Bank Exams 2019: History of Banking System of India

History of Banking System of India


Most of the competitive exams comprise of General awareness questions. If you are preparing for the Bank Exams, then you definitely, need to check the history of Banking in India.

What is a Bank?

Banking is an industry that handles cash, credit, and other financial transactions. It is used to save cash and get credits keeping the safety concerns in mind.

According to the Banking Regulation Act 1949, Banking Company means a company which transacts the business of banking in India. Accepting the deposits of money from the public which are repayable on demand for the purpose of lending or investment of the money acquired from the public in the form of deposits’.

Functions of Bank

  1. It provides liquidity for Economic growth
  2. Acts as a pillar of the financial system
  3. It offers safety to the money deposited by the depositor.
  4. It provides credits or loans to the dealers, households and businesses.
  5. It provides the government to reach the masses in terms of financial matters.
  6. It is the operator of the payment system

The system of Banking in India can be categorized as

  1. Pre – Independence Phase (1786 – 1947)
  2. Post – Independence Phase (1947 to till date)

The Pre – Independence Phase

  1. This system commenced by the foundation of Bank of Hindustan in Calcutta in 1770. After this, many banks including General Bank of India and Oudh Commercial Bank came till 1881. Oudh Commercial was the first commercial bank of India. 
  2. From 1865 to 1991, the following banks were introduced –
  3. Allahabad Bank ( 1885)
  4. Punjab National bank (1894, HQ in Lahore)
  5. Bank of India (1906)
  6. Bank of Baroda (1908)
  7. Central Bank of India (1911)
  8. Banks like Bank of Bombay, Bank of Bengal and Bank of Madras merged into a single entity – Imperial Bank of India, 1922.
  9. The Imperial Bank of India later came to be known as State bank of India in 1955.
  10. In 1926, Hilton Young Commission recommended the formation of Reserve Bank of India, which got established in 1935.
  11. During this period, more than 600 small scale banks were established but suffered a high rate of failures. These banks weren’t successful enough and lacked public trust. 

The Post Independence Phase

This can be divided into three periods

  1. Pre-nationalization Period (1947 to 1969)
  2. Post nationalization Period (1969 to 1991)
  3. Liberalization Period (1991 to till date)

The Pre and Post – Nationalization Period of (1997 – 1969)

The pre and the Post nationalization phase of Banking in India emerged with the need of Nationalization of Banks with the view of economic planning. Key features of this period-

  • The bank caters the needs of large industries and big business houses.
  • Sectors like agriculture, small scale industries, and exports were growing slowly and the poor masses were tortured by the money lenders
  • In the year 1949, 1st January the reserve bank of India was nationalized.
  • The Banking Companies Act (1949) came into Indian legislation that regulates all banking firms in India. It was passed as the Banking Companies Act 1949 and it came into force from 16 March 1949. It was changed to the Banking Regulation Act 1949 from 1 March 1966. J&K was included under this law in 1955.
  • Further, fourteen commercial banks were nationalized on 19th July 1969
  • Smt. Indira Gandhi was the prime minister of India, during in 1969

The Liberalization period

 In this period, with the first economic reforms in India in 1991, the banking system undergoes liberalization. There is remarkable growth in the procedure of development of banks with the liberalization of economic policies. The key points of this system are as follows –

  • It focuses on making bank competitive and strong and conducive to the stability of the financial system.
  • It allowed foreign banks to open an office in India.
  • To allow competition among the banks, liberalization ensured the private and public bank, equal treatment.
  • It asks the banks to adopt progressive function such as merchant banking, and underwriting, retail banking etc.

Progression of Liberalization period

  • Kotak Mahindra bank and the yes bank entered the system after getting approved by RBI in the year 2003 and 2004.
  • In 2014, RBI granted in-principle approval to IDFC and Bandhan financial services to set up banks.

The banking system of India is one of the progressing systems in the world. The banks have now become digital. Cashless transactions are the preferred mode of transactions. The new system includes the Banks like Paytm which was established in 2010. It has revolutionized the banking system of India and made it completely digital.

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