History of Banking in India

Before we start we need to understand where the term “Banking” emerged. The term Banking emerged from an Italian word “ Bancho ” which mean is “bench”. In early days people used to do transactions sitting on a bench since then this banking term came into the picture.

Italy is known for the origin of the World Banking System. The first-ever bank was also established in Italy in 1157 which name was Bank of Venice.

The second bank was Bank of Barcelona established in 1401,

The third bank was Bank of Geneva in 1407 and

The fourth bank was Bank of England established in 1694

So we knew some clues of the history of world banking. Now we must know what is the meaning of banking or general definition of banks.

✍️ Definition of Banking:-

We won’t make the definition of banking complicated so in simple words “ Banks are the financial institutions which accepts deposits of funds from public and provide withdrawal whenever demanded by depositors. Banks also provide some other facilities like advance, credit, different types of loans to their customers ”

✍️ Beginning of Banking in India

🔸 The phase leading up to independence laid the foundations of the Indian banking system. The beginning of commercial banking of the joint stock variety that prevailed elsewhere in the world could be traced back to the early 18th century.

🔸 The story of banking in India starts from Bank of Hindustan established in 1770 and it was first bank at Calcutta under European management. It was liquidated in 1832.

🔸 The General Bank of Bengal and Bihar, which came into existence in 1773, after a proposal by Governor (later Governor General) Warren Hastings, proved to be a short lived experiment.

🔸 In 1786 General Bank of India was set up. Trade was concentrated in Calcutta after the growth of East India Company’s trading and administration.

🔸 With this grew the requirement for modern banking services, uniform currency to finance foreign trade and remittances by British army personnel and civil servants.

🔸 The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh.

🔸 The Government subscribed to 20 per cent of its share capital and shared the privilege of appointing directors with voting rights. The bank had the task of discounting the Treasury Bills to provide accommodation to the Government. The bank was given powers to issue notes in 1823.

🔸 The Bank of Bombay was the second Presidency bank set up in 1840 with a capital of Rs.52 lakh, and the Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh.

🔸 They were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters.

🔸 The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.

🔸 Next came Allahabad Bank which was established in 1865 and working even today. The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 150 years is Allahabad Bank. Allahabad bank is also known as one of India’s Oldest Joint Stock Bank.

🔸 However, the Oldest Joint Stock bank of India was Bank of Upper India established in 1863 and failed in 1913.

🔸 The first Bank of India with Limited Liability to be managed by Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad. This bank failed in 1958.

🔸 The first bank purely managed by Indians was Punjab National Bank, established in Lahore in 1895. The Punjab national Bank has not only survived till date but also is one of the largest banks in India.The Bank of India was set up in 1906 in Mumbai.

🔸 The Swadeshi Movement of 1906 provided a great impetus to joint stock banks of Indian ownership and many more Indian commercial banks such as 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.

🔸 In 1921,the three Presidency Banks i.e., Bank of Bengal,Bank of Bombay and Bank of Madras were merged with each other and Imperial Bank of India got birth. Imperial Bank of India was later renamed in 1955 as the State Bank of India.

✍️ Emergence of Reserve Bank Of India

As so many banks existed that time so the need of one monitoring authority for the Banks arises i.e. central Bank of the country. So there came the establishment of Reserve Bank of India which is currently central bank of our country.

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.

The Reserve Bank was constituted to

➖Regulate the issue of banknotes

➖Maintain reserves with a view to securing monetary stability and

➖To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.

The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947.

After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder’s bank, was nationalised in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture.

The Reserve Bank was also instrumental in institutional development and helped set up institutions like :

➖Deposit Insurance and Credit Guarantee Corporation of India(DICGC)

➖Unit Trust of India (UTI)

➖National Bank of Agriculture and Rural Development (NABARD)

➖Discount and Finance House of India etc. to build the financial infrastructure of the country.

With liberalisation, the Bank’s focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.