Origin and Growth of

Indian Banking

Origin and Growth of Indian

Banking
Banking in India, originated in the
last decades of the 18th century.
Among the first banks were the Bank
of Hindustan, which was established
in 1770 and liquidated in 1829-32;
and the General Bank of India,
established in 1786 but failed in
1791.

 The largest bank, and the oldest still in existence, is the

State Bank of India(S.B.I).
It originated as theBank of Calcuttain June 1806.
In 1809, it was renamed as theBank of Bengal. This was one of
the three banks funded by apresidency government, the other
two were theBank of Bombayand theBank of Madras.
The three banks were merged in 1921 to form the
Imperial Bank of India, which upon India's independence, became
theState Bank of Indiain 1955.
For many years the presidency banks had acted as quasi-central
banks, as did their successors, until theReserve Bank of India
was established in 1935, under the
Reserve Bank of India Act, 1934.

 In 1960, the State Banks of India was

given control of eight state-associated
banks under the State Bank of India
(Subsidiary Banks) Act, 1959. These
are now called itsassociate banks.
In 1969 theIndian governmentnationalised
14 major private banks. In 1980, 6 more
private banks were nationalised

History of Banking
Ancient India
TheVedas(2000-1400 BCE) are earliest Indian texts to mention the concept
ofusury. (practice of lending money at unreasonably high rates of interest)
Sutras(700-100 BC) and theJatakas(600-400 BC) also mention usury.
VasishthaforbadeBrahminandKshatriyavarnasfrom participating in usury.
By the 2nd century usury seems to have become more acceptable.
TheManusmriticonsiders usury an acceptable means of acquiring wealth or
leading a livelihood. It also considers money lending at, different ceiling rates
for different castes
The Jatakas also mention the existence of loandeeds. These were
calledrnapatraorrnapanna. TheDharmashastrasalso supported the use of
loan deeds.
Kautilyahas also mentioned the usage of loan deeds, calledrnalekhaya.
Later during theMauryan period(321-185 BCE), an instrument calledadesha
was in use, which was an order on a banker directing him to pay the sum on
the note to a third person, which corresponds to the definition of a modern
bill of exchange.
In large towns, merchants also gaveletters of creditto one another.

 Medieval era
The use of loan deeds continued into theMughal era
and were calleddastawez. Two types of loan deeds
have been recorded. Thedastawez-e-indultalabpwas
payable on demand anddastawez-e-miadiwas
Payable after a stipulated time.
The use ofpayment ordersby royal treasuries,
calledbarattes, have been also recorded.
There are also records of Indian bankers using
issuing bills of exchange on foreign countries
. The evolution ofhundis, a type of credit instrument,
also occurred during this period and remain in use.

 Colonial era
During theperiod of British rulemerchants established
the Union Bank of Calcutta in 1829
TheAllahabad Bank, established in 1865 and still
functioning today
Foreign banks too started to appear, particularly inCalcutta,
in the 1860s.
TheComptoir d'Escompte de Parisopened a branch in
Calcutta in 1860, and another inBombayin 1862; Then
followed inMadrasandPondicherry,
HSBCestablished itself inBengalin 1869. Calcutta was the
most active trading port in India, mainly due to the trade of
theBritish Empire, and so became a banking centre.

 Oudh Commercial Bank, established in

1881 inFaizabad. It failed in 1958.
The next was thePunjab National Bank
, established in Lahorein 1894, which
has survived to the present and is now
one of the largest banks in India.
The period between 1906 and 1911
saw the establishment of banks
inspired by theSwadeshimovement.

 A number of banks established then have survived to the

present such asThe South Indian Bank,Bank of India,
Indian Bank,Bank of Baroda,andCentral Bank of India.
The fervour of Swadeshi movement led to the
establishment of many private banks inDakshina
KannadaandUdupi district, (which were unified earlier and known by
the name South Canara (South Kanara) district).
Five nationalised banks started in this district and also a
leading private sector bank. Hence undivided Dakshina
Kannada district is known as "Cradle of Indian Banking".
(Five major banks of India (Syndicate Bank, Canara Bank,
Corporation Bank, Vijaya Bank and Karnataka Bank)
The years of the First World War were turbulent, 94
banks in India failed between 1913 and 1918

 Post-Independence
Thepartition of Indiain 1947 adversely impacted the economies of
PunjabandWest Bengal, paralysing banking activities
India'sindependencemarked the end of a regime of theLaissez-fairefor
the Indian banking.
TheGovernment of India initiated measures to play an active role in the
economic life of the nation, and the Industrial Policy Resolution adopted by
the government in 1948 envisaged amixed economy.
This resulted in greater involvement of the state in different segments of
the economy including banking and finance. The major steps to regulate
banking included:
TheReserve Bank of India, India's central banking authority, was
established in April 1935, but was nationalised on 1 January 1949 under
the terms of the Reserve Bank of India (Transfer to Public Ownership) Act,
1948 (RBI, 2005b).[
In 1949, theBanking Regulation Act was enacted, which empowered the
Reserve Bank of India(RBI) "...to regulate, control, and inspect the banks
in India."

 Nationalisation in the 1960s

Despite the provisions, control and regulations of theReserve Bank of India,
banks in India except theState Bank of India(SBI), remain owned and
operated by private persons.
By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of theIndian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the
nationalisation of the banking industry.
The Government of India issued an ordinance ('Banking Companies
(Acquisition and Transfer of Undertakings) Ordinance, 1969') andnationalised
the 14 largest commercial banks with effect from the midnight of 19 July
1969.
A second dose of nationalisation of 6 more commercial banks followed in
1980. The stated reason for the nationalisation was to give the government
more control of credit delivery.
With the second dose of nationalisation, the Government of India controlled
around 91% of the banking business of India.
Later on, in the year 1993, the government mergedNew Bank of Indiawith
Punjab National Bank.It was the only merger between nationalised banks and
resulted in the reduction of the number of nationalised banks from 20 to 19.

 Liberalisation in the 1990s

In the early 1990s, the then government embarked on a
policy ofliberalisation, licensing a small number of private
banks.
These came to be known asNew Generation tech-savvy
banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated
with Oriental Bank of Commerce,UTI Bank(since renamed
Axis Bank),ICICI BankandHDFC Bank
This move, along with the rapid growth in the
economy of India, revitalised the banking sector in India,
which has seen rapid growth with strong contribution from
all the three sectors of banks, namely, government banks,
private banks and foreign banks.
The next stage for the Indian banking has been set up, with
proposed relaxation of norms for foreign direct investment.

 Pradhan Mantri Jan Dhan Yojana is a scheme for

comprehensivefinancial inclusionlaunched by the
Prime Minister of India,Narendra Modi, in 2014.Run
byDepartment of Financial Services,
Ministry of Finance, on the inauguration day, 1.5
Crore (15 million) bank accounts were opened
under this scheme.
By 15 July 2015, 16.92croreaccounts were
opened, with around20,288.37
crore(US$3.0billion) were deposited under the
scheme, which also has an option for opening new
bank accounts with zero balance.

 Current period
The Indian banking sector is broadly classified into scheduled banks and
non-scheduled banks.
All banks included in the Second Schedule to the Reserve Bank of India Act,
1934 are Scheduled Banks. These banks comprise Scheduled Commercial
Banks and Scheduled Co-operative Banks. Scheduled Co-operative Banks
consist of Scheduled State Co-operative Banks and Scheduled Urban
Cooperative Commercial Banks in India are categorised into five different
groups according to their ownership and/or nature of operation:
State Bank of India and its Associates
Nationalised Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks.
In the bank group-wise classification, IDBI Bank Ltd. is included in
Nationalised Banks.

 Types of banks

Types of banks

Types of banks
The Indian banking sector is broadly classified into
scheduled banksand non-scheduled banks.
The scheduled banks are those included under the 2nd Schedule
of the Reserve Bank of India Act, 1934.
The scheduled banks are further classified into: nationalised
banks;
State Bank of Indiaand its associates;
Regional Rural Banks(RRBs);
foreign banks; and other Indian private sector banks.
The term commercial banks refers to both scheduled and nonscheduled commercial banks regulated under the
Banking Regulation Act, 1949.

Types of banks
In many countries central bank is known by different names.
Federal Reserve Bank of U.S.A, Bank of England in U.K. and
Reserve Bank of India in India.
Reserve Bank of India is the Central Bank of our country. It was
established on 1stApril 1935 under the RBI Act of 1934.
It holds the apex position
performs various developmental and promotional functions
wide powers to supervise and control the banking structure.
occupies the pivotal position in the monetary and banking
structure of the country.
authority to formulate and implement monetary and credit
policies.
owned by the government of a country and has the monopoly
power of issuing notes.

Commercial Banks
Commercial bank is an institution that accepts
deposit, makes business loans and offer related
services to various like accepting deposits and
lending loans and advances to general
customers and business man.
These institutions run to make profit.
They cater to the financial requirements of
industries and various sectors like agriculture,
rural development, etc.
it is a profit making institution owned by
government or private of both.

Commercial bank includes public sector, private

sector, foreign banks and regional rural banks
Public sector banks: It includes SBI, seven (7)
associate banks and nineteen (19) nationalised
banks. Altogether there are 27 public sector banks.
The public sector accounts for 90 percent of total
banking business in India and State Bank of India is
the largest commercial bank in terms of volume of
all commercial banks.
b. Private sector banks:Private sector banks are
those whose equity is held by private shareholders.
For example, ICICI, HDFC etc. Private sector bank
plays a major role in the development of Indian
banking industry.

 c. Foreign Banks:
Foreign banks are those banks, which have their head
offices abroad. CITI bank, HSBC, Standard Chartered
etc. are the examples of foreign bank in India.
D. Regional Rural Bank (RRB):
These are state sponsored regional rural oriented
banks. They provide credit for agricultural and rural
development. The main objective of RRB is to develop
rural economy. Their borrowers include small and
marginal farmers, agricultural labourers, artisans etc.
NABARD holds the apex position in the agricultural
and rural development.

Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in
1904. They are organised and managed on the principal of cooperation and mutual help. The main objective of co-operative
bank is to provide rural credit.
The cooperative banks in India play an important role even
today in rural co-operative financing. The enactment of Cooperative Credit Societies Act, 1904, however, gave the real
impetus to the movement. The Cooperative Credit Societies
Act, 1904 was amended in 1912, with a view to broad basing it
to enable organisation of non-credit societies.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
iii. Primary cooperative banks and the base or local level.

 4. Scheduled and Non-Scheduled banks:

A bank is said to be a scheduled bank when it has a paid up
capital and reserves as per the prescription of RBI and
included in the second schedule of RBI Act 1934. Nonscheduled bank are those commercial banks, which are not
included in the second schedule of RBI Act 1934.
5. Development banks and other financial institutions:
A development bank is a financial institution, which provides
a long term funds to the industries for development purpose.
This organisation includes banks like IDBI, ICICI, IFCI etc.
State level institutions like SFCs SIDCs etc. It also includes
investment institutions like UTI, LIC, and GIC etc.

 Savings banks: These banks

function with the intention to
culminate saving habits among
people, especially those who belong
to low income groups or those who
are salaried. The money these people
deposit in the banks are invested in
securities, bonds etc. These days,
many commercial banks perform the
dual functions of savings bank. The

 Investment banks: These are financial institutions that provide financial

and advisory assistance to their customers. Their clients can be individuals,
businesses, or government organizations. They assist their customers to
raise funds when required. These banks act as the underwriters for their
customers when they want to raise capital by issuing securities. In some
cases, they also help their customers to issue securities.
When there is a merger or an acquisition, they provide their customers with
the necessary support like marketing, foreign trading, foreign exchange,
sale of equities, fixed income instruments etc. Apart from raising capital,
these banks render valuable financial advise to their customers and various
kinds of businesses. Some examples of these banks include, Bank of
America, Barclays Capital, Citi Bank, Deutsche Bank etc.
Specialized banks: These provide unique services to their customers.
Some such banks include, foreign exchange banks, development banks,
industrial banks, export import banks etc. These banks also provide huge
financial support to businesses and various kinds projects and traders who
have to import or export their goods or services

Payment banks
The newly licensed payment banks will join Indias vast banking system, which has
several layers of banks, performing different roles and objectives
Payment banks, targetted towards people without access to the formal banking system,
will provide savings, deposit, payment and remittance services. Photo: AFP
On Wednesday, the Reserve Bank of India (RBI) gave in-principle approval to 11 entities
to open a new category of banks, payment banks as part of the governments bid to
increase financial inclusion and help expand banking services. Payment banks, targetted
towards people without access to the formal banking system, will provide savings,
deposit, payment and remittance services. Unlike conventional banks, payment banks
will not be in the business of lending. Essentially, these banks are targeted towards
financially excluded customers like migrant workers, low-income households and small
businesses. The list of 11 entites includes nine organisations, including Aditya Birla Nuvo
Ltd, Airtel M Commerce Services Ltd, Cholamandalam Distributions Ltd, Reliance
Industries Ltd, Tech Mahindra Ltd, Vodafone m-Pesa Ltd, Fino Pay Tech Ltd, Department of
Posts and National Securities Depository Ltd (NSDL). Two individuals, Dilip Shanghavi,
founder of Sun Pharmaceutical Industries Ltd, and Vijay Shekhar Sharma, founder of
One97 Communications Ltd that runs mobile payment company PayTM, were also
included in the list.
Hailed for their disruptive, almost Uber-like effect on the banking industry, the newly
licensed payment banks will join Indias vast banking system, which has several layers of
banks, performing different roles and objectives, once they full criteria laid down by RBI
in 18 months

 In order to expedite financial inclusion, finance minister

Arun Jaitley in his budget speech said RBI will create a
framework for licensing small banks and other
differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are
contemplated to meet credit and remittance needs of
small businesses, unorganized sector, low income
households, farmers and migrant work force.
Within a week of the budget, RBI issued draft guidelines
for setting up small banks and payment banks. RBI in its
guidelines said that both payment banks and small
banks are niche or differentiated banks, with the
common objective of furthering financial inclusion

 Following are some of the conditions which arecommon to boththe

banks as collated by Motilal Oswal.
The minimum capital requirement would be Rs 100 crore
Promoter contribution would be at least 40 per cent for the first five
years. Excess shareholding should be brought down to 40 per cent by
the end of fifth year, to 30 per cent by the end of 10th year and to 26
per cent in 12 years from the date of commencement of business
Foreign shareholding in these banks will be as per current FDI policy
Voting rights to be line with the existing guideline for private banks
Entities other than promoters will not be permitted to have
shareholding in excess of 10 per cent.
The bank should comply with the corporate governance guidelines,
including fit and proper criteria for Directors as issued by RBI
Operations of the bank should be fully networked and technology
driven from the beginning

Small Banks
The purpose of the small banks will be to provide a whole suite of basic
banking products such as deposits and supply of credit, but in a limited area of
operation.
The objective for these Small Banks is to increase financial inclusion by
provision of savings vehicles to under-served and unserved sections of the
population, supply of credit to small farmers, micro and small industries, and
other unorganised sector entities through high technology-low cost operations.
Resident individuals with 10 years of experience in banking and finance,
companies and Societies will be eligible as promoters to set up small banks.
NFBCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can
convert their operations into those of a small bank. Local focus and ability to
serve smaller customers will be a key criterion in licensing such banks.
Branch expansion: For the initial three years, prior approval will be required.
The area of operations would normally be restricted to contiguous districts in a
homogenous cluster of states of union territories so that the Small Bank has a
local feel and culture. However, if necessary, it would be allowed to expand its
area of operations beyond contiguous districts in one or more states with
reasonable geographical proximity.

 The bank shall primarily undertake basic banking activities of accepting deposits
and lending to small farmers, small businesses, micro and small industries, and
unorganised sector entities. It cannot set up subsidiaries to undertake non-banking
financial services activities. After the initial stabilisation period of five years, and
after a review, the RBI may liberalise the scope of activities for Small Banks.
The promoters other financial and non-financial services activities, if any, should
be distinctly ring-fenced and not co-mingled with banking business.
A robust risk management framework is required and the banks would be subject
to all prudential norms and RBI regulations that apply to existing commercial
banks, including maintenance of CRR and SLR.
In view of concentration of area of operations, the Small Bank would need a
diversified portfolio of loans, spread over it area of operations.
The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 15 per cent of capital funds.
Loans and advances of up to Rs 25 lakhs, primarily to micro enterprises, should
constitute at least 50 per cent of the loan portfolio.
For the first three years, 25 per cent of branches should be in unbanked rural
areas

Payment banks
Objective of payments banks is to increase financial inclusion by providing
small savings accounts, payment/remittance services to migrant labour,
low income households, small businesses, other unorganised sector
entities and other users by enabling high volume-low value transactions in
deposits and payments/remittance services in a secured technology-driven
environment.
Those who can promote a payments banks can be a non-bank PPIs,
NBFCs, corporates, mobile telephone companies, super market chains,
real sector cooperatives companies and public sector entities. Even banks
can take equity in Payments Banks.
Payments Banks can accept demand deposits (only current account and
savings accounts). They would initially be restricted to holding a maximum
balance of Rs 100,000 per customer. Based on performance, the RBI could
enhance this limit.
The banks can offer payments and remittance services, issuance of
prepaid payment instruments, internet banking, functioning as business
correspondent for other banks.

 Payments Banks cannot set up subsidiaries to

undertake NBFC business.
As in the case of Small Banks, other financial and
non-financial services activities of the promoters
should be ring-fenced.
The Payments Banks would be required to use
the word Payments in its name to differentiate it
from other banks.
No credit lending is allowed for Payments Banks.
The float funds can be parked only in less than
one year G-Secs

Payment banks