the early phase of banking in india

YOGESH NAMDEO INGLE.MBA (FINANCE), NET (MANAGEMENT), Ph.D (WIP), G.D.C &A, NCMP.

1

It evolved with the money lenders accepting deposits and issuing receipts.

According to the Central Banking Enquiry Committee (1931), money lending activity in India could be traced back to the Vedic period, i.e., 2000 to 1400 BC. The existence of professional banking in India could be traced to the 500 BC. Kautilya’s Arthashastra, dating back to 400 BC

Evolution of Central Banking in India

Evolution of banking in India


2

The western variety of joint stock banking was brought to India by the English Agency houses.

1. Bank of Bombay, established in 1720 in Bombay.2. Bank of Hindustan in Calcutta in in 1770.3. The General Bank of Bengal and Bihar in 1773.

The English Agency house and the bank was closed down in 1832.



3

To fulfill the requirement of modern banking services, uniform currency to finance foreign trade and remittances by British army personnel and civil servants

The Presidency banks were governed by Royal Charters.

1. Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh.

2. The Bank of Bombay was the second Presidency bank set up in 1840 with a capital of Rs.52lakh.

3. The Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh.

Presidency banks



4

The first Indian owned bank was the Allahabad Bank set up in Allahabad in 1865.

The second, Punjab National Bank was set up in 1895 in Lahore.

The third, Bank of India was set up in 1906 in Mumbai.

Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were established between 1906 and 1913.

By the end of December 1913, the total number of reporting commercial banks in the country reached 56 comprising 3 Presidency banks.



5

18 Class ‘A’ banks (with capital of greater than Rs.5 lakh)

23 Class ‘B’ banks (with capital of Rs.1 lakh to 5 lakh)

12 exchange banks. Exchange banks were foreign owned banks that engaged mainly in foreign exchange business in terms of foreign bills of exchange and foreign remittances for travel and trade.

Class A and B were joint stock banks.



6

The presidency banks were amalgamated into a single bank, the Imperial Bank of India, in 1921.

The Imperial Bank of India also functioned as a central bank prior to the establishment of the Reserve Bank in 1935.

In 1930, the banking system, in all, comprised 1258 banking institutions registered under the Indian Companies Act, 1913.

Of the 1258 entities registered as banks in 1930, while some were banks in genuine terms, others were indigenous banks, nidhis and loan companies.



7

The Swadeshi Movement also provided impetus to the co-operative credit movement and led to the establishment of a number of agricultural credit societies and a few urban co-operatives.

The late Shri Vithal L Kavthekar pioneered the urban co-operative credit movement in the year 1889 in the then princely State of Baroda.

The first registered urban co-operative credit society was the Conjeevaram Urban Co-operative Bank, organized in Conjeevaram, in the then Madras Presidency.

Agricultural credit societies & urban co-operatives



8

The world economy was gripped by the Great Depression during the period from 1928 to 1934. This also had an impact on the Indian banking industry with the number of banks failing rising sharply due to their loans going bad. The capital of banks that failed, on an average, was lower than the average size of the capital of reporting banks in categories A and B, indicating that the banks that failed were small.

The issue of bank failures and the need for catering to the requirements of agriculture were the two prime reasons for the establishment of the Reserve Bank.



9

The Reserve Bank of India Act, 1934 gave the Reserve Bank powers to regulate issue of bank notes, the custody of the commercial banks’ cash reserves and the discretion of granting them accommodation.

In 1935, banks were required to maintain cash reserves of 5 per cent of their demand liabilities and 2 per cent of their time liabilities on a daily basis. The task of managing the currency that was assigned to the Controller of Currency came to the Reserve Bank in March 1935 under Section 3 of the RBI Act, 1934.



10

When the country attained independence, Indian banking was entirely in the private sector.

Commercial banks had a regional focus, as alluded to earlier. West Bengal had the largest number of scheduled commercial banks, followed by Madras and Bombay. As regards the non-scheduled banks, Madras had the largest number, followed by a distant second and third by West Bengal and Bombay, respectively



11

The year 1948 was one of the worst years for the relatively larger banks as 45 institutions (out of more than 637 banks) with paid-up capital averaging about Rs.4 lakh were closed down.

They failed as they had over-reached themselves by opening more branches than they could sustain on the strength of their resources and by making large loans against property or inadequate security. Some of these, however, had prudential issues as they were functioning with very low capital base.



12

Between the period from 1960 to 1966, as many as 217 banks were amalgamated under different provisions such as under Section 45 of the BR Act 1949 (compulsory amalgamation) and Section 44 A of BR Act 1949 (voluntary amalgamation).

The Government nationalized 14 banks with deposits of over Rs.50 crore by promulgating the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969.

Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank, and Vijaya Bank with deposit liabilities of Rs.200 crore and above, were nationalized in April 1980.



13

In January 1993, norms for the entry of new private sector banks were announced.



14

Evolution of Central Banking in India

Rakesh Mohan-Evolution of Central Bankin

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15Evolution of banking in India

the early phase of banking in india

Economy & Finance

central bank of india

bank of bombay

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bank of baroda

allahabad bank

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