The Indian banking system has a rich and dynamic history, reflecting the country's economic, social, and political transformations. From ancient moneylenders to modern digital banks, this evolution is a testament to India's adaptability and innovation.
Establishment of the First Banks in India
Bank of Hindustan (1770)
The Bank of Hindustan was the first financial Bank established in India. Although it ceased operations in the early 19th century, it laid the groundwork for institutional banking in the country.
Presidency Banks: Bombay, Calcutta, and Madras
The Presidency Banks, established in major cities, played a pivotal role in formalising the banking sector. These banks were initially established to cater to the financial needs of European businesses but gradually extended services to the local population.
History of Banking in India Before Independence
The history of banking in India is deeply intertwined with the country's economic and cultural development. Indian banking has evolved significantly, transitioning from ancient lending systems to a modern, structured financial system.
Ancient Period
Early Lending Practices: Banking in India traces its origins to ancient times, with references found in Vedic texts. Merchants and moneylenders provided loans and managed deposits during this period.
Indigenous Banking: Institutions like Shroffs, Seths, and Chettis were prevalent, serving as the traditional banking entities.
Hundi System: An indigenous credit system, the Hundi functioned as a negotiable instrument similar to modern-day checks and promissory notes.
Medieval Period
During the Mughal era, banking evolved with greater use of financial instruments. The Hundi system expanded, and merchants engaged in long-distance trade using these instruments.
Colonial Period
Birth of Modern Banking: The British introduced structured banking to India in the 18th century.
Bank of Hindustan: Established in 1770 in Kolkata, it was the first bank of its kind in India, although it ceased operations by 1832.
Presidency Banks: Banks like the Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843) were established, laying the foundation of modern banking. These later merged to form the Imperial Bank of India in 1921, which eventually became the State Bank of India in 1955.
Post-Independence Era
Nationalisation of Banks (1969 & 1980): To make banking accessible to the masses, the Indian government nationalized 14 major banks in 1969 and six more in 1980. This move revolutionized banking and expanded the reach of financial services to rural areas.
Reserve Bank of India (RBI): Established in 1935, the RBI became the central authority for monetary policy and financial regulation post-1947.
Liberalisation and Modern Era
Economic Reforms (1991): The liberalisation era ushered in significant reforms, opening up the banking sector to private and foreign players. Banks like ICICI, HDFC, and Axis Bank emerged as key private players.
Technology Integration: The late 1990s and 2000s saw a surge in technology-driven services, including ATMs, online banking, and mobile banking.
Financial Inclusion Initiatives: Schemes like the Pradhan Mantri Jan Dhan Yojana (PMJDY) aimed to bring unbanked populations into the formal financial fold.
Present and Future of Indian Banking
Digital Banking: The adoption of digital platforms and fintech solutions has redefined customer experiences. UPI (Unified Payments Interface) and mobile wallets have transformed payment systems.
Green Banking: Banks are adopting sustainable practices to support environmentally friendly initiatives.
India's banking history reflects its journey of transformation and resilience, showcasing its role as a pillar of economic growth and stability.
Nationalisation and Growth of Public Sector Banks
The Era of Nationalisation (1969)
The Indian government nationalised 14 major commercial banks in 1969, aiming to increase public trust and ensure financial inclusion. A second wave of nationalisation occurred in 1980, bringing more banks under government control.
Formation of Regional Rural Banks (RRBs)
In 1975, Regional Rural Banks (RRBs) were established to address the financial needs of rural areas. These banks focused on providing credit to farmers, artisans, and small businesses.
Impact of Nationalising Banks
At the time when India was newly independent, bank branches had to be rapidly established across the length and breadth of the country. Nationalised banks improved access for people from all parts of India and the average domestic savings doubled in the period. There was a comparable rise in public deposits that contributed to the banks’ expansion and aided the expansion of small businesses and the agriculture sector. Other benefits of the nationalisation of banks are -
Greater public confidence due to better accountability
RBI and the nationalised bank were the biggest employers
Marginal farmers were provided loans at reasonable rates
Stabilisation of costs of essential goods
Bank privatisation in India
The period of economic liberalisation that began in 1991 transformed the way India banked. With a greater influx of foreign investment in the country, a more robust banking system was required and in the process, many nationalised banks and financial institutions were privatised. RBI gave10 licences for the establishment of private sector banks in India to -
ICICI Bank
Times Bank
IDBI Bank
HDFC Bank
IndusInd Bank
Global Trust Bank
Axis Bank
Centurion Bank
Bank of Punjab
Development Credit Bank
Furthermore, foreign banks were allowed to set up branches in India. Other developments that have since been introduced are-
No more banks can be nationalised.
RBI and the government would treat nationalised and private-sector banks equally
Indian Banks could start joint ventures with a foreign bank
Small finance banks can set up branches across India
There has been a greater digital push in the banking sector with internet banking access through websites and mobile applications. Furthermore, with the introduction of the Unified Payment Interface (UPI) and BHIM in 2016, the nation has ushered in an era of digital payments. India’s pioneering work with digital banking gas received global recognition and new fintech services are integrating banking services to give a wide range of financial services.
About the Author
JAIN College
JAIN PU College, a part of the renowned JGI Group, is committed to empowering students with quality education. Beyond academics, the college ensures its online content reflects the same standard of excellence. Every blog and article is meticulously vetted and proofread by subject matter experts to ensure accuracy, relevance, and clarity. From insightful educational topics to engaging discussions, JAIN PU College's content is crafted to inform, inspire, and add value to its readers, reflecting the institution's commitment to intellectual growth and innovation.
