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, both of which are now defunct. The
oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in
June 1806, which almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which
were established under charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form
theImperial Bank of India, which, upon India's independence, became the State 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. TheAllahabad Bank, established in 1865 and still
functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues
stock and requires shareholders to be held liable for the company's debt) It was not the first though.
That honor belongs to the Bank of Upper India, which was established in 1863, and which survived
until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank
of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate

States, promoters opened banks to finance trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India during that period failed. The depositors lost
money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the
exclusive domain of Europeans for next several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte
de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches
in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengalin 1869.
Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so
became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881
in Faizabad. It failed in 1958. The next was thePunjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of
stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other
infrastructure had improved. Indians had established small banks, most of which served particular
ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a
number of Indian joint stock banks. All these banks operated in different segments of the economy.
The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian
joint stock banks were generally under capitalized and lacked the experience and maturity to compete
with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect
of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by
solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by
the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. 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.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara ( South
Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank.
Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

During the First World War (1914-1918) through the end of the Second World War (1939-1945), and
two years thereafter until the independence of India were challenging for Indian banking. The years of
the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian
economy gaining indirect boost due to war-related economic activities. At least 94 banks in India
failed between 1913 and 1918 as indicated in the following table:

Authorised
Year Number of banks Paid-up Capital
capital
s that failed (Rs. Lakhs)
(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Contents
 [hide]
 1 Post-

independence

2 Nationalisatio

3 Liberalisation

4 Further

reading

5 Notes

6 See also

7 External links

[edit]Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active
role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government
in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different
segments of the economy including banking and finance. The major steps to regulate banking
included:

 In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it
became an institution wholly owned and run by the Government of India.
 In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
 The Banking Regulation Act also provided that no new bank or branch of an existing bank
could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of
India or SBI, continued to be owned and operated by private persons. This changed with the
nationalisation of major banks in India on 19 July 1969.

[edit]Nationalisation

The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

By the 1960s, the Indian banking industry had become an important tool to facilitate the development
of the Indian economy. At the same time, it had emerged as a large employer, and a debate had
ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime
Minister of India expressed the intention of the GOI in the annual conference of the All India Congress
Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with
positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance
andnationalised the 14 largest commercial banks with effect from the midnight of July 19,
1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of
political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on
9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for
the nationalization was to give the government more control of credit delivery. With the second dose
of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the
year 1993, the government merged New Bank of India with Punjab National Bank. It was the only
merger between nationalized banks and resulted in the reduction of the number of nationalised banks
from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer
to the average growth rate of the Indian economy.

[edit]Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization,

licensing a small number of private banks. These came to be known as New Generation tech-savvy
banks, and included Global Trust Bank (the first of such new generation banks to be set up), which
later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI
Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the
banking sector in India, which has seen rapid growth with strong contribution from all the three sectors
of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for
Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which
could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the
4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a
modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom
in India. People not just demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets relative to other banks in comparable economies in its region.
The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The
stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange
rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in its
services sector-the demand for banking services, especially retail banking, mortgages and investment
services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to
hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake
exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in their
loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports
that the banks' loan recovery efforts have driven defaulting borrowers to suicide