Historical Background Of Banking

History of Banking in India

Banking in India in the modern sense originated in last decades of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829 - 32.

The first bank of limited liability managed by Indians was Oudh Commercial Bank or Awadh Commercial Bank founded in 1881. Punjab National Bank was established in 1894.

Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial banks. Banking crisis during 1913 -1917 and failure of 588 banks in various States during the decade ended 1949 underlined the need for regulating and controlling commercial banks.

The Banking Companies Act :

It was passed in February 1949, which was subsequently amended to be read as Banking Regulation Act, 1949.This Act provided the legal framework for regulation of the banking system by RBI. The largest bank - Imperial Bank of India - was nationalised in 1955 and rechristened as State Bank of India, followed by formation of its 8 Associate Banks in l959.

The largest and oldest bank still in existence is the State Bank of India. It originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three banks funded by a presidency government; the other two were the Bank of Bombay and the Bank of Madras. The three banks were merged in 1921 from the Imperial Bank of India, became the State Bank of India in 1955. For many years the presidency bank had acted as quasi - central banks, as did their successors, untill the Reserve Bank of India (RBI) was established in 1935, under the Reserve Bank of India Act, 1934.

In 1960, the State Bank of India was given control of eight state - associated banks under the State Bank of India (Subsidiary Banks) Act, 1959.

Nationalisation in the 1969: (19 July 1969)

With a view to bring commercial banks into the mainstream of economic development with definite social obligations and objectives, the Government issued an ordinance on 19 July 1969 acquiring ownership and control of 14 major banks in the country. In 1969, the Indian government nationalised 14 major private banks (Commercial banks). In 1980, 6 more private banks (Commercial Banks) were nationalised. [Andhra Bank, Corporation Bank, Oriental Bank of Commerce (OBC), Punjab & Sind Bank, Vijaya Bank, New Bank of by India]. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19.

Liberalization in the 1990's

In the early 1990's, the government embarked on a policy of liberalization, licensing a small number of private banks. These came to known as New Generation Techsavvy banks and included Global Trust bank, which later amalgamated with oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI bank & HDFC bank.

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 a home at 4%) of functioning.

SBI Merger

Five associate banks, State Banks, of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad, State Bank of Mysore (SBM), State Bank of Patiala (SBOP) and State Bank of Travancor (SBT) merged in SBI under SBI Act 1955. Other two banks State Bank of Saurashtra and State Bank of Indore got merged in 2008 and 2010. Thus, SBI controls 25% portion of Indian Banking Industry and in terms of Assets size SBI 45th biggest bank in the world. Apart from this Bhartiya Mahila Bank (BMB), also merged with SBI, which was set up in 2013.

This largest consolidation exercise in banking history of India be effective from 1 April 2017.

Sample Questions

(More Questions for each concept available in Login)

Question : 1

Under provisions of which one of the following Acts, does the RBI issue directives to the banks in India?
A. RBI Act	B. Banking Regulation Act	C. Essential Commodities Act	D. Both (1) and (2) above
Right Option : D
View Explanation