Thursday, 27 August 2015

History of banking in india

banking history indian

Here we are sharing some important point of "History of banking in India".Information presented here is taken from the official site of the Reserve Bank of India.Hope this will help you in coming bank tests.


  • The pre-independence period was largely characterised by the existence of private banks organised as joint stock companies. Most banks were small and had private shareholding of the closely held variety.
  • Joint stock banking was brought to India by the English Agency houses of Calcutta and Bombay . The first bank of a joint stock variety was Bank of Bombay, established in 1720 in Bombay . This was followed by Bank of Hindustan in Calcutta, which was established in 1770 by an agency house. This bank was closed down in 1832.
  • The General Bank of Bengal and Bihar came into existence in 1773.This one also failed.
  • The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh.The bank was given powers to issue notes in 1823.The Bank of Bombay was the second Presidency bank set up in 1840 and followed by Bank of Madras in 1843. The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861.
  • The first Indian owned bank was the Allahabad Bank set up in Allahabad in 1865, the second, Punjab National Bank was set up in 1895 in Lahore, and the third, Bank of India was set up in 1906 in Mumbai.All these banks were founded under private ownership.
  • 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.
  • The first registered urban co-operative credit society was the Conjeevaram Urban Co-operative Bank, organised in Conjeevaram, in the then Madras Presidency
  • The presidency banks were amalgamated into a single bank, the Imperial Bank of India, in 1921. The Imperial Bank of India was further reconstituted with the merger of a number of banks belonging to old princely states such as Jaipur, Mysore, Patiala and Jodhpur. The Imperial Bank of India also functioned as a central bank prior to the establishment of the Reserve Bank in 1935. Thus, during this phase, the Imperial Bank of India performed three set of functions, viz., commercial banking, central banking and the banker to the government.


  • The Reserve Bank of India Act 1934 was enacted paving the way for the setting up of the Reserve Bank of India.
  • The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b)
  • First governer of RBI-Mrs.Osborne Smith
  • First Indian governer of RBI-C.D Deshmukh


  • Many banks failed during this period.
  • In 1949, the Banking Regulation Act(formerly Banking Companies Act) was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India".
  • The Banking Companies Act of 1949 conferred on the Reserve Bank the extensive powers for banking supervision as the central banking authority of the country
  • Between 1954 and 1966, several banks were either amalgamated or they otherwise ceased to function or their liabilities and assets transferred to other banks.
  • The bank failures and the hardship caused to the depositors led the Reserve Bank to provide safety nets to depositors. The Banking Companies (Second Amendment) Act, 1960, which came into force in September 19, 1960 sought to facilitate expeditious payments to the depositors of banks in liquidation and also vested the Government and the Reserve Bank with additional powers to rehabilitate banks in difficulties.
  • In order to ensure the safety of deposits of small depositors in banks in India, the Deposit Insurance Corporation Act, 1961 was enacted. Accordingly, Deposit Insurance Corporation of India was established in January 1962. India was then one of the few countries to introduce such a deposit insurance; the US was the first country to introduce the deposit insurance.
  • In order to understand the grass root level situation to be able to address the concerns regarding the financing of the rural sector, the Reserve Bank commissioned the All India Rural Credit Survey Committee (AIRCS) in 1951. The AIRCS survey results were submitted in August 1954 and published in December the same year. The survey had very clear suggestions regarding the Reserve Bank’s development role. It noted that the Imperial Bank of India’s vigorous involvement in promoting the institutionalisation of credit to agriculture could be crucial and recommended the statutory amalgamation of the Imperial Bank of India and major state associated banks to form the State Bank of India (SBI).
  • The Imperial Bank of India was converted into the State Bank of India in 1955 with the enactment of the State Bank of India Act, 1955. The SBI was envisaged to act as the principal agent of the Reserve Bank to handle banking transactions of the Union and the State Governments throughout the country. Eight banks that then formed subsidiaries of SBI were nationalised in 1960.
  • The concept of social control over banking was introduced in December 1967 through the Banking Laws (Amendment) Act 1968, which came into force on February 1, 1969.The main objectives of social control was to achieve a wider spread of bank credit, prevent its misuse, direct a larger volume of credit flow to priority sectors and make it more effective instrument of economic development.


  • Government nationalised 14 banks with deposits of over Rs.50 crore by promulgating the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. These banks were the Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India. The objective was to serve better the needs of development of the economy in conformity with national policy objectives.( Indira Gandhi was the Prime Minister of India then).
  • The Indian banking system underwent major structural transformation after the nationalisation in 1969. To address the issue of urban orientation, specific emphasis was laid on making banking facilities available in the then unbanked areas.
  • Lead Bank Scheme (LBS)1969. The LBS, launched by the Reserve Bank with a view to mobilising deposits on a massive scale throughout the country and also for stepping up lending to weaker sections of the economy, became the principal instrument for branch expansion. The ‘lead bank’ designated for the district was responsible for taking lead role in surveying the credit needs of the population, development of banking and of credit facilities in the district allotted to it.


  • The Differential Rate of Interest (DRI) Scheme was instituted in 1972 to cater to the needs of the weaker sections of the society and for their upliftment. The scheme targeted low income people in rural areas and gave them credit at concessional rate. 
  • Idea of starting rural banks was first suggested by the Banking Commission (1972), action along these lines was initiated after the ‘Twenty Point Programme’ or ‘New Economic Programme’ of the Government of India launched in the mid-1970s.
  • The Regional Rural Banks Ordinance was promulgated on September 26, 1975, which was subsequently replaced by the Regional Rural Banks Act on February 9, 1976.
  • Prathama Grameen Bank -first RRB
  • The RRBs were owned by three entities with their respective shares as follows: Central Government → 50% State government → 15% Sponsor bank → 35%


  • Some private banks were observed to suffer from some governance problems. Further, there was a need to address the need of credit delivery in greater measure. Accordingly, six banks, viz, Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank, and Vijaya Bank with deposit liabilities of Rs.200 crore and above, were nationalised in April 1980. With the nationalisation of these six banks by the Government, the number of public sector banks, including the State Bank of India and its associate banks rose to 28 in April 1980, constituting 91 per cent deposits of the banking sector.


  • The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD), set up by the Reserve Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman, conceived and recommended the establishment of the National Bank for Agriculture and Rural Development (NABARD). It was established on 12 July 1982 by a special act by the parliament and its main focus was to uplift rural India by increasing the credit flow for elevation of agriculture & rural non farm sector


  • In many ways the first wave of financial liberalisation also took place in the second half of the 1980s. As part of this process, the Reserve Bank took a number of initiatives towards liberalisation. With a view to providing some relief to borrowers with a good credit record and at the same time to provide flexibility to banks in the matter of interest rates charged to their borrowers, the ceiling on all lending interest rate was removed, subject to a minimum rate.Deregulation of Interest Rates was one of the major reform implemented during 1990s.
  • Reserve Bank allowed entry of new banks in the private sector. In January 1993, norms for the entry of new private sector banks were announced. Second, in the context of the steps towards deregulation and the changed banking scenario in the country, it was decided in May 1992 to give greater freedom to banks in the matter of opening of branches.
  • Following liberalisation of entry of new private sector banks, 10 new banks were set up in the private sector by 1998. Besides, 22 foreign banks were also set up.
  • Board for Financial Supervision (BFS) was set up within the Reserve Bank to attend exclusively to supervisory functions and provide effective oversight in an integrated manner over the banking system, financial institutions and non-banking financial companies. The scope of supervisory oversight by the BFS was initially restricted to banks, financial institutions and non-banking financial companies. Subsequently, its scope was enlarged to include UCBs, RRBs and primary dealers. The BFS initiated several measures to strengthen the supervisory systems. In order to have in place ‘an early warning system’ to take prompt corrective action, a computerised Off-site Monitoring and Surveillance (OSMOS) system for banks was instituted in November 1995.
  • In 1997 the focus shifted to the evaluation of total operations and performance of the banks under the CAMELS system (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity System and Controls) for domestic commercial banks and CALCS (Capital Adequacy, Asset Quality, Liquidity Compliance and Systems) for foreign banks.
  • Another significant institutional development was in the field of customer service. The Reserve Bank, as the regulator of the banking sector, was actively engaged, from the very beginning, in the review, examination and evaluation of customer service in the banks.
  • for expeditious and inexpensive resolution of customer complaints against deficiency in banking services, the Reserve Bank announced in June 1995, the Banking Ombudsman Scheme, 1995 under the provisions of the Banking Regulation Act, 1949. The Scheme covered all scheduled commercial banks having business in India, except RRBs and scheduled primary co-operative banks.The Banking Ombudsman Scheme was revised during the years 2002 and 2006. The Banking Ombudsman Scheme (BOS) 2006 covers all Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks under its scope
  • Many banks, both in the public and private sectors, were not able to meet the priority sector targets. Therefore, those public and private sector banks which had shortfalls in lending to the priority sector or to agriculture were required to contribute specified allocations to the Rural Infrastructure Development Fund (RIDF). The first RIDF was established with NABARD in 1995-96 to provide loans to the State Governments for financing rural infrastructure projects.
  • The framework for further strengthening the banking sector was provided by the Committee on Banking Sector Reforms - CBSR (Chairman: Shri M. Narasimham), which submitted its report in April 1998.
  • Banks were subjected to asset liability management (ALM) framework to avoid asset-liability mismatch problems.
  • To address NPAs(non performing asset) Union Budget 2000-01 announced the establishment of a Credit Information Bureau (India) Ltd. (CIBIL).

You can read original article on RBI site from here.

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