History of Banking in India

Structure of the organised banking sector in India. Number of banks are in brackets. Banking in India From Wikipedia, the free encyclopedia Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions.

After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) – 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18. 2% and 6. 5% respectively Contents 1 Early history 2 From World War I to Independence 3 Post-independence 4 Nationalisation 5 Liberalisation 6 Further reading 7 Notes 8 See also 9 External links Early history Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct.

The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which Banking in India – Wikipedia, the free encyclopedia http://en. wikipedia. org/wiki/Banking_in_India 1 of 5 9/12/2009 11:04 AM The Bank of Bengal, which later became the State Bank of India. almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though.

That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks.

Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. 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 first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious ommunities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, “In respect of banking it seems we are behind the times.

We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments. ” The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of 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.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four Banking in India – Wikipedia, the free encyclopedia http://en. wikipedia. org/wiki/Banking_in_India 2 of 5 9/12/2009 11:04 AM nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as “Cradle of Indian Banking”. From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years Number of banks that failed Authorised capital (Rs. Lakhs) Paid-up Capital (Rs. Lakhs) 1913 12 274 35 1914 42 710 109 1915 11 56 5 916 13 231 4 1917 9 76 25 1918 7 209 1 Post-independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India’s independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance.

The major steps to regulate banking included: In 1948, the Reserve Bank of India, India’s central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) “to regulate, control, and inspect the banks in India. ” The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969. Nationalisation By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalise the banking industry.

Indira Gandhi, the-then Prime Minister of India expressed the Banking in India – Wikipedia, the free encyclopedia http://en. wikipedia. org/wiki/Banking_in_India 3 of 5 9/12/2009 11:04 AM intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled “Stray thoughts on Bank Nationalisation. ” The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.

Jayaprakash Narayan, a national leader of India, described the step as a “masterstroke of political sagacity. ” Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India.

Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalised banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009. [1][2] Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India.

People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government.

The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.

This is the first time an investor has been allowed to hold more than 5% in Banking in India – Wikipedia, the free encyclopedia http://en. wikipedia. org/wiki/Banking_in_India 4 of 5 9/12/2009 11:04 AM a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks’ loan recovery efforts have driven defaulting borrowers to suicide. 3] [4] [5][6] Further reading The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921-1955) (Volume III) Banking Frontiers – a monthly magazine, published by Mumbai based Glocal Infomart. Editor – Manoj Agrawal Notes ^ PSU banks’ policies saved India from financial blushes: Chidambaram (http://economictimes. indiatimes. com/News/Economy/Policy /PSU_banks_policies_saved_India_from_financial_blushes_Chidam baram/rssarticleshow/3901203. cms) 1. ^ The importance of public banking (http://www. hinduonnet. com/fline/fl2525/stories /20081219252504800. htm) 2. ^ http://www. humsurfer. com/icici-banks-recovery-agents-3. rive-man-to-suicide ^ http://www. parinda. com/news/crime/20070918/2025/icici-personal-loan-customer-commits-suicideafter- alleged-harassment-recov 4. 5. ^ http://www. hindu. com/2008/06/30/stories/2008063057470300. htm 6. ^ http://www. indiatime. com/2007/11/07/icicis-third-eye/ See also List of banks in India List of Cooperative Banks in India External links Private banks score over public sector banks (http://www. rupeetimes. com/news/personal_loan /private_banks_in_india_score_over_public_sector_banks_1249. html) The importance of public banking (http://www. hinduonnet. com/fline/fl2525/stories /20081219252504800. htm)

Brief profiles, 2008-09 performance, and 2009-10 outlook on 10 leading Indian banks (http://banks. seasonalmagazine. com) Retrieved from “http://en. wikipedia. org/wiki/Banking_in_India” Categories: Banking in India This page was last modified on 29 August 2009 at 18:54. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of Use for details. Wikipedia┬« is a registered trademark of the Wikimedia Foundation, Inc. , a non-profit organization. Banking in India – Wikipedia, the free encyclopedia http://en. wikipedia. org/wiki/Banking_in_India 5 of 5 9/12/2009 11:04 AM

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