History of Banking in India:- Phases of Indian Banking System with Recent Developments

History of Banking in India, Phases of Indian Banking System & What are the recent developments in the banking sector?

If you guys are preparing for prestigious government recruitment exams such as UPSC, IBPS Exam, SSC Exam, Railway or RBI etc. do you all these above have one thing in common that is general knowledge.

Hence, It is significant to be well versed with general knowledge topics. General Knowledge forms an important section of every competitive exams.

So in this post, we will discuss the detailed history of banking in India prepared from the point of view of exams.

The word bank is widely used and circulated.

As per the companies act 1949, banking is defined as the system accepting for the agenda of lending and investing from the public repayable on demand or otherwise and withdrawable by cheque draft.

The banking system in India has three significant function

  • Operations of the Payment system
  • Depositor and protector of people’s savings
  • Issue loans to individual and Companies
  • The Banking system in India can be categorized into two phases
    1. Pre-Independence Phase (1786-1947)
    2. Post- Independence Phase (1947 to till date)

    The post-Independence period may further be divided into three phases-

    1. Pre-nationalisation Period (1947 to 1969)
    2. Post nationalization Period (1969 to 1991)
    3. Liberalization Period (1991 to till date)

According to the Indian Banking Regulation Act defined banking as the ‘Accepting the deposits of money from the public which are repayable on demand for the purpose of lending or investment of the money acquired from the public in the form of deposits’.

So, without any ado, let’s get started

What is Bank?

A bank is a financial institution that undertakes the banking activity i.e. it accepts the deposits and then lends the same to earn some profits.

A bank is a financial intermediary and money creator that creates money by lending money to the borrower.

What is Banking?

In simple words, banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities.

However, with the passage of time, the activities covered by the bank have now enlarged and now various other services are also offered by the banks.

The banking services include

  • Issuance of debit and credit cards
  • Providing safe custody of valuable items
  • ATM services
  • Online transfer of funds across the country
  • As per the banking company’s act of 1949, Banking is defined as, accepting the purpose of lending or investment of deposit money from the public
  • Chief Ministers of India 2019

History of Banking in India-Introduction

According to the banking companies’ act of 1949, banking is defined as, accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise withdrawable by cheque draft

Bank safeguards the savings of the public and provides loans and advances.

The prominent function of the banking sector

  • It provides liquidity for economic growth
  • It acts as the main pillar of the financial system
  • It offers safety and security to the depositors who want to deposit their cash savings in the bank
  • It provides credit or loans to the dealers, household, small as well as large business houses.
  • It helps manage all the financial transaction between parties
  • It provides the government with the flexibility to reach the masses across the country
  • Manage all the financial transaction between parties
  • Bank provides service of overdraft
  • Discounting of the bill of exchange

Phases of Indian Banking system

  1. The pre-independence phase i.e. before 1947
  2. The second phase from 1947 to 1991
  3. Third phase 1991 and beyond
  4. List of Bank Holidays 2019

The Pre-independence phase

  • This phase is identified by the presence of a large number of banks
  • Banking system commenced in India with the foundation of the bank of Hindustan on Calcutta which is now renamed as Kolkata in 1770 which ceased to operate in 1832
  • After that may bank came but they were not successful
  1. General Bank of India (1786-1791)
  2. Oudh commercial banks(1881-1958)-the first commercial bank
  • Where some are successful and continue to lead even now like
  • Allahabad bank
  • Punjab National bank
  • Bank of India
  • Bank of Baroda
  • The central bank of India
  • While some others like the bank of Bengal, the bank of Bombay, the bank of Madras, merged into a single entity in 1921 which came to be known as the imperial bank of India
  • Imperial Bank of India was later renamed in 1955 as the state bank of India
  • On April 1935 Reserve Bank of India was inaugurated which is based on the recommendation of Hilton young commission( set up in 1926
  • In this time period, most of the bank were small in size and suffered from a high rate of nonsuccess. Due to this, people lost their confidence in confidence.
  • People continue to rely on the unorganized sector

The Second phase from 1947 to 1991

  • The main attribute of this phase is the nationalization of the bank.
  • With the view of economic planning, nationalization emerged to be an effective measure

Need for Nationalization in India

  • The bank mostly serve the need of large industries, big business houses
  • Sectors such as agriculture, small scale industries, and exports were straggling behind
  • The poor masses were tortured by the money lenders
  • Following this, in the year 1949, 1st January the reserve bank of India was nationalized
  • Fourteen commercial banks were nationalized on 19th July 1969
  • Smt Indira Gandhi was the prime minister of India, during in 1969
  • Fourteenth commercial banks were nationalized on 19th July 1969

The following bank is nationalized

  • The central bank of India
  • Bank of India
  • Punjab national bank
  • Bank of Baroda
  • United commercial bank
  • Canara bank
  • Dena bank
  • United Bank
  • Syndicate bank
  • Allahabad bank
  • Indian bank
  • Union Bank of India
  • Bank of Maharashtra
  • Indian overseas bank
  • 6 more commercial bank was nationalized in April 1980 these are mentioned below
  • Andhra bank
  • Corporation bank
  • A new bank of India
  • Oriental bank of commerce
  • Punjab and Sindh bank
  • Vijaya Bank

Meanwhile on the recommendation of the Narasimha committee. RRB was formed on October 2, 1975. The main aim behind the formation of RRBs was to cater to the large unserved population of the rural areas and promote financial inclusion

With a view to meet the specific need from the different sector (i.e. agriculture, housing, foreign trade, industry some apex level banking institution were also set up like a)Nabard

  • EXIM (est 1982)
  • NHB(est 1988)
  • SIDBI (est 1990)

Impact of Nationalization

  • Improved productivity in the banking system since public confidence was built
  • Sectors such as agriculture, small and medium industries commenced getting funds which led to the economic growth
  • Increase penetration of bank branches in the rural areas

Third phase 1991 and beyond

  • In this period there is remarkable growth in the procedure of development of banks with the liberalization of economic policies
  • Even after nationalization and the subsequent regulation that followed, a large portion of masses is untapped by the banking services
  • In 1991, the Narasimha committee gave its recommendation i.e. to allow the entry of private sectors players into the banking system
  • RBI gave license to 10 private entities, out of which only a few survived the market demands, which are ICICI, HDFC, Axis Bank, Indus land bank, DCB
  • In the year 1988, the Narasimha committee recommended the entry of more private players]
  • RBI proposed two kinds of banks i.e. payment banks and small banks
  • In the year 2015, the Reserve bank of India RBI gave in-principle license to 11 entities to bring out payment banks and granted in principle approval to the 10 applicants to set up small financial banks

Liberalization Phase

  • The prime impel of the recommendation was to make bank competitive and strong and conducive to the stability of the financial system
  • The committee suggested for no more nationalization of banks
  • The foreign bank would be allowed to open an office in India
  • In order to make the bank competitive, the committee advised that public sector banks and private sector banks should be treated equally by the bank
  • It was highlighted that the bank should be motivated to be abandoned and leave the conservative and traditional system of banking and adopt progressive function such as merchant banking, and underwriting, retail banking etc.
  • The government of India accepted all the major recommendation of the committee

What are the Recent Developments in the Banking Sector?

  • The Kotak Mahindra bank and the yes bank got a license from the reserve bank of India to take entry in the system in the year 2003 and 2004
  • In the year 2014, RBI grants in-principle approval to IDFC and Bandhan financial services to set up banks

Today, the Indian banking industry is one of the flourishing industries.

Banking industries of any country need to be productive, efficient as it plays an active role in the economic development of the country.

Frequently Asked Question

Q Which is the first bank in India?

Among the first banks were the Bank of Hindostan, which was established in 1770 and liquidated in 1829-32; and the General Bank of India, established in 1786 but failed in 1791. The largest bank and the oldest still in existence is the State Bank of India (S.B.I). It originated as the Bank of Calcutta in June 1806.

Q What are the two most popular Banks?

The two most popular banks are

  • Retail banks
  • Commercial banks

Q What are the different type of bank?

  • Commercial banks
  • Cooperative banks
  • Central banks
  • Industrial banks
  • Agriculture banks
  • Saving Banks
  • Foreign banks

Thus bank are classified on the basis of their function in which they are specialized But it must be noted that Commercial Banks are now providing services of agricultural banks, they are providing loans for industries as industrial banks, they are even enlarging their services into foreign exchange replacing the foreign exchange banks. Therefore the commercial banks are raising their capabilities for attracting a large number of customers.

What are the different types of bank accounts?

  • Bank Accounts are classified into four different types. They are,
  • 1) Current Account.
  • 2) Savings Account.
  • 3) Recurring Deposit Account.
  • 4) Fixed Deposit Account.

Now, you must be well versed with what is the banking system, and where does it all start The business of banking and lending money has existed from the earliest time of the citizens because it responds to the imperative needs of the society.

Final words
Dear Readers

I hope you had a great time reading about “What is Indian Banking History?”

Yes, over the year the banking sector has remarked fantastic strides in terms of service, speed, and technology.

The history of banking refers to the development of banking and banks.

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Have a wonderful day and stay tuned for another update.