Our banking system is divided into commercial banks (public and private banks), Regional Rural Banks, Cooperative Banks, etc.

One of the key events that marked the evolution of the Indian banking sector is the nationalization of banks. The event made way for the Indian economy to get a global position among the top ten economies in the world.

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In this blog, we seek to discuss the history of banking in India.

The advancement in the Indian banking system can be classified into three different phases.

  1. The pre-independence phase, i.e., before 1947
  2. After independence phase, i.e. from 1947 to 1991
  3. The LPG (1991) era and beyond, i.e. 1991 and beyond

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1.The Pre-Independence Phase

This phase is categorized by the presence of a considerable number of banks in India. Nearly 600 banks were present in India.

The banking system started with the foundation of Bank of Hindustan in the then capital, Calcutta (present-day Kolkata) in 1770. The bank ceased its operations in 1832.

Post Bank of Hindustan, many other banks evolved such as the General Bank of India (1786-1791) and Oudh Commercial Bank (1881-1958), but they did not continue their operations for long.

Oudh Commercial Bank was the first commercial bank of India.

Source: Slideshare

Some banks of the 19th century continue to operate even now establishing themselves as an institution of excellence. For example, Allahabad Bank was established in 1865, and Punjab National Bank was established in 1894.

Also, some banks such as Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras (est. 1843) were merged into one entity.

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The new body was called Imperial Bank of India which was later renamed as the State Bank of India.
In the year 1935, the Reserve Bank of India was commissioned upon the recommendation of the Hilton Young Commission.

During this phase, due to the failure of majority of small-sized banks, the confidence of the public was low, and people continued to engage with money lenders and unorganized players.

2. After independence Phase – 1947 to 1991

One of the main features of the period was the nationalization of the bank.

Why was Nationalization Needed?

  • The banks primarily catered to large businesses
  • Critical sectors such as agriculture, small-scale industries and exports were lagging
  • The moneylenders exploited masses

Thus, in the year 1949, the Reserve Bank of India was nationalized. In two decades, fourteen commercial banks were nationalized in July 1969 during the reign of Smt. Indira Gandhi.

In 1975, based on the recommendation of the Narasimham committee, Regional Rural Banks (RRBs) were constituted with an objective of serving the unserved. The primary goal was to reach masses and promote financial inclusion.

Some other specialized banks were also set up to promote the activities that were required for the economy.

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For example, NABARD was established in 1982 to support agriculture-related work. Similarly, EXIM bank was built in 1982 for export and import.

National Housing Bank was set up in 1988 for the Housing sector, and SIDBI was established in 1990 for small-scale industries.

Was Nationalization Successful?

Nationalization was a significant step in the banking sector, and it helped improve people’s confidence in the system.

Small and critical industries started getting access to capital that helped boost economic growth.
Additionally, the move added to the country’s growth across the global banking sector.

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3.Third phase – The LPG (1991) Era and Beyond

1991 saw a remarkable change in the Indian economy.

The government opened up the economy and invited foreign and private investors to invest in India. This move marked the entry of private players in the banking sector.

The RBI provided banking license to ten private entities of which some of the notable ones survived such as ICICI, HDFC, Axis Bank, IndusInd Bank, and DCB.

Source: YouTube

In 1998, the Narsimham committee again recommended entry of more private players. Thus, the RBI provided a license to Kotak Mahindra Bank in 2001 and Yes Bank in 2004.

Nearly after a decade, the third round of licensing took place. The RBI in 2013-14, allowed a license for IDFC bank and Bandhan Bank.

The story didn’t end here, with an aim to make sure that every Indian gets access to finance, the RBI introduced two new set of banks – Payments bank and small banks, and this marked the fourth phase in the banking industry.

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1.Payments Bank

  • These banks are allowed to accept a nominal deposit (Rs. 1 lakh per currently).
  • These banks are not allowed to provide credit (both loans and credit cards), but can operate both current account and savings accounts.
  • Other services include ATM/debit cards, net-banking, and mobile banking. Bharti Airtel started first payments’ bank in India.

Source: faisalkhan.com

Following the six most active payments bank currently –

  • Aditya Birla Payments Bank
  • Airtel Payments Bank
  • India Post Payments Bank
  • Fino Payments Bank
  • Jio Payments Bank
  • Paytm Payments Bank

Source: Jagran Josh

2.Small Finance Bank

These banks are niche banks, with basic banking service, which include acceptance of deposits and lending.

The primary objective is to serve the unserved, such as small business units, small and marginal farmers, micro and small industries, and unorganized sectors.

Source: India Microfinance

Following are the small finance bank currently operational in India –

  • Ujjivan Small Finance Bank
  • Jana Small Finance Bank
  • Equitas Small Finance Bank
  • AU Small Finance Bank
  • Capital Small Finance Bank
  • Fincare Small Finance Bank
  • ESAF Small Finance Bank
  • North East Small Finance Bank
  • Suryoday Small Finance Bank
  • Utkarsh Small Finance Bank

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We believe rapid digitization in banks coupled with the new model of banking will continue to remain the key theme for the fourth and ongoing phase of the banking industry.

Conclusion

There has been a big revolution in the banking sector over the years and it is bound to evolve further. With various steps and new features that the banking industry is introducing, this sector will grow further.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww