History of Banking: How Has Banking Evolved Over Time?

Banking is the backbone of India’s economic growth as time has passed and technology has advanced, we’ve seen big changes in how banks are run to meet people’s needs. Banking services have been around in India since ancient times, but the organized form we know started after Indian gained independence in 1947. Even before the British era, various banking activities took place, though not in an organized way. When the British arrived in 17th century, the foreign banking system began to decline. The first European bank, the bank of Hindustan, was established by Mayer’s Alexander and company in 1770.

 

PRE- INDEPENDENCE PHASE

 

Before India gained independence (1786 -1947), the first bank, called the “Bank of Hindustan”, was established in 1770 in Calcutta. Unfortunately, this bank faced difficulties and stopped operating in 1832.During this time, over 600 banks were registered in India but only a handful survived . Some of the early banks were :-

i) General Bank of India (1786-1791),

ii) Oudh Commercial Bank (1881-1958)

iii) Bank of Bengal (1809)

iv) Bank of Bombay (1840)

v) Bank of Madras (1843)

Under the british rule, the East India Company set up three banks known as the presidential banks : bank of Bengal , bank of madras , bank of Bombay . In 1921, these were merged into one bank called “Imperial Bank of India”.

The Reserve Bank of India ,which is the central bank of our nation , was established in 1935 under R.B.I Act of 1934. It took over the currency issue authority and credit control from the then Imperial Bank of India. The Bank was nationalised in 1948.

 

RESERVE BANK OF INDIA ACT,1934

The Reserve Bank of India (RBI) was established in 1935, and the Reserve Bank of India Act, 1934, provided the legal framework for its functioning. The Act gave the RBI the power to regulate the country’s monetary policy, issue currency, and supervise banks.Theprologue of RBI act 1934 are :-

i) Set the matters of bank notes 

ii) Set of the country and credit system of india

iii) Keep the reserves with the view to security firmness in india

 

 

POST INDEPENDENCE PHASE 

After independence , most of the country’s major banks were privately owned . this created a problem because people in rural areas still had to rely on money lenders for financial help. To address this issue , the government decided to nationalize the banks. The nationalization of bank was done under the Banking Regulation Act of 1949. The Reserve Bank of India was nationalized in 1949. In 1955 the State Bank of India was formed and 14  other banks were nationalized in 1969 and the list of some of the major banks are :- 

i) Allahabad Bank 

ii) Bank of India 

iii) Bank of Baroda 

iv) Central Ban k of India 

v) Canara Bank 

vi) Union Bank of India 

 

FUNCTIONS OF COMMERCIAL BANKS :-

 

Commercial banks have both primary and secondary functions that are the following 

 

Primary function :- 

i) Accepting deposits

ii) Providing loans

iii) Credit creation 

iv) Fixed deposit 

v) Current deposit 

 

Secondary Function :-

i) Providing locker facilities 

ii) International Trade 

iii) Exchanging of foreign currency 

iv) Letter of credit 

 

Modern Function :-

i) Issuing of credit and debit card 

ii) Online services

iii) E – Banking 

iv) E- cheques

v) Mutual funds 

vi) Discounting 

vii) Cold bond 

 

STRUCTURE OF BANKING SYSTEM :- 

The banking system of India consist of the RBI, Commercial banks, Cooperative banks and Development banks .Through mobilization of resources and their better allocation , banks play an important role in the development process of underdeveloped countries.

Compelling reasons for Bank Nationalization 

 

To boost private sectors :-Around 361 banks failed between 1947 and 1955, equating to approximately 40 banks per year. Customer’s deposits were forfeited , and there was no way to recover them .

To assist agricultural sector :- Nationalization was accompanied by a promise to support the agricultural sector. Banks favoured big industries and business while ignoring the rural sector.

Economic and political factors:- The two wars in 1962 and 1965 had wreaked havoc on the economy . The nationalization of Indian banks would boost the economy by increasing deposits.

To boost rural sectors:- Agricultural and rural sectors had been much ignored by the commercial banks.

 

Arguments against Nationalization of Banks

Fall in efficiency of services:- The bank provide efficient services on a lower rate to customers due to the competition among the banks. afternationalization the banks would not be able to provide these kinds of facilities. 

Lack of Elasticity :- With nationalization of banks , they will loose the quality of elasticity because they will have to take prior permission from his high officers before taking any decisions.

Lack of competition:- After nationalization, employees became more public sector minded, quality of service dropped.

 

R.C Cooper  V. Union of India 

R.C Cooper , who was the director of the central bank of India , had several shares in the Bank of Baroda and filed a petition in the supreme court of India in 1969. This was the point where several banks were being nationalized and R.C Cooper challenged the Banking Companies Ordinance, 1969 , passed at that time 

The Supreme Court of India heard the historiccase of rc cooper vs union of India in 1970. The question in the case concerned whether the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, which the Indian President had issued in 1969, was constitutional.

This case was fought on the basic premise and had raised the question of socialism before the supreme court. The judgement expanded the scope and ambit of Article 31(2) of the Indian Constitution while also examining that of Article 19.The rights of all the shareholders were upheld while preserving the dignity and powers of the parliament.

 

Achievements of Nationalization :-

Branch Expansion – In the Banking system , both geographically and functionally . From 6569 branches and offices in june 1969, their number increased to 32,643 in june 2003.

Deposit Growth :-  The deposits of these banks in june 1969 were Rs. 3897Cr which increased to Rs. 6,88,613 Cr in march 2003.

 

Thus, the history of banking in India shows that with time and the needs of people, major developments have been brought about in the banking sector with an aim to prosper it.  There is a complete orientation re-orientation in banking system after nationalization . There is a shift from “Class” banking to “Mass” banking and from “Elite”banking to “Social” banking.