Banking in India

Evolution of Banking in India

Banking in India

The banking system in India is mainly classified into scheduled and non-scheduled banks.  Scheduled banks are those banks included under the 2nd Schedule of the Reserve Bank of India Act, 1934.

The scheduled banks are again classified into various banks including State Bank of India and its associates, nationalized banks, foreign banks, regional rural banks (RRBs), and other private sector banks in India.

Generally, the supply, product range and reach of banking in India are fairly mature-even though reach in rural India and to the poor remains a challenge.

Evolution of Banking in India

The system of banking started when the empires needed a way to pay for foreign goods and services.  They needed some medium of exchange that can be facilitated easily.

Before this, banking procedures are also followed by certain informal methods in the ancient world.  However, the system of formal banking has been developed around the 20th century.

There are 3 phases of how banking has been changed with time.  These phases include:

Phase 1 – Pre-Independence phase

Phase 2 – Post-Independence phase

Phase 3 – The LPG phase

 

Pre-Independence Banking Phase

The pre-independence phase is from the year 1770 to 1947.  Before the time of independence, there were about 600 banks in India.

The first bank of India was established in the year 1770 in Calcutta as the Bank of Hindustan.  However, it got closed down in 1832.

The first commercial bank in the history of banking in India is the Oudh Commercial Bank.

A few other banks were established in the 19th century, like the Allahabad Bank and the Punjab National Bank.  They have survived the test of time and exist even today.

Very few banks of India were able to succeed during this phase. Some of the banks were –

  • The General Bank of India (1786-1791)
  • Bank of Bengal (1809)
  • Bank of Bombay (1840)
  • Oudh Commercial Bank (1881-1958)
  • Bank of Madras (1843)

This phase also witnessed the association of the 3 major banks – Bank of Bengal, Bank of Madras, and Bank of Bombay established by The East India Company.  They together amalgamated and formed the Imperial Bank. This was taken over by the SBI (State Bank of India) in 1955.

Various other banks that were founded during this time were the Allahabad Bank, Punjab National Bank, Bank of India, Bank of Baroda, and Central Bank of India.

The reasons for the failure of many major banks during the pre-independence period are:

  • Indian account holders turned out fraud-prone.
  • Lack of machines and technology.
  • Human errors & time-consuming.
  • Less number of facilities available.
  • Lack of proper management skills.

After the pre-independence phase, then comes the post-independence phase.

Post-Independence Banking Phase

The post-independence phase is between the years 1947 and 1991.  After independence, the evolution of the banking system continued the same as before.

The Government of India decided to nationalise the banks in 1969 under the Banking Regulation Act, 1949. A total of 14 banks were nationalised, including the Reserve Bank of India (RBI).

All the major banks were led privately which was a reason of matter as people in the rural areas still turned to money lenders for support.

In 1975, the Government of India identified that several groups were financially excluded. Between the years 1982 and 1990, it created banking institutions with specialised functions in line with the evolution of financial services in India.

The Reserve Bank of India was nationalized in 1949.  The other banks that were nationalized under the Banking Regulation Act, 1949 are:

  • Allahabad Bank
  • Bank of India
  • Bank of Baroda
  • Central Bank of India
  • Bank of Maharashtra
  • Canara Bank
  • Dena Bank
  • Indian Overseas Bank
  • Indian Bank
  • Punjab National Bank
  • Syndicate Bank
  • Union Bank of India
  • United Bank
  • UCO Bank

In the year 1980, 6 other banks were nationalized.  They are:

  1. Andhra Bank
  2. Corporation Bank
  3. New Bank of India
  4. Oriental Bank of Comm.
  5. Punjab & Sind Bank
  6. Vijaya Bank

Seven subsidiaries of SBI were nationalized in 1959.  They were:

  • State Bank of Patiala
  • State Bank of Hyderabad
  • State Bank of Bikaner & Jaipur
  • State Bank of Mysore
  • State Bank of Travancore
  • State Bank of Saurashtra
  • State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which was merged in 2008. State Bank of Indore was merged in 2010.

 

The LPG Banking Phase

This phase started in the year 1991 and is continued till date.  LPG in this means the Liberalisation, Privatisation and Globalisation.

From 1991 onwards, there was a great change in the Indian economy. The government invited private investors to fund in India. Ten private banks were approved by the RBI.

A few famous names which exist even today from this liberalisation are HDFC, Axis Bank, ICICI, DCB and IndusInd Bank.

To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a commission under the guidance of Shri. M Narasimham to manage the various improvements in the Indian banking industry.

In the early to mid-2000s, two other banks, Kotak Mahindra Bank (2001) and Yes Bank (2004), received their licenses. IDFC and Bandhan banks were also given licenses in 2013-14.

The greater development was the introduction of Private sector banks in India. RBI gave licenses to 10 Private sector banks to settle themselves in the country.  They include:

  • Global Trust Bank
  • ICICI Bank
  • HDFC Bank
  • Axis Bank
  • Bank of Punjab
  • IndusInd Bank
  • Centurion Bank
  • IDBI Bank
  • Times Bank
  • Development Credit Bank

Mainly, in this phase of banking evolution, many of the users have shifted to online banking.

Currently, the list of all the Public Sector and the Private Sector Banks in India are:

  • Axis Bank
  • Bank of Baroda
  • Bank of India
  • Bandhan Bank
  • Bank of Maharashtra
  • Canara Bank
  • Central Bank of India
  • City Union Bank
  • Dhanlaxmi Bank
  • Federal Bank
  • HDFC Bank
  • IDBI Bank
  • Indian Bank
  • Indian Overseas Bank
  • ICICI Bank
  • IDFC Bank
  • Indusind Bank
  • Karnataka Bank
  • Karur Vysya Bank
  • Kotak Mahindra Bank
  • Lakshmi Vilas Bank
  • Punjab National Bank
  • Punjab & Sind Bank
  • RBL Bank
  • State Bank of India
  • South Indian Bank
  • UCO Bank
  • Union Bank of India
  • Yes Bank