Evolution of the Indian banking
System
Evolution
The progress of narrative of Indian Banking System can be segregated in four distinct phases.
1. Pre-Independence Phase (1720 to 1947)
2. Pre-Nationalization phase (1948 to 1968)
3. Post - Nationalization-Phase (1969 to 1990)
4. Liberalized/Reforms Phase (1991 onwards)
Pre-Independence Phase
(1720 to 1947)
Pre-Independence Phase (1720 to 1947)
• The western type of joint stock banking was brought to India by the English Agency House of Calcutta and Bombay.
• The first bank of the joint stock variety was Bank of Bombay, established in 1720 in Bombay.
• Bank of Hindustan in Calcutta in 1770 by an agency house.
• These banks were liquidated with the closure of agency house.
• The General Bank of Bengal and Bihar, which came into
existence in 1773, after a proposal by the then Governor
Warren Hastings existed only for a short while
Pre-Independence Phase (1720 to 1947)
• The East India Company established Bank of Bengal in Calcutta on June 2, 1806 with a capital of Rs.50 lakh.
• Bank of Bombay (1840), with a capital of Rs.52 lakh,
• Bank of Madras in July 1843 with a capital of Rs.30 lakh.
All three were independent units and called ―Presidency
Banks‖ as they were set in three Presidencies that were the
units of administrative jurisdiction in the country for the
East India Company
Pre-Independence Phase (1720 to 1947)
• The first formal regulation for banks was the enactment of the Companies Act in 1850. (Unlimited liability for banking and insurance)
• In 1860, the concept of limited liability was introduced in banking. As a result several joint stock banks were floated.
• In 1865, Allahabad Bank was established for the first time exclusively by Indians.
• The second, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
• The third, Bank of India was set up in 1906 in Bombay.
• These banks were incorporated under private ownership.
Pre-Independence Phase (1720 to 1947)
• The Swadeshi Movement of 1906 provided a great momentum of joint stock banks of Indian ownership.
• Indian commercial banks such as Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were established between 1906 and 1913.
• By the end of December 1913, the total number of reporting commercial banks in the country reached to 56.
3 Presidency Banks.
18 class A‘ banks (with capital greater than 5 lakh).
23 class B‘ banks (with capital of Rs.1 lakh to 5 lakh) 12 Foreign exchange banks .
• The three presidency banks were amalgamated into a single bank on the recommendation of Hilton Young Commission. The Imperial Bank of India was established in 1921.
Pre-Independence Phase (1720 to 1947)
The Imperial Bank of India functioned as a central bank prior to the establishment of RBI in 1935
• Functions of Imperial Banks Commercial banking
Central banking
Banker to the government.
The Swadeshi movement and co-operative credit
• Provided momentum to the co-operative credit movement
• Led to the establishment of a number of agricultural credit societies and few urban co-operatives.
• The main objectives of such cooperatives were to meet the banking and credit requirements of people with smaller means to protect them from exploitation.
• An Act was passed in 1912 giving legal recognition to credit societies and the like.
• The Maclagan Committee, set up to review the performance of co- operatives in India and to suggest measures to strengthen them.
World War II (1939-45)
Impact on Indian Banking Sector
• The world economy was gripped by the great depression which affected Indian banking too.
• Banks gripped with bad loan failed.
• Most of the banks that failed had a low capital base.
• Far-reaching impact on the banking sector, both on the
expansion as well as failures.
Bank failures in India -1913 to 1947
Branch Expansion 1940 to 1945
Reasons for failure of banks
• According to Indian Central Banking Enquiry committee (1929)
(a) insufficient capital
(b) poor liquidity of assets
(c) combination of non-banking activities with banking activities
(d)incompetent and inexperienced directors.
The Committee also noted that the commercial banks played
a negligible role in financing the requirements of agricultural
production and co-operative credit
Need for Central Bank in the country
• On the basis of major recommendations of the Central Banking Enquiry committee, the Reserve Bank of India Act was passed in 1934
• The Reserve Bank of India came into existence
in 1935 as the central banking authority of the
country.
Legislation of banks during the pre- independence period
• In 1939 the Reserve Bank submitted to Central
Government its proposal for banking legislation in India.
-RBI Companies (Inspection) Ordinance, 1946,
-Banking Companies (Restriction of Branches) Act, 1946
-The Companies (Control) Ordinance, 1948 were passed.
Most of the provisions in these enactments were
subsequently embodied in the Banking Companies
Act in 1949.
Domestic Factors for Failure of banks during pre- independence period
• Low capital base
• insufficient liquid assets
• inter-connected lending
• Inappropriate banking regulations
MAJOR CONCERNS
Even after more than 12 years after establishment of the RBI, the issue of strengthening the Reserve Bank through a separate legislation was not realized.
non-scheduled banks as they remained outside the purview of the Reserve Bank.
Banking sector focused operation in urban areas and neglected rural
credit
Pre-Nationalization phase
(1948 to 1968)
Status of banks in 1947
• 648 commercial banks (97 scheduled and 551 non-scheduled banks).
• The number of offices - 2,987
• Total deposits -Rs 1,080 crore
• Advances - Rs 475 crore.
Indian banking was entirely concentrated in the private sector.
In addition to the Imperial Bank, there were five big banks, each holding public deposits aggregating Rs.100 crore and more (Central Bank of India Ltd., Punjab National Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd. and United Commercial Bank Ltd. )
All other commercial banks were also in the private sector and had a regional character; most of them deposits of less than Rs.50 crore.
RBI was also not completely State owned until it was nationalized in terms of the Reserve Bank of India (transfer to Public Ownership) Act, 1948.
Challenges for RBI post independence
• T
o develop a sound structure along contemporary lines .• The issue of bank failure in some measure was addressed by the Banking Companies Act, 1949 (later renamed as the Banking Regulation Act), but to a limited extent.
• The Banking Companies Act of 1949 conferred on the Reserve Bank the extensive powers for banking supervision as the central banking authority of the country.
• However, bank failures continued in the period after independence and after the enactment of the Banking Companies Act, although such failures reduced considerably.
• In order to protect public savings, it was felt that it would be better to wind up insolvent banks or amalgamate them with stronger banks.
• Banking Companies (Amendment) Act 1961 was enacted that sought compulsory reconstruction or amalgamation of banks. The Act enabled compulsory amalgamation of a banking
