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History of Indian Banking System: An Overview

May 25, 2017 19:05 IST
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History of Indian Banking System

 The Banking system of the country is the base of the economy and economic development of the country. It is the most leading part of the financial sector of the country as it is responsible for more than 70 % of the funds flowing through the financial sector in the country.

 The banking system in the country has three primary functions:

  • Operations of Payment system
  • Depositor and protector of people’s savings
  • Issue loans to individual and Companies

The Banking system in India can be categorised in two phases

  • Pre-Independence Phase (1786-1947)
  • Post- Independence Phase (1947 to till date)

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

  • Pre-nationalisation Period (1947 to 1969)
  • Post nationalisation Period (1969 to 1991)
  • Liberalisation Period (1991 to till date)

Pre-Independence Phase (1786-1947)

The origin of the Banking system in India can be traced with the foundation of Bank of Calcutta in 1786. The Banking in India originates in the last decade in the 18th century with the foundation of the English Agency houses in Bombay and Calcutta (now Kolkata).

  • Three presidency banks Bank of Bengal, Bank of Bombay and Bank of Madras established in the 19th Century under the charter of the British East India Company.
  • In 1935, the presidency banks merge together and formed a new bank named Imperial Bank of India.
  • The Imperial Bank of India subsequently named the State Bank of India.
  • The first Indian-owned Allahabad Bank was set up in 1865 in Allahabad.
  • In 1895, the Punjab National Bank was established in 1895.
  • The Bank of India founded in 1906 in Mumbai.
  • Many more commercial banks such as Canara Bank, Indian Bank, Central Bank of India, Bank of Baroda and Bank of Mysore were established between 1906 and 1913 under Indian ownership.
  • The central Bank of India, RBI establish in 1935 on the recommendation of Hilton-Young Commission.

At that time, the Banking system was only covered the urban population and need of rural and agriculture sector was totally neglected.   

Post- Independence Phase (1947 to till)

  • At the time independence, the entire Banking sector was under private ownership. The rural population of the country had to dependent on small money lenders for their requirements. To solve these issues and better development of the economy the Government t of India nationalised the Reserve Bank of India in 1949.
  • In 1955 the Imperial Bank of India was nationalised and named the State Bank of India.
  • The Banking Regulation Act enacted in 1949.

Nationalisation Period (1969 to 1991)

  • In 1969, Government of India nationalised 14 major banks whose national deposits were more than 50 crores.
  1. Allahabad Bank               
  2. Bank of India                          
  3. Punjab National Bank
  4. Bank of Baroda
  5. Bank of Maharashtra         
  6. Central Bank of India
  7. Canara Bank         
  8. Dena Bank
  9. Indian Overseas Bank
  10. Indian Bank
  11. United Bank                              
  12. Syndicate Bank             
  13. Union Bank of India
  14. UCO Bank

The Indian Banking system immensely developed after nationalisation but the rural and weaker section of the society was still not covered under the system.

To solve these issues, the Narasimham Committee in 1974 recommended the establishment of Regional Rural Banks (RRB). On 2nd October 1975, RRBs were established with an objective to extend the amount of credit to the rural section of the society.

  • Six more banks further nationalised in the year 1980. With the second wave of nationalisation, the target of priority sector lending was also raised to 40%.
  1. Andhra Bank             
  2. Corporation Bank
  3. New Bank of India
  4. Oriental Bank of Commerce                           
  5. Punjab & Sindh Bank
  6.   Vijaya Bank

Liberalisation Phase (1990 to till)

In order to improve financial stability and profitability of Public Sector Banks, the Government of India set up a committee under the chairmanship of Shri. M. Narasimham. The committee recommended several measures to reform banking system in the country.

  • The major thrust of the recommendations was to make banks competitive and strong and conducive to the stability of the financial system.
  • The committee suggested for no more nationalisation of banks.
  • Foreign banks would be allowed to open offices in India either as branches or as subsidiaries.
  • In order to make banks more competitive, the committee suggested that public sector banks and private sector banks should be treated equally by the Government and RBI.
  • It was emphasised that banks should be encouraged to abandon the conservative and traditional system of banking and adopt progressive function such as merchant banking and underwriting, retail banking, etc.
  • Now, foreign banks and Indian banks permitted to set up joint ventures in these and other newer forms of financial services.
  • 10 Privates players got a license from the RBI to entry in the Banking sector. These were Global Trust Bank, ICICI Bank, HDFC Bank, Axis Bank, Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank.

The Government of India accepted all the major recommendation of the committee.

Recent Development in Indian Banking Sector:

  • Kotak Mahindra Bank and Yes Bank got a license from RBI to entry in the system in the year 2003 and 2004.
  • In 2014, RBI grants in-principle approval to IDFC and Bandhan Financial Services to set up banks.

Today, Indian Banking industry is one of the most growing flourishing industries.  Banking systems of any country need to be effective, efficient as it plays the active in the economic development of the country.

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