History of Banking in India-

From the ancient times in India, an indigenous banking system has prevailed. The businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been carrying on the business of banking since ancient times. These indigenous bankers included very small money lenders to shroffs with huge businesses, who carried on the large and specialized business even greater than the business of banks.

·         The origin of western type commercial Banking in India dates back to the 18th century.

The story of banking starts from Bank of Hindusthan established in 1779 and it was first bank at Calcutta under European management.

·         In 1786 General Bank of India was set up.

Since Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, it became a banking center.

·         Three Presidency banks were set up under charters from the British East India Company- Bank of Calcutta, Bank of Bombay and the Bank of Madras. These worked as quasi central banks in India for many years.

The Bank of Calcutta established in 1806 immediately became Bank of Bengal.

·         In 1921 these 3 banks merged with each other and Imperial Bank of India got birth. It is today’s State Bank of India.

·         The name was changed after India’s Independence in 1955. So State bank of India is the oldest Bank of India.

In 1839, there was a fruitless effort by Indian merchants to establish a Bank called Union Bank. It failed within a decade.

·         Next came 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.

·         The Oldest Joint Stock bank of India was Bank of Upper India established in 1863 and failed in 1913.

·         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.

·         The first bank purely managed by Indian was Punjab National Bank, established in Lahore in 1895. The Punjab national Bank has not only survived till date but also is one of the largest banks in India.

However, the first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911. So this bank is called India’s First Truly Swadeshi bank.

Central Bank of India was dreams come true of Sir Sorabji Pochkhanawala, founder of the Bank.

·         Sir Pherozesha Mehta was the first Chairman of this Bank.

Many more Indian banks were established between 1906-1911. This was the era of

the Swadeshi Movement in India. Some of the banks are Bank of India, Corporation

Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

·         Bank of India was the first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974.

The Bank was founded in September 1906 as a private entity and was nationalized in July 1969. Since the logo of this Bank is a star, its head office in Mumbai is located in Star House, Bandra East, Mumbai. There was a district in Today’s Karnataka state called South Canara under the British empire. It was bifurcated in 1859 from Canara district , thus making Dakshina Kannada and Udupi district. It was the undivided Dakshina Kannada district. It was renamed as Dakshina Kannada in 1947. Four banks started operation during the period of Swadeshi Movement and so this was known as “Cradle of Indian Banking.

This was the first phase of Indian banking which was a very slow in development. This era saw many ups and downs in the banking scenario of the country.

The Second Phase starts from 1935 when Reserve bank of India was established.

Between the period of 1911-1948, there were more than 1000 banks in India, almost

all small banks. The Reserve Bank of India was constituted in 1934 as an apex Bank, however without major government ownership. Government of India came up with the Banking Companies Act 1949. This act was later changed to Banking Regulation (Amendment) Act 1949.

·         The Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank of India. The Reserve Bank of India was made the Central Banking Authority.

The banking sector reforms started immediately after the independence. These reforms were basically aimed at improving the confidence level of the public as most banks were not trusted by the majority of the people. Instead, the deposits with the Postal department were considered safe.

The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act.

·         State Bank of India was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments.

In a major process of nationalization, 7 subsidiaries of the State Bank of India were nationalized by the Indira Gandhi regime. In 1969, 14 major private commercial banks were nationalized. These 14 banks Nationalized in 1969 are as follows:

1.Central Bank of India

2. Bank of Maharastra

3. Dena Bank

4. Punjab National Bank

5. Syndicate Bank

6. Canara Bank

7. Indian Bank

8. Indian Overseas Bank

9. Bank of Baroda

10. Union Bank

11. Allahabad Bank

12. Union Bank of India

13. UCO Bank

14. Bank of India.

The above was followed by a second phase of nationalization in 1980, when Government of India acquired the ownership of 6 more banks, thus bringing the

total number of Nationalised Banks to 20. The private banks at that time were allowed to function side by side with nationalized banks and the foreign banks were allowed to work under strict regulation.

·         After the two major phases of nationalization in India, the 80% of the banking sector came under the public sector / government ownership.

Please note the following sequence of events:

Creation of Reserve bank of India: 1935

Nationalization of Reserve Bank of India : 1949 (January )

Enactment of Banking Regulation Act : 1949 (March)

Nationalization of State Bank of India : 1955

Nationalization of SBI Subsidiaries : 1959

Nationalization of 14 major Banks : 1969

Creation of Credit Guarantee Corporation: 1971

Creation of Regional Rural Banks : 1975

Nationalization of 7 more banks with deposits over Rs. 200 Crore: 1980

The result was outstanding. The public deposits in these banks increased by 800% , as the government ownership gave the public faith and trust.

The third phase of development of banking in India started in the early 1990s when

India started its economic liberalization.