History of Banking in India

Ancient Period

• Traces of money lending can be found in Vedas, the ancient Indian text. The concept of usury is mentioned in Vedas with the word kusidin translated as “usurer”. Usury is the practice of making unethical or immoral loans that unfairly enrich the lender.
• The Sutras (700–100 BCE) and the Jatakas (600–400 BCE) also mention usury. Texts of this period also condemned usury. The Manusmriti considered usury an acceptable means of acquiring wealth or leading a livelihood.
• The Jatakas, Dharmashastras and Kautilya also mention the existence of loan deeds, called mapatra, mapanna, or malekhaya.
• 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. 

Medieval Period

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-miadi was payable after a stipulated time. The use of payment directives 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.

The history of banking in India can be classified as:

• Pre-independence phase (1770-1947)
• Post independence phase  (1947-till date)

Post Independence phase can be further divided into:

• Nationalisation Phase (1947-1969)
• Post-nationalisation Phase (1969-1991)
• Liberalisation Phase (1991-till date)

Pre-independence phase (1770-1947)

Banking in India started in the 1700s. However, in the early days, the primary goal was to establish new banks and make the banking sector a relevant presence in Indian society. The pre-independence phase saw about 600 banks working together to make the nation’s economy more robust by bringing in some considerable developments.

Modern banking in India originated in the mid of 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.

The East India Company founded three key presidency banks. These include the Bank of Bombay (1840), Bank of Madras (1843) and Bank of Calcutta(1806) which immediately became the Bank of Bengal(1809). These three banks merged and became the Imperial Bank of India in 1921. The Imperial Bank of India was later nationalized and renamed The State Bank of India, which is now the largest public sector bank in India.

In the history of Indian banking, the Oudh Commercial Bank(1881-1958) was the country’s first commercial bank.

Other banks founded in the nineteenth century, such as Allahabad Bank (Est. 1865) and Punjab National Bank (Est. 1894), have withstood the test of time and continue to exist today.

Post independence phase  (1947-till date)

 India’s independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. 

Nationalisation Phase (1947-1969)

• The Reserve Bank of India, India’s central banking authority, was established in April 1935, but was nationalized on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
• In 1949, the Banking Regulation Act was enacted, which empowered the Reserve Bank of India (RBI) to regulate, control, and inspect the banks in India.
• The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
• Despite the provisions, control and regulations of the Reserve Bank of India, banks in India except the State Bank of India (SBI), remain owned and operated by private persons.
• The Government of India issued the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalized the 14 largest commercial banks with effect from the midnight of 19 July 1969. 

The following banks were nationalized in 1969:

• Allahabad Bank (now Indian Bank)
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Central Bank of India
• Canara Bank
• Dena Bank (now Bank of Baroda)
• Indian Bank
• Indian Overseas Bank
• Punjab National Bank
• Syndicate Bank (now Canara Bank)
• UCO Bank
• Union Bank of India
• United Bank of India (now Punjab National Bank)

Post-nationalisation Phase (1969-1991)

To have more control on credit delivery Government started second round of nationalizations of six more commercial banks in 1980. With this, Government controlled around 91% of Indian banking business. The following banks were nationalized in 1980:

• Punjab and Sind Bank
• Vijaya Bank (Now Bank of Baroda)
• Oriental Bank of Commerce (now Punjab National Bank)
• Corporation Bank (now Union Bank of India)
• Andhra Bank (now Union Bank of India)
• New Bank of India (now Punjab National Bank)

Liberalisation Phase (1991-till date)

From early 1990s The government focused on policy of liberalisation by  licensing a small number of private banks. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank
2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

Amalgamation of The Banks

• SBI merged with its associate bank State Bank of Saurashtra in 2008 and State Bank of Indore in 2010. The merger of 5 remaining associate banks State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore and the Bharatiya Mahila Bank with SBI went into effect from 1 April 2017.
• The amalgamation of  Dena Bank and Vijaya Bank with erstwhile Bank of Baroda became effective from 1 April 2019.
• The merger of the Oriental Bank of Commerce and United Bank of India with Punjab National Bank, making PNB the second largest PSB after SBI came into effect since 1 April 2020. 
• The Syndicate Bank merged with Canara Bank from 1 April 2020.
•  Andhra Bank and Corporation Bank merged with Union Bank of India from  1 April 2020.
• Allahabad Bank merged with Indian Bank from 1 April 2020.