Banks are the lifeblood of an economy. Banks perform the important function of mobilizing money from savers to borrowers. In other words, it is the channel responsible for maintaining liquidity in the country’s economic system.
The Indian banking system has evolved over time, transforming from rudimentary money-lending practices to a sophisticated, digitally integrated financial network.
The evolution of banking in India over the years can be divided into three phases, and the developments during each phase make for interesting reading. Read on to learn more about the history of banking in India.
Phase 1 (1786-1969)
This is the infancy stage of modern-day banking in India that started during the British rule and lasted nearly 200 years. This period laid the foundation for formal banking institutions and infrastructure in India.
The Bank of Hindustan was the first bank to commence operations in India, laying the foundation of the Indian banking system. It ceased operations in 1932.
Presidency Banks
Britishers set up three presidency banks in India, marking the beginning of what we see as the modern banking system in India. The three presidency banks were:
- Bank of Bengal (1806)
- Bank of Bombay (1840)
- Bank of Madras (1843)Â
These banks were established to serve the primary purpose of catering to Britishers’ trade and commerce interests.
In 1921, these three banks were merged to form the Imperial Bank of India, which later became the State Bank of India (SBI) in 1955 independent India.
The Imperial Bank functioned as a quasi-central bank until the Reserve Bank of India (RBI) was established on 1st April, 1935.
Other notable banks established during this phase included the Allahabad Bank (established in 1865) and the Punjab National Bank (established in 1894), both of which remain operational today.
Financial inclusion remained elusive despite establishing banks as these banks primarily catered to the rich urban population, leaving the common man and rural regions underserved.
The need for economic growth and financial inclusion of all Indians led to India’s second phase of banking reforms.
Phase 2 (1969-1991)
While the evolution of banking in India began almost 200 years ago in 1786, the penetration of banking services remained low and concentrated in just a few Indian cities. An average Indian or small business still did not have access to the banking system.
As a free India found its feet and the economy stabilized, the need for financial inclusion grew strong. The second phase of banking in India is crucial in the history of banking in India as it made banking accessible to all.
The second phase was marked by the nationalization of banks, a landmark reform to expand financial inclusion and strengthen economic stability. During this period, the average Indian household and large and small businesses finally had access to the banking system.
Rationale for Nationalization
The government of India nationalized banks with the primary objective of addressing the socio-economic challenges faced by the newly independent nation. The reasons for nationalization of banks included:
- Making banking services accessible to Indian households, whether in urban or rural areas
- To promote the mobilization of credit from savers to businesses
- To ensure availability of credit at a reasonable rate for agriculture and small businesses
- Reducing dependence on money lenders, especially in rural areas
- Promoting equitable wealth distribution and economic development
- Strengthening the centre’s hold on the country’s financials and giving them control of the Indian banking system
- Strengthening public confidence in the banking system
Banks Nationalized in 1969
The year 1969 saw the first wave of bank nationalization. 14 banks were nationalized in 1969 under the leadership of the then Prime Minister Indira Gandhi. These banks were nationalized because they had deposits of more than 50 crores of rupees. Nationalization was done to help the economy develop and to avoid an economic crisis. The banks are as follows:
- Canara BankÂ
- Allahabad BankÂ
- UCO BankÂ
- United Bank of India
- Indian Overseas Bank
- Syndicate Bank
- Bank of Baroda
- Bank of India
- Punjab National Bank
- Bank of Maharashtra
- Indian Bank
- Central Bank of India
- Dena Bank
- Union BankÂ
The first phase of bank nationalization was followed by a second round in 1980.
Banks Nationalized in 1980
Six more banks were nationalized in 1980, further consolidating the government’s hold on the Indian banking system. Here are the banks that were nationalized in 1980:
- Vijaya Bank Limited
- Punjab and Sind Bank Limited
- Oriental Bank of Commerce Limited
- New Bank of India Limited
- Corporation Bank Limited
- Andhra Bank Limited
Financial Institutions
The evolution of banking in India was not just limited to nationalization. To expand financial inclusion, the government also established specialized banks to boost priority sectors such as agriculture and small and medium enterprises.
Specialized financial institutions, such as NABARD (National Bank for Agriculture and Rural Development) and SIDBI (Small Industries Development Bank of India), were established to serve specific sectors. During India’s second phase of banking evolution, Regional Rural Banks (RRBs) were also launched to serve rural areas effectively.
Benefits of Nationalization
Nationalization brought several benefits to India’s banking sector:
- Financial Inclusion: Banking services reached rural and semi-urban areas.
- Economic Growth: Credit flow increased for agriculture, small industries, and infrastructure projects.
- Stability: Public confidence grew as government ownership reduced risks of bank failures.
- Social Impact: Employment opportunities expanded within the banking sector.Â
However, inefficiencies like bureaucratic delays and a lack of competition emerged as challenges during this phase. From 1991 onwards, India witnessed the third phase of the banking system’s evolution, during which the Indian economy underwent major economic reforms such as liberalization, privatization, and globalization.
The third phase of the evolution of banking in India saw the rise of private sector banks, such as HDFC Bank, ICICI Bank, and many more, to combat the inefficiencies of government banks and further the financial inclusion process in India.
Phase 3 (1991-Present)
The post-economic reforms era marked a paradigm shift in the Indian banking history, with private sector banks paving the way for increased financial inclusion through technological advancements and the entry of international banks in India.
Entry of Private and Foreign Banks
Private sector banks like HDFC, ICICI, Kotak Mahindra, and Axis Bank emerged as key players in India’s post-liberalization era. In addition to private sector banks, international banking giants such as Citibank, HSBC, and Standard Chartered expanded their operations in India.
Other Noteworthy Developments
The health of banks is a barometer for the health of the economy. Various steps have been initiated to improve the health of Indian banks and keep their balance sheets strong. While a strong banking system is a must, it is also important that the banking system is accessible to all citizens irrespective of their economic status or their geographical location. India has taken numerous steps over the years to boost financial inclusion.
Here are some reforms that played a pivotal role in the evolution of banking in India:
- Technological Advancements:Â
India has made deep strides in financial inclusion through technological advancements. The introduction of technologies such as ATMs, internet banking, mobile banking, and most recently the UPI, revolutionized customer experience while improving the ease of banking.
- Merger of Banks:Â
Consolidation efforts led to stronger entities. Several public sector banks were merged to strengthen the banks’ balance sheet. For instance, several associate banks of the State Bank of India were merged with their parent entity, State Bank of India.
- Regulatory Changes:
The RBI introduced Basel norms for risk management and capital adequacy for all banks functioning in India.
- Financial Inclusion Initiatives:
Programs like Jan Dhan Yojana brought millions into formal banking, paving the way for the digital disbursement of government benefits and subsidies to the marginalized in India.
Different Types of Banks in India
The third phase of Indian banking evolution gave birth to various types of banks in India as provisions were made to cater to different segments of the economy, be it businesses, individuals with short-term small ticket financing needs, or large organizations to raise capital for their businesses.
Here are the different types of banks that operate in India currently:
Commercial Banks
Commercial banks include PSU banks such as the SBI and Punjab National Bank and private sector banks such as HDFC and ICICI Bank. These banks offer a wide range of services, including deposit taking, loan provision, wealth management, and services tailored for businesses, such as merchant banking and underwriting.
Commercial banks dominate the financial landscape in India due to their extensive reach and wide range of services.
Small Finance Banks
The primary objective of small finance banks is to serve the underserved segments of the society, such as small businesses and low-income individuals. They generally offer smaller ticket size loans for short tenures. Examples of small finance banks are Ujjivan Small Finance Banks and Equitas Small Finance Bank.
Cooperative Banks
Cooperative banks operate on a smaller scale than commercial and small finance banks. They are primarily regional and do not have a pan-Indian presence.
They are governed by cooperative principles and cater primarily to farmers and small traders, playing a pivotal role in credit delivery in rural areas.
Payment Banks
Payment banks are specialized institutes licensed by the Reserve Bank of India to provide basic financial services such as deposits, remittances, and digital payments. Payment banks are generally digital and do not have a physical presence like commercial banks.
Payment banks further improve financial inclusion, though they cannot offer loans or issue credit cards. However, these banks have played a crucial role in boosting digital transactions in India. Paytm Payments Bank and Airtel Payments Bank are payment banks.
Conclusion
The evolution of banking in India tracks the country’s journey toward economic growth and social transformation. It has come a long way, from presidency banks to digital wallets, with each phase uniquely shaping India’s robust financial system. As we move forward, innovations like blockchain technology and AI are set to redefine the future of Indian banking.
