Evolution of Banking System in India

Evolution of Banking System in India

During ancient time there was Barter System which prevailed in society. As there was no concept of money or due to the lack of a common unit of currency goods and services were exchanged against the goods and services.  The barter system has the concept of ‘exchange of goods with the goods ‘. People exchange their goods or services with others for the wants of their goods.

The system was the failure due to the several reasons like:

Mismatch of the wants of the people

e.g.: A being the soap seller wants to exchange the soaps for wheat on the other side B being the apple seller wants to sells his apples for the soap but here both the sellers has to wait for the match of their wants

Difficulty in Pricing

It creates a difficulty in balancing in the value of the goods being exchanged. 

Saving for the future

Barter system one of the biggest drawbacks is saving the wealth for the future generation.

Ancient Indians were the earliest issuers of coins in the world, along with Chinese and Lydian. The first Indian coins punch-marked coins called Puranas, Karshapans or Pana – were minted in the 6th century BC by the Mahajanapadas of ancient India. The coins were of silver and of irregular shape.

Later, many coins were introduced by the Kings and Rajas as per being ruled with their varieties of inscriptions in Sanskrit or Urdu.  The advent of British East India Company in 1600 then introduced the new currency named ‘rupaiya’ which grew in popularity to other British colonies too.

During the 18th century for the first time ‘Paper Money’ was introduced in the British India. After 1857 revolt, Rupee made official currency of colonies of India, with the head of King George VI. Later in 1987, the Indian currency was introduced with the portrait of Mahatma Gandhi and Ashok Pillar watermark.

Bank and Banking System

What is a Bank?

Bank is the financial organization, which accepts money which can be withdrawn on demand and lends money on request to the individual

Banking system is the base of the economy of any country. Bank of Hindustan in 1770, by the East India Company at Calcutta under the European Management was the first bank to be established or from where the origin of the banking system can be traced. The evolution of the banking system in India has undergone three phases.

1)   Phase I ( 1786- 1969)

2)   Phase II (1969- 1991)

3)   Phase III ( 1991- till today )

Phase I ( 1786- 1969 )

During the period 1786-1986 witnessed the major developments in the modern banking system in India.  The banking system started with the foundation of Bank of Hindustan in 1770 which ceased to exist in 1830. The East India Company established the three presidency banks: Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843) which in 1921 united into one Imperial Bank of India and later merged under the same name ‘State Bank of India’ also known as SBI. That’ why SBI is the known to be one of the oldest banks of the India

Along with these many more banks came into being after 1857 revolt like Allahabad bank ( 1865) Punjab National Bank from 1894 with the headquarter at Lahore (currently in Pakistan). From 1885 to 1913 many banks came into existence and liquidated due to the absence of a regulatory body.

Then, the Reserve bank of India was established on April 1 1935 in accordance with the provisions of the Reserve Bank of India, 1934. The aim of the RBI is to operate the currency and credit system in India. Though originally RBI was privately owned but afterward nationalized on 1st January 1949, making it an autonomous body. All the shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation. Reserve Bank of India is directly under the Ministry Of Finance and RBI always had to consult the government before taking policy decisions.

Later, in 1949 Banking Companies Act was passed which was later renamed to Banking Regulation Act 1949 as the provision of the Indian Companies Act 1913 was found inadequate and unsatisfactory to regulate the banking business in India. This Act conferred a wide range of supervisory and regulatory powers to the RBI over the other banks. The Act made RBI statutory and regulatory authority of the Indian banking system.

After Independence phase II (1969- 1991)

Government of India took major steps to build a strong banking system in India. The structure of the Indian banking system is divided into commercial banks and cooperative banks. Commercial banks mean the banks that offer services to the general public. It further includes Public Sector Banks like SBI, BOI etc; private banks like ICICI, Kodak, etc; foreign banks like City bank , HSBC etc and regional rural banks. On the other side corporate banks are the banks that are established under the Cooperative Societies Act whose main aim is not to earn profits (no profit no loss) thorough banking business. It can be urban cooperative and the state cooperative.

The Nationalization of the banks changed the history of the banking system in India. In 1969 then Prime Minister Indira Gandhi nationalized the 14 largest commercial banks. Nationalization is the process of transforming the private stake into the public basically increasing the share of government in the banking sector. The purpose behind such a step was to break the ownership control of the bank by few families and concentration of wealth and economic power in a few hands.

During 1955 the central government entered the banking business with nationalization of the Imperial bank of RBI took a 60% stake and formed a new bank SBI. The nationalization of banks enlarged the sphere of public sector banking which prior to 1969 was confined to only the state bank of India.

The process of nationalization in the long run led to economic stability and also strengthened the economy of India. But, it was highly criticized as it was the time when Indian was at war with China and Pakistan which led to political anger. Many pointed out bank nationalization being the political strategy to pull down the business houses who backed her opponents.

The third phase (1969- 1991)

The third Phase also includes the present phase. The government of India took the banking sector to the other level which has given away to the foreign investment and modernized way to handle the transition. The introduction of ATM, internet banking, E-banking, mobile banking gave a new life to the banking system which we all are experiencing. The government opened up the economy for the foreign investors and private to freely invest in India. It has also brought many policies to help small entrepreneurs and businessmen.

NABARD was established in 1982 to give credit to the farmers to support agricultural work. Small Industry Development Bank of India (SIDBI). Exchange Bank was established to help internal trade sale and purchase of foreign exchange.

“The views of the authors are personal

Frequently Asked Questions:

What is the barter system?

The exchange of goods for the goods is known as the barter system. It had prevailed during the ancient time when there was no common unit which cannot be used in return for the exchange of goods and services.

Write about the nationalization of the bank?

Nationalization is the process by which gives the government more control than to the private individual. During the year 1966 when Indian was governed under the Congress government 14 banks were nationalized.

Which bank is called India’s truly swadeshi bank?

The first Indian Commercial bank which was wholly owned and managed by Indian was the Central Bank of India. It was also called India’s truly Swadeshi Bank.

Write about the oldest bank of India?

The State Bank of India is India’s oldest bank. It is the merger of Bank of Calcutta, Bank of Bombay and Bank of Madras which was established under the East India Company. This bank was also called the Imperial Bank.

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Aditi Anand
I am Aditi Anand pursuing my BLS LLb from KES Jayantilal H Patel Law College , Mumbai University . Currently I am in my Vlllth Semester. I have chosen law as my career as this field have a dynamic characteristics which fills me with an enthusiasm and attracts me the most. The sections of law like Constitutional Law, Criminal Law, Civil ( property and contract) are preferred the most. Infact, these days I am heading my interest towards the taxation Laws. During my law school I have been a part of many debate, Moot and writing competition where I have achieved my best results. I always love to keep myself updated with the current socio- eco and political situation Beside this I am good debater and leader with good supervising and managing skills . During my leisure time I like to read, chit chat , watch movies /series , baking and to teach.