This article is written by Anupriya Chatterjee, an intern under Legal Vidhiya
INTRODUCTION
Banking consists of various activities that is done through financial institutions to accept deposits from individuals and other entities which for example can be company shares or shares in the markets which is like a loop of gain and loss for the country.
One of the significant and crucial roles of the British Era was introducing the banking system in India.
In India banking system dates back to the 18th century. It is also the period when the Britishers started colonizing India.
To understand the historical aspect will briefly look into the three phases of the banking system in India and understand how it has evolved with time.
Phases of the banking system in India
Phase I
British Era/ Pre-Independence 1770-1947
The first bank of India was ‘The Bank of Hindustan’ from 1770-1832 set up by the agency house of Alexander and Company which was located in Calcutta (Kolkata) however due to some reasons it shut down in 1832. following the steps of Hindustan bank, many banks were opened but only a few could run during those days. Listed down are some banks out of 500-600 banks
·[1] The General Bank of India (1786-1791)
· Oudh Commercial Bank (1881-1958)
· Bank of Bengal (1809)
· Bank of Bombay (1840)
· Bank of Madras (1843)
But one of the essential banks which were set up by The East India Company were
- Bank of Bengal
- Bank of Bombay
- Bank of Madras
And these were called the presidential banks of the country and were transformed into one entity called the ‘imperial Bank of India’ in 1921. it was one of the first and biggest commercial banks in the Indian subcontinent the Imperial Bank of India (IBI).
Functions
The Imperial Bank of India carried out each and every routine task that a commercial bank was anticipated to carry out. The Imperial Bank of India also carried out a number of tasks that a central bank would typically conduct because there was no central banking institution in India until 1935.
In 1933 Sir Badridas Goneka a business tycoon became the first Indian to be appointed as the chairman of this prominent bank of those times.
*Prior to 1861, when the Paper Currency Act gave the Indian government control of the privilege, these three banks had the only authority to print money. On January 27, 1921, the Presidency banks merged, and the newly formed banking organization adopted the name Imperial Bank of India. Even without government support, the Imperial Bank of India remained a joint-stock business.
The emergence of State Bank of India
Bank of Bengal which was established in 1806 was changed into the State Bank of India. It was the first joint stock bank ever created in British India and was supported by the government of Bengal.
These are some famous historical banks that have to maintain to be relevant with time and technology.
1. Allahabad Bank
The bank was established in Allahabad in 1865 and offered banking and financial services for 155 years by a group of Europeans who established Allahabad Bank on April 24, 1865. It had locations in Jhansi, Kanpur, Lucknow, Bareilly, Nainital, Calcutta, and Delhi by the end of the 19th century.
2. Punjab National Bank
The first Swadeshi bank in India, Punjab National Bank (PNB), began operations on April 12, 1895, in Lahore with a working capital of Rs. 20,000 and an authorized capital of Rs. 2 Lakh. The Bank was the first bank solely run by Indians with Indian capital, and it was founded in the spirit of nationalism.
3. Bank of India
Mumbai’s Bandra Kurla Complex serves as the home base for the Bank of India (BOI), a public sector bank in India. It was established in 1906, and in 1969 it was nationalized, becoming government-owned. BoI is a founding member of SWIFT (Society for Worldwide Inter Bank Financial Telecommunications), which makes it easier to offer services for communication and financial processing that are both affordable.
4. Central Bank of India
The first Indian commercial bank that was entirely owned and run by Indians was the Central Bank of India, which was founded in 1911. The Bank’s founding father, Sir Sorabji Pochkhanawala, had a dream that was finally realized with the foundation of the Bank.
5. Canara Bank
Canara Bank, which is well renowned for its focus on the needs of its clients, was established in Mangalore, then a tiny port city in Karnataka, in July 1906 by Shri Ammembal Subba Rao Pai, a remarkable thinker, and philanthropist. Over its 100-year history, the Bank has experienced the many stages of its growth trajectory.
6. Bank Of Baroda
The Bank of Baroda (BOB), a state-owned banking and financial services company with its headquarters in Vadodara (formerly known as Baroda), Gujarat, India, was founded on July 20, 1908.
Failure of Phase 1
During this period of pre-independence many banks failed to keep up and here are some reasons why :
l Not having access to the high demand of depositors
l Lack of technology and equipements
l Since people were unskilled in India it led to mismanagement and greater loss
l Lack of proper management in the office and keeping up correct records of the accounts
l Employee corruption
Phase II
Post-Independence Period (1947-1991)
After independence, this led to the evolution of banks in India and during that time government of India decided to collectively nationalize the banks under the banking regulation act, of 1949. in this total 14 banks were nationalised and introduced to the Reserve Bank of India.
- Allahabad Bank
- Bank of India
- Bank of Baroda
- Bank of Maharashtra
- Central Bank of India
- Canara Bank
- Dena Bank
- Indian Overseas Bank
- Indian Bank
- Punjab National Bank
- Syndicate Bank
- Union Bank of India
- United Bank
- lUCO Bank
History of reserve bank of India
[2]The Hilton Young Commission’s recommendations served as the foundation for the creation of the Reserve Bank of India. The Bank’s operation is governed by the Reserve Bank of India Act, 1934 (II of 1934), which went into effect on April 1, 1935.
The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore, and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi, and Rangoon.
The Reserve Bank of India had the intriguing quality that from the beginning, people saw the bank as having a specific function to play in the context of development, notably agriculture. In the 1960s, when India began its plan endeavors, the Reserve Bank, in many respects, pioneered the idea and technique of utilizing finance to promote development, and the Bank’s development function came into sharper focus. The Bank also played a crucial role in the establishment of institutions that helped create the nation’s financial infrastructure, including the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India, and others.
In 1975, the government of India acknowledged several groups which were financially left out of the banking system. In accordance with the development of financial services in India, it formed banking institutions with specialist roles.
- NABARD (1982): to aid in agricultural endeavours
- EXIM (1982): to encourage import and export
- Housing projects will be financed by the National Housing Board.
- SIDBI is used to finance small businesses.
Phase III
The new era
The emergence of liberalization, privatization, and globalization in 1991 led to drastic economic changes. The government opened the door to foreign investment in India. The RBI approved ten private banks.
[3]The globalization process started in the 1970s and intensified in India in the 1990s. The expansion of commerce, services, finance, and production are all results of the globalization of the economy. Since the introduction of LPG, the banking industry in India has opened up. One prerequisite for achieving the required economic growth is the traditional banking system. Although banks don’t produce new money, their lending, borrowing, and related operations help to speed up the process of wealth creation, distribution, trade, and consumption. If there were no banks, a large amount of the country’s capital would be idle. A long-standing industry and foundational force in Indian society is banking. The Central Banking Enquiry Committee claims that money lending in India dates back to the Vedic era. In addition to that in 1949, two significant measures were made that had a major impact on structural reforms in the banking industry: 1) The Banking Regulation Act, which gave the RBI significant regulatory authority over commercial banks, was passed; and 2) The Nationalization of the RBI. These structural and regulatory changes have improved the competitiveness of this industry and the state of the Indian banking sector.
Two further banks obtained their licenses in the early to mid-2000s: Kotak Mahindra Bank (2001) and Yes Bank (2004). In 2013–2014, licenses were also granted to the IDFC and Bandhan banks.
There were also the following significant adjustments and advancements:
- In India, branches of foreign banks including Citibank, HSBC, and Bank of America were established.
- The process of nationalising banks came to a halt.
- Public and private sector banks were treated equally by the RBI and the government.
- Banks for payments were established.
- Small financing banks were allowed to open branches all over India.
- Transactions and other relevant banking activities have started to be digitalized by banks.
The procedure of Nationalisation of Banks
It might be described as a procedure whereby the national government or the state gains the authority to seize private businesses, organizations, or even assets and place them under their control, i.e. public ownership. Many socialist nations have started this procedure in order to switch from capitalism to socialism.
In India, the Reserve Bank of India was nationalized on January 1st, 1949, as a result of the RBI (Transfer of Public Ownership) Act being passed.
Comparably, the Imperial Bank of India was nationalized in 1955 and later renamed the State Bank of India, which is currently the biggest bank in the public sector.
It was created by the State Bank of India Act of 1955, and in addition to acting as the RBI’s chief agent, it is in charge of managing bank transactions all throughout the nation. Due to this abrupt nationalization, banks across the nation had to undergo significant reforms, which ultimately sparked economic expansion.
[4]Problems with nationalizing of banks
1. Economic problems: The banks were unable to provide the necessary assistance to end poverty or to finance the foundational layers of society. It was evident in rural India.
2. Competition with Private Banks: Public sector banks were never able to outperform private banks in terms of performance, despite government support and additional impetus brought on by a rise in deposits.
3. Financial inclusion was unsuccessfully achieved despite being the main goal of nationalizing banks. It was not sufficiently supported. After the start of the Jan Dhan Yojana government effort, it was only partially accomplished.
Conclusion
The banking system of the country has changed in 100 years. From being unskilled labor to now being one of the highest-producing skilled labor forces in the world has led to the fastest growth in this industry as well. During the 100 years period, we saw slow growth of banks some were out of work and others are still relevant with time and technology. Post-independence we saw the introduction of the Reserve Bank of India which central bank of the country which authrorises and controls all banks of the nation. The process of nationalization of banks led to drastic yet great changes in the economy and the flow of new regulations and money in the country.
[1] https://byjus.com/bank-exam/history-banking-india/
[2] https://rbi.org.in/history/Brief_History.html
[3] Development of Commercial Banks during Pre and Post Globalization Era in India: An Analysis , U.yuvaraja, July 2019
[4] https://blog.finology.in/recent-updates/nationalization-of-banks
