The word 'bank' comes directly from the Italian word 'banca'.

Originally, in medieval Italy (especially in cities like Florence, Venice, and

Genoa), merchants who dealt with money exchange, currency conversion, or lending
would sit on a wooden bench in the marketplace. This very bench was referred to as
'banca' in Italian.

When a merchant or moneylender went bankrupt, their 'banca' (bench) would be

broken. From this practice, the English word 'bankrupt' originated, meaning 'insolvent'.
Due to the use of 'banca' for these money-dealing benches, the term gradually came to
refer to the financial institution itself.

In short, the etymology of the word 'bank' can be summarized as follows:

• Origin: The Italian word 'banca'.

• Meaning: A wooden 'bench' used in the marketplace for conducting money transactions.
• Evolution: Over time, the institution of merchants who conducted business from these
benches came to be known as a 'bank'.

Today, we use the word 'bank' globally for a financial institution that accepts
deposits, grants loans, and provides other financial services. In Marathi, we have also
adopted the English word 'bank' (बँक), pronounced as 'baenk'. Although the traditional
Marathi term is 'अ धकोष' (adhikosh), 'bank' is more commonly used in daily
conversation.

Here's a historical overview of the Indian banking system, translated into English:

Historical Overview of the Indian Banking System

The history of the banking system in India spans thousands of years, evolving from ancient times
to the modern, digital era we see today.

1. Ancient and Medieval Periods (2000 BCE - 17th Century CE)

• Vedic Period and Early Transactions: The roots of banking in India can be traced back
to the Vedic period (2000 - 1000 BCE). Texts like the 'Rigveda' and 'Atharvaveda'
mention 'Rna' (debt/loan) and 'Kusidin' (moneylender), indicating the practice of lending
and borrowing.
• Manusmriti and Kautilya's Arthashastra: The 'Manusmriti' (200 BCE - 200 CE)
laid down rules for deposits, mortgages, loans, and interest rates. Kautilya's
'Arthashastra' (4th Century BCE) provides a detailed description of the work of
 moneylenders, bankers, and merchants. It mentions instruments like 'Adesha' (bill of
exchange) and 'Nirdesha' (letter of credit), which were used to transfer money from
one place to another. This system facilitated financing for long-distance trade journeys.
• Mahajans and Shroffs: During the medieval period, 'Mahajans' and 'Shroffs'
(moneylenders) acted as local bankers. They performed functions like accepting deposits,
granting loans, issuing 'Hundi' (indigenous bills of exchange), and dealing in currency
exchange. These individuals were crucial for both trade and administration.
• Role of Temples: In ancient India, temples played a significant role in financial
transactions. They served as safe places for valuable items and grains and also provided
loans to those in need.

2. Mughal and Maratha Periods (16th - 18th Century CE)

• Banking in the Mughal Empire: The banking system became more organized during
the Mughal period. The 'Hundi' system was extensively used for trade across the empire.
Prominent merchant families, such as the Jagat Seths of Bengal, established large
banking empires that even provided loans to the contemporary government and the East
India Company.
• Financial System in the Maratha Empire: During the Maratha period, especially under
the Peshwas' rule, moneylenders and 'Pedhas' (banking houses) were the backbone of
the financial system. They financed the army and administration, while also providing
loan and deposit facilities for common people.

British Rule and the Rise of Modern Banking (18th - 20th Century)
• First Bank: The advent of modern banking in India began with the arrival of the East
India Company.
o Bank of Hindustan (1770): This was the first bank in India established on the lines of
European banking, started in Kolkata. However, it did not last long and closed down in
1832.
• Presidency Banks: The British government established three Presidency Banks in India,
which were later amalgamated:
o Bank of Bengal (1806)
o Bank of Bombay (1840)
o Bank of Madras (1843)
o These banks had the right to issue notes and served as bankers to the government.
• Banks Established by Indians:
o Allahabad Bank (1865): The first joint-stock bank in India to be managed by Indians.
o Punjab National Bank (1894): The first bank established solely with Indian capital.
o Bank of India (1906): This bank became the first Indian bank to open a branch abroad
(in London).
• Imperial Bank of India (1921): The 'Imperial Bank of India' was formed by merging the
Presidency Banks. This bank was later transformed into the State Bank of India (SBI) in
1955.
• Establishment of the Reserve Bank of India (1935): The British government decided to
establish a central bank in India based on the recommendations of the Hilton Young
Commission (1926). In accordance with the Reserve Bank of India Act of 1934, the
Reserve Bank of India (RBI) was established as India's central bank on April 1, 1935. It
was empowered to issue currency, regulate banks (as a 'bank of banks'), carry out the
financial functions of the government as its banker, control foreign exchange (Forex),
regulate for financial stability, and manage the country's monetary policy.

Post-Independence Period and Nationalization (1947 - Present)

• In 1949, the 'Banking Companies Act' was enacted, giving the Reserve Bank of India
(RBI) powers to regulate the banking sector. The RBI itself was nationalized on
January 1, 1949.
• The 'Imperial Bank of India' was later transformed into the 'State Bank of India'
(SBI) in 1955.

Need for Bank Nationalization:

• After independence, the government felt it was essential to gain more control over banks
to extend banking services to rural areas and accelerate economic development.
First Nationalization (1969):
• On July 19, 1969, then Prime Minister Indira Gandhi nationalized 14 major private
banks. All these banks had deposits exceeding ₹50 crores.
• The banks nationalized were: Allahabad Bank, Bank of Baroda, Bank of India, Bank of
Maharashtra, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian
Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, United Bank of
India, and Union Bank of India.
• Objective: To make credit available to agriculture, small-scale industries, and the poorer
sections of society.
• Outcomes:
o Banking services reached rural areas.
o The number of bank branches increased significantly.
o The concept of social banking took root (e.g., priority sector lending).

Second Nationalization (1980):

• On April 15, 1980, an additional 6 banks were nationalized: Vijaya Bank, Punjab &
Sind Bank, Oriental Bank of Commerce, New Bank of India, Corporation Bank, and
Andhra Bank.
• Reasons and Objectives:
o It was a further step in the nationalization initiated in 1969.
o To extend financial services to rural areas, agriculture, small-scale industries, and poor
and middle-class citizens.
o To ensure stronger government intervention and implementation of social planning in the
banking sector.
Liberalization and Reforms (1990s):
• Following the economic reforms of 1991, the Indian government began liberalizing the
banking sector. This allowed the entry of private banks (e.g., ICICI Bank, HDFC Bank)
and led to an increased adoption of technology.
Digital Revolution:

• In the 21st century, digital banking, mobile banking, UPI, and other FinTech
innovations have brought about a major revolution in the Indian banking system, making
transactions easier and faster.

Current Status:
• Today, the Indian banking system is a mixed and vast system comprising public sector
banks, private sector banks, foreign banks, regional rural banks, and cooperative banks,
all supporting the country's economic development.

Significant Initiatives:
• Jan Dhan Yojana (2014): Connected millions of citizens to bank accounts.
• UPI, NEFT, Bharat QR: Facilitated digital banking services.
• Aadhaar linking, mobile banking, internet banking: Enabled faster services.
• PM Mudra Yojana, Kisan Credit Card (KCC), and DBT (Direct Benefit Transfer):
Empowered financial inclusion.

Current Challenges:
• Rising NPAs (Non-Performing Assets).
• Need for cyber security.
• Limited service reach in some rural areas.
 Important Private Banks
(Established after the 1990s Economic Reforms)

Bank Name Establishment Year / Transition Year

HDFC Bank 1994

ICICI Bank 1994

Axis Bank (formerly UTI Bank) 1993

IndusInd Bank 1994

Yes Bank 2004

Kotak Mahindra Bank 2003 (Conversion from NBFC to Bank)

IDFC FIRST Bank 2015

Bank Mergers

• 1993 – First Merger: New Bank of India merged with Punjab National Bank (PNB).
• 2017 – SBI Six Subsidiary Banks Merger:
o State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Patiala, State
Bank of Hyderabad, State Bank of Travancore, Bharatiya Mahila Bank

These six subsidiary banks were merged into the State Bank of India (SBI).

Important Committees Related to the Banking Sector

Narasimham Committee (1991 and 1998)
• Most influential reforms after economic liberalization.
• Recommended measures for NPA (Non-Performing Assets) control in banks, implementation
of Basel Norms, and reforms in Priority Sector Lending.
• Basel Norms are international regulatory standards developed for the banking sector, ensuring
banks' financial stability, risk management, and capital requirements. These norms are
formulated by the Basel Committee on Banking Supervision (BCBS).
 Raghuram Rajan Committee (2008)
• Focused on extending financial services to rural areas and considered the introduction of new
types of banks (Small Finance Banks, Payments Banks).

P.J. Nayak Committee (2014)

• Aimed at increasing transparency and efficiency in the governance of public sector banks.

Other Special Types of Banks

Establishment
Bank Name Type Details
Year

Special for Later merged with

Bharatiya Mahila Bank 2013
Women SBI

Small Finance
Bandhan Bank 2015
Bank

Small Finance
AU Small Finance Bank 2017
Bank

Equitas Small Finance Small Finance

2016
Bank Bank

India Post Payments Bank

2018 Payments Bank
(IPPB)

Airtel Payments Bank 2017 Payments Bank

Paytm Payments Bank 2017 Payments Bank

Small Finance Banks
• Provide services like savings accounts, current accounts, loans, FDs, etc. There is no maximum
limit on deposits in these banks.
Payments Banks
• Allow opening of savings and current accounts. Digital transactions like UPI and NEFT can be
performed. They cannot offer loans or credit cards. The deposit limit is ₹2 lakhs (as per RBI
regulations).
 History of Demonetization in India
India has undergone demonetization three times to date. The primary objectives have
consistently been to curb black money, eliminate counterfeit currency, and stop terror
financing.
1. First Demonetization – January 12, 1946
• Denominations Withdrawn: ₹1,000 and ₹10,000 notes.
• Objective: The main aim of this demonetization was to control the black money
accumulated during the war period.

2. Second Demonetization – January 16, 1978

• Prime Minister: Morarji Desai (Janata Party government).
• Denominations Withdrawn: ₹1,000, ₹5,000, and ₹10,000 notes.
• Objective: To eradicate black money, which had become a significant issue for the
economy at the time.
• Method: The government demonetized these notes through an ordinance.

3. Third and Most Significant Demonetization – November 8, 2016

• Prime Minister: Narendra Modi (BJP government).
• Denominations Withdrawn: ₹500 and ₹1,000 notes (these accounted for approximately
86% of the currency in circulation at that time).
• Objectives:
o To unearth black money.
o To halt the circulation of counterfeit currency.
o To stop terror financing.
o To promote digital transactions and move towards a 'cashless' economy.

This demonetization was implemented with immediate effect, leading to significant

economic and social changes across the country.

Here's a detailed overview of the structure of the Indian banking system, translated into English:
 Structure of the Indian Banking System
The Indian banking system is primarily divided into two main parts:

A) Central Bank:

• Reserve Bank of India (RBI):

o Establishment: Established on April 1, 1935, under the Reserve Bank of India Act,
1934.
o Nationalization: Nationalized on January 1, 1949.
o Key Functions:
Issuance of Currency: Holds the sole right to print currency notes.
Banker to the Government: Acts as a banker and financial advisor to both Central and
State governments.
Banker and Supervisor of Banks: Guides, regulates, and controls other banks. Also acts
as the 'lender of last resort' to them.
Credit Control: Controls the money supply through various instruments like Repo Rate,
Reverse Repo Rate, Bank Rate, CRR (Cash Reserve Ratio), and SLR (Statutory
Liquidity Ratio).
Foreign Exchange Management: Manages the country's foreign exchange reserves.
Developmental Functions: Promotes economic development.
Collection and Publication of Data: Gathers and publishes economic data.

B) Commercial Banks:
Commercial banks primarily perform the core functions of accepting deposits and
granting loans with the objective of earning profit. They are classified as follows:
• 1. Public Sector Banks:
o These banks have a major shareholding by the government.
o State Bank of India (SBI) and its Associates: (Currently, all associate banks have been
merged with SBI – on April 1, 2017). SBI is the largest bank in India.
o Nationalized Banks: Banks that were nationalized in 1969 and 1980 (e.g., Bank of India,
Punjab National Bank, Bank of Baroda, etc.).

• 2. Private Sector Banks:

o The ownership and management of these banks lie with private shareholders.
o Old Private Banks: Banks that existed before nationalization.
o New Private Banks: Banks established after economic liberalization in the 1990s (e.g.,
ICICI Bank, HDFC Bank, Axis Bank, etc.).
• 3. Regional Rural Banks (RRBs):
o Establishment: Set up in 1975 to provide banking facilities to people in rural areas.
o These banks are funded by the Central Government, State Governments, and concerned
sponsor banks.
o Primarily provide credit for agriculture and rural development.

• 4. Foreign Banks:
o These banks have their head offices abroad, but their branches operate in India.
o They play an important role in foreign exchange transactions and international trade (e.g.,
Citibank, Standard Chartered Bank, etc.).

• 5. Co-operative Banks:
o Banks based on the principle of cooperation, whose main objective is to provide financial
assistance to their members.
o Types:
State Co-operative Banks
District Central Co-operative Banks
Primary Agricultural Credit Societies (PACS)
Urban Co-operative Banks

• 6. Development Banks:
o Provide long-term credit for industrial and agricultural development.
o Examples:
Industrial Development Bank of India (IDBI) - Established in 1964.
Small Industries Development Bank of India (SIDBI) - Established in 1990.
National Bank for Agriculture and Rural Development (NABARD) - Established in
1982, it is the apex institution for rural credit.
Export-Import Bank of India (EXIM Bank) - Established in 1982, it promotes import-
export trade.

• 7. Differentiated Banks:
o Small Finance Banks (SFBs): Established to promote financial inclusion, they provide
loans to small businesses and marginal farmers.
o Payments Banks: Accept deposits (up to ₹2 lakh), but cannot offer loans. They primarily
focus on payment and remittance services.
 Important Committees and their Recommendations in the
Banking Sector
Several committees have been formed to make the Indian banking sector more efficient. Some of
the important committees are as follows:

• Narasimham Committee - I (1991)

o Formation: Established in 1991 to suggest reforms in India's banking system.
o Key Recommendations:
To make the banking system more market-based and competitive.
Implementation of Capital Adequacy Norms for banks.
Simplifying the process of opening bank branches.
Reducing Non-Performing Assets (NPAs).
Recommendation for adopting the Liquidity Adjustment Facility (LAF) (implemented in
2000).

• Narasimham Committee - II (1998)

o Formation: To review the progress in the banking system and suggest further reforms.
o Key Recommendations:
Mergers of banks to create larger and stronger banks.
Granting licenses to new private banks.
Increasing the use of information technology in the banking sector.
Greater focus on NPA management.

• K.C. Chakrabarty Committee (1985)

o Made recommendations for improving the functioning of public sector banks.

• R. Gandhi Committee (2015)

o Made recommendations regarding the granting of new licenses to Urban Cooperative Banks
and their business expansion. Suggested a minimum business size limit of ₹20,000 crore for
Urban Cooperative Banks wishing to convert into commercial banks.

• Bimal Jalan Committee (2014)

o For setting guidelines for granting licenses to new banks.

• Bibek Debroy Committee (2015)

o Made recommendations on the restructuring of the railways, where the role of the Indian
Railway Finance Corporation (IRFC) was important. (Though not directly related to the banking
sector, it is related to financial institutions.)
 Administrative Reforms and Modernization (Post-2000)
To make the Indian banking sector more efficient, several committees have been established.
Some of the important ones are:

• K.C. Chakrabarty Committee (1985)

o Made recommendations for improving the functioning of public sector banks.
• S.S. Tarapore Committee (1997 and 2000)
o Chairman: S.S. Tarapore
o Formation: Established in 1997 to consider the feasibility and implications of Capital Account
Convertibility.
o Reports Submitted: Submitted reports in 1997 and 2000.
o Key Recommendations: Focused on improving foreign exchange management, ensuring
financial stability, and liberalizing the capital markets.

• P.J. Nayak Committee (2013-2014) - On Bank Governance

o Chairman: P.J. Nayak
o Formation: Constituted by the Reserve Bank of India on December 9, 2013, to review the
governance of public sector banks.
o Report Submitted: Submitted its report on May 12, 2014.
o Key Recommendations:
Bank Investment Company (BIC): Transferring the government's stake in banks to an
independent holding company.
Bank Boards Bureau (BBB): Recommending high-level appointments (established in 2016).
Autonomy: Granting more autonomy to public sector banks.
o Current Status: The BBB has been transformed into the Financial Services Institutions
Bureau (FSIB) (operational since 2022), which recommends appointments for top management
in public sector banks and financial institutions.

Major Recent Reforms (Post-2014)

• Pradhan Mantri Jan Dhan Yojana (PMJDY), 2014
o This was a significant step towards financial inclusion. It aimed to ensure at least one bank
account for every household, including zero-balance accounts, debit cards, and insurance
facilities. This vastly expanded banking services.
• Insolvency and Bankruptcy Code (IBC), 2016
o This proved to be a revolutionary law for NPA management. It helped in timely and efficient
recovery of debts when companies became insolvent.
• Bank Mergers (2017, 2019, 2020)
o Several public sector banks were merged with the aim of creating larger, stronger, and more
competitive banks, reducing their number to 12.
• Small Finance Banks (SFBs) and Payments Banks (Licenses since 2014)
o New types of banks were licensed to enhance financial inclusion and focus on specific services.
• Promotion of Digitalization
o Promotion of technologies like UPI (Unified Payments Interface), internet banking, and
mobile banking, which increased digital transactions and made banking services more
convenient.
• Recapitalization and Asset Reconstruction Companies (ARCs)
o To tackle the NPA problem, the government heavily recapitalized public sector banks and
established the National Asset Reconstruction Company Limited (NARCL) (Bad Bank)
(operational since 2021).
• Reforms in Rural and Cooperative Banks
o Several measures have been taken to improve the efficiency of Regional Rural Banks (RRBs)
and cooperative banks.

Other Important Details

• Scheduled Banks:
o Banks included in the Second Schedule of the Reserve Bank of India Act, 1934. They receive
various facilities from the RBI.

• Non-Scheduled Banks:
o Banks that are not included in the Second Schedule.

• Nationalization:
o The government nationalized private banks to ensure that banking services could reach all
sections of society and to control economic inequality.

• Financial Inclusion:
o Making banking services available to poor and underprivileged segments of society. Schemes
like Jan Dhan Yojana and Mudra Yojana are steps taken in this direction.

• Digital Banking:
o The use of technology such as internet banking, mobile banking, and UPI (Unified Payments
Interface) has made banking transactions easier and faster.

• NPA (Non-Performing Assets):

o When a borrower fails to repay loan installments or interest for a period of more than 90 days,
that loan is categorized as an NPA. NPAs pose a significant challenge for banks.
 The Role of Banking in Development
Banks play an extremely crucial role in the economic and social development of a country. They
act like the "blood vessels" of an economy, ensuring smooth financial transactions and
accelerating development. Here's a detailed look at how banks contribute to development:

1. Capital Formation and Investment Promotion:

• Mobilization of Savings: Banks accept small and large savings from individuals, households,
and businesses (e.g., savings accounts, fixed deposits). By consolidating these scattered savings,
banks accumulate a large pool of capital.
• Funding for Investment: This accumulated capital is then made available as loans to
entrepreneurs, farmers, and other businesses. This leads to the establishment of new industries,
expansion of existing ones, and an increase in production. Such investment helps in job creation
and an increase in the overall Gross Domestic Product (GDP).

2. Credit Supply:
• Loans to Various Sectors: Banks provide loans to various sectors such as agriculture, industry,
service sector, small-scale industries, education, and housing.
o Agriculture Sector: Farmers receive loans for purchasing seeds, fertilizers, machinery, and for
irrigation, which boosts agricultural production.
o Industrial Sector: Industries get loans for procuring raw materials, adopting new technologies,
increasing production, and for modernization.
o Micro, Small, and Medium Enterprises (MSMEs): These industries create large-scale
employment and play a vital role in local development. Banks provide them with working capital
and loans for expansion plans.
o Education Loans: Banks offer loans to students for higher education, contributing to human
resource development.
o Home Loans: The availability of home loans stimulates the construction industry and improves
people's living standards.
• Increased Production: Adequate and timely credit supply enhances production capacity and
improves the supply of goods and services, leading to economic growth.

3. Financial Inclusion:
• Services to Underserved Sections: Banks provide banking services to the poor, low-income
groups, people in rural areas, and small entrepreneurs. Schemes like Jan Dhan Yojana and
Mudra Yojana have brought a large number of people into the formal banking system.
• Self-Reliance: This provides people with opportunities to save, conduct secure transactions, and
access credit, making them more financially empowered.

4. Facilitating Transactions:
• Payment Systems: Banks offer facilities such as cheques, demand drafts, net banking, mobile
banking, UPI (Unified Payments Interface), and debit/credit cards. These make money
transactions easy, secure, and fast.
• Increased Economic Efficiency: Reduced cash transactions and increased digital transactions
make the economy more transparent and efficient.
 5. Balanced Regional Development:
• Rural and Semi-Urban Branch Expansion: After nationalization, banks extensively opened
branches in rural and semi-urban areas. This helped reduce economic disparity between urban
and rural regions.
• Promotion of Local Development: These branches collect local savings and simultaneously
provide loans to local entrepreneurs, farmers, and professionals, thereby fostering the
development of those areas.

6. Foreign Trade and Investment:

• Import-Export Financing: Banks provide Letters of Credit and other financial services to
import-export companies, which facilitates international trade.
• Foreign Exchange Management: Banks play a crucial role in foreign exchange transactions
and in attracting Foreign Direct Investment (FDI).

7. Support to Government Development Schemes:

• Implementation of Government Schemes: Benefits from various government development
schemes (e.g., subsidies, pensions, scholarships) are directly credited to beneficiaries' bank
accounts. Banks play a crucial role in the successful implementation of these schemes.
• Social Security: These schemes provide financial security to vulnerable sections of society.

8. Credit Control and Economic Stability:

• Reserve Bank's Role: The Reserve Bank (the central bank) controls the money supply and
credit through instruments like interest rates, Cash Reserve Ratio (CRR), and Statutory
Liquidity Ratio (SLR). This helps in controlling inflation and maintaining economic stability.
• Planned Development: The central bank's policy helps the banking system contribute to
development in a planned and stable manner.

9. Employment Generation:
• Direct Employment: The banking sector directly provides employment to a large number of
people.
• Indirect Employment: Loans provided by banks lead to the establishment of new industries and
businesses, indirectly creating significant employment in other sectors.