History of Banking in India (Before & After Independence): The

banking
system is considered as the backbone of a nation's economy.
Modern
banking in India originated in the last decade of the 18th
century. We have
come up with the history of banking, before and after
independence.
The history of banking began when empires needed a way to
pay for foreign
goods and services with something that could be exchanged or
facilitated
easily. Prior to this, banking procedures were carried by
informal methods in
the ancient World. However, formal banking has been
developed around the
20th century. In India, banking has developed from the
primitive to the modern
stage of banking in a fashion that has no parallel in world
history.
Today, the Indian banking system is divided into commercial
banks (Both
Public, Private Banks, schedules and non-scheduled), Regional
Rural Banks,
Cooperative Banks, etc. In this article, we will dig deeper to
make you
understand different phases of the Indian Banking system along
with other
interesting facts .
Phases of Indian Banking System
The advancement in the Indian banking system is classified into 3
distinct
phases:
1. The Pre-Independence Phase i.e. before 1947
2. Second Phase from 1947 to 1991
3. Third Phase 1991 and beyond
The Pre-Independence Phase of Banking i.e. before 1947
· This phase is characterized by the presence of a large number of
banks
(more than 600).
· Banking system commenced in India with the foundation of few banks
like Bank of Hindustan in Calcutta (now Kolkata) in 1770 whichceased to
operate in 1832.
· After that many banks came but were not successful like:
(1) General Bank of India (1786-1791)
(2) Oudh Commercial Bank (1881-1958) – the first commercial bank of
India.
· Whereas some are successful and continue to lead even now like:
(1) Allahabad Bank (est. 1865)
(2) Punjab National Bank (est. 1894, with HQ in Lahore (that time))
(3) Bank of India (est. 1906)
(4) Bank of Baroda (est. 1908)
(5) Central Bank of India (est. 1911)
· While some others like Bank of Bengal (est. 1806), Bank of
Bombay (est. 1840), Bank of Madras (est. 1843) merged into a single
entity in 1921 which came to be known as Imperial Bank of India.
· Imperial Bank of India was later renamed in 1955 as the State Bank of
India.
· In April 1935, Reserve Bank of India was formed based on the
recommendation of Hilton Young Commission (set up in 1926).
· In this time period, most of the bank were small in size and suffered
from a high rate of failures. As a result, public confidence is low in
these banks and deposit mobilization was also very slow. People
continued to rely on the unorganized sector (moneylenders and
indigenous bankers).
The Second Phase of Banking from 1947 to 1991
· Broadly the main characteristic feature of this phase is
the Nationalization of the bank.
· With the view of economic planning, nationalization emerged as an
effective measure.
Need for nationalization in India:
(a) The banks mostly catered to the needs of large industries, big
business houses.
(b) Sectors such as agriculture, small-scale industries and exports were
lagging behind.
(c) The poor masses continued to be exploited by the moneylenders.
· Following this, in the year 1949, 1st January the Reserve Bank of India
was nationalized.
· Fourteen commercial banks were nationalized on 19th July 1969. Smt.
Indira Gandhi was the Prime Minister of India, during in 1969. The
following banks are nationalized:

1. Central Bank of India

2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara Bank
7. Dena Bank
8. United Bank
9. Syndicate Bank
10. Allahabad Bank
11. Indian Bank
12. Union Bank of India
13. Bank of Maharashtra
14. Indian Overseas Bank
· Six more commercial banks were nationalized in April 1980. These are
mentioned below:
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6.Vijaya Bank.
· Meanwhile, on the recommendation of the Narasimham Committee,
Regional Rural Banks (RRBs) were formed on Oct 2, 1975. The objective
behind the formation of RRBs was to serve the large unserved
population of rural areas and promoting financial inclusion .
· With a view to meet the specific requirement from the different
sector
(i.e. agriculture, housing, foreign trade, industry) some apex level
banking institutions were also set up like:(a) NABARD (est. 1982)
(b) EXIM (est. 1982)
(c) NHB (est. 1988)
(d) SIDBI (est. 1990)
Impact of Nationalization
· Improved efficiency in the Banking system – since the public‘s
confidence got boosted.
· Sectors such as Agriculture, small and medium industries started
getting funds which led to economic growth.
· Increased penetration of Bank branches in rural areas.

Third Phase of Banking 1991 and Beyond

· This period saw remarkable growth in the process of the development
of banks with the liberalization of economic policies.
· Even after nationalization and the subsequent regulations that
followed,
a large portion of the masses is untouched by the banking services.
· Considering this, in 1991, the Narasimham committee gave its
recommendation i.e. to allow the entry of private sector players into
the
banking system.
· Following this, RBI gave licenses to 10 private entities, out of which
few
survived the market demands, which are ICICI, HDFC, Axis Bank,
IndusInd Bank, DCB.
· In 1998, the Narsimham committee again recommended the entry of
more private players. As a result, RBI gave a license to the following
newbies:
(a) Kotak Mahindra Bank (2001)
(b)Yes Bank (2004)
· In 2013-14, the third round of bank licensing took place and in
2015, IDFC Bank and Bandhan Bank emerged.
· In order to further financial inclusion, RBI also proposed to set up 2
new
kinds of banks i.e. Payment Banks and Small Banks.
· In 2015, RBI gave in-principle licenses to 11 entities to launch
Payments
Bank and granted 'in-principle' approval to the 10 applicants to set up
Small Finance Banks.
Note:
· The RBI issued a license to the bank under Section 22(1) of the
Banking
Regulation Act, 1949, to carry on the business of Small Finance Bank
(SFB) and Payments Bank in India.
Committee on Small Banks - The applications were analyzed and
evaluated
by an External Advisory Committee (EAC). The EAC for small banks was
chaired by Usha Thorat, former deputy governor, RBI.
Committee on Payment Banks - These applications were analyzed and
evaluated by an External Advisory Committee (EAC). The EAC
Committee for
Payment Banks was chaired by Dr. Nachiket Mor, Director, Central
Board of
the Reserve Bank of India.
List of Public Sector Banks & Private Sector Banks
Axis Bank
Mumbai
Bank of Baroda
Vadodara
Bank of India
Mumbai
Bank of Maharashtra
Pune
Bandhan Bank
Kolkata
Canara Bank
Bengaluru
Central Bank of India
Mumbai
Citi Union Bank
Tamil Nadu
Dhanlaxmi Bank
Kerala
Federal Bank
Kochi
HDFC Bank
Mumbai
IDBI Bank
Mumbai
Indian Bank
Chennai
Indian Overseas Bank
Chennai
ICICI Bank
Mumbai
IDFC Bank
Mumbai
IndusInd Bank
Mumbai
Karnataka Bank
Mangaluru
Karur Vysya Bank
Tamil Nadu
Kotak Mahindra Bank
Mumbai
Lakshmi Vilas Bank
Chennai
List of Small Finance Bank
Bank Name Headquarters
Capital
Small
Finance
Bank
Jalandhar, Punjab
Equitas
Small
Finance
Bank
Chennai, Tamil Nadu
Utkarsh
Small
Finance
Bank
Varanasi, UP
Suryoday
Small
Finance
Bank
Belapur, Navi Mumbai
Ujjivan
Small
Finance
Bank
Bengaluru, Karnataka
ESAF Small
Finance
Bank
Thrissur, Kerala
Au Small
Finance
Bank
Jaipur, Rajasthan
Fincare
Small
Finance
Bank
Bengaluru, Karnataka

Having a good functstem is one of the main facets of a developing country like ou
In India, we have numerous banks and types of banks where we can easily do o
needful money transactions. The varied types of banking in the spectrum help a
satisfy the needs of each sector of the country. There are banks for different secto
one bank funds the local entrepreneurs, while another bank capitalizes the b
venture capitalist, while there are other sets of banks that work for the benefit of
t
agricultural sector.
Thus, we see, there are different types of banking in India, but before we move on
determine the various types of banking, let us refresh our memories about so
basic concepts.
Having a good functioning bankin system is one of the main facets of a
developing country like ours. In India, we have numerous banks and types of
banks where we can easily do our needful money transactions. The varied types
of banking in the spectrum help and satisfy the needs of each sector of the
country. There are banks for different sectors, one bank funds the local
entrepreneurs, while another bank capitalizes the bug venture capitalist, while
there are other sets of banks that work for the benefit of the agricultural sector.
Thus, we see, there are different types of banking in India, but before we moveon
to determine the various types of banking, let us refresh our memories ab
What is Banking?
Banking is directly or indirectly connected with the trade of a country and the life
of each individual.
It is an industry that manages credit, cash, and other financial transactions. In
banking, the
commercial bank is the most influential institution for any country’s economy or
for providing any
credit to its customers.
In India, a banking company is responsible for transacting all the business
transactions including
withdrawal of cheques, payments, investments, etc. In other words, the bank is
involved in the
deposit and withdrawal of money, repayable on demand, savings, and earning a
decent amount ofprofits by lending money.
Banks also help to mobilise the savings of an individual, making funds accessible
to businesses and
help them to start a new venture.
However, unlike commercial banks, private sector banks are owned, operated,
and regulated by
private investors and have the right to operate .
Types of Banking
Banks are further segregated into four types.
Commercial banks: These banks are regulated by Banking Regulation Act, 1949.
They accept the
public deposit from the public for lending or investment.
Cooperative banks: Cooperative banks are undertaken by the State Cooperative
Societies Act and
give cheap credit to their members. The rural population is dependent on the
cooperative banks for
its financial backup.
Specialised banks: These banks provide financial help to special industries, foreign
trade, etc. Few
examples of specialised banks are foreign exchange banks, export and import
banks, development
banks, etc.
Central banks: These banks manage, check, and monitor all the activities of the
commercial banks
of a country .n
Types of Bank Accounts
The major types of bank accounts are –
· Savings Account
The facilities of savings account are only for savings purposes, and a bank
is liable to pay interest on the funds which are deposited in the account. In
India, the rate of interest for savings accounts ranges from anywhere
between 4% to 7%.
· Current Account
The current account mainly contains liquid deposits that are utilized for
business purposes and not for savings or investments. No interest is paid
on such an amount, and there are no maturity periods as well due to the
continuous nature of the account.
· Fixed Deposit Account
A particular sum of money is deposited in a fixed deposit account for a
given duration. If a deposit is taken out before the maturity date, penalties
will be imposed. Fixed deposits enjoy higher interest rates. The interest
rate is subjected to variation from bank to bank and also periodic revisions.
· Recurring Deposit Account
In the case of a recurring deposit account, a deposit will have to be made
by the account holder at regular intervals for a specified period. The bank
will have to pay the relevant rate of interest when the amount is repaid
after the fixed period.
Having a good functioning banking system is one of the main facets of a
developing country like ours. In India, we have numerous banks and types of
banks where we can easily do our needful money transactions. The varied types
of banking in the spectrum help and satisfy the needs of each sector of the
country. There are banks for different sectors, one bank funds the local
entrepreneurs, while another bank capitalizes the bug venture capitalist, while
there are other sets of banks that work for the benefit of the agricultural sector.
What are the Types of Commercial Banks?
There are four types of commercial banks in India. Those are –
1. Public Sector Banks
Commercial banks in India where the government holds majority stakes in
the bank (that is more than 50%) fall under the category of public sector
banks.
Examples of public sector banks in India are – Bank of Baroda, Canara
Bank, Punjab National Bank, etc.
2.
Private Sector Banks
Commercial banks in India in which higher equity stakes are held by
individual shareholders as opposed to the government fall under the
category of private sector banks.
Apart from the shareholding structure, both public sector and privatesector banks
offer the same set of services. The aspects on which those
are different involve charges that are imposed as well as the duration and
description of the services that are provided.
Examples of such financial institutions in India are – HDFC Bank, Axis
Bank, IndusInd Bank, ICICI Bank, etc.
3.
Small Finance Banks
The objective of Small Finance Banks in India is to provide financial
inclusion to less privileged sections of the economy, which ordinarily fails
to gain access to financial institutions. Small Finance banks cover small
and micro business units, marginal and small farmers, and various entities
in the unorganized sector.
Examples of Small Finance Banks in India are – Janalakshmi Small
Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank,
etc.
4.
Regional Rural Banks
Regional Rural Banks in India have very specific mandates such as
granting loans to marginal and small farmers cooperative societies,
agricultural labourers along small entrepreneurs and artisans among
others.
These banks were established according to the recommendations of
the
Narsimha Committee on Rural Credit. Examples of Regional Rural Banks
in
India – Kerala Gramin Bank, Pragathi Krishna Gramin Bank, etc.
Commercial Banks and Its Functions
The major functions of commercial banks include the following –
· Deposits
One of the primary functions of commercial banks is to accept deposits
from their customers, which can be both individuals or business
entities.
The deposits may be in the form of time deposits, savings deposits, and
current deposits.
· Lending
The deposits that are taken by the commercial banks are further
invested
by way of granting loans to their customers. Banks derive profits in this
manner. However, the lending of funds may take different forms such
ascash credit, advances, discounting bills, overdraft, etc.
· Remitting Funds
Fund remittance, or money transfer in general vernacular, is also done by
these commercial banks. Funds can be transferred in various modes such
as IMPS, NEFT, RTGS, draft pay orders, etc., for specified commissions.
· Cheque Facilities
Cheque facilities provided by commercial banks also help in drawing funds.
Money can be withdrawn both by the owner and the payee. The bearer
cheques can be cashed immediately, but the crossed cheques can only be
deposited in the account of the payee.
· Services of General Utilities
Banks provide general utility services too. For instance, traveller cheques
are issued, locker facilities provide for safe custody, and facilities of credit
and debit card services.
· Services as Agent
Commercial banks may also serve the role of agents to their customers by
way of various services. Services may include a collection of cheques,
drafts, and bills, insurance premium payment, trustee or executor or
customers’ estate, etc.
What is e-Banking?
Electronic banking or e-banking engages electronic mediums enabling customers
to access their funds. It does away with the need of the customer to visit the
bank premises for a transaction.
With greater penetration of the internet, it has become easier for customers to
avail the facilities of e-banking. E-banking has become convenient for both
bankers and customers. Banks have to bear reduced transaction costs and also
significantly less margin for human error. The fixed costs also lessen
considerably.
Customers enjoy greater access round the clock and do not have to visit bank
premises. It helps to save both time and money for the customer. It also removes
geographical distance in the case of certain banking transactions.
Types of e-Banking
· Internet Banking
Both financial and non-financial transactions can take place over the
internet. Customers can engage in various transactions such as remitting
funds, checking balance and account statements, and also paying utility
bills, among others.
· ATM
Automated Teller Machine (ATM) is a computerized electronic device that
allows customers to withdraw funds, change Personal Identification
Numbers, and (in some cases) also deposit funds. It does away with the
need for any human interface.
· Mobile Banking
Mobile banking app is an online portal of a bank, similar to internet banking.
The app may be downloaded on iOS or Android and can be accessed to
avail of the banking services. Apart from usual services, it can also be used
to locate the ATM nearest to the customer.
· Debit Card
Debit cards allow customers to access funds directly from the bank
account. In such a case, the transaction amount is directly deducted from
the account. One can use a debit card for shopping online, paying at POS
outlets, and also withdrawing cash from ATMs.
The banking landscape in India is undergoing major changes lately, which
is bound to have far-reaching effects on the sector.
Functions of Central Bank
A central bank is deemed as the lender of the last resort, as per Hawtrey ( a
British economist). The central bank is the organ of the government which
controls major financial operations of the government. Through its various
operations, the objectives of the central bank are to support the economic policy
of a country by influencing the way financial institutions behave.
The central bank of India is RBI or Reserve bank of India and it is a statutory bank.
The primary role of RBI in India is to print currency notes and manage the money

supply in the economy of India. Let us now delve into the central bank and its
functions where we will discuss the role of the central bank in the money market:
· Regulator of Currency- The main function of the central bank is to print
currency notes and RBI has the sole right in the country for this operation.
RBI prints money of all denominations apart from 1 rupee note. It is the
ministry of finance that issues 1 rupee note.
· Banker and Advisor to the Government- This role of the central bank is of
a fiscal agent to the government where the RBI keeps the deposits of both
central and state governments. It also makes payments on behalf of the
government, along with buying and selling foreign currencies. The various
functions of a reserve bank as an advisor is to tender useful suggestions
to the government regarding monetary policies and other economic
matters.
· Custodian of Commercial Banks- As per law, commercial banks need to
keep a reserve that is equal to a certain percentage of the NDTL (net
demand and time liabilities). These reserves help commercial banks clear
cheques by transferring funds from one bank to another. The resee bank
facilitates these transactions as it acts as a custodian and lender of cash
reserves to the commercial banks.
· Custodian and Manager of Foreign Exchange Reserves- To keep the rates
of foreign exchange stable, the reserve bank buys and sells foreign
currencies at international prices. If the supply of foreign currency
decreases in the economy, RBI sells them at foreign exchanges, and in
case of surplus supply, it buys them. RBI is also an official reservoir of
foreign currencies and gold. RBI sells gold to monetary authorities of other
countries at fixed prices.
· Lender of the Last Resort- The RBI grants accommodation to commercial
banks, financial institutions, bill brokers, etc. in the form of collateral
advances or re-discounts. This step is taken in times of stress so that the
financial structure of the country is saved from collapsing. This lending is
done on the basis of government securities, treasury bills, government
bonds, etc.
· Controller of Credit- The Reserve bank of India controls the credit created
by commercial banks. The credit flow in the country is regulated by means
of two methods; quantitative method and qualitative method. RBI applies
tight monetary policies when it observes that there is enough supply of
money which may cause an inflationary situation. It squeezes the money
supply to keep inflation in check.Transfer and Settlements- The central bank acts
as a “clearinghouse” by
providing free services to commercial banks in transferring and settling
their mutual claims. Since the RBI holds reserves of commercial banks, it
facilitates the clearing of cheques by transferring funds between banks.
The principle of bookkeeping is followed in this procedure to make transfer
entries into their accounts. There is a separate department operated by the
central bank in big cities and trade centers to transfer and settle the claims
of one bank on the other.
Examples of Central Banks
Some of the well known central banks across the world are:
1. Federal Reserve (USA)
2. Reserve Bank of India (India)
3. People’s Bank of China (China)
4. Bank of England (UK)
5. European Central Bank (EU or European Union)
Words that Matter
1. Commercial Bank: Commercial bank is a financial institution which performs
the
functions of accepting deposits from the public and making loans and
investments,
with the motive of earning profit.
2. Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be
kept by
the commercial banks with themselves (Statutory Liquidity Ratio) and with the
central
bank (Cash reserve Ratio).
3. Money Multiplier or Credit Multiplier: When the primary cash deposit in the
banking
system leads to multiple expansion in the total deposits, it is known as money
multiplier
or credit multiplier.
4. Central Bank: The central bank is the apex institution of a country’s monetary
system.
The design and the control of the country’s monetary policy is its main
responsibility.
5. Quantitative Instruments or General Tools of Monetary Policy: These are the
instruments of monetary policy that affect overall supply of money/credit in the
economy.
6. Qualitative Instruments or Selective Tools of Monetary Policy: The instruments
which are used to regulate the direction of credit is known as Qualitative
Instruments.
7. Bank rate: It is the rate of interest at which central bank lends to commercial
banks
without any collateral (security for purpose of loan)
8. Repo rate: It is the rate at which commercial bank borrow money from the
central
bank for short period by selling their financial securities to the central bank.
9. Reverse Repo rate: It is the rate at which the central bank (RBI) borrows money from
commercial bank.
10. Open Market Operation: It consists of buying and selling of government securities
and bonds in the open market by central bank.
11. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total
deposits,
which it is required to keep with the central bank.
12. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand
and
time liabilities, which commercial banks are required to maintain with
themselves.
13. Marginal requirement: Business and traders get credit from commercial bank
against the security of their goods. Bank never gives credit equal to the full value
of the
security. It always pays less value than the security. So, the difference between
the
value of security and value of loan is called marginal requirement.
14. Moral suasion: It implies persuasion, request, informal suggestion, advice and
appeal by the central banks to commercial banks to cooperate with general
monetary
policy of the central bank.
15. Selective Credit Controls (SCCs): In this method the central bank can give
directions to the commercial banks not to give credit for certain purposes or to
give
more credit for particular purposes or to the priority sectors.
Bank Credit is the aggregated amount financial institutions (i.e., banks) are
willing and able to offer a loan or advance to an individual or organization.

Money Multiplier:-
Money Multiplier refers to the process of creation of credit by the
commercial banks, with the help of initial deposits made by the public
and legal reserve ratio. It is calculated as
Money Multiplier = 1/LRR
In above example LRR is 10%
Hence Money Multiplier = 1/10% = 10 times.
The conclusion:-
The money creation by the bank solely depends upon the initial
deposits and percentage of LRR.
If the initial deposits are higher, money (credit) creation is also higher,
and vice versa.
If the legal reserve ratio is less, money creation is higher and vice
versa.
What is Money Creation by the Banking System?
Banks can lend the money simply because they do not expect all the investors and
depositors to
withdraw what they have deposited at the same time. When the banks lend
money to any person, a
new deposit is opened in that particular person’s name. Hence, the money supply
rises to old
deposits and new deposits (plus currency).
Now, let us take an instance. Presume that there is only one bank in the nation.
Let us structure a
fictional balance sheet for this bank only. The balance sheet is data that is
recorded of assets and
liabilities of any enterprise.
Traditionally, the assets of the enterprise are recorded on the left-hand side and
liabilities are
recorded on the right-hand side. Accounting rules say that both sides of the
balance sheet must be
equal and have to tally, or total assets must be equal to that of the total liabilities.
Assets are items that an enterprise possesses or what an enterprise can claim
from others. In the
case of a bank, apart from buildings, furniture, etc., its assets are the loans given
to the public. When
the bank provides a loan of ₹1,000 to a person, this is the bank’s claim on that
person for ₹1,000.
Another asset that a bank has is known as reserves. Reserves are the deposits
which commercial
banks upkeep with the Central Bank, the Reserve Bank of India (RBI) and its cash.
These reserves
are partly kept as cash, and partially in the form of financial instruments that is –
bonds and treasury
bills that are issued by the RBI.
Reserves are similar to deposits we keep with banks. We keep deposits and these
deposits are our
assets, they can be withdrawn by us. Similarly, commercial banks like the State
Bank of India (SBI)
keep their deposits with RBI and these are called Reserves.
Assets = Reserves + Loans
Liabilities for any enterprise are its debts or what it owes to others. For a bank,
the main liability is
the deposits that people keep with it.
Liabilities = Deposits
The accounting rule states that both sides of the account must balance.
Therefore, if assets are
greater than liabilities, they are recorded on the right-hand side as Net Worth.
Net Worth = Assets – Liabilities