History of Indian Banking System

The first bank in India, called The General Bank of India, was established in the year 1786. Then the East India Company established the Bank of Bangol (1809) , Bank of Bambay (1640) and Bank of Madras (1843). These three banks were called Presidency Banks. The next bank was Bank of Hindustan which was established in 1870. The Allahabad Bank which was established in 1865 was the first bank run by Indians. Then in 1894, Punjab National Bank Ltd. was set up between 1906 to 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were setup. In 1921 all presidency banks were combined to form Imperial Bank of India which was run by European shareholders. After that Reserve Bank of India was established in April 1935.

1786 : General Bank of India

1809 : Bank of Bengal [Presidency Bank]

1840 : Bank of Bombay [Presidency Bank]

1843 : Bank of Madras [Presidency Bank]

1865 : Allahabad Bank [First Bank run by Indian]

1870 : Bank of Hindustan

1894 : Punjab National Bank Ltd.

1906 to 1913 : Bank of India, Central Bank of India, bank of Barodra, Canara Bank, Indian Bank, Bank of Mysore

1921 : Imperial Bank of India [Combining all Presidency Banks run by European shareholders]

1935 : Reserve Bank of India

1949 :  Enchantment of Banking Regulation Act and nationalisation of RBI

1955 : Nationalisation of Imperial Bank of India and renamed as State Bank of India

1959 : Nationalisation of SBI subsidiaries

1969 : Nationalisation of 14 major Commercial Banks 

1975 : Creation of Regional Banks

1980 : Nationalisation of 7 Banks with deposits over 200 Cr.

1995 : IDBI was converted into a complete bank

2013 : Bhartiya Mahila Bank Ltd was established

At present there are 27 Nationalised Banks in India including SBI and its associates.

Banking Sector Reforms

The banking sector handling 80% of the flow of money in the economy needed serious reforms to make it internationally reputable. And for this two expert committees were set up in 1990’s under the chairmanship of M. Narshimham (Ex- RBI Governer). These committee submitted their recommendations in 1991 (Narsimham Committee I) and 1998 (Narsimham Committee II). These reports were landmark documents and have influenced greatly the banking sector reforms during the past few years.

The recommendation of Narsimham Committee I (1991) was as follows :

  1. The RBI was advised not to use CRR as the principal instrument of monetary and credit control, in place it, Open Market Operation should be used as principal instrument.
  2. The committee recommended the reduction of the higher proportion of Statutory Liquidity Ratio and Cash Reserve Ratio. Both of these ratios were very high at that time.
  3. The committee recommended that directed credit programmes should phased out gradually since these programmes were reducing the profitability of banks.
  4. The interest rate should be on the grounds of market forces such as demand for and supply of funds.
  5. Elimination of government controls on interest rate phasing out of concessional interest rate for priority sector.
  6. The actual numbers of public sector banks need to be reduced.
  7. Local banks should be concentrated on region specific banking and Regional Rural Banks should focus on agriculture and rural financing.
  8. Those days banks were under the dual control of Reserve Bank of India and Banking Division of Ministry of Finance Government of India. The committee recommended that RBI should be made the primary agency for the regulations of banking system.
  9. The committee recommended the establishment of Asset Reconstruction Fund (ARF). This fund will take over the proportion of bad and doubtful debts form the banks and financial institutes. It would help banks to get rid of debts.

The recommendations of Second Narsimham Committee 1998 was as follows :

  1. For successful establishment of banks which were facing the problem of Non performing assets committee recommended “Narrow Banking Concept” where weak banks will be allowed to place their funds only in short term and risk free assets.
  2. In order to improve the internet strength of the Indian Banking System the committee recommended that the Government should raise the prescribed capital adequacy. This will further improve their absorption capacity also.
  3. As it had earlier mentioned that freedom for banks in its working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards & enabled them to adopt professional corporate strategy. 
  4. The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act etc. This up-gradation will bring them in line with the present needs of banking sector in India.
  5. Apart from these major recommendations the committee has also recommended faster computerisation, technology up-gradation, training of banks, professionalism in banking, reviewing bank recruitment etc.

Financial Inclusion

Financial inclusion is the delivery of banking services at an affordable cost to vast section of people. Financial inclusion and financial literacy is twin pillar, where financial inclusion acts on the supply side i.e., for creating access and financial literacy acts from the demand side.

In India, the concept of financial inclusion was first incorporated in 2005 when it was introduced by K.C.Chakraborthy, the chairman of Indian Bank. Mangalam village in India where all households were provided banking facilities.

In January 2006, the RBI allowed commercial banks to make use of services of Non-Governmental organisations (NGO’s), Self- Help Groups, micro-finance institutions, and other civil society organisations as intermediaries for providing financial and banking services.

 

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