Banking History in India

 

Banking History in India

      • Pre-Independence Banking History

      • Post-Independence Banking History

Pre-Independence Banking


  • The origin of modern Banking in India dates back to the 18th century.

  • Bank of Hindusthan was established in 1770 and it was the first bank at Calcutta under European management.
  • Banking Concept in India was brought by Europeans.
  • In 1786 General Bank of India was set up.
  • On June 2, 1806 the Bank of Calcutta established in Calcutta. It was the first Presidency Bank during the British Raj.
  • Bank of Calcutta was established mainly to fund General Wellesley’s wars against Tipu Sultan and the Marathas.

  • On January 2, 1809 the Bank of Calcutta renamed as the Bank of Bengal.
  • In 1839, there was a fruitless effort by Indian merchants to establish a Bank called Union Bank but it failed within a decade.
  • On 15th April, 1840 the second presidency Bank was established in Bombay – Bank of Bombay.
  • On 1 July 1843 the Bank of Madras was established in Madras, now Chennai. It was the third Presidency Bank during the British Raj.
  • Allahabad Bank which was established in 1865 and working even today.
  • The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years is Allahabad Bank. Allahabad bank is also known as one of India’s Oldest Joint Stock Bank.
  • These Presidency banks worked as quasi central banks in India for many years under British Rule.

  • The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860.
  • 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.

  • The Oldest Joint Stock bank of India was Bank of Upper India established in 1863 but this bank was become defunct in 1913.
  • In 1881, Oudh Commercial Bank was established at Faizabad it was the first Bank of India with Limited Liability to be managed by Indian Board. After Independence, In 1958 this bank failed.
  • In 1895 Punjab National Bank was established in Lahore in Punjab province of Undivided India. It was the first bank purely managed by Indian. PNB has not only survive but also become the second largest public sector bank in India.
  • The first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911.
  • Central bank of India was also called India’s First Truly Swadeshi bank.

  • The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community.  The period between 1906 and 1911 thousands of Banks were established in India. Many of those 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.

  • At least 94 banks in India failed between 1913 and 1918 due to economic crisis during World War I.

  • In 27th January, 1921 Bank of Calcutta, Bank of Madras and Bank of Bombay were amalgamated  to form Imperial Bank of India.

  • In 1926 Hilton-Young Commission submitted it’s report.

  • In 1934 Reserve Bank of India act was passed.

  • On the recommendation of Hilton-Young Commission, On 1st April 1935 Reserve Bank of India was established.

  • RBI was established with initial share capital worth Rs. 5 crore with 5 Lakh Rs. 100 share dividend.

  • The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.

Post-Independence Banking History


It can be classified into two major categories:

1)Nationalization Era

After Independence, in 1951, the All India Rural Credit survey, committee of Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and ten others banks into a newly established bank called the State Bank of India (SBI). The Government of India accepted the recommendations of the committee and introduced the State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and got the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of India was “to extend banking facilities on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank                                      Subsidiary with effect from

1.  State Bank of Hyderabad                                      1st October 1959

2.  State Bank of Bikaner                                             1st January 1960

3.  State Bank of Jaipur                                               1st January 1960

4.  State Bank of Saurashtra                                      1st May 1960

5.  State Bank of Patiala                                              1st April 1960

6.  State Bank of Mysore                                             1st March 1960

7.  State Bank of Indore                                              1st January 1968

8. State Bank of Travancore                                       1st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the SBI Group.

The SBI Group under statutory obligations was required to open new offices in rural and semi-urban areas and modern banking was taken to these unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This was a turning point in the history of commercial banking in India.

Later the Government Nationalized six more commercial private sector banks with deposit liability of not less than Rs. 200 crores on 15th April 1980, viz.

  • Andhra Bank.

  • Corporation Bank.

  • New Bank if India.

  • Oriental Bank of Commerce.

  • Punjab and Sind Bank.

  • Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every corner of the country. Later in 1975, Regional Rural Banks were set up to supplement the activities of the commercial banks and to especially meet the credit needs of the weaker sections of the rural society.

Nationalization of banks paved way for retail banking and as a result there has been an alt round growth in the branch network, the deposit mobilization, credit disposals and of course employment.

The first year after nationalization witnessed the total growth in the agricultural loans and the loans made to SSI by 87% and 48% respectively. The overall growth in the deposits and the advances indicates the improvement that has taken place in the banking habits of the people in the rural and semi-urban areas where the branch network has spread. Such credit expansion enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast of profitability of the banks.

Consequences of Nationalization:

  • The quality of credit assets fell because of liberal credit extension policy.

  • Political interference has been as additional malady.

  • Poor appraisal involved during the loan meals conducted for credit disbursals.

  • The credit facilities extended to the priority sector at concessional rates.

  • The high level of low yielding SLR investments adversely affected the profitability of the banks.

  • The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs.

  • There was downward trend in the quality of services and efficiency of the banks.

2)Post-Liberalization Era—Thrust on Quality and Profitability


By the beginning of 1990, the social banking goals set for the banking industry made most of the public sector resulted in the presumption that there was no need to look at the fundamental financial strength of this bank. Consequently they remained undercapitalized. Revamping this structure of the banking industry was of extreme importance, as the health of the financial sector in particular and the economy was a whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater with the initiation of the real sector reform process in 1992. the reforms have enhanced the opportunities and challenges for the real sector making them operate in a borderless global market place. However, to harness the benefits of globalization, there should be an efficient financial sector to support the structural reforms taking place in the real economy. Hence, along with the reforms of the real sector, the banking sector reformation was also addressed.

The route causes for the lackluster performance of banks, formed the elements of the banking sector reforms. Some of the factors that led to the dismal performance of banks were.

  • Regulated interest rate structure.

  • Lack of focus on profitability.

  • Lack of transparency in the bank’s balance sheet.

  • Lack of competition.

  • Excessive regulation on organization structure and  managerial resource.

  • Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a paradigm shift in the banking industry, by addressing the factors for its dismal performance.

In this context, the recommendations made by a high level committee  on financial sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms. These reforms tried to enhance the viability and efficiency of the banking sector. The Narasimham Committee suggested that there should be functional autonomy, flexibility in operations, dilution of banking strangulations, reduction in reserve requirements and adequate financial infrastructure in terms of supervision, audit and technology. The committee further advocated introduction of prudential forms, transparency in operations and improvement in productivity, only aimed at liberalizing the regulatory framework, but also to keep them in time with international standards. The emphasis shifted to efficient and prudential banking linked to better customer care and customer services.

 

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