Course Code: 18BMC205A

Course Title: Banking and Financial Institutions

Course Leader

Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in

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 Lecture No. 4
Evolution and History of Banking

At the end of this session, student will be able to:

– Explain the Evolution of Banking

– Discuss the History of Indian Banking

– Discuss the concept of banker and customer

– Explain the General Relationship between

banker and customer

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 Contents
• History of Banking

• History of Indian Banking

• Nationalizations in the 1960s

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 Evolution of Banking Institutions

• As early as 2000 B.C Babylonians had developed a system of banks.

• In ancient Greece and Rome, the practice of granting credit was widely
prevalent
• The books of old Sanskrit law giver, Manu, are full of regulations
governing credit
• Some of the banks carried business on their own account and others
were appointed by the Government to receive taxes
• They used to transact their business on similar lines as those of
modern banks
• People used to settle their account with their creditors by giving a
cheque or draft on the bank

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 Evolution of Banking Institutions Contd..

• If the creditor also had an account at the same bank, the account was
settled by an order to make the transfer of such money from one
name to another
• These bankers also received deposits and lent money
• Loan banks were also common in Rome. From these loan banks, the
poor citizens received loans without paying interest. They lent money
for period of 3-4 years on the security of land
• During the early periods, though the banking business was done by
private individuals, many countries established public banks either for
the purpose of facilitating commerce or to serve the Government
• Originally, it was not a bank in the modern sense, being simply an
office for the transfer of the public debt
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 Evolution of Banking Institutions Contd..

• History shows the existence of a Monte in Florence in 1336

• The meaning of Monte is given in the Italian dictionary, as Monte – a
standing bank or mount of Money
• As early as 1349, the business of banking of was carried on by the
drapers of Barcelona
• During 1401, a public bank was established in Barcelona. It is used to
exchange money, receive deposits and discount bills of exchange both
for the citizens and for the foreigners
• The bank of Amsterdam was established in 1609 to meet the needs of
merchants of the city. It accepted all kinds of deposits
• These deposits could be withdrawn on demand or transferred from
the account of one person to another

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 Evolution of Banking Institutions Contd..

• The beginning of English banking may correctly be attributed to the

London Goldsmiths
• They used to receive their customers Valuables and funds for safe
custody and issue receipts acknowledging the same
• However, the goldsmiths mark a turning point in the history of English
banking which resulted in the growth of private banking and the
establishment of the “Bank of England” in 1694
• In India, as early as the Vedic period, banking existed in the crudest
form
• The book of Manu contain references regarding deposits, pledges,
policy of loan and rates of interest

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 History of Indian Banking

• Indian Banking system, as you see it today in India has come a long
way.
• It has transitioned from unorganized system of lending and borrowing,
passing through establishments of private banks to nationalization, to
liberalization and now facing globalization of the financial world.
• It is interesting note that some parts of our county still has
unorganized system of finance.
• The organized system is so well developed that it can compete with its
international counterparts in terms of technology, financial products
and services infrastructure, efficiency and professtionalism.

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 History of Indian Banking Contd…

• There exist a rich history behind all this development but in the
current context its best to review it in phases i.e

• Pre - independence
• Post - independence

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 History of Indian Banking Contd…

• Pre-Independence
As you would know the indigenous system of banking had existed in
India for many centuries an catered the credit needs of the economy
of the that time.
– Indigenous Bankers
• Form ancient days Indigenous Bankers had been organized in the
form of family or individual business
• These indigenous bankers varied in size and belonged to different
parts of the country
• These indigenous bankers used to lend money against all kinds of
securities such as gold, Jewellery, land, promissory notes.

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 History of Indian Banking Contd…

RBI and Indigenous bankers

The RBI has made attempts to regulates and provide facilities to
indigenous bankers.
So RBI made the following suggestions:

– They must give up their trading and commission business

– Switch over to the western system of accounting
– They should develop the deposit side of their business
– Change their role to act as discount houses
– Should have their accounts audited by certified charted
accountants
– Submit their account to RBI periodically
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 History of Indian Banking Contd…

Money Lenders
– Contrary to modern economy and banking, in olden days, money
lending meant banking.
– Since there was no banking authority or regulatory body, whoever
has sufficient money and considered himself money wise and
started money lending business.

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 History of Indian Banking Contd…

Chit Funds

– Chit fund is system of polled resources of funds and utilizing it

effectively for the benefit of member – borrowers
– The chit refers to a transaction under which a person enters into an
agreement with a specified number of persons that every one of
then shall subscribe a certain sum of money
– The subscription is made by way of periodical instalments by lot or
by auction or by tender
– It is important to note that only one person alone benefits from a
system of pooled recourses.

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 History of Indian Banking Contd…

Indian Joint Stock Banks

– 1770 Bank of Hindustan, the first bank in India on modern lines
established
– Oudh Commercial Bank Established in 1881
– Punjab National Bank Ltd in 1895
– People’s Bank 1901
– The Bank of India Ltd in 1906
– The Bank of Baroda Ltd 1908
– Central Bank of India in 1911

There was severe banking crisis in the Indian banking history when
several banks failed in 1913 – 17 and again followed by economic
depression in 1928 14
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 History of Indian Banking Contd…

Presidency Banks
– The roots of the modern commercial banking in India can be traced
back to the early eighteenth century when the bank of Calcutta
was established in June 1806
– Which was renamed as Bank of Bengal in January 1809
– Mainly to fund General Wellesley’s wars.
– This was followed by the establishment of the Bank of Madras in
July 1843.
– The bank of Bombay established by East India company in 1868

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 History of Indian Banking Contd…

Imperial Bank
– The three presidency banks, namely bank of Bombay, Bank of
Madras and Bank of Bengal were amalgamated in January 1921 to
form Imperial bank of India
– Also called as bankers bank and of a banker to the government
– This provided for the need of central bank in India

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 History of Indian Banking Contd…

Reserve Bank of India

– Though imperial bank was intended to be gradually developed into
a Central bank but Hilton Young Commission recommended the
establishment of a separate institution
– A Royal commission on Indian Currency and Finance was set up in
1925 in recognition of the growing Indian economy
– It recommended that an entirely separate institution called
Reserve Bank of India (RBI) be created with the central task of
maintaining monetary stability in India
– A notification issued on December 20, 1934 and 14 th January 1935
the RBI came in to existence though it was formally inaugurate
only on April 1st 1935

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 History of Indian Banking Contd…

Post Independence
– Immediately after independence, the government of India initiated
measures to play an active role in the economic life of the nation.
– Cooperative banks
– Industrial finance corporation of India (IFCI) - 1948
– Industrial credit and investment corporation of India (ICICI) - 1955
– Industrial Development Bank of India (IDBI) – 1964
– National Bank for Agriculture and Rural Development (NABARD) –
1982
– Export Import bank of India (EXIM Bank) - 1982

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 Nationalisation Of State Bank of India
– Pursuant to the provisions of the State Bank of India Act, of 1955
undertaking of the Imperial Bank of India was taken over by
newly constituted State Bank Of India.
State Bank of India and its subsidiary Banks
– The Bank of Jaipur
– The Bank of Indore
– The Bank of Mysore
– The Bank of Patiala
– The Travancore Bank
– The state Bank of Hyderabad
– The state Bank of Saurashtra

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 Nationalisation in the 1960s

• In 1969 the Indian government nationalized 14 major private banks.

• These banks having deposits of more than Rs 50 Crore.
• On 20th July 1969 the following banks were taken over by the Government
of India under Banking Companies Act.
• In 15th April 1980 Six more banks were nationalized and These banks
having deposits of more than Rs 200 Crore

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 Summary
• As early as 2000 B.C Babylonians had developed a system of banks.
• In ancient Greece and Rome, the practice of granting credit was widely
prevalent.
• 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. This bank failed in 1958
• This was one of the three banks founded by a presidency government,
the other two were the Bank of Bombay in 1840 and the Bank of
Madras in 1843

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 Summary

• The period between 1906 and 1911 saw the establishment of banks
inspired by the Swadeshi movement.
• The Government of India issued an ordinance ('Banking Companies
(Acquisition and Transfer of Undertakings) Ordinance, 1969') and
nationalized the 14 largest commercial banks with effect from the
midnight of 19 July 1969.

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 References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.

b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd

c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited)
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 Disclaimer

• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.

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