The Theory of Everything: Banking In India
Ancient India
In India, references about banking and regulations were even found in our scriptures and ancient texts. Debt is even mentioned in our Vedic literature. The Vedas (2000-1400 BCE) are earliest Indian texts to mention the concept of usury. The word kusidin is translated as usurer. The Sutras (700-100 BCE) and the Jatakas (600-400 BCE) also mention usury. Also, during this period, texts began to condemn usury. Vasishtha forbade Brahmin and Kshatriya varnas from participating in usury. By the 2nd century CE, usury seems to have become more acceptable. The Manusmriti considers usury an acceptable means of acquiring wealth or leading a livelihood. It also considers money lending above a certain rate, different ceiling rates for different caste, a grave sin.Banking products are also found quoted in Chanakya's Arthashastra (300 B.C.).Moving to Modern day banking system, the concept of banking is laid by the people of Italy under the name Banco.
The Jatakas also mention the existence of loan deeds. These were called rnapatra or rnapanna. Loans deeds were also called rnalekhaya.
Later during the Mauryan period (321-185 BCE), an instrument called adesha 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 gave letters of credit to one another.
Medieval era
The use of loan deeds continued into the Mughal era and were called dastawez. Two types of loans deeds have been recorded. The dastawez-e-indultalab was payable on demand and dastawez-e-miadiwas payable after a stipulated time. The use of payment orders by royal treasuries,called barattes, have been also recorded. There are also records of Indian bankers using issuing bills of exchange on foreign countries. The evolution of hundis, a type of credit instrument, also occurred during this period and remain in use.
Pre-Independence i.e. before 1947
- This phase is characterized by the presence of a large number of banks (more than 600).
Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832. After that many banks came but some were not successful like -
- General Bank of India (1786-1791)
- Oudh Commercial Bank (1881-1958) - the first commercial bank of India.
Whereas some are successful and continue to lead even now like -
- Allahabad Bank (est. 1865)
- Punjab National Bank (est. 1894, with HQ in Lahore (that time))
- Bank of India (est. 1906)
- Bank of Baroda (est. 1908)
- Central Bank of India (est. 1911)
While some others like Bank of Bengal(est. 1806), Bank of Bombay (est. 1840),Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India.
Imperial Bank of India was later renamed in 1955 as the State Bank of India.
In April 1935, Reserve Bank of India was formed based on the recommendation ofHilton Young Commission (setup in 1926).
In this time period, most of the bank were small in size and suffered from high rate of failures. As a result public confidence is low in these banks and deposit mobilization was also very slow. People continued to rely on unorganized sector (moneylenders and indigenous bankers).
Post-Independence from 1947 to 1991
Broadly the main characteristic feature of this phase is the nationalization of bank.With the view of economic planning, nationalization emerged as the effective measure.
Need for nationalization in India:
a) The banks mostly catered to the needs of large industries, big business houses.
b) Sectors such as agriculture, small scale industries and exports were lagging behind.
c) The poor masses continued to be exploited by the moneylenders.
Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.
14 commercial banks were nationalized in 19th July, 1969. Smt. Indira Gandhi was the Prime Minister of India, during in 1969. These were -
1. Central Bank of India
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara Bank
7. Dena Bank
8. United Bank
9. Syndicate Bank
10. Allahabad Bank
11. Indian Bank
12. Union Bank of India
13. Bank of Maharashtra
14. Indian Overseas Bank
6 more commercial banks were nationalized in April 1980.
These were:
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6.Vijaya Bank.
Meanwhile on the recommendation of M.Narsimhan committee, RRBs (Regional Rural Banks) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve large unserved population of rural areas and promoting financial inclusion.
With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also setup like
- NABARD (est. 1982)
- EXIM (est. 1982)
- NHB (est. 1988)
- SIDBI (est. 1990)
Impact of Nationalisation:
a) Improved efficiency in the Banking system – since the public 's confidence got boosted.
b) sectors such as Agriculture, small and medium industries started getting funds – led to economic growth.
c) increased penetration of Bank branches in the rural areas.
After 1991 and beyond
- This period saw a remarkable growth in the process of development of banks with the liberalization of economic policies. Even after nationalization and the subsequent regulations that followed, a large portion of masses are untouched by the banking services.
- Considering this, in 1991, the Narsimhan committee gave its recommendation i.e. to allow the entry of private sector players into the banking system. Following this RBI gave license to 10 private entities, of which 6 are survived, which are- ICICI, HDFC, Axis Bank, IDBI, Indus, DCB.
Note: IDBI at present is a government Bank
- In 1998, the Narsimhan committee again recommended entry of more private players. As a result RBI gave license to
- Kotak Mahindra Bank (1985)
- Yes Bank (2004)
- In 2013-14, 3rd round of bank licensing took place. And in 2014IDFC bank and Bandhan Bank emerged.
- In order to further financial inclusion, RBI also proposed to set up 2 kind of banks i.e. Payment Banks and Small Banks.
Some Important Facts -
1. Allahabad Bank, established in 1865 -Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years.
2. Imperial Bank of India was later renamed in 1955 as the State Bank of India.
3. 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.
4. Punjab National Bank is the first bank purely managed by Indians, which was established in Lahore in 1895.
5. First Truly Swadeshi bank - Central Bank of India is called India's First Truly Swadeshi bank, which was established in 1911 and wholly owned and managed by Indians.
6. Union Bank of India was inaugurated by Mahatma Gandhi in 1919.
7. Osborne Smith was the first governor of the Reserve Bank.
8. CD Desmukh was the first Indian to be the governor of Reserve Bank.
9. Savings account system in India was started by Presidency Bank, 1833.
10. The first Indian bank to open overseas branch is Bank of India. It established a branch in London in 1946.
11. ICICI Bank was the first Indian bank to provide internet banking facility.
12. Central Bank of India was the first public bank to introduce Credit card.
13. ICICI is the first bank to provide mobile ATM.
14. Bank of Baroda has the maximum number of overseas branches.
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