History of Banking In India – Evolution of Banking System in India

Banking is considered to be the “Backbone of a Nation’s Economy”. The Indian Banking, today, is divided into commercial banks which are Private, Public scheduled and non-scheduled banks, Regional and Rural, and Cooperative Banks.

Banking Companies Act of 1949 defined banking as accepting for the purpose of lending or investment of depositing money from the public, repayable on demand or otherwise and withdrawable by cheque draft or otherwise. Let us learn more about the History of Banking System in India.

History of Banking System in India

The Banking sector in India has seen a lot of transitions and changes over the centuries. It can be broadly categorized into 3 sub-parts that are:

1. Pre-Independence (Before 1947)
2. II Phase (1947 to 1991)
3. III Phase (1991 and beyond). 

Banking during Pre-Independence (1770 to 1947)

There were quite a few banks established during this time. The Banking System in India began with the establishment of the Bank of Hindustan in 1770 but it stopped operating by 1832. 

During this period, over 600 banks were established. However, very few were able to succeed. 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 alliance 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. 

Other Banks that were established during this time were –  Allahabad Bank (est. 1865), Punjab National Bank (est. 1894), Bank of India (est. 1906), Bank of Baroda (est. 1908), and Central Bank of India (est. 1911). 

The reasons why many major banks failed to survive during the pre-independence period, the following conclusions can be drawn:

• Indian account holders had become fraud-prone.
• Lack of machines and technology.
• Human errors & time-consuming.
• Fewer facilities.
• Lack of proper management skills.

Following the Pre-Independence period was the post-independence period which observed some major changes in the banking industry scenario and has to date developed a lot. 

II Phase of Indian Banking – Banking Post Independence (1947 to 1991)

The then Government – after Indian Independence, decided to nationalize the Banks because all the major banks were led privately which was a cause of concern as people in the rural areas still turned to money lenders for assistance.

Under the Banking Regulation Act, 1949, these banks were nationalized and the Reserve Bank of India was nationalized in 1949. These banks are:

1. Allahabad Bank               
2. Bank of India                          
3. Bank of Baroda
4. Central Bank of India
5. Bank of Maharashtra  
6. Canara Bank         
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank                         
11. Syndicate Bank             
12. Union Bank of India
13. United Bank 
14. UCO Bank

In  1980, 6 other banks were nationalized that 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 which were nationalized in 1959:

1. State Bank of Patiala 
2. State Bank of Hyderabad 
3. State Bank of Bikaner & Jaipur 
4. State Bank of Mysore 
5. State Bank of Travancore 
6. State Bank of Saurashtra 
7. 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.

Impact of Nationalisation on Banking System

There were several reasons for nationalism in the banks of India that are:

1. Nationalism led to an increase in funds and thereby increased the economic condition of the country. 
2. It increased efficiency. 
3. It helped in boosting the rural and agricultural sector of the country. 
4. This opened up a major employment opportunity for the people. 
5. The profit gained by Banks was used by the Government for the betterment of the people. 
6. The competition was decreased and work efficiency had increased. 

The post-independence phase was the one that led to the major development of the banking sector in India. 

III Phase of Indian Banking(1991 to beyond)

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

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank
2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

A majority of Indian citizens shifted to online or net banking. 

List of Public Sector Banks and Private Sector Banks in India are:

1. Axis Bank
2. Bank of Baroda 
3. Bank of India 
4. Bandhan Bank 
5. Bank of Maharashtra 
6. Canara Bank 
7. Central Bank of India 
8. City Union Bank 
9. Dhanlaxmi Bank 
10. Federal Bank 
11. HDFC Bank 
12. IDBI Bank 
13. Indian Bank 
14. Indian Overseas Bank 
15. ICICI Bank 
16. IDFC Bank 
17. Indusind Bank 
18. Karnataka Bank 
19. Karur Vysya Bank
20. Kotak Mahindra Bank 
21. Lakshmi Vilas Bank 
22. Punjab National Bank 
23. Punjab & Sind Bank 
24. RBL Bank 
25. State Bank of India 
26. South Indian Bank 
27. UCO Bank 
28. Union Bank of India 
29. Yes Bank 

List of Small Finance Banks in India:

1. Capital Small Finance Bank 
2. Equitas Small Finance Bank 
3. Utkarsh Small Finance Bank 
4. Suryoday Small Finance Bank 
5. Ujjivan Small Finance Bank 
6. ESAF Small Finance Bank 
7. Au Small Finance Bank 
8. Fincare Small Finance Bank 
9. North East Small Finance Bank 
10. Jana Small Finance Bank 

List of payment banks in India:

1. Airtel Payment Bank Ltd. 
2. Paytm Payments Bank 
3. Fino Payments Bank 
4. Jio Payments Bank 
5. Aditya Birla Idea Payments Bank 
6. India Post Payment Bank 

Conclusion

The banks have revolutionized over the years. The Banking sector is extremely important for a country’s economy. In order to keep the system to thrive, estimated interval changes and modifications are to be made.