Essays

Banking in India has its origin in the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mughal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce.

The first bank in India, though elemental, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are—Early Phase from 1786 to 1969 of commerical banks; Nationalization of Commerical Banks and up to 1991, prior to Indian banking sector reforms; and New Phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and the Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, for mostly Europeans shareholders. In 1865, Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came into being in 1935.

During the first phase, the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

During those days, public had lesser confidence in banks. As an aftermath, the deposit mobilization was slow. Instead of banks, the savings bank facility provided by the Postal department was considered comparatively safer. Moreover, funds were largely given to traders.  

Government took major steps in the Indian Banking Sector Reforms after independence. In 1955, it nationalized Imperial Bank of India with extensive ' banking facilities on a large scale, especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. It was on the efforts of the then Prime Minister of India, Mrs. Indira Gandhi that 14 major commercial banks in the country were nationalized in 60s. The second phase of nationalization, with Indian Banking Sector Reforms, was carried out in 1980 with the nationalization of seven more banks. This step brought 80% of the banking segment in India under the government ownership. After the nationalization of banks, the branches of the public sector banks in India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of the Government ownership, gave the public implicit faith and immense confidence about the sustainability of these institutions.

The third phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M. Narasimham, a committee was set up to suggest measures for banking sector reforms. Today, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking have been introduced. The entire system has become more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock, unlike other East Asian Countries that had to suffer. This is largely due to flexible exchange rate regime, high foreign exchange reserves and reforms in the capital markets and banks.

Presently, in India, the banking sector is segregated as public or private sector banks, co-operative banks and regional rural banks. Bouquet of services are available at customer's demand in today's banking system. Different types of accounts and loans, have been facilitated with the advent of plastic money and money transfer across the globe. The last decade experienced a complete reform in the financial and banking sector. The capital and financial markets, banking & non-banking institutions and financial instruments were redressed towards development. RBI is the central bank of the country since 1935. It regulates, controls credit, issues licenses and functions as banker of all banks and the government.

Industrial Development Bank of India (IDBJ) is the tenth largest bank in the world in terms of development. With the advancement of technology, banking sector has become more easy, fast, accurate and also timesaving. ATMs, Mobile Banking, SMS Banking and Net Banking are only the tips of an iceberg. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalization of the Indian banking system and placed numerous demands on the banks. Operating in this demanding environment has exposed banks to various challenges. The last decade has witnessed major changes in the financial sector—new banks, new financial institutions, new instruments, new windows, and new opportunities—and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demand for new products, particularly derivatives, requires banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalized environment.