HISTORY OF BANKING IN INDIA

ARTICLES- ECONOMICS
HISTORY OF BANKING IN INDIA

Banks or financial institutions play a crucial role in the working of any economy. For a very long time the services rendered by have remained the backbone of an economy. The traditional functions of banks were receiving deposits and providing loans. Today, banks have traced a positive trajectory and have taken up many new functions, shifting itself from the line of traditional banking. The journey of banks from traditional to modern has been long ad interesting. Let us travel together along the path of reforms traversed by the Indian banking through these years.

A BRIEF HISTORY

In the history of banking, the origin of the first sector banks goes back to the goldsmiths who accepted the deposits of gold and ensured its availability to the bearer. Receipts confirming the deposits of gold by a client were issued which ensured the availability of this gold to the bearer. The second sector banking catering to investment and finance goes back to moneylenders who lent their money on interest. Later, these two were combined together to form the banks or financial institutions.
In India the origin of traditional banks may be traced back to the first decade of the 18th century. The journey of Indian banking can be divided into four phases:-
• Pre- independence era from 1786 to1947
• Pre-nationalisation era from 1947 to 1969
• Natinalisation era from 1969 to 1991
• Post- liberalization era (or New phase of Indian Banking System) from 1991 to the present day

EARLY BANKING IN INDIA

The first bank in India was the General Bank of India established in 1786. The second conventional banks were Bank of Hindustan and Bengal Bank started in 1806. The East India Company entered the banking sector in 1809 and established the Bank of Bengal. Later Bank of Bombay and Bank of Madras were established in 1840 and 1843 respectively. These three banks were collectively referred to as the Presidency Banks of East India Company. In 1865, the Allahabad bank was established and the Punjab National Bank came into existence in 1894 at Lahore. Between 1906 and 1913, a number of banks were established in India, namely, Bank of India, Central Bank of India, bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore etc. but 94 banks in India collapsed between 1913 and 1918 despite the indirect boost to Indian economy due to war related economic activities.
In 1920, the three Presidency Banks were amalgamated to form the Imperial Bank of India. Till 1925 the banks were run completely on European shareholders. In 1935, the Federal Bank was established according to the Government of India Act of 1935. This later became the Reserve Bank of India and still remains the Central Monetary Authority of India. The period between 1913 and 1948 saw a creeping growth in the banking sector with periodic financial failures. During this period approximately 1100 small banks were established which played a negligible role in the economy.

PRE- NATIONALISATION BANKING IN INDIA

The post- independence era marked the end of Laissez- Faire. The government played a crucial role in the Indian Banking sector reforms after independence. The government involvement in banking raised the confidence of customers in the banking operations, particularly the deposit mobilization of banks. Earlier, the savings bank facility of Postal Department was a safer alternative. The traders were largely engaged in banking transactions. As a first step, the Industrial Policy Resolution was passed in 1948 which envisaged India as a mixed economy. Soon after, the Banking Companies Act of 1949 was introduced (which later became the Banking Regulation Act of 1949) to streamline the working of banks. According to the Act, the powers of RBI were extended for the supervision of the complete banking network in India thus, raising the RBI to the status of Central Banking Authority. Also RBI was nationalized in 1949.
The period saw a steady decline in the importance of non- scheduled commercial banks. Deposits of scheduled banks registered phenomenal increase. The rate of growth of time deposits was increasing as compared to growth in demand deposits. Further, number of personal accounts in relation to business accounts increased considerably. On July 1, 1955, the Imperial Bank was partially nationalized and re-christened as the State Bank of India. 92% shares of the bank which had networks in rural and semi- urban areas were acquired by RBI, thus, making SBI the first state owned commercial bank in the country. In 1960, 8 subsidiary banks of SBI (now 7) were nationalized. These banks acted as the principal agents of RBI and handled the government’s banking operations. In order to provide protection to depositors, on January 1, 1962, Deposit Insurance Corporation was set up, thereby, mobilizing deposits from a wide spectrum of the society.

THE NATIONALISATION ERA

Due to the profit maximization aim of the private banks, their operation will have a lop-sided fashion, over-emphasizing the fund flow towards business sector. This leads to the formation of monopolies and the concentration of economic power. The priority sectors like agricultural sector and small- scale industries are often ignored and the overall development of the economy suffers. Consequently in July 1969 during the prime minister ship of Indira Gandhi, 14 commercial banks with deposits worth Rs. 500 million or more were nationalized which included:-

• Central Bank of India
• Bank of Maharashtra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• United Bank
• UCO
• Bank of India

After nationalization, the banks began to support the agricultural sector, small industries and exports, new entrepreneurs and development programmes of the backward regions of the country. This was achieved through deposit mobilization by branch expansion and by ensuring adequate financial credit to priority sectors. The changes in banking sector during 1969 enabled the banking companies to give up the traditional system of banking and take new and progressive functions. The number of nationalized banks raised to 20 with the nationalization of 6 more banks in 1980. (with the merger of New Bank of India with Punjab National Bank in 1993, the number was to reduced to 19).

POST- LIBERALIZATION ERA

The year 1991 saw the introduction of New Economic Policy in India, during the prime minister ship of P.V.Narasimha Rao. This marked a remarkable shift in the economic situation in India which also influenced the banking sector largely. Liberalization of banking sector in India was initiated since 1991-92. it aimed at raising the allocative efficiency of available savings, increasing the returns on investment and promoting accelerated growth and development of the real sector. The important reforms in the banking sector in India are:-

a) Prudential Measures which included introduction of international best practices and norms on risk- weighted capital adequacy requirement, accounting, income recognition, provisioning and exposure and measures to strengthen risk management.
b) Competition Enhancing Measures like granting of operation autonomy to public sector banks, reduction of public ownership in public sector banks and transparent norms for entry of Indian private sector, foreign and joint venture banks and insurance companies, permission for foreign investment in the form of Foreign Direct Investment and portfolio investment.
c) Enhancing Role of Market Reforms such as sharp reduction in pre- emption through reserve requirements, market determined pricing for government securities etc. and introduction of pure inter-bank cash money market, auction based repo- reserve, facilitation of improved payment and settlement mechanism.
d) Institutional and Legal Measures for instance, setting up of Lok Adalats, Debt Recovery Tribunals, Asset Reconstruction Companies, Settlement Advisory Committees, Corporate Debt Restructuring Mechanism, etc. for quicker recovery, promulgation of securitization and reconstruction of financial assets and enforcement of securities act. Setting up of information bureau setting up of Clearing Corporation of India Limited.
e) Supervisory Measures like establishment of Board of Financial Supervision. Introduction of CAMELS Supervisory Rating System. Recasting the role of Statutory Auditors. Strengthening corporate governance.
f) Technology Related Measures such as setting up of INFRINET, Negotiated Dealing System (NDS) and Real Time Gross Settlement System (RTGS).

Though the steps taken by the Government of India for reforming the banking sector are laudable, the liberalization and the banking sector reforms thrown several new issues. The future of the priority sector, comprising the agricultural sector and the small scale sector, was one of the major concerns. They would distance themselves from the priority sectors in the name of profitability. There has been stagnation in the efficiency of the banking sector in the post liberalization period as commercial banks were not in a position to absorb the shock of liberalization.

MODERN BANKING IN INDIA

Today all sectors have been largely influenced by the development in science and technology. Similarly, it influenced the banking sector also. With the introduction of newer technologies, the banking operations have become easier, quicker, accessible and more reliable.

IT in Banking Sector

IT has made a major presence in the banking sector as it has changed the shape of three major financial intermediaries- access to liquidity, transformation of assets and monitoring of risks are the three important financial intermediaries.
Strengthening the Computerized Check Clearing, Electronic Clearing Service (ECS) and Electronic Fund Transfer are the latest systems that are practiced in the banking sector due to the developments in technology. The RTGS System (Real Time Gross Settlement) and the card system including Credit, Debit and Small cards have gained importance and greater acceptance as a medium of financial transaction.

E- Banking

Areas of concern of the Reserve Bank are regulation of issuing E- money, the prudential norm to be followed for preserving the effectiveness of monetary policy and integrity of the E- money. The RBI has constituted a working group to study and submit a report on the working of electronic money. On the basis of their report the RBI has made several revolutionary reforms in the E- Banking sector.

CONCLUSION

The banks have modern from traditional both in their functioning and outlook. Today the banks aim at customer care. The branches are now centrally air- conditioned and the ambience is very pleasant and with music in the background, refreshing both the employees and the customers. The new generation banks have active and energetic staff for the service of their customers. The banks also provide a large number of services apart from maintaining accounts and providing loans. Credit Cards, Debit cards, ATM Cards and payment of bills are some of the common functions performed by the banks. Sale of professional courses entrance forms and other application forms are also undertaken by the banks. This has widened the scope of the banking sector. Banks play an important role in the functioning of the economy and an economy without banks is like a building without foundation. In spite of the problems faced by the banking sector around the world, there will be a regaining of momentum and once again the banks will form an essential component of the economy. But the banks must ensure that the loans are for productive purposes and the repayment capacity of the borrowers must also be taken into consideration. Otherwise, the crisis in the banking sector will continue, taking the world economy to a worse situation not confronted ever since the Great Depression of 1930s.