Banking Awareness: History of Banking in India

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History of Banking in India

Beginning of Banking in India

The phase leading up to independence laid the foundations of the Indian banking system.

  • The first bank of a joint stock variety was Bank of Bombay, established in 1720 in Bombay. It failed in 1770
  • This was followed by Bank of Hindustan in Calcutta, which was established in 1770. The bank was closed down in 1832.

Presidency Banks

  • The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh. The bank was given powers to issue notes in 1823.
  • The Bank of Bombay was the second Presidency bank set up in 1840 with a capital of Rs.52 lakh.
  • The Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh.

Why Presidency Banks?- They were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters. The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861. After this the right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.

Imperial Bank of India

The three presidency banks were amalgamated into a single bank, the Imperial Bank of India, in 1921. The Imperial Bank of India also functioned as a central bank prior to the establishment of the Reserve Bank in 1935. Thus, during this phase, the Imperial Bank of India performed three set of functions, viz., commercial banking, central banking and the banker to the government.

Indian owned banks– The first Indian owned bank was the Allahabad Bank set up in Allahabad in 1865, the second, Punjab National Bank was set up in 1895 in Lahore, and the third, Bank of India was set up in 1906 in Mumbai.

Setting up of the Reserve Bank of India

  • In 1926, the Royal Commission on Indian Currency and Finance (Hilton Young Commission) recommended the formation of Central Bank i.e the Reserve Bank of India.
  • Accordingly, the Reserve Bank of India Act 1934 was enacted paving the way for the setting up of the Reserve Bank of India. The issue of bank failures and the need for catering to the requirements of agriculture were the two prime reasons for the establishment of the Reserve Bank.
  • The RBI Act came into force on January 1, 1935. The RBI was inaugurated on April 1, 1935 as a shareholders’ institution. The RBI was nationalized on January 1, 1949.
  • The issue of bank failure in some measure was addressed by the Banking Companies Act, 1949 (later renamed as the Banking Regulation Act), but to a limited extent. The Banking Companies Act of 1949 conferred on the Reserve Bank the extensive powers for banking supervision as the central banking authority of the country.

Setting up of State Bank of India

  • In 1955 State Bank of India was formed by amalgamating the Imperial Bank of India with the ten major banks associated with the former princely states. (The ten major state-associated banks were the State Bank of Saurashtra, Bank of Patiala, Bank of Bikaner, Bank of Jaipur, Bank of Rajasthan, Bank of Indore, Bank of Baroda, Bank of Mysore, Hyderabad State Bank, and Travancore Bank.)
  • In the same year the State Bank of India (Subsidiary Bank) Act was passed, with the State Bank of Hyderabad becoming the first subsidiary of the SBI. In the next five years, the State Bank of Bikaner, State Bank of Jaipur, State Bank of Travancore, State Bank of Mysore, State Bank of Indore, State Bank of Saurashtra and State Bank of Patiala became subsidiaries of the SBI. Following the 1963 merger of the Bikaner and Jaipur banks, their seven remaining subsidiaries were converted into associate banks.
  • In 2008, State Bank of Saurashtra was merged with SBI and in 2009 State Bank of Indore was merged with SBI.
  • On April 01, 2017 the remaining 5 State Bank associate banks and Bharatiya Mahila Bank were merged with SBI.

Nationalisation of Banks in 1969

  • Need for Nationalisation: Before 1960s a notable feature of Indian commercial banking was the control of the major banks by leaders of commerce and industry. Banks were run to satisfy their requirements rather than along commercial principles. The consequence was the gradual erosion in the capital base of banks.
  • Accordingly, the Government nationalised 14 banks (with effect from the midnight of 19 July 1969) with deposits of over Rs.50 crore by promulgating the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969.
  • These banks were the Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India. The objective was to serve better the needs of development of the economy in conformity with national policy objectives.

Nationalisation of Banks in the 1980

  • Some private banks were observed to suffer from some governance problems. Further, there was a need to address the need of credit delivery in greater measure. Accordingly, six banks, viz, Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank, and Vijaya Bank with deposit liabilities of Rs.200 crore and above, were nationalised in April 1980.
  • New Bank Of India was merged with PNB in 1993.

Setting up of Regional Rural Banks

  • The definition of the priority sector was formalised in the 1972, although initially there were no specific targets in priority sector lending. However, in November 1974, public sector banks were advised that their priority sector lending should reach a level of not less than one-third of the outstanding credit by March 1979.
  • The Differential Rate of Interest (DRI) Scheme was also instituted in 1972 to cater to the needs of the weaker sections of the society and for their upliftment. The scheme targeted low income people in rural areas and gave them credit at concessional rate.
  • Need for RRBs: It was felt that commercial banks were not tuned to the needs and requirements of small and marginal farmers, while the co-operatives lacked resources to meet the expected demand. The need, therefore, was felt of a separate banking structure, capable of combining the local feel and familiarity of rural problems characteristic of co-operatives and the professionalism and large resource base of commercial banks.
  • The Regional Rural Banks Ordinance was promulgated on September 26, 1975, which was subsequently replaced by the Regional Rural Banks Act on February 9, 1976. Regional Rural Banks (RRBs) were set up with a view to developing the rural economy by providing credit for the purpose of development of agriculture, trade, commerce, industry and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
  • The first Regional Rural Bank “Prathama Grameen Bank”/ Prathama Bank was set up on October 2, 1975. 
  • The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively.

Important One liners and Questions

  1. First Joint Stock Bank in India?- Bank of Bombay-1720. Failed in 1770
  2. First ‘Presidency bank’?- Bank of Bengal established in Calcutta in 1806
  3. In which year Imperial Bank of India was formed?- 1921
  4. Before the formation of RBI, which bank functioned as the banker to the Government?- Imperial Bank of India
  5. First Indian owned bank?- Allahabad Bank in 1865
  6. In which year RBI was formed?- 1935
  7. In which year RBI was nationalised?- 1949
  8. In which year SBI was formed?- 1955
  9. 14 Banks were nationalised in 1969
  10. 6 Banks were nationalised in 1980
  11. The first Regional Rural Bank “Prathama Grameen Bank” was set up on October 2, 1975. 





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