Banking in India 1630037 226011474 2008-07-16T12:55:08Z Acad Ronin 70274 Removed reference list; irrelevant references {{Reflist}}[[Image:Scheduled banking structure in India.png|thumb|300px|right|Structure of the organised banking sector in India. Number of banks are in brackets.]] '''Banking in India''' originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the [[State Bank of India]] being established as "The Bank of Bengal" in [[Calcutta]] in June 1806. A couple of decades later, foreign banks like [[Credit Lyonnais]] started their [[Kolkata|Calcutta]] operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the [[British Raj|British Empire]], and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the [[Allahabad Bank]], which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as [[Punjab National Bank]], in 1895 in Lahore and [[Bank of India]], in 1906, in [[Mumbai]] - both of which were founded under private ownership. The [[Reserve Bank of India]] formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. ==Early history== At the end of late-18th century, there were hardly any banks in India in the modern sense of the term. At the time of the [[American Civil War]], a void was created as the supply of cotton to [[Lancashire]] stopped from the Americas. Some banks were opened at that time which functioned as entities to finance industry, including speculative trades in cotton. With large exposure to speculative ventures, most of the banks opened in India during that period could not survive and failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. [[Image:Bank of Bengal.jpg|thumb|250px|right|The [[Bank of Bengal]], which later became the [[State Bank of India]].]] At the beginning of the 20th century, Indian economy was passing through a relative period of stability. Around five decades have elapsed since the [[Indian rebellion of 1857|India's First war of Independence,]] and the social, industrial and other infrastructure have developed. At that time there were very small banks operated by Indians, and most of them were owned and operated by particular communities. The banking in India was controlled and dominated by the presidency banks, namely, the [[Bank of Bombay]], the [[Bank of Bengal]], and the [[Bank of Madras]] - which later on merged to form the [[Imperial Bank of India]], and Imperial Bank of India, upon India's [[Indian independence movement|independence]], was renamed the [[State Bank of India]]. There were also some exchange banks, as also a number of Indian [[Joint stock company|joint stock]] banks. All these banks operated in different segments of the economy. The presidency banks were like the [[central bank]]s and discharged most of the functions of central banks. They were established under charters from the [[British East India Company]]. The exchange banks, mostly owned by the Europeans, concentrated on financing of foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency banks, and the exchange banks. There was potential for many new banks as the economy was growing. Lord Curzon had observed then in the context of Indian banking: ''"In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."'' Under these circumstances, many Indians came forward to set up banks, and many banks were set up at that time, a number of which have survived to the present such as [[Bank of India]] and [[Corporation Bank]], [[Indian Bank]], [[Bank of Baroda]], and [[Canara Bank]]. ==During the Wars== The period during the [[First World War]] (1914-1918) through the end of the [[Second World War]] (1939-1945), and two years thereafter until the [[Indian independence movement|independence]] of India were challenging for the Indian banking. The years of the First World War were turbulent, and it took toll of many banks which simply collapsed despite the [[Economy of India|Indian economy]] gaining indirect boost due to war-related economic activities. At least 94 banks in India failed during the years 1913 to 1918 as indicated in the following table: {| class="wikitable" |- ! Years || Number of banks <br>that failed || Authorised capital<br> (Rs. Lakhs) || Paid-up Capital<br> (Rs. Lakhs) |- | 1913 || 12 || 274 || 35 |- | 1914 || 42 || 710 || 109 |- | 1915 || 11 || 56 || 5 |- | 1916 || 13 || 231 || 4 |- | 1917 || 9 || 76 || 25 |- | 1918 || 7 || 209 || 1 |} ==Post-independence== The [[partition of India]] in 1947 had adversely impacted the economies of [[Punjab, India|Punjab]] and [[West Bengal]], and banking activities had remained paralyzed for months. India's [[Indian independence movement|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]]. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: *In 1948, the [[Reserve Bank of India]], India's central banking authority, was nationalized, and it became an institution owned by the Government of India. *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 may be opened without a licence from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the [[State Bank of India]], continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19th July, 1969. ==Nationalisation== By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the [[Indian economy]]. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. [[Indira Gandhi]], the-then [[Prime Minister of India]] expressed the intention of the [[Government of India|GOI]] in the annual conference of the All India Congress Meeting in a paper entitled ''"Stray thoughts on Bank Nationalisation."'' The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and [[Nationalization|nationalised]] the 14 largest commercial banks with effect from the midnight of [[July 19]], [[1969]]. [[Jayaprakash Narayan]], a national leader of India, described the step as a ''"masterstroke of political sagacity." '' Within two weeks of the issue of the ordinance, the [[Parliament of India|Parliament]] passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it received the [[President of India|presidential]] approval on 9th August, 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. ==Liberalisation== In the early 1990s the then [[Narsimha Rao]] government embarked on a policy of [[liberalisation]] and gave licences to a small number of private banks, which came to be known as ''New Generation tech-savvy banks'', which included banks such as Global Trust Bank (the first of such new generation banks to be set up)which later amalgamated with Oriental Bank of Commerce,[[UTI Bank]](now re-named as [[Axis Bank]]), [[ICICI Bank]] and [[HDFC Bank]]. This move, along with the rapid growth in the [[economy of India]], kickstarted the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in [[India]] completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. ==Current situation== Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially [[retail banking]], mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the [[Government of India]] holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 [[Automated teller machine|ATMs]]. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. ;See also *[[List of banks in India]] *[[List of Cooperative Banks in India]] ==Further reading== * ''The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921-1955)'' (Volume III) * Banking Frontiers - a monthly magazine, published by Mumbai based Glocal Infomart. Editor - Manoj Agrawal ==External links== *[http://www.rupeetimes.com/news/personal_loan/private_banks_in_india_score_over_public_sector_banks_1249.html Private banks score over public sector banks] {{Banking in India}} [[Category:Banking in India| ]] [[fa:بانکداری در هندوستان]]