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 Bank of Hindustan, which
started in 1790; both 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 the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.
History
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. The Allahabad 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 Bengal in 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 the Punjab 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."
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Structure of the organised
banking sector in India. Number
of banks are in brackets.
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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 .
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:
• The Reserve Bank of India, India's central banking authority, was nationalized
on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
• 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.
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Nationalisation
Despite the provisions, control and regulations of Reserve Bank of India, banks
in India except the State Bank of India or SBI, continued to be owned and operated
by private persons. 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 nationalization of
the banking industry. Indira Gandhi, then Prime Minister of India, expressed the
intention of the Government of India in the annual conference of the All India Congress
Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The meeting
received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance
and nationalised 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 Government of India
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.
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Banks Nationalisation in India:
Newspaper Clipping, Times of
India, July, 20, 1969
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Liberalisation
In the early 1990s, the then Narasimha 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.
Adoption of banking technology
The IT revolution had a great impact in the Indian banking system. The use of computers
had led to introduction of online banking in India. The use of the modern innovation
and computerisation of the banking sector of India has increased many fold after
the economic liberalisation of 1991 as the country's banking sector has been exposed
to the world's market. The Indian banks were finding it difficult to compete with
the international banks in terms of the customer service without the use of the
information technology and computers.
The RBI in 1984 formed Committee on Mechanisation in the Banking Industry (1984)
whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The
major recommendations of this committee was introducing MICR[5] Technology in the
all the banks in the metropolis in India.This provided use of standardized cheque
forms and encoders.
In 1988, the RBI set up Committee on Computerisation in Banks (1988) headed by Dr.
C.R. Rangarajan which emphasized that settlement operation must be computerized
in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram.It
further stated that there should be National Clearing of inter-city cheques at Kolkata,Mumbai,Delhi,Chennai
and MICR should be made Operational.It also focused on computerisation of branches
and increasing connectivity among branches through computers.It also suggested modalities
for implementing on-line banking.The committee submitted its reports in 1989 and
computerisation began form 1993 with the settlement between IBA and bank employees's
association .
IN 1994, Committee on Technology Issues relating to Payments System, Cheque Clearing
and Securities Settlement in the Banking Industry (1994) was set up with chairman
Shri WS Saraf, Executive Director, Reserve Bank of India. It emphasized on Electronic
Funds Transfer (EFT) system, with the BANKNET communications network as its carrier.
It also said that MICR clearing should be set up in all branches of all banks with
more than 100 branches. Committee for proposing Legislation On Electronic Funds
Transfer and other Electronic Payments (1995) emphasized on EFT system. Electronic
banking refers to DOING BANKING by using technologies like computers, internet and
networking,MICR,EFT so as to increase efficiency, quick service,productivity and
transparency in the transaction.
Apart from the above mentioned innovations the banks have been selling the third
party products like Mutual Funds, insurances to its clients.Total numbers of ATMs
installed in India by various banks as on end March 2005 is 17,642..The New Private
Sector Banks in India is having the largest numbers of ATMs which is followed by
SBI Group, Nationalized banks, Old private banks and Foreign banks[7].The total
off site ATM is highest for the SBI and its subsidiaries and then it is followed
by New Private Banks, Nationalised banks and Foreign banks. While on site is highest
for the Nationalised banks of India
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