Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the
State Bank of IndiaState Bank of India is the largest bank in India.The bank traces its ancestry back through the Imperial Bank of India to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent...
, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the
Reserve Bank of IndiaThe Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937...
, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the
Government of IndiaThe Government of India, also known as the Union Government or the Central Government, was established by the Constitution of India, and is the governing authority of a union of 28 states and seven union territories, collectively called the Republic of India...
holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000
ATMsAn automated teller machine is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a human clerk or bank teller...
. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively
Early history
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 the Bank of Hindustan, both of which 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 BombayBank of Bombay was the second of the three presidency banks of the Raj period. It was established, pursuant to a charter of the British East India Company, in the year 1868, about a decade after India's First War of Independence. The bank was headquartered in Bombay, now called Mumbai...
and the
Bank of MadrasThe Bank of Madras, one of the three Presidency Banks, the other two being, the Bank of Bengal and the Bank of Bombay, was established on 1 July 1843, and was headquartered in Madras, now Chennai.-Origin:...
, 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 1925 to form the
Imperial Bank of IndiaThe Imperial Bank of India was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955.-Origin:...
, which, upon India's independence, became the State Bank of India.
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 BankAllahabad Bank, which began operations in 1865, now has its head-quarters in Kolkata. Currently the bank has 2260 branches across the country...
, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. 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 SimlaThe Alliance Bank of Simla was a British-run though India-registered bank that commenced operations in Simla in 1874. Early In 1913, it acquired some of the assets and liabilities of the Bank of Upper India, which had been founded in Meerut in 1963 and had been the first joint-stock bank in India....
.
When the
American Civil WarThe American Civil War , also known as the War Between the States and several other names, was a civil war in the United States of America. Eleven Southern slave states declared their secession from the United States and formed the Confederate States of America...
stopped the supply of cotton to
LancashireLancashire is a non-metropolitan county of historic origin in the North West of England. It takes its name from the city of Lancaster, and is sometimes known as the County of Lancaster. Lancashire County Council is based in Preston. However, Lancaster is still considered to be the county town...
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, formerly , is the capital of the Indian state of West Bengal. It is located in eastern India on the east bank of the River Hooghly. When referred to as Calcutta, it usually includes the suburbs, and thus its population exceeds 15 million, making it India's third-largest metropolitan area and...
, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in
BombayMumbai, formerly Bombay, is the capital of the Indian state of Maharashtra. The city proper is the most-populous in the world, with approximately 14 million inhabitants. Along with the neighbouring suburbs of Navi Mumbai and Thane, it forms the world's 4th largest urban agglomeration, with around...
in 1862; branches in
MadrasChennai , formerly known as , is the capital city of the Indian state of Tamil Nadu. Chennai is the fourth most populous metropolitan area and the fifth most populous city in India. Located on the Coromandel Coast of the Bay of Bengal, Chennai city had a population of 4.34 million in the 2001...
and Pondichery, then a French colony, followed.
HSBCHSBC Holdings plc is a public limited company incorporated in England and Wales in 1990, and headquartered in London since 1993. As of 2009, it is both the world's largest banking group and the world's 6th largest company according to a composite measure by Forbes magazine.Hong Kong which served as...
established itself in
BengalBengal , is a historical and geographical region in the northeast region of the Indian Subcontinent...
in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the
British EmpireThe British Raj was the British colonial rule in the Indian subcontinent between 1858 and 1947; it can also refer to the period of dominion, and even the region under the rule...
, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
FaizabadFaizabad is the headquarters of Faizabad District and a municipal board in the state of Uttar Pradesh, India, situated on the banks of river Ghaghra . Faizabad has a twin city of Ayodhya, considered to be the birthplace of Lord Ram. Faizabad was the first capital of the Nawabs of Awadh...
. It failed in 1958. The next was the
Punjab National BankPunjab National Bank , was registered on May 19, 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The Bank is the second largest government-owned commercial bank in India with about 4,904 branches across 764 cities. It serves over 37 million customers. The bank has...
, established in
LahoreLahore is the capital of the Pakistani province of Punjab and the second largest city in Pakistan after Karachi. Historically the main city of the undivided Punjab, it is often called the Garden of Mughals because of its rich Mughal heritage...
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 MutinyThe Indian Rebellion of 1857 began as a mutiny of sepoys of the British East India Company's army on 10 May, 1857, in the town of Meerut, and soon erupted into other mutinies and civilian rebellions largely in the upper Gangetic plain and central India, with the major hostilities confined to...
, 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 stockA joint stock company is a type of business entity: it is a type of corporation or partnership involving two or more legal persons. Certificates of ownership are issued by the company in return for each financial contribution, and the shareholders are free to transfer their ownership interest at...
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."
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 IndiaBank of India , established on 7 September, 1906 is a bank with headquarters in Mumbai. Government-owned since nationalization in 1969, It is one of India's leading banks, with about 2,884 branches including 27 branches outside India...
,
Corporation BankCorporation Bank, founded in 1906 in Udupi, Karnataka state, India, is one of the Indian banks in Public Sector Undertaking. The bank was founded with an initial capital of Rs...
,
Indian BankIndian Bank, established in 1907, is a major Indian commercial bank headquartered in Chennai , India. It has 22,000 employees, 1,582 branches and is one of the big public sector banks of India. It has overseas branches in Colombo, Sri Lanka, Singapore, and 229 correspondent banks in 69 countries...
,
Bank of BarodaBank of Baroda is the third largest Public Sector bank in India, after State Bank of India and Punjab National Bank. BoB has total assets in excess of Rs. 2.27 lakh crores, or Rs. 2,274 billion, a network of over 3000 branches and offices, and about 1100+ ATMs...
,
Canara BankCanara Bank is a major commercial bank. It was established in India in 1906, which makes it among the older Indian banks. As of 2008, the bank had a network of 2641 branches, spread across India and other countries. Its head office is located in Bangalore, India. The bank also has international...
and
Central Bank of IndiaCentral Bank of India, ' a government-owned bank, is one of the oldest and largest commercial banks in India. The bank currently has 3,168 branches and 270 extension counters across 27 Indian states....
.
The fervour of Swadeshi movement lead to establishing of many private banks in
Dakshina KannadaDakshina Kannada , , is a coastal Karnataka district in the state of Karnataka in India. It is bordered by Udupi District to the north, Chikkamagaluru district to the northeast, Hassan District to the east, Kodagu to the southeast, and Kasaragod District in Kerala to the south...
and
Udupi districtUdupi district in the Karnataka state of India was created in August 1997. The three northern taluks, Udupi, Kundapur and Karkal, were separated from Dakshina Kannada District to form Udupi district. Udupi is famous for Ashta Matha, i.e. eight Matts and Sri Krishna Temple. Udupi is also one of...
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".
From World War I to Independence
The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the
independenceThe term Indian independence movement incorporates various national and regional campaigns, agitations and efforts of both nonviolent and militant philosophy. The term encompasses a wide spectrum of political organizations, philosophies, and movements which had the common aim of ending the British...
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 economyThe economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity basis....
gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:
| Years |
Number of banks
that failed |
Authorised capital
(Rs. Lakhs) |
Paid-up Capital
(Rs. Lakhs) |
| 1913 |
12 |
274 |
35 |
| 1914 |
42 |
710 |
109 |
| 1915 |
11 |
56 |
5 |
| 1916 |
13 |
231 |
4 |
| 1917 |
9 |
76 |
25 |
| 1918 |
7 |
209 |
1 |
Post-independence
The
partition of IndiaThe Partition of India was the partition of British India that led to the creation, on August 14, 1947 and August 15, 1947, respectively, of the sovereign states of the Dominion of Pakistan and the Union of India...
in 1947 adversely impacted the economies of Punjab and
West BengalWest Bengal is a state in eastern India. With Bangladesh, which lies on its eastern border, the state forms the ethno-linguistic region of Bengal. To its northeast lie the states of Assam and Sikkim and the country Bhutan, and to its southwest, the state of Orissa...
, paralyzing banking activities for months. India's
independenceThe term Indian independence movement incorporates various national and regional campaigns, agitations and efforts of both nonviolent and militant philosophy. The term encompasses a wide spectrum of political organizations, philosophies, and movements which had the common aim of ending the British...
marked the end of a regime of the
Laissez-faireThe general meaning of Laissez-faire is to allow events to take their own course, or to let people do what they choose. The term is a French phrase literally meaning "let it be" or "leave it alone"....
for the Indian banking. The
Government of IndiaThe Government of India, also known as the Union Government or the Central Government, was established by the Constitution of India, and is the governing authority of a union of 28 states and seven union territories, collectively called the Republic 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 economyA mixed economy is an economic system that includes a variety of public and government control, or a mixture of capitalism and socialism.There is not one single definition for a mixed economy, but relevant aspects include: a degree of private economic freedom intermingled with centralized economic...
. 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:
- In 1948, the Reserve Bank of India
The Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937...
, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.
- 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.
However, despite these provisions, control and regulations, banks in India except the
State Bank of IndiaState Bank of India is the largest bank in India.The bank traces its ancestry back through the Imperial Bank of India to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent...
, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969.
Nationalisation
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 possibility to nationalise the banking industry.
Indira GandhiIndira Priyadarshini Gandhi Indira Priyadarshini Gandhi Indira Priyadarshini Gandhi ( Indirā Priyadarśinī Gāndhī; née: Nehru; (19 November 1917 – 31 October 1984) was the Prime Minister of the Republic of India for three consecutive terms from 1966 to 1977...
, the-then
Prime Minister of IndiaThe Prime Minister of India is the head of government of the Republic of India, and head of the Council of Ministers, appointed by the President to assist the latter in the administration of the affairs of the executive in India...
expressed the intention of the
GOIThe Government of India, also known as the Union Government or the Central Government, was established by the Constitution of India, and is the governing authority of a union of 28 states and seven union territories, collectively called the Republic of India...
in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.
Jayaprakash NarayanJayaprakash Narayan , widely known as JP, was an Indian freedom fighter and political leader, remembered especially for leading the opposition to Indira Gandhi in the 1970s and for giving a call for peaceful Total Revolution...
, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
ParliamentThe Parliament of India is the federal and supreme legislative body of India. It consists of the office of President of India and two houses, the lower house, known as the Lok Sabha and the upper house, known as the Rajya Sabha.. It is located in New Delhi at Sansad Bhavan on Sansad Marg...
passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidentialThe President of India or Rashtrapati is the head of state and first citizen of India, as well as the Supreme Commander of the Indian Armed Forces. In theory, the President possesses considerable power...
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 GOI 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 BankPunjab National Bank , was registered on May 19, 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The Bank is the second largest government-owned commercial bank in India with about 4,904 branches across 764 cities. It serves over 37 million customers. The bank has...
. 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.
The nationalised banks were credited by some, including Home minister
P. ChidambaramP Chidambaram is an Indian politician and present Union Minister of Home Affairs of the Republic of India. He is among the most prominent cabinet ministers of the ruling United Progressive Alliance union government led by Indian Prime Minister Manmohan Singh. From May 2004 to November 2008, he...
, to have helped the
Indian economyThe economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity basis....
withstand the global financial crisis of 2007-2009.
Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalizationIn general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy...
, 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 BankAxis Bank, previously called UTI Bank, was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established...
(earlier as UTI Bank),
ICICI BankICICI Bank is India's largest private sector bank by market capitalisation and second largest overall in terms of assets. Bank has total assets of Rs. 3,793.01 billion at March 31, 2009 and profit after tax Rs. 37.58 billion for the year ended March 31, 2009....
and
HDFC BankHDFC Bank Ltd. is a commercial bank of India, incorporated in August 1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was promoted by the Housing Development Finance Corporation, a premier housing finance company of India...
. This move, along with the rapid growth in the
economy of IndiaThe economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity basis....
, 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 setup 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 49% with some restrictions.
The new policy shook the Banking sector in
IndiaIndia, officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the south, the Arabian Sea on the west, and the Bay of Bengal...
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 bankingRetail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks...
, 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.
Further reading
- The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921-1955) (Volume III)
- Banking Frontiers - a monthly magazine, published by Mumbai based Glocal Infomart. Editor - Manoj Agrawal
External links