The Evolution of Banking in India

The banking sector in India plays a vital role in this country’s economic development. Over the centuries, numerous changes have occurred within this industry, from technological advancement to the diversification of financial services and products. 

Currently, the Indian banking system includes commercial banks, small finance banks, and cooperative banks.

Banks operating within the boundaries of India abide by the Banking Regulation Act 1949. 

Let’s understand India’s banking system in three phases.

• Phase 1 (1786-1969)

This is the pre-independence phase, which lasted nearly 200 years. During this period, there were close to 600 banks. At the same time, some significant developments in the banking industry also took place. 

Bank of Hindustan is the first bank to exist, marking the foundation of India’s banking system. But it ceased to exist in 1932. 

• Presidency Banks

The East India Company founded three key presidency banks. These include the Bank of Bombay (1840), Bank of Madras (1843) and Bank of Calcutta (1806).

These three banks merged and became the Imperial Bank of India. In 1955, it was renamed the State Bank of India. Besides these, more banks, including Punjab National Bank and Allahabad Bank, came into existence. 

Between 1913 and 1948, there was stagnation in India’s banking space as growth was slow. Multiple banks encountered periodic failures. The lack of confidence in the country’s banking system played a part in the slow mobilisation of funds and the growth of this sector. There were around 1100 banks during this period.

To streamline these banks' operations, the Indian Government introduced the Banking Regulation Act 1949. 

• Phase 2 (1969-1991)

Post-independence, Indians were doubtful about the private ownership of banks. Instead, they preferred to rely on moneylenders for necessary financial assistance. To combat this issue, the Indian Government nationalised 14 commercial banks in 1969.

The main objective of this move was to reduce the concentration of power and wealth of certain families that owned and controlled these financial institutions.

There were other reasons too for nationalisation: 

• To support India’s agricultural sector
• Mobilise savings among individuals
• Facilitate the expansion of India’s banking network by opening more branches
• Boost the priority sectors through banking services

Some of the banks that were nationalised in 1961 include:

• Central Bank of India
• United Bank
• Canara Bank 
• Indian Overseas Bank 
• Dena Bank  
• Union Bank of India 
• Bank of Baroda 
• Bank of India 
• Allahabad Bank

The evolution of India’s banking system continued in this trajectory.

In 1980, the Government nationalised six more banks, including:

• Corporation Bank
• Punjab & Sind Bank
• New Bank of India
• Vijaya Bank
• Andhra Bank
• Oriental Bank of Commerce

• Financial Institutions

Besides nationalising private banks, the Indian Government established a few financial institutions (between 1982 and 1990) to fulfil specific objectives. 

• EXIM Bank – for promoting import as well as export 
• National Housing Board- for funding housing projects
• National Bank for Agriculture and Rural Development (NABARD) – for supporting agricultural activities 
• Small Industries Development Bank of India (SIDBI) – for providing financial assistance to small-scale Indian industries

Benefits of Nationalisation

• Increased efficiency in the industry 
• Empowered small-scale industries 
• Provided a massive boost to India’s agricultural sector
• Increased public deposits 
• Ensured better outreach 
• Provided employment opportunities

• Phase 3 (1991- Present)

Since 1991, the Indian banking system has been evolving. The Indian Government encouraged foreign investment, which opened the economy to foreign and private investors, which has led to the introduction of mobile banking, internet banking, ATMs, and more. 

Some foreign banks in India include:

• HSBC
• Citibank
• Bank of America
• Standard Chartered Bank
• DBS Bank 
• Royal Bank of Scotland 

To stabilise the nationalised public sector banks, the Indian Government formed the Narasimham Committee in 1991 to manage reforms in the banking sector. During this time, the Government approved various private banks. These include Axis Bank, IndusInd Bank, and ICICI Bank. 

Other noteworthy developments or changes:

• Small finance banks became eligible to open new branches anywhere in India
• The Government and RBI began to treat both private and public sector banks equally
• Banks started digitising transactions along with other banking operations 
• Payments banks were established 

Different Types of Banks in India

Currently, there are four types of banks in India: 

• Commercial Banks

  These banks adhere to the provisions of the Banking Regulations Act 1949. Commercial banks accept deposits from the public and give out loans to generate profits. They are segregated into four types: Private sector banks, public sector banks, regional rural banks and foreign banks. 

• Small Finance Banks

  Small finance banks provide financial assistance to those segments of society that other banks do not serve. The customer base of such banks includes small business units, micro industries, and more. 

• Cooperative Banks

  A managing committee controls the operations of these banks. Cooperative banks are not designed to make a profit, and the customers of these banks are their owners. These banks are categorised into state cooperative banks and urban cooperative banks.

• Payments Banks

  This new type of bank in India can accept limited deposits. These banks are allowed to provide savings and current account services. They can also issue debit cards. But as per RBI norms, they are not eligible to offer credit cards or loans.

  That said, Payment Banks are said to play a vital role in the growth of e-banking in India. Airtel Payments Bank and Fino Payments Bank are a few examples of payment banks in the country.

Banks are constantly putting in efforts to ensure maximum customer satisfaction. With continued improvement in online banking services, including mobile banking, the banking system in India is getting streamlined.

This rapid digitisation of banking services and prudent operating models will play a crucial role as we move towards the fourth phase.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.