Indian Banking System: 3 Phases of Indian Banking

System
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January 6, 2014

Phases of Indian Banking System are summarized below:

Without a sound and effective banking system in India it cannot have a healthy economy.
The banking system of India should not only be hassle free but it should be able to meet
new challenges posed by the technology and any other external and internal factors.

For the past three decades India’s banking system has several outstanding achievements to
its credit. The most striking is its extensive reach; it is no longer confined to only
metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even
the remote comers of the country. This is one of the main reasons of India’s growth process.

The government’s regular policy for Indian bank since 1969 has paid rich dividends with the
nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a
draft or for withdrawing his own money. Today, he has a choice, Gone are days when the
most efficient bank transferred money from one branch to other in two days. Now it is
simple as instant messaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:

i. Early phase from 1786 to 1969 of Indian banks.

ii. Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

iii. New phase of Indian Banking System with the advent of Indian Financial and Banking
Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase
III.

Phase I:
The Genera; Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1806), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called them Presidency Banks.
These three banks were amalgamated m 1921 and imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1885 and 1913,
Bank of India Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of
Mysore were set up Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To
streamline the functioning and activities of commercial banks, the Government of India
came up with the Banking Companies Act, 1949 which was later changed to Banking
Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of
India was vested with extensive power for the supervision of banking in India as the Central
Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.

Phase II:
Government took major steps in the Indian Banking Sector Reform after independence. In
1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale
specially in rural and semi urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State Governments all
over the country.

Seven banks forming subsidiary of State Bank of India were nationalised on 19th July 1959.
In 1969, major process of nationalisation was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi 14 major commercial banks in the country was
nationalised.

Second phase of nationalisation in Indian Banking Sector Reform was carried out in 1980
with six more banks. This step brought 80% of the banking segment in India under
Government ownership.

The following are the steps taken by the Government of India to Regulate Banking
Institutions in the country.

i. 1949: Enactment of Banking Regulation Act.

ii. 1955: Nationalisation of State Bank of India.

iii. 1959: Nationalisation of SBI subsidiaries.

v. 1969: Nationalisation of 14 major banks.

vi. 1971: Creation of credit guarantee corporation.

vii. 1975: Creation of regional rural banks.

viii. 1980: Nationalisation of 6 banks with deposits over 200 crore.

After the nationalisation the branches of the public sector banks in India rose to
approximately 800% and deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.

Phase III:
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was
setup by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being made to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given more importance than
money.

The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macro-economics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposure.