The Indian subcontinent as it was known 67 years ago was known for its culture, war and trade.

It is a region which
has a history dating from the first civilizations of the world. The Indian subcontinent is famous for its great empires
and the British Colony. Not only have the emperors and British royal family ruled over this region but also the
merchants and trades men.
As mentioned at the beginning of this paper, we will be discussing financial sector of India in detail, particularly the
oldest and most important bank of the country (region or an economy before the boundaries were established).
After discussing the history and role of the prominent bank of Germany and Russia we chose India as our next stop.
The period of establishment, growth and maturity of the respective banks are different but their roles were similar.
The belonged to different regions with different types of government rule, yet they played a key role as the policy
maker and intermediary between investors. Neither Germany nor Russia was ever a colony. Looking at the banking
sector in India will give our argument and comparison a new dimension.
To perform an in-depth analysis of the banking sector of India we will move from the informal set up in this industry
to the State Bank of India (present name and establishment). We will look how the bank grew in power in order to
affect the economy during colonial and post-colonial (industrialization of India) times.
The State Bank of India as it is known today has been subject to many different names and roles during the last two
centuries. Established as three different banks initially, merged together, regrouped, and ruled during the era of
Presidency banks (Amiya Kumar Bagchi 1987).
The Evolution of the State Bank of India is a comprehensive book written by Amiya Kumar Bagchi in four
volumes to describe the formation and growth of the bank. This bank was the bank bone of the money market of
India from 1806. Most of the research and key facts about the State Bank of India have been take from the different
volumes of the book mentioned above. Another source used to quote the key facts from the initial stage of the
banks in India is the The Presidency Banks: The Transition by Arun Kumar Banerji.
One of the three banks which merged to form the Imperial Bank of India in 1921 was the Bank of Calcutta (later
changed to Bank of Bengal). Bank of Bengal was formed in 1806. It was formed with the intention of funding the
wars of General Wellesleys war against Tipu Sultan and the Marathas.
The second bank was the Bank of Bombay (also known as the presidency bank of the Raj period). It was established
in 1840 as a commercial bank. It had a checkered history. It was liquidated in 1868, caused by the speculative
cotton boom, but was reestablished in the same year. The Presidency banks at that time issued their own notes and
coins, and so did the Bank of Bombay.
The third Presidency bank was the Bank of Madras. It was established in 1941. The bank failed in the crash of 1866.
The paper currency Act of 1861 divested these banks of the right to note issue; the Presidency Banks were,
however, given the free use of Government balances and were initially given the right to manage the note issues of
Government of India. The Bank of Madras was formed in 1843 as a joint stock company with a capital of Indian
Rupees 3 million by the amalgamation of Madras Bank, Carnatic Bank (1788), the British Bank of Madras (1795),
and the Asiatic Bank (1804).
As you can see the establishment of Banks in the sub-continent was not new. With the East India Company gaining
power in the region, the colonizers made sure banks were there to support the system. In 1921 the three
independent Presidency banks were merged to form the Imperial Bank of India which turned into the State Bank of
India in 1955 with the Reserve Bank of India acquiring a controlling interest in it. The State Bank of India as many
would think is not the governments bank. The Reserve Bank of India is the governments bank with significant
control over State Bank of India. It is a separate entity, as to say, with a number of consolidated subsidiaries locally
and internationally.
The motivation behind the establishment of the three presidency banks was either the forceful nature of imperial
finance or the rise of the need of local Europeans. The reason behind these banks was anything but the
industrialization and modernization of the region. Their evolution was, however, shaped by ideas culled from similar
developments in Europe and England, and was influenced by changes occurring in the structure of both the local
trading environment and those in the relations of the Indian economy to the economy of Europe and the global
economic framework.
Rural India was given the highest priority when the first 5 year plan was developed in 1951. The commercial banks
of the country including the Imperial Bank of India had till then confined their operations to the urban sector and
were not equipped to respond to the emergent needs of economic regeneration of the rural areas. The rural area

was not only neglected in terms of industrialization and education but also basic needs and structure of commerce
and trade. In order, therefore, to serve the economy in general and the rural sector in particular, the All India Rural
Credit Survey Committee recommended the creation of a state partnered and state-sponsored bank by taking over
the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. The role and
events of the Imperial Bank of India at that time consists of quite a few acts of integration and consolidation for the
betterment of the industry, region and growth. An act was accordingly passed in Parliament in May 1955 and the
State Bank of India was constituted on 1 July 1955. More than a quarter of the resources of the Indian banking
system thus passed under the direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was
passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries
(later named Associates).
The State Bank of India was thus born with a new sense of social purpose aided by the 480 offices comprising
branches, sub offices and three Local Head Offices inherited from the Imperial Bank. The State Bank of India was
destined to act as the pacesetter in this respect and lead the Indian banking system into the exciting field of
national development. Not only did it integrate to expand and growth locally but also extended its reach to
international economies to serve the Non Resident Indians (NRI). All the above strategies were not only for short
term and immediate growth but acted as a base for substantial growth.
The Salient features of the industrialization in India can be divided into two phases with the roots going back to the
East India Company and the British Raj for almost a decade. Indias first Prime Minister, Jawaharlal Nehru, who
served India till 1964, believed industrialization as the key to easing poverty. Industrialization not only promised
self-reliance for his nation that had just, but also offered external economies accruing from technical progress.
Believing the potential of agriculture and exports to be limited, Indian governments taxed agriculture by skewing
the terms of trade against it and emphasizing import substitution, thus giving priority to heavy industry. The
Industries (Development and Regulation) Act (IDRA) in 1951 laid the foundations for this administrative control on
industrial capacity. Over time, the licensing requirements became increasingly stringent and were accompanied by
a scale of procedures that required authorization by a number of incongruent ministries. As we all know India
entered late in the process of Industrialization. To counter this drawback India adopted an explicit policy of owning
all the major industries, the state owned enterprises. At different times, nationalized industries included chemicals,
electric power, steel, transportation, and life insurance, portions of the coal and textile industries, and banking. To
promote these industries the government not only levied high tariffs and imposed import restrictions, but also
subsidized the nationalized firms, directed investment funds to them, and controlled both land use and many prices.
Under the Prime Minister Indhira Gandhi (1966-77), two major shifts took place in the role of the state. First, the
neglect of agriculture was reversed through monetary benefits to the farmers. The green revolution took off. The
second shift was the further tightening of state control over every aspect of the economy. Banks were nationalized,
trade was increasingly restricted, price controls were imposed on a wide range of products, and foreign investment
was squeezed. This is the era which created the movement where banks were nationalized in order for the
government to control all direct and indirect monetary issues. In 1973, dealings in foreign exchanges as well as
foreign investment came to be regulated by the Foreign Exchange and Regulation Act (FERA).
Beginning in the early 1980s, a mild trend towards deregulation started. Economic reforms were introduced,
starting to liberalise trade, industrial and financial policies, while subsidies, tax concessions, and the depreciation of
the currency improved export incentives. These measures helped GDP growth to accelerate to over 5% per year
during the 1980s, compared to 3.5% during the 1970s, and reduced poverty more rapidly. However Indias most
fundamental structural problems were only partially addressed. Tariffs continued to be among the highest in the
world, and quantitative restrictions remained pervasive.
The government expanded antipoverty schemes, especially rural employment schemes, but only a small fraction of
the rising subsidies actually reached the poor. Competition between political parties drove subsidies up at every
election. The resulting fiscal deficits (8.4% of GDP in 1985) contributed to a rising current account deficit. Indias
foreign exchange reserves were virtually exhausted by mid-1991 when a new government headed by Narasimha
Rao came to power.
Since independence, new foreign investment has been rigidly controlled in line with established development
thinking. Investment was mostly restricted to industries where it was felt that the acquisition of foreign technology
was important, or where the promise of exports was convincing. The FERA was a landmark. In most industries,
foreign shareholdings in rupee companies had to be reduced to 40%. The relative importance of foreign ownership
in the private corporate sector fell significantly in the next decades. The attitude towards foreign investment began
to change in 1985 as a part of Ghandis drive for advanced technology. Despite this, looking at 1988 shows how

poorly India fared in attracting private foreign investment. Net Private Foreign Investment to India (in million US$)
was $280. This is compared to her Asian competitors with figures of $2344 (China), $1093 (Thailand) and $986
(Philippines).
To further give evidence for our facts and analysis on India and the State Bank of we quote and comment on two
research articles. The first one is Deregulation, Ownership, and Productivity Growth in the Banking
Industry: Evidence from India, written by Subal C. Kumbhakar and Subrata Sarkar. This article was published in
Journal of Money, Credit and Banking. It states how the total factor productivity grew with the deregulation of banks
after the initial phase of industrialization had taken place. The research concludes that deregulation and
privatization of banks in India has not helped the growth of the banking sector or the real industries. It is the
government banks which still dominate the industry in respect to all possible roles and functions.
The deregulation of the Indian banks started in the last decade of the 20 th century. This was the time when the
foundations of industrialization had been laid. India was on its way to prosperity, but before anything else, banks
were de-regularized or privatized. We quote here an article which is written to comment on the De-regularization of
the Indian banks after the industrialization. This article is Financial deregulation and efficiency: An empirical
analysis of Indian banks during the post-reform period, by Abhiman Das and Saibal Ghosh. The article
concurs with the conclusion of the previous article of how the banks have decreased in power, influence and
substantial growth over the time. This may not directly harm the growth and emergence of industries in India for
now but the repercussions are soon to be seen. A downfall of the financial sector can cause mayhems in the world
of business. It is only the concrete foundation of the bank from the 19 th century which allowed India to prosper with
its industries even after the dismal state the British rule had left it in.