THE NATURE AND DEVELOPMENT OF BANKING

 

History of banking in India is one of the key concepts as far as practical purposes and competitive exams are concerned. Besides, History of Banking in India also acts as a foundation for the economic development of the nation. Over the years, there have been major changes in the banking system and management along with advancements considering the banking needs of the people. History of Banking in India is important concept for banking awareness topics in Banks exam

·         Banking services have been in existence in India since ancient times. However, the history of banking in India traces back to 1947 when India got independence.

·         Although it was not in an organized form before the Britishers, various banking activities would be carried out.

·         After the Britishers entered in the 17th century, the foreign banking structure started declining. Mayer’s Alexander and Company set up the first European Bank, that is, the Bank of Hindostan in 1770.

Evolution Banking in India The banking sector in India has seen a great deal of evolution. Banks have been with us for a long period of time, even before the country got its independence, the banks existed. Given below is a clear picture of the banking history and its evolution: Banking history in India can be broadly divided into the following stages:

·         Pre - Independence (Before 1947)

·         Post - Independence Phase - (Between 1947 to 1991)

·         Liberalisation (1991 - Until Now)

History of Banking Pre - Independence (Before 1947)

·         The pre-independence stage has seen some more important events as the phase marked the presence of more than 600 banks.

·         The banking system in India began with the establishment of the Bank of Hindustan in 1771, but it shut its operations by 1832

·         The phase also witnessed the alliance of 3 major banks, that is, Bank of Bengal, Bank of Bombay, and Bank of Madras. These banks were amalgamated to be called the Imperial Bank. The State Bank of India (SBI) took over the Imperial Bank in 1955

 The following banks were established during this period:

 

Bank Name                Established in

Allahabad Bank               1865

Punjab National Bank      1894

Bank of India                   1906

Bank of Baroda                1908

Central Bank of India      1911

 

History of Banking Post - Independence Phase - (Between 1947 to 1991)

·         Nationalization of the banks was a major event to take place during this phase.

·         The Reserve Bank of India (RBI) was nationalized on 01st January 1949

·         Apart from nationalization of banks, various Regional Rural Banks (RRBs) were formed as well on 02nd October 1975

Nationalization & Its Impacts Nationalization is the transferring of public sector assets to be operated or owned by the central or the state government. In India, the banks that were previously functioning under the privacy sector were transferred to the public sector by the act of nationalization. Thus, the nationalized banks came into existence. The nationalization of banks brought about the following benefits to the banking industry as well as the economic growth of the country:

·         Increased levels of efficiency in the banking system

·         Boosted confidence of the masses in the banks

·         Growth in the small scale industries leading to increase in funds and economic growth

·         Increased penetration of the banks with motive transitioning from profit to service, especially in the rural areas

·         Stabilization of costs as essential goods supply increased

·         Competition alleviation and increase in the working efficiency and performance of the banks

Following banks were nationalized during that phase:

Name of the Banks:- Allahabad Bank, UCO Bank, Bank of India, Union Bank, Central Bank of India, United Bank of India, Canara Bank, Bank of Baroda, Indian Bank, Bank of Maharashtra, Punjab National Bank, Dena Bank, Syndicate Bank, Indian Overseas Bank.

 History of Banking in India Liberalization- Present Scenario The structure of banking in India has been broadly divided into organized sectors and unorganized sectors. Organized sector comprises the RBI, commercial banks, cooperative banks, and specialized financial institutions like the ICICI, IFC, etc. The unorganized sector is the one that is not regulated by the government or the RBI. Such bodies are highly vulnerable towards fraud and instability. Let’s look into the structure of banking in India in more detail in the below section:

Scheduled Banks Scheduled banks are those which are included in the second schedule of the RBI Act of 1934. In order to be registered as a scheduled bank, it must satisfy the following conditions:

·         Paid-up capital and collected funds should not be less than INR 5 lakhs

·         Any activity of the bank should not be detrimental or adversely affect the customers’ interests.

Four types of scheduled commercial banks are:

1. Public sector banks, 2. Private sector banks, 3. Foreign banks, 4. Regional Rural banks

Non Scheduled Banks They are described as “a banking company as defined in clause C of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank.” RBI is the central bank of the nation and all the banks in India are required to follow the guidelines issued by the RBI.

History of Banking in India – Reforms After the successful establishment of the banks in the country, they would require regular monitoring and regulations in order to derive maximum profits within the banking sector. The government passed a resolution to set up a committee under the leadership of Shri M. Narasimham in order to manage the reforms in the Indian banking sector.

Name of the Banks Global Trust Bank,        ICICI Bank, HDFC Bank, Axis Bank, Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank        Development Credit Bank

Other important measures include:

·         Setting up new branches of several foreign banks in India

·         The act of nationalization of banks came to a halt

·         It was decided to treat both public and private sector banks in one and the same manner by the RBI as well as the government

·         Foreign banks permitted to start joint ventures with Indian banks

·         With the advent of digital banking, payments banks were introduced in the country

·         Small finance banks would be able to set up their branches anywhere in India

·         Digital banking made more prominent with various banking apps available for funds transfer