Banking History in India: Pre-1947

• Banking in India has evolved through distinct phases, reflecting the country's economic and social changes
• The phases can be broadly categorized into pre-independence era, post-independence era, and liberalization era

Pre-Independence Era (Before 1947)

• Early banking was characterized by private and presidency banks
• The first banks were the Bank of Hindustan (1770) and the General Bank of India (1786)
• These early banks had limited success and eventually failed
• The East India Company established the Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843)
• These were known as the Presidency Banks
• Foreign banks also started operations in India during this period
• Allahabad Bank (1865) was the first fully Indian-owned bank
• Punjab National Bank (1894) was another significant Indian bank established during this time
• The Swadeshi movement in the early 20th century led to the establishment of more Indian-owned banks
• This era was largely unregulated, leading to bank failures and instability

Post-Independence Era (1947-1991)

• This period focused on nationalization and social objectives
• The Reserve Bank of India (RBI) was established in 1935 but nationalized in 1949
• RBI was designated as the central bank to regulate and supervise the banking sector
• The Imperial Bank of India was nationalized in 1955 and renamed the State Bank of India (SBI)
• SBI was mandated to extend banking services to rural areas
• In 1969, 14 major commercial banks were nationalized
• This aimed to align banking with national economic goals and to direct credit to priority sectors like agriculture and small industries
• A second wave of nationalization occurred in 1980, nationalizing 6 more commercial banks
• This further increased the government's control over the banking sector
• Priority Sector Lending (PSL) was introduced, requiring banks to allocate a certain percentage of their lending to specified sectors
• The Branch Expansion Policy focused on expanding the geographical reach of banks, especially in rural and underserved areas
• Regional Rural Banks (RRBs) were established in 1975 to cater to the needs of rural populations
• Deposit insurance was introduced to protect depositors' money
• The growth of banking slowed down due to inefficiencies and lack of competition

Liberalization Era (1991-Present)

• This era brought significant reforms aimed at improving efficiency and competitiveness
• The Narasimham Committee (1991) recommended reforms for the banking sector
• These included reducing statutory reserve requirements (CRR and SLR)
• Recommendations also included deregulation of interest rates, and introducing prudential norms for asset classification and income recognition
• Private sector banks were allowed to be established, leading to increased competition
• Foreign banks were also allowed to expand their operations in India
• Computerization and technology adoption were encouraged to improve efficiency
• New banking products and services were introduced, such as ATMs, credit cards, and internet banking
• The focus shifted to profitability, efficiency, and customer service
• The second Narasimham Committee (1998) further recommended strengthening the banking system
• Recommendations included measures to deal with Non-Performing Assets (NPAs)
• Recommendations also included strengthening risk management practices, and improving corporate governance
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) was enacted in 2002
• This provided banks with legal tools to recover bad loans
• The Banking Regulation Act was amended to strengthen the regulatory powers of the RBI
• Financial inclusion became a major focus, with initiatives like Jan Dhan Yojana aimed at bringing banking services to the unbanked population
• Payments banks and small finance banks were introduced to further enhance financial inclusion
• Digital banking and fintech innovations have transformed the banking landscape
• Mobile banking, UPI, and other digital payment methods have gained popularity
• The banking sector has become more resilient and efficient
• The sector has faced challenges such as increasing NPAs and cybersecurity threats
• Continuous reforms and technological advancements are shaping the future of banking in India