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EVOLUTION OF BANKS IN INDIA BY: - MR MOHAMMADAZAR SHAIKH
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EVOLUTION OF BANKS IN INDIA
AUTHORED BY: - MR MOHAMMADAZAR SHAIKH
ABSTRACT:
The core of industry, trade,
and commerce is banking and finance. As things stand,
the banking industry is essential to a nation's
ability to develop. Lending loans, taking deposits, and other associated services are all provided by
banks. Lending money to those in need and depositing money from those with more to save are two different things.
In the realm of human
existence, banking is among
the most vital and significant aspects. When it comes to facilitating quicker access
to banking services, online banking systems
are among the best tools available to banks, clients, and financial organizations.
Every day, banks have a lot of user-related tasks that
require a large infrastructure, a larger workforce,
and more labour for banking operations. The development of computers and networks
led to the simplification of banking operations through the use of online,
mobile, and ATM banking. There are advantages and
disadvantages to every system, and the network
banking system is no
exception.
Some of the disadvantages include hacking and illegal
access. Because a customer's account is
linked to their money, the banking system must perform a number of important
tasks in the authentication and validation of customer accounts. This study aims to outline
the development of India's banking sector as well as the benefits of the new framework.
These days, banking permeates every facet of our daily lives—at home, at
school, at work, on travel, and
everywhere else we handle financial matters. The importance of banking in our daily lives is becoming more and more apparent. What are the institutions that are so necessary in today's
world?
Very few people, aside from the very wealthy, purchase their homes with
only cash. For most of us to make
such a big purchase, we need credit in the form of loans. In actuality, a lot
of people seek financial assistance
from banks in order to meet their needs. The current state of the world wouldn't
function properly without
banks to grant
credit. We will examine the origins of this
burgeoning sector in this piece.
Key words: currency,
money, nationalization, liberalization, and commercial banking
INTRODUCTON
One of the most important ideas for both practical applications and
competitive examinations is the
history of banking in India. Moreover, the nation's economic progress is based
on the history of banking in India.
Significant modifications to the banking system an administration have occurred over time, coupled
with innovations that have taken into account
the requirements of the public
in terms of banking. An essential notion for banking awareness themes
in bank exams is the history of banking in India.
The foreign banking system began to deteriorate in the 17th century when
the British arrived. In 1770, Mayer's Alexander
and Company established the Bank of Hindustan, the first bank in Europe.
A nation's ability to develop is dependent on its contemporary banking
system. A developed economy is characterized by a banking
system that is well-established, organized, and effective. A well-designed banking
system increases economic
efficiency by directing
savings toward investments
with better rates of return. An economy's resilience is contingent upon the effectiveness of its financial system, which is reliant on the nation's banking infrastructure.
The word "bank" comes from the old Italian word
"banca" or the French word "banque," both of which refer to a bench or table used for exchanging money. In the past, European
moneylenders and money changers would place large amounts of coins from
various nations on tables
or benches in order to lend or exchange. The origins of contemporary banking
can be found in Florence
during the Middle Ages, specifically in 1397. A wealthy family
of merchants known as the Medici built a network of
stores where customers could deposit money and take it out in a different city where a Medici
agent was present.
The Church and a number of wealthy
families stored their funds in Medici banks.
This made it possible
for wealthy people to travel without having to worry about robbery risks or
carrying huge quantities of cash. By
1700, banking was becoming more and more common throughout Europe.
In Europe, established banks existed
in almost all of the nations.
The British founded the "Bank of Hindustan" in 1770, marking
the beginning of banking operations
in India. There, as autonomous entities, the "General Bank of India,"
"Bank of Bengal,"
"Bank of Bombay," and "Bank of Madras" were founded in
1786, 1809, 1840, and 1843, respectively; the last three were dubbed Presidency Banks.
Following their 1920 merger, these banks became Imperial Bank of
India, which subsequently changed its name to State Bank of India.
Evolution Banking System1
The history of banking is fascinating and shows how trade and commerce
have changed over time. Additionally, it sheds information on the political, cultural, and way of life of civilized humankind. Religion and faith in
God have historically been the strongest human
faiths. The place
of worship and the seat of
religion were seen as secure
locations for cash and
valuables.
Due to the lack of steel safes in ancient residences, the majority of
rich individuals kept accounts at
their temples. The temples were constantly occupied by a large number of pious and trustworthy individuals, such as priests
and temple employees, who added a feeling of safety. Records
from antiquity, including
Greece, Rome, Egypt, and Ancient
Babylon, imply that temples not only stored wealth but also lent it out.
The primary cause of temple looting
during wartime is the fact that the majority of them served as the financial hubs of their communities.
The individual involved in this "lending" operation was
referred to as the "Banker" due to the standard bench he established. It is also noted that as the
furious depositors damaged the banker's
bench and table,
the term "bankrupt" changed.
coins were certificates of value stamped
by an authority, generally the king, on metal, mainly gold, silver, and
bronze, but they might be any other
metal. Paper was discovered to be an alternative to metal as a result of
growing confidence in this
authority's ability to value goods and services and the need for more trade. the instability of monarchical governance
resulted in the banks gaining control over currency since they were able to maintain trust, manage credit, and
engage in trading. Every type of money represented a unit of
worth and guaranteed
to reimburse the
bearer of given value. A stable financial system emerged as a result of
the inability to govern and organize due to foolish
loans. Sweden's Stockholm’s Banco introduced the world's first
banknotes in July 1661.
India's Banking History2
In addition to being incredibly extensive and intriguing in and of
itself, the history of Indian coinage sheds
a great deal of insight
on the diverse facets of life in various eras. The Rig Veda Only gold, silver, copper, and bronze
are mentioned, and tin, lead, iron, and silver are also mentioned in later Vedic books. Iron coins have recently been
discovered at extremely early stages in Pandu Rajar Dhibi (Bengal) and
Attranji Kheri (U.P.).
In India, there
has been a
monetary economy since
the time of
the Buddha. trade in the modern sense. These
instruments were used extensively during the Buddhist era. Large town
merchants extended letters of credit
to one another.
Trade guilds played the role of bankers, taking deposits and making
loans. Larger temples functioned as
bankers, while southern village communities provided loans to peasants in a profitable manner. Numerous bankers
with expertise were present, and
 |
The word "chief" actually refers to moneylenders such as the
Sethi. It has endured in northern India as of late.
Cowry shells, or varataka, were frequently used by the impoverished in several regions
of India to pay for small goods.
Indigenous banking began as rural money lending, with some people
utilizing their own personal savings
for this kind of financing. The main bankers identified in the scriptures were the
Vaishyas. The
first
type
of
Indian
Bill
of
Exchange that
existed
was
referred to as "Hundi".
The barter system was used to
govern imports and exports.
The Artha sastra of Kautilya speaks of a money called panas, and even
court fines were paid with panas.
Havell, E. B. in his work: According
to India's History
of Aryas Rule, Muhammad Tughlaq produced copper coins as
counterweights and by
an they were forced to pass by imperial decree
at the price of silver and gold. Instead of using gold to pay their tribute,
the people used copper to pay for all the necessities and extravagances they could afford.
Due to their lack of knowledge of the local language and the inexperience
of the native individuals involved in
the European trade, English traders who arrived in India in the 17th century
were unable to take advantage
of the local bankers. Consequently, the English In addition to their commercial
operations, agency houses in Bombay and Calcutta started to engage in unlimited liability banking.
These agency houses were set up by Europeans with aptitude for business
who left the civil and military
forces.
Between 1834 and 1847, a kind of corporate structure known as a managing
agency emerged. These agency
houses' main focus was trade, but they also ventured into banking as a side business to support the operations of
their primary venture. With no capital of their own, the English agency houses that started acting as bankers to the East
India Company relied on deposits to keep their money. They created joint stock banks, printed paper money, and funded the transportation of crops. The first of these was Hindustan Bank, which was founded in 1770 by one of the
Calcutta agency firms.
India first established banking in the latter half of the eighteenth century.
The General Bank of India, established in 1786, and the Bank
of Hindustan, established in 1790, were the earliest banks; both are now closed.
The bank that has been around the longest the State Bank of
India is located in India. It was first established in June 1806 as the Bank of Calcutta, which quickly changed its name to the Bank of Bengal.
The Bank of Bombay and the Bank of Madras were
the other two presidency banks,
all of which were founded
under charters from the British
East India Company.
What is
Bank?3
A bank is a financial entity that provides its clients with banking
services and other financial operations, according
to the Banking Companies Act of 1949. Generally speaking, a bank is an organization that offers basic financial services
including loan provision
and deposit acceptance.
|
Evolution of bank 4
India's banking industry has seen significant change. Banks have been
around for a very long time; in fact,
they existed even before the nation gained its freedom. An overview of the development of banking is provided
below:
India's banking history
can be roughly
categorized into the
following phases: prior to Independence (1947 or before)
phase Following Independence: (Between 1947 until 1991) liberalization
(1991–Present)
Phase 1: The Pre-Independence Phase5
Almost 600 banks operated in India prior to its independence. The Bank of
Hindustan was the first bank to be
established, having been established in Calcutta in 1770. The school dissolved in 1832. In the history of Indian
banking, the Oudh Commercial Bank was the country's first commercial bank. some 19th-century banks
have withstood the test of time and are still in operation today, like Allahabad Bank (founded in 1865) and
Punjab National Bank (founded in
1894). established in the early to mid-1800s, the Bank of Bengal, the Bank of
Madras, and the Bank of Bombay were
among the other institutions that were merged into one to form the Imperial
Bank, which subsequently evolved
into the State Bank of India.
Phase 2: The Post-Independence Phase6
·
Following its independence, India's financial system continued to develop essentially in the same way. In accordance
with the 1949 Banking Regulation Act, the
Indian government chose to nationalize the banks in 1969. The Reserve Bank of India was one of the fourteen banks
that were nationalized (RBI). the Indian government acknowledged that several communities were being financially excluded in 1975. it established banking organizations with specialized roles
between 1982 and 1990 to keep up with the development of financial
services in India.
·
NABARD (1982) – to support
agricultural activities
·
EXIM (1982) – to
promote export and import
·
National Housing Board – to finance housing
projects
·
SIDBI – to fund small-scale industries
|
Phase 3: The
LPG Era (1991 Till Date)7
There was a radical shift in the Indian economy starting in 1991. India
opened its doors to private
investment by the government. The RBI approved ten private banks. Among the
well- known brands that have
survived this liberalization are IndusInd Bank, ICICI, HDFC, Axis Bank, and DCB. two further banks were
granted licenses in the early to mid-2000s: Kotak Mahindra Bank (2001)
and Yes Bank (2004).
Other notable changes
and developments during this era were:
International banks that have branches
in India include
Bank of America,
HSBC, and Citi bank. the process
of nationalizing banks came to a complete halt.
• Payments banks
were established.
• It was approved for small financing banks to open branches across India.
• Digitalization of transactions and other associated banking processes started
to happen in banks.
Reasons India Nationalized Its Banks:
Let us examine the rationale
behind the government's decision to nationalize banks to gain a
better understanding of the effects of nationalization on the banking
sector and the broader public:
• To Energize
Priority Sectors: Between 1947 and 1955, 361 banks failed, or around 40 banks annually, indicating that the bank
collapse was occurring quickly! Clients lost their deposits And had no way to get back.
• A Neglected
Agricultural Sector: Banks gave preference to big companies and industries while ignoring the rural area. With
nationalization came a promise to uphold the agriculture industry.
• Branch Expansion: Nationalization made it easier for new branches to open, ensuring that banks were as
widely represented as possible across
the nation.
• Mobilization of Savings: By giving individuals greater access to banks and encouraging them to
save, nationalizing the banks would help a cash-strapped economy by bringing in
more money.
|
• Political
and Economic Factors: The economy was severely impacted by the two conflicts in 1962 and 1965. Increased deposits
from the nationalisation of Indian banks would the advantage to Nationalization. One of the most important developments in the history of Indian banks was the nationalisation of those institutions. India now has nineteen
nationalized banks.
Here are a few ways that nationalisation benefited
the economy:
1. 1. Higher Savings: The creation of new branches
resulted in a notable rise in savings.
Gross domestic savings
nearly doubled in the 1970s as the country's income
increased.
2. Enhanced Efficiency: With more responsibility, banks' efficiency increased. Additionally, it
raised public trust.
3. Empowering SSIs:
The economy improved
proportionately as a result of the support
given to small-scale
enterprises (SSIs).
4. Financial
Inclusion: The Indian economy and banking industry's overall statistics demonstrated a noticeable improvement. It
was reflected in metrics such as the gross investment
rate from 1969 to 1991, the gross savings rate, the share of advances to DGP, and
the GDP share of bank deposits.
2.
2. Expanded Reach:
Financial institutions were no longer
confined to large
cities. In the most
isolated regions of the nation, branches were opened.
3. An Increase
in Public Deposits: The expansion of banks' operations aided in the growth of exports, small businesses, and
agriculture. Public deposits also increased
proportionately to this rise.
4. Strengthening
the Green Revolution: One of the top priorities on the government's agenda,
the Green Revolution benefited from the assistance that the recently
nationalized banks gave to the farming industry.
Nationalization & Its Impacts8
The process of transferring assets
from the public
sector to the federal or state governments for management or ownership is known as nationalization. Through
the process of nationalization, banks in India that had previously
operated under the privacy sector were moved to the public sector. Consequently, the nationalized
banks were established. The banking sector and the nation's economic expansion
benefited from the nationalization of banks in the following
ways: Higher levels of efficiency in the banking
sector raised public trust in the banks Small-scale industry
growth resulting in a rise in funding
and economic expansion
increased bank presence, particularly in rural regions,
with a shift in focus
from profit to service Cost stabilization as the supply of
necessities rose reduction of competition and improvement of the banks' operational effectiveness and performance.
The Negative Aspects
of Nationalization9
To offer an
objective perspective on the
matter, the following are some drawbacks of nationalization:
1. Socio-economic
Challenges: The banks were unable to help the grassroots levels of society sufficiently to end poverty or to give
them with necessary funding. This was especially clear in India's rural areas.
2. Competition
from Private Banks: Public sector banks were never able to outperform private banks in terms of performance,
even with government support and additional push from a growth in
deposits.
3. Inability
to Achieve Financial Inclusion: Despite being the main goal of nationalizing banks, financial inclusion was not sufficiently supported. It was only partially realized
until the introduction of the Jan Dhan Yojana savings
account program.
|
List of Banks in India Before
Independence10
Here is a list of banks before Independence. The small, brief list bears
testimony of how few banks existed during that era:
|
Bank
|
Year Established
|
|
Allahabad Bank
|
1865
|
|
Punjab National Bank
|
1894
|
|
Bank of India
|
1906
|
|
Central Bank of India
|
1911
|
|
Canara Bank
|
1906
|
|
Bank of Baroda
|
1908
|
Types of Banks in India
We should talk about the different kinds of banks that are currently
operating in India as we wrap off our exploration of the development of the country's banking sector. The following are the main types of banks that you are probably going to encounter:
1. Public Sector
Banks
In a public sector bank, the majority of the shares are owned by the
government. The State Bank of India
is a good example, since the Indian government owns 58.6% of its shares. Another option is Punjab National Bank,
in which the government has a
58.87% share. State banks, their
affiliated organizations, and nationalized banks make up the two further categories of public sector banks. In
nationalized banks, the government controls every aspect of the bank and maintains total authority over it. However,
selling shares of these banks is another
option available to the government. The government's interests are diminished
when this takes place.
Occasionally, the government acquires a minority stake in these
institutions, following which the bank is listed on the Indian stock exchange.
2. Private Sector
Banks
|
Banks in the private sector are owned by private companies. They gained
notoriety in the 1990s. Owing to
their superior service, private banks pose a serious threat to public sector banks.
3. Small Finance
Banks in India
Basic banking services including deposits, loans, and bank transfers are
offered by a few specialty banks in
India. These are small finance banks that serve segments of the economy such as small industries, marginal
farmers, and other unorganized sector segments that are not served by traditional banks. Ujjivan
Financial Services Pvt Ltd in Bangalore and Equites Holdings Pvt Ltd in
Chennai are two examples
of these banks.
4. Payment Banks in
India
The RBI developed a brand-new model known as payment banks. These banks are not permitted to offer credit
cards or loans,
but they are able to take restricted deposits. In addition
to offering savings
and current accounts, they also have the ability
to issue debit or ATM cards. Bharti Airtel established Airtel
Payments Bank, an illustration of a payment bank in India. Because these banks provide online payment
options such as mobile payment apps, they also
play a significant role in the development
of e-banking in India.
The Indian
Banking System Drives
the Economy
Indian banks have changed the grim financial scene in the nation
throughout time in order to support its expanding economy.
Without a question, the Indian banking
sector is the backbone of the nation's economy even now. The
2016 demonetization of currency notes serves as a perfect illustration. Current
banknotes were destroyed
almost instantly, causing
turmoil throughout the country. Banks enabled citizens
to exchange their obsolete banknotes across the nation, which aided in the economy's
recovery from the shock. The Indian banking sector is constantly changing, and with it, so is its capacity to offer
solid assistance to a country that is constantly in need of financial advancement.
Liberalization of Banking
in India's Past and Current
Situation
India's banking industry
can be broadly classified into organized and unorganized sectors.
The RBI, commercial banks, cooperative banks,
and specialist financial
organizations like as ICICI, IFC, and others make up the organized
sector. The sector that is not subject to government or RBI regulation is known as the unorganized sector. These
organizations are very susceptible to
instability and deception. In the part below, let's take a closer look at the
Indian banking industry's organizational structure:
Banks on Schedule
The banks included in the second
schedule of the RBI Act of 1934 are referred
to as scheduled banks. To qualify as a scheduled bank, it needs to meet the following requirements:
The total
amount of paid capital and monies received
must not be less than INR 5 lakhs. The bank's actions
shouldn't be harmful
or negatively impact the interests
of its clients.
Scheduled commercial banks come in four varieties:
banks in the public sector banks
in the private sector overseas banks
local banks in rural
areas
CONCLUSION
India's banking industry is currently fairly developed in terms of
supply, scale, and product offerings.
Partnerships should strike the correct balance between obligation and value by having the proper combination of long-term
assets and chance cash flow, especially in a non- industrialized country like India where framework projects
are common. Furthermore, a strong domestic capital market is essential for the financial
industry to raise capital, fund growth, and maintain
an appropriate capital
sufficiency ratio to manage risk.
Furthermore, bank investments are increasing. The banking industry is facing a number of
challenges as a result of the money market's ongoing
downturn, according to the researcher's analysis of the industry. The financial sector
in India has now actually
advanced in terms of item contributions, supply,
and extension. Their entry into the nation of India
continues to cause problems for the private sector and foreign banks. To calculate the optimal debt-to-equity ratio,
firms in emerging countries like India
need to have the right mix of risk capital and long-term resources. A strong
domestic capital market is also
essential for the financial industry to raise money, promote growth, and maintain an appropriate capital
sufficiency ratio to manage risk. Additionally, bank interests are shifting vertically. After studying the banking sector,
the researcher found that more issues are facing
the sector as a result of the money
market's continuous decrease.
REFERENCE
1. https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=b61b7844652aabb
2aa6eaa66afd08b3b6457f76c
2. https://testbook.com/banking-awareness/history-of-banking-in-india
3. https://byjus.com/bank-exam/history-banking-india/
5. https://jupiter.money/blog/evolution-of-banking-in-india/
Article Information
EVOLUTION OF BANKS IN INDIA BY: - MR MOHAMMADAZAR SHAIKH
Authors: MR MOHAMMADAZAR SHAIKH
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/04
- 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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