Indian Banking History Quiz

1.0 Introduction

• Indian banking history dates back to the 17th century, with the Madras Bank founded in 1683.
• Primarily managed by European traders working with the East India Company.

2.0 Evolution

2.1 Phase I: Pre-Independence (Before 1947)

2.1.1 Bank of Hindustan

• Modern Indian banking originated in the mid-18th century.
• The Bank of Hindustan was one of the first banks, established in 1770.
• First paper notes were issued by private banks like the Bank of Hindustan in the late 18th century.
• Bank of Hindustan was liquidated in 1832.

2.1.2 Imperial Bank of India

• The East India Company established three Presidency Banks during British rule:
  • Bank of Calcutta (1806)
  • Bank of Bombay (1840)
  • Bank of Madras (1843)
• These banks were reorganized and amalgamated into the Imperial Bank of India on January 27, 1921.
• The Imperial Bank of India was nationalized on July 1, 1955, transforming into the State Bank of India.

2.1.3 Other Pre-Independence Banks

• Oudh Commercial Bank (1881): First commercial bank in India.
• Allahabad Bank (1865): Oldest continuously operating joint-stock bank in India until 2020 merger.
• Punjab National Bank (1894): Second-largest government-owned bank.
• Bank of India (1906)
• Bank of Baroda (1908)
• Central Bank of India (1911)
• Reserve Bank of India (1935)

2.2 Phase II: Post-Independence (1947-1990)

2.2.1 Pre-Nationalization Phase (1947-1968)

• After independence, commercial bank presence was limited in urban and industrial areas.
• Banks primarily focused on the needs of the rich and industrial class.
• Nexus existed between banks and industrial houses.
• Bank boards, predominantly composed of industrialists, held decision-making power and influenced policies.
• Policies favored business houses, impacting everyday administration and banking for the poor.

2.2.2 Nationalization of Banks (1969-1990)

• Twelve major private banks were nationalized in 1969.
• The aim was to increase government control over the banking sector.
• Nationalization was linked to industrial houses' influence over banks.
• 1980 saw another round of nationalization involving six more commercial banks, with control over credit delivery as the stated reason.

2.3 Phase III: Liberalization (1991-Present)

2.3.1 Problems in the Indian Banking System

• Government-controlled banks experienced poor performance.
• Non-performing assets (NPAs) significantly threatened the financial system's stability.
• Banking reforms were integrated into the liberalization process.
• Reforms aimed at improving the flexibility of banking operations, enhancing productivity, efficiency, and profitability.

2.3.2 Indian Economic Crisis (1991)

• The 1991 crisis originated from a balance of payments deficit, heavily reliant on imports.
• Global events, like the 1990-91 Gulf War and a fall in remittances, exacerbated the crisis.

2.3.3 Narasimham Committee I (1991)

• The purpose of the committee was to study financial systems and suggest improvements.
• Recommendations included reducing CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) to streamline operations.
• They suggested deregulation of interest rates to align with market forces and phasing out directed credit programs toward targeted borrowers.
• Established special tribunals to manage bad debt and assets and establish a fund for bad debt resolution.

2.3.4 Narasimham Committee II (1998)

• The purpose was to review the implementation of banking reforms.
• Recommendations focused on strengthening banks, specifically encouraging mergers to create stronger entities.
• The committee aimed to narrow the focus of banks' operations to specific industry niches with high credit potential.
• Key recommendation was to enhance capital adequacy ratios, particularly for foreign banks looking to enter the market.

2.3.5 Major Committees on Financial System - Pre and Post-1991 Reforms

Tandon Committee (1974)

• Purpose was to provide guidelines on bank supervision and ensure proper use of credit.
• The committee identified the importance of relating bank credit to business plans and resources of borrowers.

Khan Committee (1997)

• Examined Development Financial Institutions (DFIs) and suggested gradual transition to universal banking.

2.3.6 Lead Bank Scheme (LBS)

• Launched in 1969 to mobilize deposits for weaker sections.
• Aim was to increase lending to vulnerable segments and facilitate better reach to the public.

2.3.6.1 High-Level Committee (2009)

• Reviewed the Lead Bank Scheme given changes in the financial sector.
• The committee suggested ways to increase coverage and introduced financial inclusion as a primary goal.