Open Access Research Article
EVOLUTION OF BANKING IN INDIA
Published Paper
Article Details
EVOLUTION
OF BANKING IN INDIA
AUTHORED BY
- AKASH CHANDRAKANT KAMBIRE
DEPARTMENT
OF L.L.M.
P.E.
SOCIETY’S, MODERN LAW COLLEGE
GANESHKHIND,
UNIVERSITY CIRCLE, PUNE
Abstract -
The evolution of banking in India
represents a dynamic journey intertwined with the nation's economic, social,
and political history. This research article provides a comprehensive
exploration of this evolution, spanning from the pre-independence era to the
contemporary digital age. Delving into the early development of banking in
India, it examines the influences of colonial rule, indigenous banking
practices, and regulatory frameworks. The post-independence period witnessed
significant reforms, including nationalization and the establishment of the
Reserve Bank of India (RBI), shaping the banking sector's structure and
function. Subsequent liberalization and privatization initiatives in the 1990s
ushered in a new era, marked by the entry of private and foreign banks,
fostering competition and innovation. The advent of technology further
revolutionized banking, with digitalization transforming service delivery and
customer experiences. This article evaluates the current trends and future
outlook, considering emerging challenges and opportunities such as fintech
innovation and financial inclusion efforts. Through a historical lens, it
illuminates the transformative forces that have shaped banking in India,
offering insights for policymakers, practitioners, and researchers alike.
Introduction
–
The evolution of banking in India
stands as a testament to the nation's economic resilience, adaptability, and
growth. From its inception amidst colonial rule to its modern-day manifestation
as a powerhouse of financial innovation, the journey of Indian banking reflects
a tapestry interwoven with historical, socio-economic, and regulatory threads.
Rooted in ancient trade practices and
indigenous financial systems, the early foundations of banking in India were
shaped by the intersection of local customs and foreign influences. The
colonial era saw the establishment of the first European banks on Indian soil,
setting the stage for a gradual transformation of the financial landscape. Yet,
it was not until India's struggle for independence and subsequent
nation-building efforts that the true contours of its banking system began to
take shape.
Post-independence, the newly-formed
nation embarked on a path of economic reconstruction and self-reliance, guided
by socialist principles and central planning. In this context, the Reserve Bank
of India (RBI) emerged as a cornerstone institution, tasked with regulating
monetary policy and supervising the burgeoning banking sector. The era of
nationalization in the 1960s and 1980s further underscored the government's
interventionist approach, aiming to democratize access to financial services
and steer credit towards priority sectors.[1]
However, the winds of change blew
through India's economy in the 1990s, as the nation embraced liberalization,
privatization, and globalization. This watershed moment heralded a new era of
dynamism and competition in the banking sector, as barriers to entry were
dismantled, and private and foreign players entered the fray. The subsequent
decades witnessed a surge in innovation, efficiency, and customer-centricity,
as banks vied for market share in an increasingly globalized world.
Yet, perhaps the most transformative
force in the evolution of Indian banking has been the advent of technology.
From the advent of ATMs to the rise of internet banking and mobile payments,
technological advancements have reshaped the very fabric of the banking
experience. Today, India stands at the forefront of digital innovation, with
initiatives such as the Unified Payments Interface (UPI) and Aadhaar-enabled
payments revolutionizing financial inclusion and empowering millions with
access to formal banking services.
The banking sector in India plays a
vital role in this country’s economic development. Over the centuries, numerous
changes have occurred within this industry, from technological advancement to
the diversification of financial services and products.
Currently, the Indian banking system
includes commercial banks, small finance banks, and cooperative banks.
Banks operating within the boundaries
of India abide by the Banking Regulation Act 1949.[2]
What is
Bank? –
As per the Banking Companies Act of
1949, a bank is a financial institution that dispenses banking and other
financial operations to their customers. A bank is generally considered as an
institution which provides fundamental banking services such as providing loans
and accepting deposits.
Indian Banking Sector
Banks and banking in India have been
classified into various groups. In its activities, each group has its own set
of advantages and disadvantages. They have their own distinct target audience.
Some work exclusively in the rural sector, while others work in both rural and
urban settings. The majority of them only serve cities and major towns.
The banking industry is one of the
most essential financial pillars of the financial sector, and it is critical to
the economy’s functioning. It is critical for a country’s economic development
that its trade, industrial, and farm funding needs are handled with greater commitment
and responsibility. As a result, a country’s progress is inextricably related
to the development of banking. In today’s economy, banks should be viewed as
development leaders rather than money merchants. They play a crucial role in
deposit mobilization and credit disbursement to many sectors of the economy.
The Reserve Bank of India (RBI),
commercial banks, cooperative banks, and development banks comprise India’s
banking system (development finance institutions). The core of India’s
financial system is these institutions, which serve as a meeting point for
savers and investors. Banks play a vital role in the development of poor
countries by mobilizing resources and efficiently allocating them.[3]
Types of
Banks in India
1. Central Bank
The Reserve Bank of India is the
central bank of our country. Each country has a central bank that regulates all
the other banks in that particular country.
The main function of the central bank
is to act as the Government’s Bank and guide and regulate the other banking
institutions in the country. Given below are the functions of the central bank
of a country:
·
Guiding
other banks
·
Issuing
currency
·
Implementing
the monetary policies
·
Supervisor
of the financial system
In other words, the central bank of
the country may also be known as the banker’s bank as it provides assistance to
the other banks of the country and manages the financial system of the country,
under the supervision of the Government.[4]
2. Cooperative Banks
These banks are organised under the
state government’s act. They give short term loans to the agriculture sector
and other allied activities.
The main goal of Cooperative Banks is
to promote social welfare by providing concessional loans
They are organised in the 3 tier
structure
Tier 1 (State Level) – State
Cooperative Banks (regulated by RBI, State Govt, NABARD)
·
Funded
by RBI, government, NABARD. Money is then distributed to the public
·
Concessional
CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
·
Owned
by the state government and top management is elected by members
Tier 2 (District Level) –
Central/District Cooperative Banks
Tier 3 (Village Level) – Primary
Agriculture Cooperative Banks[5]
3. Commercial Banks
·
Organised
under the Banking Companies Act, 1956
·
They
operate on a commercial basis and its main objective is profit.
·
They
have a unified structure and are owned by the government, state, or any private
entity.
·
They
tend to all sectors ranging from rural to urban
·
These
banks do not charge concessional interest rates unless instructed by the RBI
·
Public
deposits are the main source of funds for these banks[6]
The commercial banks can be further
divided into three categories:
1) Public sector Banks – A bank where the majority stakes
are owned by the Government or the central bank of the country.
2) Private sector Banks – A bank where the majority stakes
are owned by a private organization or an individual or a group of people
3) Foreign Banks – The banks with their headquarters
in foreign countries and branches in our country, fall under this type of bank
|
Public Sector Banks
|
Private Sector Banks
|
Foreign Banks
|
|
State Bank of India
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab National Bank
Punjab & Sind Bank
Syndicate Bank
Union Bank of India
United Bank of India
UCO Bank
Vijaya Bank
IDBI Bank Ltd.
|
Catholic Syrian Bank
City Union Bank
Dhanlaxmi Bank
Federal Bank
Jammu and Kashmir Bank
Karnataka Bank
Karur Vysya Bank
Lakshmi Vilas Bank
Nainital Bank
Ratnakar Bank
South Indian Bank
Tamilnad Mercantile Bank
Axis Bank
Development Credit Bank (DCB Bank
Ltd)
HDFC Bank
ICICI Bank
IndusInd Bank
Kotak Mahindra Bank
Yes Bank
IDFC
Bandhan Bank of Bandhan Financial
Services.
|
Australia and New Zealand Banking
Group Ltd.
National Australia Bank
Westpac Banking Corporation
Bank of Bahrain & Kuwait BSC
AB Bank Ltd.
HSBC
CITI Bank
Deutsche Bank
DBS Bank Ltd.
United Overseas Bank Ltd
J.P. Morgan Chase Bank
Standard Chartered Bank
There are over 40 Foreign Banks in
India
|
4. Regional Rural Banks (RRB)
·
These
are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.
·
RRBs
were established in 1975 and are registered under a Regional Rural Bank Act,
1976.
·
RRBs
are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
·
196
RRBs have been established from 1987 to 2005.
·
From
2005 onwards government started merger of RRBs thus reducing the number of RRBs
to 82
·
One
RRB cannot open its branches in more than 3 geographically connected districts.
5. Local Area Banks (LAB)
·
Introduced
in India in the year 1996
·
These
are organized by the private sector
·
Earning
profit is the main objective of Local Area Banks
·
Local
Area Banks are registered under Companies Act, 1956
·
At
present, there are only 4 Local Area Banks all which are located in South India
6. Specialized Banks
Certain banks are introduced for specific
purposes only. Such banks are called specialized banks. These include:
·
Small Industries Development Bank of India (SIDBI) –
Loan for a small-scale industry or business can be taken from SIDBI. Financing
small industries with modern technology and equipment’s is done with the help
of this bank
·
EXIM Bank – EXIM Bank stands for Export and Import
Bank. To get loans or other financial assistance with exporting or importing
goods by foreign countries can be done through this type of bank
·
National Bank for Agricultural & Rural Development
(NABARD) – To get any kind of financial assistance for rural, handicraft,
village, and agricultural development, people can turn to NABARD.[7]
7. Payments Banks
A newly introduced form of banking,
the payments bank has been conceptualized by the Reserve Bank of India. People
with an account in the payments bank can only deposit an amount of up to
Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile
banking, the issue of ATM, and debit card can be done through payments banks.
Given below is a list of the few payments bank in our country:
·
Airtel Payments Bank
·
India Post Payments Bank
·
Fino Payments Bank
·
Jio Payments Bank
·
Paytm Payments Bank
·
NSDL Payments Bank[8]
Feature of Banking
–
1) Deals with Money
A bank’s main characteristic is that
it handles all financial transactions. You can put your money in a bank
account, for example, to store it safely, and you will be interested in the
money you save in the account.
2) Provides Loans
Banks gain additional money by
providing loans for a variety of products. The bank earns the additional funds
by lending money to the qualifying person at predetermined rates.
Banks now provide loans for a variety
of purposes, including study loans, vehicle loans, housing loans, personal
loans, and so on.
3) Withdrawal and payment facilities
Customers can use a bank’s numerous
payment and withdrawal services to receive their money quickly and easily.
Customers can use cheques and draughts to withdraw money, as well as ATMs
established by banks at various sites throughout the city.
4) Internet services
Modern banks now provide internet
services, which is another element of a bank. The growth of the internet and
its integration into the banking industry has made it even easier for customers
to do numerous transactions. Through their apps, banks are providing online
services. You can pay your bills, buy groceries, and shop without having cash
on you.
5) Business
Banking’s sole purpose is not to
supply consumers with banking services. To make additional money, all banks are
involved in subsidiary enterprises. Their only responsibility is to deliver
optimum customer satisfaction and maximum interest rates in order to attract
more clients to bank with them. To make a profit, money is moved from one hand
to the next.[9]
Evolution of Banking in India [10]
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:
1) Pre - Independence (Before 1947)
2) Post - Independence Phase - (Between
1947 to 1991)
3) Liberalisation (1991 - Until Now)
·
Pre
Independence-Period (1786-1947)
The first bank of India was the “Bank
of Hindustan”, established in 1770 and located in the then Indian capital,
Calcutta. However, this bank failed to work and ceased operations in 1832.
During the Pre Independence period
over 600 banks had been registered in the country, but only a few managed to
survive.
Following the path of Bank of
Hindustan, various other banks were established in India. They were:
1.
The
General Bank of India (1786-1791)
2.
Oudh
Commercial Bank (1881-1958)
3.
Bank
of Bengal (1809)
4.
Bank
of Bombay (1840)
5.
Bank
of Madras (1843)
During the British rule in India, The
East India Company had established three banks: Bank of Bengal, Bank of Bombay
and Bank of Madras and called them the Presidential Banks. These three banks
were later merged into one single bank in 1921, which was called the “Imperial
Bank of India.”
The Imperial Bank of India was later
nationalised in 1955 and was named The State Bank of India, which is currently the
largest public sector Bank.
Reasons why major banks failed to
survive during the pre-independence period –
·
Indian
account holders had become fraud-prone
·
Lack
of machines and technology
·
Human
errors & time-consuming
·
Fewer
facilities
·
Lack
of proper management skills.[11]
·
Post
Independence Period (1947-1991)
At the time when India got
independence, all the major banks of the country were led privately which was a
cause of concern as the people belonging to rural areas were still dependent on
money lenders for financial assistance.
With an aim to solve this problem,
the then Government decided to nationalise the Banks. These banks were
nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank
of India was nationalised in 1949.
Candidates can check the list of
Banking sector reforms and Acts at the linked article.
Following it was the formation of
State Bank of India in 1955 and the other 14 banks were nationalised between
the time duration of 1969 to 1991. These were the banks whose national deposits
were more than 50 crores.[12]
Given below is the list of these 14
Banks nationalised in 1969:
·
Allahabad
Bank
·
Bank
of India
·
Bank
of Baroda
·
Bank
of Maharashtra
·
Central
Bank of India
·
Canara
Bank
·
Dena
Bank
·
Indian
Overseas Bank
·
Indian
Bank
·
Punjab
National Bank
·
Syndicate
Bank
·
Union
Bank of India
·
United
Bank
·
UCO
Bank
In the year 1980, another 6 banks
were nationalised, taking the number to 20 banks. These banks included:
·
Andhra Bank
·
Corporation Bank
·
New Bank of India
·
Oriental Bank of Comm.
·
Punjab & Sind Bank
·
Vijaya Bank
Apart from the above mentioned 20
banks, there were seven subsidiaries of SBI which were nationalised in 1959:
·
State Bank of Patiala
·
State Bank of Hyderabad
·
State Bank of Bikaner & Jaipur
·
State Bank of Mysore
·
State Bank of Travancore
·
State Bank of Saurashtra
·
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 merged in 2008 and State Bank of Indore, which merged in 2010.
Once the banks were established in
the country, regular monitoring and regulations need to be followed to continue
the profits provided by the banking sector. The last phase or the ongoing phase
of the banking sector development plays a hugely significant role.
Liberalisation Period (1991-Till
Date)[13]
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:
Global Trust Bank
·
ICICI Bank
·
HDFC Bank
·
Axis Bank
·
Bank of Punjab
·
IndusInd Bank
·
Centurion Bank
·
IDBI Bank
·
Times Bank
The other measures taken include:
·
Setting up of branches of the various Foreign Banks in
India
·
No more nationalisation of Banks could be done
·
The committee announced that RBI and Government would
treat both public and private sector banks equally
·
Any Foreign Bank could start joint ventures with
Indian Banks
·
Payments banks were introduced with the development in
the field of banking and technology
·
Small Finance Banks were allowed to set their branches
across India
·
A major part of Indian banking moved online with
internet banking and apps available for fund transfer
Thus, the history of banking in India
shows that with time and the needs of people, major developments have been
brought about in the banking sector with an aim to prosper it.
Reasons Why Banks Were Nationalised
in India[14]
To get a clearer picture of the
impact of nationalisation on the banking industry and the general population,
let’s understand why the government decided to nationalise banks:
·
To Energise Priority Sectors: Banks were collapsing at a fast rate – 361 banks failed
between 1947 and 1955, which converts to about 40 banks a year! Customers lost
their deposits with no chance of recovering them.
·
A Neglected Agricultural Sector: Banks favoured large industries and businesses and
neglected the rural sector. Nationalisation came with a pledge to support the
agricultural sector.
·
Expansion of Branches: Nationalisation facilitated the opening of new branches to ensure
maximum coverage of banks throughout the country.
·
Mobilisation of Savings: Nationalising the banks would allow people more access to
banks and encourage them to save, injecting additional revenue into a
cash-strapped economy.
·
Economic and Political Factors: The two wars in 1962 and 1965 put a tremendous burden on the
economy. The nationalisation of Indian banks would give the economy a boost
through increased deposits.
The Positive Effects of
Nationalisation
The nationalisation of Indian banks
was one of the most significant events in the evolution of banks in India.
Today, India has 19 nationalised banks.
Here are a few ways that
nationalisation benefited the economy:
1) Increased Savings: There was a sharp increase in
savings with the opening of new branches. As national income rose in the 1970s,
gross domestic savings almost doubled.
2) Improved Efficiency: The efficiency of banks improved
with additional accountability. It also increased public confidence.
3) Empowering SSIs: Small-scale industries (SSIs)
received a boost resulting in a proportionate improvement in the economy.
4) Financial Inclusion: The overall statistics of the
banking sector and the Indian economy showed a marked improvement. It reflected
on parameters like the share of bank deposits to GDP, the gross savings rate,
the share of advances to DGP, and the gross investment rate from 1969 to 1991.
5) Better Outreach: Banks were now no longer only
restricted to metropolitan areas. Branches were opened in the remotest corners
of the country.
6) A Surge in Public Deposits: The increased reach of banks helped
small industries, agriculture, and the export sector grow. This growth was
accompanied by a proportionate increase in public deposits.
7) Elevating the Green Revolution: The Green Revolution, one of the
biggest priority items on the government’s agenda, received a boost thanks to
the support that the newly-nationalised banks provided to the agricultural
sector.[15]
Drawbacks of Nationalisation
To provide an unbiased view on the
subject, here are a few downsides of nationalisation:
1) Socio-Economic Challenges: The banks couldn’t provide
sufficient support to eradicate poverty or provide adequate financing to the
grassroots levels of society. This was particularly obvious in rural India.
2) Competition From Private Banks: Despite government support and
increased impetus through a rise in deposits, public sector banks were never
able to surpass private banks in performance.
3) Failure to Achieve Financial
Inclusion: Although
financial inclusion was the major objective of nationalising banks, it was not
adequately enabled. It was only achieved to a limited extent after the launch
of a type of savings account called Jan Dhan Yojana.[16]
Conclusion
–
In conclusion, the Indian banking
sector faces both opportunities and challenges. Fintech innovation promises to
reshape traditional banking models, offering new avenues for service delivery
and customer engagement. However, this rapid evolution also brings regulatory
and cybersecurity concerns that must be addressed proactively.
The evolution of banking in India
mirrors the nation's journey towards economic prosperity and social
empowerment. By leveraging technology, fostering innovation, and embracing
inclusivity, Indian banks can continue to play a pivotal role in driving
sustainable development and realizing the aspirations of millions across the
country. This research illuminates the transformative forces that have shaped
Indian banking and offers valuable insights for policymakers, practitioners,
and researchers navigating the future of finance.
[1] https://unacademy.com/content/bank-exam/study-material/general-awareness/a-brief-note-on-indian-banking-system/
[2] https://groww.in/blog/the-evolution-of-banking-in-india
[3] https://jupiter.money/blog/evolution-of-banking-in-india/
[4] https://testbook.com/banking-awareness/history-of-banking-in-india
[5] https://testbook.com/banking-awareness/history-of-banking-in-india
[6] https://byjus.com/bank-exam/history-banking-india/
[7] https://groww.in/blog/the-evolution-of-banking-in-india
[8] https://jupiter.money/blog/evolution-of-banking-in-india/
[9] https://testbook.com/banking-awareness/history-of-banking-in-india
[10] https://groww.in/blog/the-evolution-of-banking-in-india
[11] https://unacademy.com/content/bank-exam/study-material/general-awareness/a-brief-note-on-indian-banking-system/
[12]
https://byjus.com/free-ias-prep/types-banks-india/
[13] https://pwskills.com/blog/history-of-banking-in-india-bfsi/
[14]
https://jupiter.money/blog/evolution-of-banking-in-india/
[15] https://testbook.com/banking-awareness/history-of-banking-in-india
[16] https://unacademy.com/content/bank-exam/study-material/general-awareness/a-brief-note-on-indian-banking-system/
Article Information
EVOLUTION OF BANKING IN INDIA
Authors: AKASH CHANDRAKANT KAMBIRE
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/11
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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