bluebook unit 1

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explain the development of banking institution in india

The development of banking institutions in India has a long and fascinating history that spans several
centuries. The evolution of Indian banking can be divided into various phases:

1. Ancient and Medieval Period (Pre-15th century): During this period, informal banking practices
existed in the form of money lending and trade financing. Merchants and moneylenders provided
financial services, but there were no formal banking institutions.

2. Pre-Independence Era (15th - 20th century): The formal banking system in India can be traced back
to the 18th century. The Bank of Hindustan, established in 1770, is considered the first bank in India.
Subsequently, the General Bank of India and the Bank of Bengal were established in 1786 and 1806,
respectively. These banks primarily served the needs of European trading companies.

3. British Colonial Period (19th - 20th century): The establishment of presidency banks, including the
Bank of Bengal, Bank of Bombay, and Bank of Madras, by the British East India Company marked a
significant milestone in the development of Indian banking. In 1921, these three presidency banks
were merged to form the Imperial Bank of India, which became a major financial institution during
the colonial era.

4. Post-Independence Era (1947 onwards): After India gained independence in 1947, there was a need
to strengthen the banking system to support economic growth and development. In 1955, the
Imperial Bank of India was nationalized and restructured as the State Bank of India (SBI), becoming
the country's first state-owned bank. The government also established several other nationalized
banks, such as Bank of India, Punjab National Bank, and Canara Bank, with the aim of extending
banking services to all parts of the country.

5. Expansion and Modernization (1960s - 1980s): The 1960s and 1970s saw a significant expansion of
banking services, especially in rural areas, through various initiatives like the nationalization of major
banks. The government introduced social control measures, aimed at directing credit to priority
sectors such as agriculture, small-scale industries, and exports.

6. Liberalization and Privatization (1990s - early 2000s): In 1991, India initiated economic reforms that
liberalized its economy and opened doors to foreign investment. The banking sector also underwent
major reforms during this period, including the establishment of private sector banks and the
introduction of new banking products and services. Foreign banks were permitted to operate in India
under certain regulations.

7. Recent Developments: In the 21st century, the banking sector in India has seen further growth and
modernization. Digital banking, online transactions, and mobile banking have become increasingly
prevalent, revolutionizing the way people access banking services. The Reserve Bank of India (RBI), as
the central banking authority, continues to play a crucial role in regulating and supervising the
banking sector to maintain stability and promote financial inclusion.

Today, India has a diverse and robust banking industry comprising public sector banks, private sector
banks, foreign banks, cooperative banks, and regional rural banks, serving the diverse financial needs
of the country's population.

15 page kslu

evltion of banking
Title: Evolution of Banking in India: A Journey of Growth and Transformation

Introduction

The banking sector in India has experienced a remarkable evolution since its inception in the 18th
century. From humble beginnings as indigenous money lenders to the modern-day financial
institutions, the journey of Indian banking has been marked by significant milestones, policy reforms,
technological advancements, and institutional changes. This essay delves into the 200-year-long
evolution of banking in India, examining the historical, social, and economic factors that shaped its
growth, and exploring the transformative impact of technology and globalization on the industry.

Historical Background

The roots of banking in India can be traced back to ancient times when indigenous money lenders
played a crucial role in providing credit and financing to individuals and businesses. However, the
formal banking system as we know it today began with the establishment of the first bank in India,
the Bank of Hindustan, in 1770. Subsequently, the General Bank of India and the Bank of Bengal were
established in 1786 and 1809, respectively. These banks primarily catered to the needs of European
merchants and the British administration during the colonial era.

During the 19th century, the banking landscape witnessed significant expansion, with the
establishment of several regional banks. The establishment of the Imperial Bank of India in 1921
marked a pivotal moment in Indian banking history, as it played a crucial role in promoting trade and
industry. However, it wasn't until India gained independence in 1947 that the banking sector saw
radical changes and reforms.

Post-Independence Era and Nationalization

Following independence, the Indian government focused on economic development and

implemented a series of reforms aimed at expanding banking services to rural areas and ensuring
financial inclusion. The Reserve Bank of India (RBI), established in 1935, was entrusted with the
responsibility of regulating and supervising the banking sector.

In 1969, a significant milestone occurred with the nationalization of 14 major commercial banks in
India. This move aimed to bring banking services to the masses and reduce the dominance of a few
influential private banks. The nationalization transformed these banks into public sector banks, and
their branches were spread across the length and breadth of the country.

Banking in the 21st Century: Liberalization and Technological Advancements

The early 1990s marked a turning point in India's economic policies with the introduction of economic
liberalization. The government adopted a series of reforms to open up the economy, and this had a
profound impact on the banking sector. The liberalization policy allowed private and foreign banks to
enter the Indian market, breaking the decades-long monopoly of public sector banks.

Private sector banks, such as ICICI Bank and HDFC Bank, emerged as formidable players in the Indian
banking landscape. These banks brought in innovative practices, customer-centric approaches, and
modern technologies, transforming the way banking services were delivered.

The adoption of technology has been a critical factor in reshaping the banking sector. With the advent
of the internet and the proliferation of computers and mobile devices, banks embraced online
banking, electronic fund transfers, and mobile banking, making financial services more accessible and
convenient for customers.

The Rise of Digital Banking and FinTech

The 21st century witnessed the rise of digital banking and FinTech (Financial Technology) in India.
These technologies revolutionized the way financial services were delivered and opened up new
avenues for customers to manage their finances.

Digital payment platforms, such as Paytm, PhonePe, and Google Pay, gained immense popularity,
allowing users to make cashless transactions and conduct online purchases effortlessly. Additionally,
the Unified Payments Interface (UPI) system, launched by the National Payments Corporation of India
(NPCI), facilitated real-time, peer-to-peer fund transfers, making transactions seamless and instant.

The emergence of FinTech startups also played a significant role in driving financial inclusion in India.
These startups leveraged technology to offer innovative solutions for lending, insurance, wealth
management, and other financial services. By targeting underserved segments of the population, they
helped bridge the gap between traditional banking and the unbanked population.

Regulatory Reforms and Financial Inclusion

As the banking sector evolved, regulatory reforms played a vital role in shaping its direction. The RBI
has continually adapted its policies to ensure stability, enhance transparency, and foster competition
in the banking industry.

In recent years, there has been an increased focus on financial inclusion, with various initiatives
launched to bring banking services to the unbanked and underbanked populations. The Pradhan
Mantri Jan Dhan Yojana (PMJDY) is one such initiative that aimed to provide every household with
access to a bank account, financial literacy, and access to credit and insurance.

Challenges and Opportunities

Despite the significant progress, the Indian banking sector also faces several challenges. Non-
performing assets (NPAs) and bad loans have been persistent issues, impacting the financial health of
banks. Additionally, cybersecurity threats pose risks to customer data and financial systems.

Moreover, while digital banking and FinTech have opened up new opportunities, there is a need to
ensure that the benefits of technology reach all segments of society, especially in rural areas where
digital infrastructure may be limited.

Conclusion

The evolution of banking in India has been a remarkable journey of growth and transformation. From
its humble beginnings as indigenous money lenders to the technologically advanced and customer-
centric financial institutions of today, the sector has come a long way. The historical context, policy
reforms, and technological advancements have all played pivotal roles in shaping the trajectory of
Indian banking.

Looking ahead, the banking sector must continue to adapt and innovate to meet the changing needs
of customers and address emerging challenges. Striking a balance between traditional banking
practices and digital innovation, ensuring financial inclusion, and maintaining robust regulatory
oversight will be essential in ensuring the continued growth and stability of the Indian banking sector
in the years to come.

Nature and Development of Banking A bank is a financial institution

that provides banking and other financial services to their
customers. A bank is generally understood as an institution which
provides fundamental banking services such as accepting deposits and
providing loans. Banks are a subset of the financial services
industry. Almost in any country, banks represent main pillar of
financial stability. Beside financial intermediaries, banks play an
important role as national financial institutions in everyday life. A
banking system provide and offer cash management services for
customers, reporting the transactions of their accounts and
portfolios throughout the day, trade with financial and bank’s
financial instruments, offer exchange of currency and disburse
different type of funds. The Banking sector offers several facilities
and opportunities to their customers. All the banks safeguard the
money and valuables and provide loans, credit, and payment services.
The banks also offer investment and insurance products. As a variety
of models for cooperation and integration among finance industries
have emerged, some of the traditional distinctions between banks,
insurance companies, and securities firms have diminished. In spite
of these changes, banks continue to maintain and perform their
primary role accepting deposits and lending funds from these
deposits. Banks are institutions which provide and hold liquidity
sustainable flow for all other financial and non financial
institutions. Through the monitoring and controlling of the banks,
central bank can sustain and provide impact on country’s financial
situations. Today banks deal with different personality, different
consumer behavior, manners and cultures. Customers can be seen as
different generally, because they have different opportunities,
financial capabilities, personalities, egos, social characters,
different tastes and by any other aspects they are absolutely
different from one to another. Through the segmentation bank
differentiate customers and rank them according to its own interests
and needs. Banks generate profit from customer’s activities and by
offering different services to them. A bank is a financial
institution and a financial intermediary that accepts deposits and
channels those deposits into lending activities, either directly by
loaning or indirectly through capital markets. A bank is the
connection between customers that have capital deficits and customers
with capital surpluses. Due to their influence within a financial
system and an economy, banks are generally highly regulated in most
countries. Banks act as payment agents by conducting checking or
current accounts for customers, paying checks drawn by customers on
the bank, and collecting checks deposited to customers’ current
accounts. Banks also enable customer payments via other payment
methods such as Automated Clearing House (ACH), Wire transfers or
telegraphic transfer, EFTPOS (pos terminal devices), and automated
teller machine (ATM). Banks borrow money by accepting funds deposited
on current accounts, by accepting term deposits, and by issuing debt
securities such as banknotes and bonds. Banks lend money by making
advances to customers on current accounts, by making installment
loans, and by investing in marketable debt securities and other forms
of money lending. Bank uses different channels of distribution such
as Automated Teller Machines, a branch is a retail location, Offices
(smaller unite that the branch), Call center, Mail, Agents, Sales
Forces, Internet banking, Mobile banking, Relationship Managers,
Telephone banking, Video banking and others. Today customers have
options they have power to influence over the banks. Customers are
taking greater control of their banking relationships, and the banks
that can provide more choice and flexibility will gain more control
over their own destinies. History and Evolution of Banking : Origin
of the word Bank: According to some authorities, the word “Bank” is
derived from the word bancus or banque, which means a bench. Some
other authorities opine that the word “Bank” is derived from the
German word “back” which means a joint stock fund. Early history of
Banking: The Babylonians had developed a banking system as early as
2000 B.C. The Roman’s minute regulations as to the conduct f private
banking were calculated to creat the utmost confidence in it. In the
middle of 12th century banks were established at Venice and Genoa.
The modern banking may be traced to the money dealers in Florence. In
England: In England, during the reign of Edward III money changing
was taken up by a Royal Exchanger for the benefit of the Crown. Later
on merchants decided to keep their cash with goldsmiths. In 1672
English Banking received a rude setback. The Bank of England was
established in 1694. With the enactment of Tonnage Act small private
banking firms were extremely affected by the new bank. Another
important Act gave a monopoly of note issue to the Bank of England.
This was the first of the central banks and is still the banker for
the English government. The BOE was originally privately owned but
was nationalised in 1946 and eventually became an independent
organization in 1998. The BOE issues all banknotes for England and
Wales and it is responsible for regulating bank notes issued by
Scottish and Northern Irish banks. As the forerunner to the modern
banking system of the UK, the BOE manages monetary policy and has its
headquarters in the City of London. The Bank of England keeps safe
all the gold reserves of the UK and that of some other countries. It
is the largest protector of gold reserves in the world. In India:
Banking is an ancient business in India with some of oldest
references in the writings of Manu. Bankers played an important role
during the Mogul period. During the early part of the East India
Company era, agency houses were involved in banking. Three Presidency
Banks were established in Bengal, Bombay and Madras in the early 19th
century. These banks functioned independently for about a century
before they were merged into the newly formed Imperial Bank of India
in 1921. The Imperial Bank was the forerunner of the present State
Bank of India. The latter was established under the State Bank of
India Act of 1955 and took over the Imperial Bank. The Swadeshi
movement witnessed the birth of several indigenous banks including
the Punjab National Bank, Bank of Baroda and Canara Bank. In 1935,
the Reserve Bank of India was established under the Reserve Bank of
India Act as the central bank of India. In spite of all these
developments, independent India inherited a rather weak banking and
financial system marked by a multitude of small and unstable private
banks whose failures frequently robbed their middle-class depositors
of their life’s savings. After independence, the Reserve Bank of
India was nationalized in 1949 and given wide powers in the area of
bank supervision through the Banking Companies Act (later renamed
Banking Regulations Act). The nationalization of the Imperial bank
through the formation of the State Bank of India and the subsequent
acquisition of the state owned banks in eight princely states by the
State Bank of India in 1959 made the government the dominant player
in the banking industry. In 1969, fourteen major Indian commercial
banks were nationalized. These banks are Allahabad Bank, Bank of
Baroda, Bank of India, Canara Bank, Central Bank of India, Dena Bank,
Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate
Bank, Union Bank of India, United Bank of India, United Commercial
Bank and Vijaya Bank. And in 1980 six more banks were nationalized.
These banks constitute the public sector banks while the other
scheduled banks and non scheduled banks are in the private sector.