For most of the countries, the history of the bank would be common. The banking industry got evolved with the money lenders accepting deposits and issuing receipts at their places. Banking got quite varied and catered the need for money in the trade, commerce, agriculture as well as individuals in the economy. With the time there have been changes introduced by the bankers at the time, and gradually the system spread its wings to many other sectors. Presently there is hardly any segment where the banking is not an essential part. Hence it is interesting to know the development of the banking system in the context of Indian society and industries.

If we look at the pre-independence time, it was largely characterized by the existence of private banks that were organized as joint-stock companies. Most of the banks were of small scale and had a private shareholding of the closely held variety.

banking-system-in-india

Banks for mostly localized and some of them got failed.  If we look at the period of 1967 to 1991, there was a major development, social control on banks in 1969 and nationalization of 14 banks in 1969 and six more in 1980. It was the period of the early 1990s when there was a huge transformation of the banking sector occurred. It was the result of the financial sector, which reformed and was introduced as part of structural reforms in 1991.

Summary for the Origin of Banking in India

The early phase of Indian banks (1786-1969)

  • The first bank in India was the general Bank of India, which was set up in the year 1786. Following banks were Bank of Hindustan and Bengal bank.
  • When the East India Company was established, Bank of Bengal, Bank of Bombay, Bank of Madras were independent units which were called as presidency banks. All the three banks were amalgamated in 1920, and the imperial bank of India, A bank of the private shareholder which were mostly European, was established.
  • Allahabad Banks was established in the year 1865, which were exclusively by Indians.
  • Punjab National Bank was set up in 1894, and its headquarter was in Lahore.
  • In the period during 1906 and 1913, Bank of India, Central Bank of India and regional banks like Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were set up in different areas of the country.
  • The reserve bank of India came into the picture in the year of 1935.
  • In the year of 1949, the Government of India formed a Banking companies Act 1949 which was later renamed to the banking regulation Act 1949.

Banking sector Reforms (1969 to 1991)

  • In the year of 1955, the government nationalized the Imperial Bank of India and began to offer extensive banking facilities, especially in the rural and semi-urban areas.
  • The government constituted that the State Bank of India would act as a principal-agent of the RBI and to Handle the banking transaction of the Union government and state government in each state of India.
  • Around 7 banks were owned by the princely state which was nationalized in 1959, and most of them become subsidiaries of the 1959 and then became subsidiaries of the state bank of India. In the year 1969, 14 commercial banks in India were nationalized.
  • In this phase of banking sector reformed and 7 more banks were nationalized in 1980. With this, around 80 % of the banking sector in India came under the Ownership of Government.

A new phase of Indian Banking system and other reforms after 1991

  • It is the phase which got introduced many more products and facilities in the banking sector as a part of the reforms process. In the year 1991, when M Narasimham was the chairperson, a committee was set up which worked for the liberalization of banking services.
  • In this phase, India flooded with foreign banks and their ATM centres. Most of their efforts were satisfactory for the customers.
  • With the advancement in technology, phone banking and net banking were introduced, which made the entire system convenient and swift. Time was given much importance in all the monetary transactions.

Nationalization of Banks

  • A nationalization of commercial banks was taken place to achieve Social Welfare, to control the private monopolizes, Expansion of Banking, Reducing Regional Imbalance, priority Sector Lending, and development of Banking Habits.
  • So To have control over the Indian banks, On 19th July 1969, Ms Indira Gandhi, who was the Prime Minister nationalized 14 large commerce banks who have got a reserve of more than 50 crores. The main aim to do nationalization was to get more client base from the rural areas and provide them with more quality services. On 15 April 1980 banks having Rs 200 crore of reserves were nationalized.

What is the Banking Structure in India?

In India, the bank Industry is divided into three main categories, which are parts, organized, and unorganized sectors. Reserve bank of India is part of the organized sector whereas commercial banks and co-operative banks and other specialized financial institutions like ICICI and IFC.

Commercial Banks

Commercial banks are the financial institutions which provide the service to businesses, organizations, individuals. Its services are offering current, deposit and saving accounts, also giving loans to businesses. A commercial Bank may be defined as the bank whose main Idea is to make deposits, taking and making loans.

It is opposite to what investment bank does. Investment Bank has the main business in securities underwriting, mergers and acquisitions advisory, management of assets, and different securities trading. Commercial Banks may be categorized as Scheduled Commercial Banks and Non-Scheduled Commercial Banks.

Private Banks

It is another bank which is owned by either an individual or general partner with the limited number of partners and license is provided by the Reserve Bank of India. Some of the examples are IndusInd Bank, ICICI Bank, Axis Bank, YES Bank, IDFC Bank, Kotak Mahindra Bank and many more.