HISTORICAL DEVELOPMENT OF BANKING SYSTEM

HISTORICAL DEVELOPMENT OF BANKING SYSTEM 

Modern 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. Thereafter, three presidency banks namely the Bank of Bengal (this bank was originally started in the year 1806 as Bank of Calcutta and then in the year 1809 became the Bank of Bengal) , the Bank of Bombay and the Bank of Madras, were set up. For many years the Presidency banks acted as quasi-central banks. The three banks merged in 1925 to form the Imperial 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. Bank of Upper India was established in 1863 but failed in 1913. The Allahabad Bank, established in 1865 , is the oldest survived Joint Stock bank in India . Oudh Commercial Bank, established in 1881 in Faizabad, failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which is now one of the largest banks in India. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community during 1906 to 1911. 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. A major landmark in Indian banking history took place in 1934 when a decision was taken to establish ‘Reserve Bank of India’ which started functioning in 1935. Since then, RBI, as a central bank of the country, has been regulating banking system.

RBI as a central Bank of India

The Reserve Bank, as the central bank of the country, started their operations as a private shareholder’s bank. RBI replaced the Imperial Bank of India and started issuing the currency notes and acting as the banker to the government. Imperial Bank of India was allowed to act as the agent of the RBI. RBI covered all over the undivided India. In order to have close integration between policies of the Reserve Bank and those of the Government, It was decided to nationalize the Reserve Bank immediately after the independence of the country. From 1st January 1949, the Reserve Bank began functioning as a State-owned and State-controlled Central Bank.. To streamline the functioning of commercial banks, the Government of India enacted the Banking Companies Act,1949 which was later changed as the Banking Regulation Act 1949. RBI acts as a regulator of banks, banker to the Government and banker’s bank. It controls financial system in the country through various measures.

State Bank of India and its Associate (Subsidiaries) Banks – A New Channel of Rural Credit

In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank by taking over the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. An act was accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates). The State Bank of India was thus born with a new sense of social purpose. Associate Banks of State Bank of India viz., State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Indore, State Bank of Saurashtra have been working as per the guidance of State Bank of India. Two banks viz. State Bank of Patiala and State Bank of Hyderabad are fully owned by State Bank of India and in other Associate Banks, the majority of shareholdings are with the SBI. Out of these associate banks, two banks viz., State Bank of Indore and State Bank of Saurashtra have been merged with the State Bank of India and merger of the remaining five banks is under process. State Bank of India and its Associate Banks were given preferential treatment by RBI over the other commercial banks, by appointing them as an agent of RBI for transacting Central and State Government business as well as setting up of currency chests for the smoother cash management in the country

Nationalisation of Banks for implementing Govt. policies

Indian Banking System witnessed a major revolution in the year 1969 when 14 major commercial banks in the private sector were nationalised on 19th July,1969. Most of these banks having deposits of above ` 50 crores were promoted in the past by the industrialists. These banks were: 1. Allahabad Bank 2. Bank of Baroda 3. Bank of India 4. Bank of Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank 8. Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11. Syndicate Bank 12. Union Bank of India 13. United Bank of India 14. United Commercial Bank (now known as UCO bank) The purpose of nationalisation was: (a) to increase the presence of banks across the nation. (b) to provide banking services to different segments of the Society. (c) to change the concept of class banking into mass banking, and (d) to support priority sector lending and growth. In 1980, another six more commercial banks with deposits of above ` 200 crores were nationalised : 1. Andhra Bank 2. Corporation Bank 3. New Bank of India 4. Punjab and Sind Bank 5. Oriental Bank of Commerce 6. Vijaya Bank 4 PP-BL&P Later the New Bank of India was merged with Punjab Nationalised Bank. The nationalisation of banks resulted in rapid branch expansion and the number of commercial bank branches have increased many folds in Metro, Urban, Semi – Urban and Rural Areas. The branch network assisted banks to mobilise deposits and a lot of economic activities have been started on account of priority sector lending. 

Regional Rural Banks 

In 1975, a new set of banks called the Regional Rural Banks, were setup based on the recommendations of a working group headed by Shri Narasimham, to serve the rural population in addition to the banking services offered by the co-operative banks and commercial banks in rural areas. Inception of regional rural banks (RRBs) can be seen as a unique experiment as well as experience in improving the efficacy of rural credit delivery mechanism in India. With joint shareholding by Central Government, the concerned State Government and the sponsoring bank, an effort was made to integrate commercial banking within the broad policy thrust towards social banking keeping in view the local peculiarities. RRBs were expected to play a vital role in mobilizing the savings of the small and marginal farmers, artisans, agricultural labourers and small entrepreneurs and inculcate banking habit among the rural people. These institutions were also expected to plug the gap created in extending the credit to rural areas by largely urban-oriented commercial banks and the rural cooperatives, which have close contact with rural areas but fall short in terms of funds. 

Local area banks 

Local Area Banks with operations in two or three contiguous districts were conceived in the 1996 Union budget to mobilise rural savings and make them available for investments in local areas. They are expected to bridge the gaps in credit availability and enhance the institutional credit framework in rural and semi-urban areas. Although the geographical area of operation of such banks is limited, they are allowed to perform all functions of a scheduled commercial bank. The Raghuram Rajan Committee had envisaged these local area banks as private, wellgoverned, deposit-taking small-finance banks. They were to have higher capital adequacy norms, a strict prohibition on related party transactions, and lower concentration norms to offset chances of higher risk from being geographically constrained. Six entities were given licenses to operate LABs by RBI but only four are functioning. . Of these four banks, Capital Local Area Bank accounted for more than 70 per cent of total assets of all four LABs taken together as on 31st March, 2012. 

New Private Sector Banks

In 1991, the Narasimham committee recommended that banks should increase operational efficiency, strengthen the supervisory control over banks and the new players should be allowed to create a competitive environment. Based on the recommendations, new private banks were allowed to start functioning.