was
much needed. British Government in India passed many
trade and commerce laws but acted little on regulating the
banking industry.

Reserve Bank of India

Another breakthrough happened in this phase, which was Reserve Bank of India.
The Reserve Bank of India was set up on the recommendations Royal Commission on
Indian Currency and Finance 4 also known as the Hilton-Young Commission. The
commission submitted its report in the year 1926, though the bank was not set up for
nine years.

Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in
India. The Government on December 20, 1934 issued a notification and on January 14, 1935, the RBI
came into existence, though it was formally inaugurated only on April 1, 1935.

Main functions of RBI were

1. Regulate the issue of banknotes
2. Maintain reserves with a view to securing monetary stability and
3. To operate the credit and currency system of the country to its advantage

The Bank began its operations by taking over from the Government the functions so far being
performed by the Controller of Currency and from the Imperial Bank of India. Offices of the Banking
Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as
the Central Bank for Burma until Japanese Occupation of Burma and later unto April 1947.

After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948
when the State Bank of Pakistan commenced operations.

India Wins Freedom
I think the second milestone in history of Indian banking was India becoming a sovereign republic.
The Government of India initiated measures to play an active role in the economic life of the nation,
and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed
economy 5 . This resulted into greater involvement of the state in different segments of the economy
including banking and finance.

The banking sector also witnessed the benefits; Government took major steps in this Indian Banking
Sector Reform after independence.

ƒ First major step in this direction was nationalized of Reserve Bank in 1949.
ƒ Enactment of Banking Regulation Act in 1949 6
ƒ Reserve Bank of India Scheduled Banks' Regulations, 1951.
ƒ Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on a large
scale especially in rural and semi-urban areas.
ƒ Nationalization of SBI subsidiaries in 1959

Government of India took many banking initiatives. These were aimed to provide banking coverage to
all section of the society and every sector of the economy. -

ƒ 1955 The Industrial Credit and Investment Corporation of India Limited (ICICI)
was incorporated at the initiative of World Bank, the Government of India and representatives
of Indian industry, with the objective of creating a development financial institution for
providing medium-term and long-term project financing to Indian businesses.

ƒ Industrial Development Bank of India Limited (IDBI) was established in 1964 by an

Act of Parliament to provide credit and other facilities for the development of the fledgling
Indian industry. Some of the institutions built by IDBI are The National Stock Exchange of
India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding
Corporation of India (SHCIL) IDBI BANK, as a private bank after government policy for new
generation private banks.

This phase of Indian banking was eventful and was a phase of restructuring, regulation. However,
despite these provisions, control and regulations, banks in India except the State Bank of India,
continued to be owned and operated by private persons.

Post Nationalization Phase (1969 to 1990)
I think nationalization 7 of banks in India was an important phenomenon. On July 19, 1969 - the
erstwhile government of India nationalized 14 major private banks. Nationalization of bank in India
was not new or happening first time. From 1955 to 1960, State Bank of India and other seven
subsidiaries were nationalized under the SBI Act of 1955.

List of Nationalized Banks in 1969

1 Central Bank of India 8 Indian Overseas Bank
2 Bank of Maharashtra 9 Bank of Baroda
3 Dena Bank 10 Union Bank
4 Punjab National Bank 11 Allahabad Bank
5 Syndicate Bank 12 United Bank of India
6 Canara Bank 13 UCO Bank
7 Indian Bank 14 Bank of India

It was not a step taken at random or because of the whims of the leadership of the time, but reflected
a process of struggle and political change which had made this an important demand of the people.

Nationalisation took place in two phases, with a first round in 1969 covering 14 banks followed by
another in 1980 covering seven banks. Currently there are 27 nationalized commercial banks.

Reasons for Nationalization

1. The need for the nationalization was felt mainly because private commercial banks were not
fulfilling the social and developmental goals of banking, which are so essential for any
industrializing country. Despite the enactment of the Banking Regulation Act in 1949 and the
nationalization of the largest bank, the State Bank of India, in 1955, the expansion of
commercial banking had largely excluded rural areas and small-scale borrowers.

2. The developmental goals of financial intermediation were not being achieved other than for
some favored large industries and established business houses. Whereas industry’s share in
credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34 per
cent to 68 per cent, agriculture received less than 2 per cent of total credit.

3. The stated purpose of bank nationalization was to ensure that credit allocation occur in
accordance with plan priorities.

4. Reduce the hold of moneylenders and make more funds available for agricultural development.
Nationalization of bank was to actively involve in poverty alleviation and employment
generation programs.

What is Nationalization: Nationalization, also spelled nationalisation, is the act of taking an industry or assets into the public
ownership of a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower
levels of government, such as municipalities, being state operated or owned by the state. The opposite of nationalization is usually
privatization or de-nationalization. The motives for nationalization are political as well as economic.
Advantages of Nationalization
1. Nationalized banks had to provide 18 per cent of their net credit to the agricultural sectors.
This was targeted to reduce the hold of moneylenders and make more funds available for
agricultural development. This has substantially helped farmers.
2. The reach of banking widened; the entry barriers that existed for customers to bank, social
economic and political were lowered. This resulted in a massive quantitative expansion of the
bank customer base as well as in the nature of services provided. Absence of concern for
profitability and targeting made banks to expand rapidly in un-banked areas thereby the
entire country was linked to banking activity.
3. Enhanced bank credit to the farm sector became instrumental for the success of green
revolution and the increase of aggregate food grain production in north and northwest India in
the 1970s and in the eastern region in the 1980s.
4. Increase in exports by small-scale manufacturers over the 1980s and 1990s, such that they
accounted for around two-third of the total value of all exports, was strongly related to access
to bank credit provided by priority sector norms.
5. Collection of saving: Private banks were not that good in attracting more saving. However,
with nationalization banks were now backed by Government of India, which tremendously
improved their credibility. This helped in more deposits, more savings hence more supply of

Disadvantages of Nationalization
1. State intervention to some extent distorted the banking sector. The domination of the State
has had a negative effect on the contribution of the banking sector as a whole to the economy.
Absence of profitability, non-realization of its potential as a business and the deterioration in
service has all affected citizens.
2. The intervention by the State and excessive domination and intervention by the bureaucracy
and polity into the functioning of banks has led to deterioration on economic efficiency, which
runs counter to the principles of a good Government.
3. Low Profitability: When the ownership is in public sector, the employs do not work for profit
and do not there performance and efficiency of the employs remains poor. Competition is
necessary for development and increasing the production. Nationalization has decreased the
spirit of competition

This phase of Indian banking not so happening for entry of new banks. Undoubtedly, it was a phase of
expansion, consolidation and increment in many ways. The banking sector grew at a phenomenal
rate, fruits of nationalization were evident, and common person was now banking with great trust.

National Bank for Agricultural and Rural Development (NABARD) was set up in 1982, as
an apex institution for agricultural and rural credit, though primarily, a refinance extension

Board for Industrial & Financial Reconstruction (BIFR) came into existence under Sick
Companies (Special Provisions) Act 1985 and started its operations wef May 15, 1987. It is meant to
deal with sick companies or potential sick companies as defined under the Act. BIFR, based on a
reference by the concerned sick company, takes a decision whether the company should be
rehabilitated or wound up.
Modern Phase from 1991 till date
This is the phase of “New Generation” tech-savvy banks. This phase can be called as “The Reforms
Phase”. Starting of the modern and current phase of Indian Banking is marked by two important

Narasimhan Committee
The Committee on Banking Sector Reforms Committee 8 headed by Mr. M. Narasimhan, it is
also known as Narasimhan Committee. The Committee, headed by former Reserve Bank of India
governor M Narasimhan, was appointed by the United Front government to review the progress in
banking sector reforms. The committee submitted its recommendations to union Finance Minister
Yashwant Sinha in November of 1991.

The Committee was required to review the progress in the reforms in the banking sector over the past
six years with and to chart a programme on Financial Sector Reforms necessary to strengthen the
India's financial system and make it internationally competitive taking into account the vast changes
in the international and financial markets, technogical advances. Some of the recommendations
offered by the committee are:

1. A reduction, phased over five years in the Statutory Liquidity Ratio (SLR) to 25 percent,
synchronized with the planned contraction in Fiscal Deficit.

2. A progressive reduction in the Cash Reserve Ratio (CRR).

3. Gradual deregulation of interest rates.

4. All banks to attain Capita Adequacy 8% in a phased manner.

5. Banks to make substantial provisions for bad and doubtful debts.

6. Profitable and reputed banks be permitted to raise capital from the public.

7. Instituting an Assets Reconstruction Fund to which the bad and doubtful debts of banks and
Financial Institutions could be transferred at a discount.

8. Facilitating the establishment of new private banks, subject to RBI norms.

9. Banks and financial institutions to classify their assets into four broad groups, viz, Standard,
Sub-standard, Doubtful and Loss.

10. RBI to be primarily responsible for the regulation of the banking system.

11. Larger role for Securities Exchange Board of India (SEBI), particularly as a market regulator
rather than as a controlling authority.

Economic Liberalization in India
The second major turning point in this phase was Economic Liberalization in India. After
Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically
dubbed as the "License Raj".

The Government of India headed by Narasimha Rao decided to usher in several reforms that are
collectively termed as liberalization in the Indian media with Manmohan Singh whom he appointed
Finance Minister.

Dr. Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms.
New research suggests that the scope and pattern of these reforms in India's foreign investment and
external trade sectors followed the Chinese experience with external economic reforms.

Reasons for the Reforms

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF
bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were
forced upon India.

That low point was the catalyst required to transform the economy through badly needed reforms to
unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively
lowered, state monopolies broken, the economy was opened to trade and investment, private sector
enterprise and competition were encouraged and globalisation was slowly embraced.

Impact of Economic Liberalization on Finance & Banking

Post nationalization now Indian banking sector was unshackled, and along with the government
banks a thick layer of private and foreign banks was taking shape. The first of such new generation
banks to be set up was Global Trust Bank, which later amalgamated with Oriental Bank of Commerce,
ICICI Bank, HDFC Bank and Axis Bank.

This move, along with the rapid growth in the economy of India, revitalized the banking sector in

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for
Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights, which
could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.

The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.
All this led to the retail boom in India. People not just demanded more from their banks but also
received more.

Banking Sector Reforms since 1992

The first type of reforms mainly based on Narasimhan Committee recommendations and the
principals of new liberalized Indian economy.

ƒ Out of the 27 public sector banks (PSBs), 26 PSBs achieved the minimum capital to risk assets
ratio (CRAR) of 9 per cent by March 2000. To enable the PSBs to operate in a more
competitive manner, the Government adopted a policy of providing autonomous status to
these banks, subject to certain benchmarks.
ƒ The Reserve Bank advised banks in February 1999 to put in place an ALM system, effective
April 1, 1999 and set up internal asset liability management committees (ALCOs) at the top
management level to oversee its implementation. Banks were expected to cover at least 60 per
cent of their liabilities and assets in the interim and 100 per cent of their business by April 1,

ƒ Interest rate deregulation has been an important component of the reform process. The
interest rates in the banking system have been largely deregulated except for certain specific
classes; these are savings deposit accounts, non-resident Indian (NRI) deposits, small loans up
to Rs.2 lakh and export credit.

ƒ In 1994, a Board for Financial Supervision (BFS) was constituted comprising select members
of the RBI Board with a variety of professional expertise to exercise 'undivided attention to
supervision'. The BFS, which generally meets once a month, provides direction on a
continuing basis on regulatory policies including governance issues and supervisory practices.
It also provides direction on supervisory actions in specific cases.

ƒ The share of the public sector banks in the aggregate assets of the banking sector has come
down from 90 per cent in 1991 to around 75 per cent in 2004. The share of wholly
Government-owned public sector banks has declined from about 90 per cent to 10 per cent of
aggregate assets of all scheduled commercial banks during the same period. Diversification of
ownership has led to greater market accountability and improved efficiency. Current market
value of the share capital of the Government in public sector banks has increased manifold
and as such, what was perceived to be a bailout of public sector banks by Government seems to
be turning out to be a profitable investment for the Government.

ƒ A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also
been recently constituted to prescribe policies relating to the regulation and supervision of all
types of payment and settlement systems, set standards for existing and future systems,
authorize the payment and settlement systems and determine criteria for membership to these
systems. Both the Houses of the Parliament have passed the Credit Information Companies
(Regulation) Bill, 2004.

ƒ Consolidation in the banking sector has been another feature of the reform process. This also
encompassed the Development Financial Institutions (DFIs), which have been providers of
long-term finance.

Since 1993, twelve new private sector banks have been set up. As already mentioned, an element of
private shareholding in public sector banks has been injected by enabling a reduction in the
Government shareholding in public sector banks to 51 per cent. As a major step towards enhancing
competition in the banking sector, foreign direct investment in the private sector banks is now
allowed up to 74 per cent, subject to conformity with the guidelines issued from time to time.

Currently, banking in India is generally fairly mature in terms of supply, product range and reach-
even though reach in rural India still remains a challenge for the private sector and foreign banks. In
terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets relative to other banks in comparable economies in its region.

Reserve Bank of India in March 2006 allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to
hold more than 5% in a private sector bank.
Current Banking Structure
Banks in India can be categorized into Scheduled and Non-scheduled Banks

Scheduled Banks
Scheduled Banks in India constitute those banks, which have been included in the Second Schedule of
Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which
satisfy the criteria laid down vide section 42 (6) (a) of the Act.

As on 30th June 1999, there were 300 scheduled banks in India having a total network of 64,918
branches. The scheduled commercial banks in India comprise of State bank of India and its associates
(8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and
regional rural banks

Non-Schedule Banks
Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Banks in India can also be classified in a different way.

ƒ Public Sector Banks

ƒ Private Sector Banks
ƒ Foreign Banks
ƒ Regional Rural Banks (RRBs)

The above mentioned classification overlaps with the previous one. Public Sector, Private Sector and
Foreign Banks fall the category of scheduled banks.

Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with
the Government of India holding a stake), 31 private banks (these do not have government stake; they
may be publicly listed and traded on stock exchanges) and 38 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75% of total assets of
the banking industry, with the private and foreign banks holding 18.2% and 6.5%
Industry Data
Banks in India RBI List

Statistical Tables Relating to Banks of India

Trend and Progress of Banking in India
ƒ Bagchi, A. K. (1972) Private Investment in India 1900-39. New Delhi: Orient
Longman Ltd.

ƒ Concept of Deregulation - Lessons from banking history in India by Prof K.V. Bhanu
Murthy, Delhi University.



ƒ RBI Publications at

ƒ The Economic Journal, Vol. 37, No. 146. Published by: Blackwell Publishing for the Royal
Economic Society.

ƒ C.P.I.M, Vol. XXIX - July 31, 2005 - Jayati Ghosh