The Indian banking system consists of commercial banks, which may be public scheduled or non-scheduled, private, regional, rural and cooperative banks. The banking system in India defines banking through the Banking Companies Act of 1949.
In this post, we take a look at the evolution of banks in India, the different categories and the impact of nationalised banks.
There were almost 600 banks present in India before independence. The first bank to be established as the Bank of Hindustan was founded in 1770 in Calcutta. It closed down in 1832. The Oudh Commercial Bank was India’s first commercial bank in the history of the evolution of banking in India.
A few other banks that were established in the 19th century, such as Allahabad Bank (Est. 1865) and Punjab National Bank (Est. 1894), have survived the test of time and exist even today.
Some other banks like the Bank of Bengal, Bank of Madras, and Bank of Bombay – established in the early to mid-1800s – were merged as one to become the Imperial Bank, which later became the State Bank of India.
After independence, the evolution of the banking system in India continued pretty much the same as before. In 1969, the Government of India decided to nationalise the banks under the Banking Regulation Act, 1949. A total of 14 banks were nationalised, including the Reserve Bank of India (RBI).
In 1975, the Government of India recognised that several groups were financially excluded. Between 1982 and 1990, it created banking institutions with specialised functions in line with the evolution of financial services in India.
From 1991 onwards, there was a sea change in the Indian economy. The government invited private investors to invest in India. Ten private banks were approved by the RBI. A few prominent names which exist even today from this liberalisation are HDFC, Axis Bank, ICICI, DCB and IndusInd Bank.
In the early to mid-2000s, two other banks, Kotak Mahindra Bank (2001) and Yes Bank (2004), received their licenses. IDFC and Bandhan banks were also given licenses in 2013-14.
Other notable changes and developments during this era were:
To get a clearer picture of the impact of nationalisation on the banking industry and the general population, let’s understand why the government decided to nationalise banks:
The nationalisation of Indian banks was one of the most significant events in the evolution of banks in India. Today, India has 19 nationalised banks.
Here are a few ways that nationalisation benefited the economy:
To provide an unbiased view on the subject, here are a few downsides of nationalisation:
Here is a list of banks before Independence. The small, brief list bears testimony of how few banks existed during that era:
|Punjab National Bank||1894|
|Bank of India||1906|
|Central Bank of India||1911|
|Bank of Baroda||1908|
As we wind down our discussion on the evolution of the Indian banking system, we should touch upon the types of banks that exist in India today. Here are the major categories of banks that you are likely to come across:
The government holds the majority of the shares of a public sector bank. A prime example is the State Bank of India, with 58.6% of its shares allocated to the Government of India. We could also consider Punjab National Bank, of which the government holds a stake of 58.87%.
Public sector banks are further divided into nationalised banks and state banks and their associated organisations.
With nationalised banks, the government has complete control and regulates the bank in all respects. But the government also has the option to sell shares of these banks. When this happens, the government’s stakes are reduced.
Sometimes the government becomes a minority in such banks, and then that bank gets listed on the Indian stock market.
Private sector banks are owned by private entities. They came into prominence in the 1990s. Due to the high-quality service that they offer, these banks present stiff competition to public sector banks.
Some niche banks in India provide basic banking services like deposits, lending, and bank transfers. These are small finance banks and cater to the part of the economy that isn’t being serviced by regular banks, such as marginal farmers, small industries and other parts of the unorganised sector.
Examples of these banks are Ujjivan Financial Services Pvt Ltd in Bangalore and Equitas Holdings Pvt Ltd in Chennai.
Payment banks are a new model created by the RBI. These banks can accept restricted deposits but are not authorised to issue loans or credit cards. They offer both current and savings accounts and can also issue ATM cards or debit cards.
An example of a payment bank in India is Airtel Payments Bank, set up by Bharti Airtel. Such banks also have a major role to play in the evolution of e-banking in India as they offer online payment solutions like mobile payment apps.
Over the years, Indian banks have transformed the country’s bleak financial landscape to feed its growing economy. Even today, there is no doubt that the Indian banking system is what keeps the country’s economy afloat.
A prime example is the demonetisation of currency notes in 2016. Existing currency notes were demolished practically overnight, throwing the nation into chaos. Banks helped the economy recover from the shock by allowing people across the country to exchange the defunct banknotes.
As the banking industry continues to evolve in India, so does its ability to provide robust support to a nation that is ever hungry for financial development.