01

Origin of Commercial Banks in India

with Respect to Foreign Banks
Dr. Durga Madhab Mahapatra*
Prof. (Dr.) Ashok kumar Mohanty**

ABSTRACT
Commercial banking system in India comprises scheduled and non-scheduled commercial banks. The scheduled
commercial banks are further classified as public sector and private sector banks. The public sector banks consists of
the State Bank of India and its seven Associate Banks, 14 major commercial banks nationalised on 19th July, 1969
and 6 major commercial banks nationalised on 15th April 1980 (under this category New Bank of India was merged
in 1993 with Punjab National Bank) and Regional Rural Banks. Thus, there are 28 public sector banks in India.
Private sector banks comprise old private sector banks numbering 20 and new generation public sector banks
numbering 9. The total number of foreign banks operating in India was 31 as on December 2007. This article
evaluates the history of Indian banking sector and also foreign banks operation in India.
Keywords: Bank, Foreign, RTGS and NPA

Introduction
Banks play a pivotal role in mobilising the
nations savings and channelizing them into high
investment priorities. But due to liberalisation
and globalisation, the whole scenario of the
banking sector has undergone a tremendous
change. This has opened a new door for the Indian
banking sector through which India is to enter the
era of adopting new technologies, core banking
system and universal banking. Hence, the scope
of working of the Indian banking sector has gone
through a change beyond our imagination,
especially during the last three decades. In this
chapter, attempts have been made go analyse in
detail the origin and growth of commercial banks
in India. But Indian Banks made remarkable
progress in the 50s and 60s. They met the credit
requirements of the industry, trade and
agriculture on a much large scale than before.
Class banking got transformed into mass banking

with the nationalising of 14 Scheduled

Commercial Banks in 1969 and then in 1980,
which are considered to be the major constituent
of the structure of Indian banking. So far as
nationalisation is concerned, this article, also
deals exhaustively current scenario of Indian
banking and origin of Foreign Banks in India.
Evolution of Banking
In modern times, commercial banking occupies
quite an important place in the financial
framework of every economy. In its naive form,
banking is as old as authentic history and the
origins of modern commercial banking are
traceable in ancient times. The New Testament
mentions about the activities of money changers
in the temples of Jerusalem. In ancient Greece, the
famous temple of Delphi and Olympia were used,
as depositories for peoples surplus funds and
these were the centres of money lending
transactions. Traces of credit by compensation

*Post Doctoral Fellow in Commerce, Berhampur University, Odisha. Email: durgagreaternoida@gmail.com

**Professor in Dept. of Commerce and Financial Studies, Berhampur University, Odisha. Email: profashokkumarmohanty@gmail.com

02

and by transfer order are found in Assyria,

Phoenicia and Egypt before the system attained
full development in Greece and Rome. The
ancient Hindu scriptures refer to the money
lending activities in the Vedic period, during the
Ramayana and Mahabharata eras, banking had
become a full-fledged business activity. During
the Smriti period, which followed the Vedic
period and Epic age, the business of banking was
carried on by the members of the Vaishya
Communities. Manu, the great lawgiver of the
time, speaks of the earnings of interest as the
business of Vaishyas. The banker in the Smriti
period performed most of those functions which
commercial banks performs in modern times such
as accepting deposits, granting secured and
unsecured loans, acting as his customers bailey,
granting loans to king in time of grave crises,
acting as the treasurer and banker to the state and
issuing and managing the currency of the
country. Banking made it first beginning around
the middle of the Twelfth Century in Italy. The
Bank of Venice, founded in 1157, was the first
public banking institution. Following its
establishment, the Bank of Barcelona and the
Bank of Genoa in 1401 and 1407 respectively were
set-up. The Bank of Venice and the Bank of Genoa
continued to operate successfully until the end of
the eighteenth century. Public banks like the
famous bank of Amsterdam, was founded in 1609.
The principal function of these banks was to help
in the development of trade and commerce by
receiving by weight the heterogeneous metallic
money which was then currency and creating in
exchange for it deposits in their banks that were
transferable through bank cheques. Bank of
England was established in the year 1694. Since
that another century and four decades time has
been taken for the development of modern
commercial banking institutions until the passage
of the Banking Act of 1933, which provided for the
establishment of joint stock banks.
Banking in Ancient India
Banking has been known to India for ages. India
evolved and worked the principles of banking
prior to the Western countries. The coinage and
currency system has its deep roots in the Indian
history. The use of gold coins and coins of other
metals finds mention in Aryan granthas was as old
as 3000 to 5000 BC. Evidences are also found in the

Gyanpratha - Vol. 7 | Issue 1 | June 2015

literature of the Vedic times i.e., 2000 to 1400 BC

regarding the existence of money-lending
operations in India. Banking was a side business
during the Vedic period and this became a fulltime business activity of the people during the
Ramayana and the Mahabharata era of banking.
During the Smriti period, which followed the
Vedic period and the Epic age, banking was
carried on by the Vaishya community. From the
laws of Manu, the great Hindu Jurist, it appears
that deposits, pledges, policy of loans and rates of
interest from a banking business was known in
India in ancient times. However, the transaction
from the money lending to banking must have
occurred before Manu, who have devoted a
special section to the subject of deposits and
pledges, where he says, A sensible man should
deposit his money with a person of good family of
good conduct, well-acquainted with the law,
veracious having many relatives, wealthy and
honourable (Arya). According to B.K. Bhargava,
the banker in the Smriti period performed most of
the functions which modern banks perform.
According to Shukra and Yajnavalka, the greatest
writers of the Smriti period, banker used to
maintain a regular system of accounts and
borrowers used to sign the loan deeds (Rnapatras).
During the Buddhist period, banking system was
decentralised and Brahmin and Kshatriyas were
also permitted to take banking as their profession.
The literature of the Buddhist period supplies
ample evidence of the Shresthis, or banker, in all
the important trade centres and of their
widespread influence in the life of the
community. Their chief activity was to lend
money to traders, to merchants, adventurers who
went to foreign countries, to explorers who
marched through forests to discover valuable
materials and to kings who were in financial
difficulties due to war and other reasons, against
the pledge of movable or immovable property or
personal surety. Acharya Vishnugupta Chanakya
Maurya (322 BC) gives in his Kautilya Arthashastra
exhaustive details and guidelines regarding
treasury-keeping, cash and credit policies, rates of
interest and so on.
Banking in Medieval India
During Muslim period banking received a great
setback as the Muslim rulers believed in the
Quranic Injunctions according to which the

Origin of Commercial Banks in India with Respect to Foreign Banks

taking of byaj or interest was a great sin (haraam),

political instability also was another factor behind
this setback. However, banking business was
made possible during the secular and settled
reign of Emperor Akbar. Private banking was
further developed during Jahangirs reign.
During Shah Jahans reign banking prospered
without interruption and large banking houses
were established. During fanatic Aurangzebs
reign, banking, which had somewhat revived
during the reigns of this great-grandfather,
grandfather and father, again suffered a great
setback. A staunch practitioner of the Quaranic
injunction, Aurangzeb adopted a negative
approach towards money lending and banking.
After all, during the Mughal rule the issues of
various kinds of metallic money in different parts
of the country gave the indigenous bankers great
opportunities for developing the very profitable
business of money-changing and the most
important among them were appointed mind
officers, revenue collectors, bankers and moneychangers to government in various parts of the
empire. Many of them wielded great influence in
the country, and those among them who came to
be known as Jagat Seths (world bankers) in the
17th and 18th centuries possessed as great a
power as the private bankers of any Western
countries.

Banking in India in the 18th and 19th Century

The Presidency Bank
The history of formal commercial banking in
India can be traced back to the 18th century. The
first commercial bank of India was the Hindustan
Bank, which was set up by Alexander & Co., an
English agency house in Calcutta in 1770.
However, it closed down in 1832 when the firm
with which it was connected collapsed. A couple
of other banks that were established during this
period met with a similar fate. The origin of
modern commercial banking in India can be
associated with the setting up of the first
Presidency Bank, viz., the Bank of Bengal in
Calcutta, in 1806. One-fifth of its total initial
capital of Rs. 50 lakh was subscribed by the State
Government, which also appointed three out of
the total nine directors. In 1840, the Bank of
Bombay and in 1843 the Bank of Madras were also

03

set up, their capital being Rs. 52 lakh and Rs. 30

lakh respectively. The East India Company
Government contributed Rs. 3 lakh in respect of
each bank.
All the three state partnered banks were under
banks of issue. The right of issue was withdrawn
by the Government in 1862 and by way of
compensation it agreed to keep its balances with
them. The Presidency Banks had their branches in
important trading centres but mostly lacked
uniformity in their operational policies. In 1867,
the Bank of Bengal submitted a proposal for a big
bank with an authorised capital of Rs. 10 crore.
But the Government did not like it since it felt that
a single all-India strong banking institution may
be difficult to manage due to paucity of suitable
personnel. In 1899 the Government proposed to
amalgamate three banks into one so that it could
also function as a Central Bank, but the
Presidency banks did not favour the idea.
However, the conditions prevailed during the
First World War period (1914-18) emphasised the
need for a unified banking institution. As a result
of which, the Imperial Bank of India was set up in
1921.

Banking in India during 20th and 21st

Century
The Imperial Bank of India
The Imperial Bank of India was established on 27th
January 1921 pursuant to the Imperial Bank of
India Act of 1920 by amalgamating the three
presidency banks of Bengal, Bombay and Madras.
The Imperial Bank combined the functions of a
commercial bank and a central bank. The bank,
thereafter, became a purely commercial bank and
acquired a pre-eminent status in the Indian
banking industry. The Imperial Bank being the
biggest commercial bank with enormous
resources was expected to extend its branches
throughout the country and conduct banking
business by inspiring public confidence. The
Imperial Bank up to 1935, the establishment of the
Reserve Bank of India, functioned as an interim
central bank of a country. It combined the
functions of both a commercial bank and a central
bank. The Imperial Bank was neither completely
on the model of the Central Bank of England nor

04

Gyanpratha - Vol. 7 | Issue 1 | June 2015

of the continent, nor of the South African type.

The Imperial Bank of India Act, 1920 especially
required the Bank to undertake government
business and act as a banker to the Government
perhaps a function admittedly appropriate to a
Central Bank. The Imperial Bank Act did not
prevent from pursuing an independent monetary
and economic policy, which enabled the bank to
act as bankers bank, which is another function of
central bank. The bank was to be the custodian of
national balances and the manager of public debt.
The Act of 1920, of course, permits the Imperial
Bank conducting normal banking business. As a
Central Bank, it granted loans to other banks,
discounted hundies and bills of exchange, granted
remittance facilities to other banks. However, it
did not possess the power of note issue. It was
vested with the Government of India. It had the
resemblance of a Central Bank, but it did not have
the degree of control over the money market,
which a Central Bank is supposed to possess.

tasks, which it now successfully performs as a

Commercial Bank. Hence, the Imperial Bank on
the banking scene occupied prominent place
among the other Indian joint stock banks. The
general public in fact stood to gain out of such
competition. If the Imperial Bank was considered
for a Central Bank, it would hamper the banking
habit and investment and jeopardise the banking
development of the country. The year 1921 marks
an era of the new venture of amalgamation of
Presidency banks into the Imperial Bank and the
bank began to gain momentum both in the
accumulation of public deposits and private
deposits from the year 1923. The Imperial Bank
enjoyed a special advantage during the period
1921-1930 in the mobilisation of deposits as it also
functioned as an agent of the Government doing
cash work. The central banking functions of the
bank gave the bank an undue advantage in the
money market and hence an increased trend in the
accumulation of deposits. The Table 1 indicates
the position of Imperial Bank of India during
1921-54. The table shows that the increase in
reserves of the bank was steady throughout the
period 1921-31. The promotion of paid-up capital
and reserves to total deposits increased to 14.56
per cent in 1931 from 1.8 percent in 1921. But after
1935 it was continuously declined to 14.11 per cent
in 1936, 11.06 per cent in 1941, 4.45 per cent in 1946
and 5.0 per cent in 1951 and has slightly increased
to 5.4 per cent in 1954. The table also reveals that
the deposits and advances were increasing
though the trend was not steady.

It was expected that Imperial Bank would rise to

the full dignity and stature of a central bank. To
make it the central bank of the land, it needed to
divide the central banking functions from
widespread network of its commercial functions.
It was detrimental to the cause of banking
development as well as of providing cheap credit
facilities to traders and borrowers. The Hilton
Young Commission pointed out that Conversion
of Imperial Bank into a true Central Bank would
involve a radical amendment of the character and
would preclude it from undertaking great many

Table 1: Position of Imperial Bank during 1921-1954

Year

Paid-up
capital

Total
Deposits

Total
Advances

Loans

Cash
Credit

Bills

Proportion of Proportion of
paid-up capital
loans and
and reserves advances to
to total
total deposits
deposits (%)
(%)

1921

8.94

82.71

50.46

18.17

21.92

10.07

1.80

60.5

1926

10.50

91.83

47.16

14.52

27.12

5.51

11.44

51.4

1931

11.04

78.54

44.01

12.20

27.23

4.58

14.56

44.0

1936

11.11

78.72

22.96

3.70

16.37

2.90

14.11

29.2

05

Origin of Commercial Banks in India with Respect to Foreign Banks

1941

11.25

101.82

34.76

7.44

22.86

4.46

11.06

34.1

1946

11.72

263.65

73.27

27.11

36.23

9.93

4.45

28.1

1951

11.96

239.12

132.74

123.76

8.97

5.00

37.9

1954

11.97

219.17

133.37

89.09

27.49

16.79

5.40

60.8

Source: RBI, Prepared from Statement No. 1, Banking and Monitoring Statistics of India, Bombay, 1956, pp. 30-31.
The total deposits of Bank which accounted at Rs.
82.71 crore in 1921 reached a record level of Rs.
91.03 crore in 1926. But after 1926 there was a fall
in the total deposits of the Imperial Bank. The
deposits declined to Rs. 78.54 crore in 1931 and Rs.
78.72 crore in 1936 from Rs. 91.83 crore in 1926.
This is mainly due to enactment of the Reserve
Bank of India Act in 1934. The Government
deposits have been transferred to the Reserve
Bank and fall in public deposits and also
Government cash work, economic depression of
1929 and the consequent economic bills had their
influence on the falling trend of deposits. But after
1936, the deposits increased enormously to Rs.
263.65 crore in 1946 from Rs. 78.72 crore in 1936.
This was not only the case with the Imperial Bank
but with the other banks too. Again there was a
fall in the deposits from Rs. 263.65 crore to Rs.
239.12 crore in 1951 and to Rs. 219.17 crore in 1954.
Hence, there has been a fall in the level of loans
and advances which figured Rs. 50.46 crore in
1921 declined to Rs. 47.16 crore in 1926, Rs. 44.01
crore in 1931 and Rs. 22.96 crore in 1936, but
increased to Rs. 4.76 crore in 1941, Rs. 73.27 crore
in 1946, Rs. 132.74 crore in 1951 and Rs. 133.37
crore in 1954.
Formation of SBI and its Associate Banks
The innumerable private joint stock banks under
both European and Indian control also emerged
during the 19th century mainly to cater to the credit
needs of the vast hinterland of the subcontinent.
While some amongst them, like the Agra and
United Services Bank and the Alliance Bank of
Simla under European control, eventually
collapsed owing to financial irregularities, there
were many others under Indian management,
especially in Bombay and Punjab, which
succumbed during the banking crisis of 1913 and

later in the 1930s and 1940s. It was these failures,

which paved the way for the passing of the
Banking Companies Act (later renamed as the
Banking Regulation Act) in 1949. Quite a few of
these private joint stock banks, however, survived
grew over the years, including the Allahabad
Bank (1865) and the Punjab National Bank (1895)
in the north, the Canara Bank (1906) and the
Indian Bank (1907) in the South and Bank of India
(1906) and the Central Bank of India (1911) in the
West. The 19th Century also witnessed the arrival
of several exchange banks in India, for financing
the subcontinents burgeoning foreign trade,
which the three presidency banks and the
imperial bank (until the establishment of the
Reserve Bank) were rigorously excluded from
engaging in. Such banks either chartered by
British Parliament or incorporated in Europe
included the Chartered Bank of India, Australia
and China, the Chartered Mercantile Bank of
India, London and China, the Hong Kong and
Shanghai Banking Corporation, the Comptoir d
Escompte de Paris and so on.
One major development during this period was
setting up of the Reserve Bank of India (RBI) in
1935 as the central bank of the country. However,
the period before independence was marked by a
series of failures, especially of small banks. At the
time of independence, there were 640 banks out of
which only 96 were scheduled banks and the rest
were non-scheduled. By the end of 1947, there
were 654 scheduled, non-scheduled and
exchange banks operating in the country with a
network of 5009 offices and deposits and
advances of Rs. 1153.45 crore and Rs. 520.29 crore
respectively, the average population per bank
office, though sharply reduced from about 8.5
lakh in 1916 to less than 70,000 in 1947, was still

06

Gyanpratha - Vol. 7 | Issue 1 | June 2015

considerably high by international standards.

Banking was concentrated in metro cities and port
towns, with a large proportion of total advances
going to trade. In this backdrop, strengthening of
the banking system was one of the major
challenges of the post-independence era. The
Imperial Bank of India was nationalised in 1947
and renamed as State Bank of India (SBI). Further,
in 1959, the State Bank of India (Subsidiary Banks)
Act was passed enabling the SBI to take over
seven banks of Princely States as its associate
banks. SBI and its associates were entrusted with
the task of serving the developmental needs of the
economy. All other banks continued to be
privately owned. It was felt that commercial bank
credit was flowing mainly to the large and wellestablished business houses, and not so much to
sectors such as agriculture and small-scale
industries.
The All India Rural Credit Survey Committee in
its report has said that the Imperial Bank of India
and other state associated banks should be
nationalised and amalgamated into one single
unit, such as the State Bank of India. In 1955, the
State Bank of India was formed transfer of assets

and liabilities of Imperial Bank of India to it did

take place, but the other state-associated banks
were left out. The state-associated banks did not
like to amalgamate themselves with the State
Bank nor the State Bank of India agreed to absorb
them on account of various difficulties, such as,
differences in the standard of working, scales of
pay of staff, etc. However, after some time, the
State Bank submitted a proposal to the stateassociated banks for making them as subsidiary
banks. Most of these banks agreed to it. Therefore,
the State Bank of India (Subsidiary Banks) Act,
1959 was passed and it received the assent of the
President on 10th September 1959. According to
provisions of the Act, the following eight stateassociated banks were taken over by the State
Bank of India as its subsidiaries. The separate
entity of those banks (Table 2) was retained in the
form of subsidiaries to enable them to serve the
local needs in their respective areas. The position
of subsidiary banks in 1960 has been shown in
Table 3. The table depicts that 10.0 per cent of
deposits and 7.3 per cent of advances in total
scheduled commercial banks are shared by State
Bank of India group.

Table 2: Taking Over of Subsidiary Banks by State Bank of India

Sl.
No.

Subsidiary
with effect from

Name

1.

State Bank of Hyderabad

1st October 1959

2.

State Bank of Bikaner

1st January 1960

3.

State Bank of Jaipur

1st January 1960

4.

State Bank of Saurashtra

1st May 1960

5.

State Bank of Patiala

1st April 1960

6.

State Bank of Mysore

1st March 1960

7.

State Bank of Indore

1st January 1960

8.

State Bank of Travancore

1st January 1960

Source: Padmavati, A. and Hemachandrika, G. (2006), Public Sector Banks in India,

G.R.P. Publication, New Delhi, p. 18.

Table 3: Position of Subsidiary Banks of State Bank of India in 1960

Sl. No.

Name of the Bank

1.

State Bank of Hyderabad

2.

State Bank of Indore

Deposits
(Rs. Lakh)

Advances
(Rs. Lakh)

19.40

10.71

8.84

6.84

07

Origin of Commercial Banks in India with Respect to Foreign Banks

3.

State Bank of Travancore

8.27

4.10

4.

State Bank of Bikaner and Jaipur*

22.97

13.30

5.

State Bank of Mysore

19.94

12.43

6.

State Bank of Patiala

10.70

3.55

7.

State Bank of Saurashtra

13.39

7.93

8.

Total (1 to 7):

103.51

58.86

9.

All Scheduled Commercial Banks

1032.78

807.12

10.0

7.3

Share of subsidiaries to all Scheduled

Commercial Banks (8 to 9):

*From 1963, the State Bank of Bikaner and Jaipur are amalgamated.
Source: Annual Reports of the Banks, 1960.
The concept of banking underwent a sea change
with the advent of the State Bank. A distinct shift
in focus was evident from security-oriented to
need-based lending, from urban to rural banking,
from class to mass banking and from activities
that contributed essentially to the banks
commercial objectives to also those that largely
served a social purpose. This transition from a
primary profit-seeking commercial bank to a
great national institution with public
responsibilities was however by no means an easy
task. It became necessary for the Bank to reshape
its organisation and reset its tradition to make
them sufficiently dynamic to suit the altered
conditions. It also involved a re-orientation of the
banks policies, a modification of its business
methods and practices and a change of outlook on
the part of its staff engaged at every level. From its
inception, the State Bank played a dual role with
due regard being had to public interest. As a
commercial bank, it continued to provide, as
hitherto, finance to industry and trade. As a
nationalised institution, it undertook several
promotional and developmental activities by way
of opening branches all over the country
including the remotest corners, evolving and
implementing a special scheme for financing
small-scale industries, extending financial
accommodation to marketing and processing
corporative societies and fostering Indias foreign
trade. Besides setting up the State Bank of India,
new institutions like the Industrial Finance
Corporation of India (IFCI) (1948), the
Agricultural Reliance Corporation (ARC) (1963),
the Industrial Development Bank of India (IDBI)

(1964) as a wholly owned subsidiary of the

Reserve Bank of India with main function of
coordinating and supplementing the operations
of other term-lending institutions as a
development agency for planning, promoting
and developing industries and the State Financial
Corporations were also established for providing
long term finance to industry and agriculture.

Social Control and Nationalised Banks

Growing emphasis on agricultural, cottage and
industrial development in the meantime, made it
even more necessary that all the banks gear
themselves to a more meaningful credit operation
in Indias hinterland. The Government thus
initiated several measures under the scheme of
social control in 1968 to secure a better alignment
on banking policy with the needs of economic
planning. Born out of persistent complaints of the
deficiencies in the banking system, the basic
postulate was to ensure that particular clients or
groups of clients were not favoured in the matter
of distribution of credit and whatever the
character of the shareholding, its influence was
neutralised in the constitution of the board of
directors and in the actual credit decision taken at
different levels of bank management. In
February 1969, the Government appointed a
Banking Commission under R.G. Saraiya,
Chairman, Bombay State Cooperative Bank to
recommend, based on a comprehensive inquiry,
changes in the structure, procedure and policy of
the Indian banking system. Although the
Commission made several recommendations

08

relating to restructuring of commercial and

cooperative banks, measures for widening their
functional coverage, improving their operational
efficiency, legislative reforms, and areas for
further research and study, nothing much was
done to implement them. An event of far-reaching
significance in the sphere of banking occurred in
July 1969 when the Government of India
promulgated an ordinance to nationalise 14 major
Indian scheduled banks with deposits of Rs. 50
crore and above, thereby ushering in new phase of
financial development. In a broadcast to the
nation, Prime Minister Indira Gandhi observed:
An institution such as the banking system, which
touches - and should touch - the lives of millions,
has necessarily to be inspired by a larger social
purpose and has to sub-serve national priorities
and objectives. That is why there has been
widespread demand that the major banks should
be not only socially controlled but also publicly
owned. Prime Minister Indira Gandhi
nationalised 14 major commercial banks in July
1969. Prior to that, most commercial banks like
Central Bank (owned by the Tatas), United
Commercial Bank (Birlas) and Syndicate Bank
(Pais) were owned and managed by
businessmen. The businessmen who owned these
banks channelized most deposits into their own
companies, often ignoring the governments
focus areas, agricultural and small-scale
industries. That was one reason for
nationalisation of major commercial banks in
India. The broad aims of nationalisation (as stated
in the Preamble to the Banking Companies Acquisition and Transfer of Undertakings Act,
1970) were to control the heights of the economy
and to meet progressively and serve better the
needs of development of the economy in
conformity with national policy and objectives.
Nationalised banks were to ensure that the needs
of productive efforts irrespective of the size and
social status of the borrower and, in particular,
those of farmers, small-scale industries and selfemployed professional groups, were increasingly
met. They were also to actively foster the growth
of new and progressive entrepreneurs and create
fresh opportunities for backward areas in
different parts of the country. Besides, widening
the network of branches particularly in the rural

Gyanpratha - Vol. 7 | Issue 1 | June 2015

and semi-urban areas, banks were also to mobilise

savings. Besides, the National Credit Council
Study Group under the Chairmanship of Prof.
D.R. Gadgil first recommended the areas
approach to nationalised banks. Therefore, the
Reserve Bank of India accepted the Lead Bank
Scheme in 1970. Under the Lead Bank Scheme
formulated thereafter, they were to act as pacesetters for providing integrated banking facilities
at the districts allotted to them. Banks were also to
be closely associated with credit linked poverty
alleviation programmes (IRDP, SEPUP, SEEUY,
etc.) initiated from time to time. Hence, on 19th
July 1969, Government of India promulgated an
ordinance, called the Banking Companies
(Acquisition and Transfer of Undertakings)
Ordinance, 1969, in terms of which the Central
Government acquired the undertaking of the 14
biggest commercial banks incorporated in India
which had deposits of not less than Rs. 50 crore
each. The names of the fourteen major commercial
banks are Allahabad Bank, Bank of Baroda, Bank
of India, Bank of Maharashtra, Canara Bank,
Central Bank of India, Dena Bank, Indian Bank,
Indian Overseas Bank, Punjab National Bank,
Syndicate Bank, Union Bank of India, United
Bank of India and United Commercial Bank. The
Table 4 reveals that at the time of nationalisation,
83 per cent of branches, 93.0 per cent of deposits
and 93.7 per cent of advances are shared by the
public sector banks. The names of the fourteen
banks taken over by the Government under the
Banking Companies Act of 1969 are given in Table
5. In 1980, six more private banks with deposits of
not less than Rs. 200 crore were nationalised in
Table 6. It was the aim to further control the
heights of the economy, to meet progressively and
serve better the needs of the development of the
economy and to promote the welfare of the people
in conformity with the policy of the state.

09

Origin of Commercial Banks in India with Respect to Foreign Banks

Table 4: Position of Scheduled Commercial Banks in India in 1969

Sl. No.

Name of the Bank

Total Branches
(No. in Lakhs)

Total
Deposits
(Rs. In Crore)

Total Advances
(Rs. In Crore)

1.

State Bank of India

1,569
(19.8)

1,114,11
(23.2)

841.36
(24.8)

2.

Subsidiaries of State Bank

of India

893
(11.3)

324,96
(6.8)

279.54
(8.2)

3.

14 Nationalised Banks

4,134
(52.2)

3,034,61
(63.0)

2,061,68
(60.7)

4.

Other Scheduled Banks

1319
(16.7)

334.24
(7.0)

213,40
(6.3)

Total:

7915
(100.0)

4,807,92
(100.0)

3,395,98
(100.0)

Note: Figures in parentheses indicate the percentage to the total.

Source: RBI, Statistical Tables, Relating to Banks in India, 1970, Bombay.

Table 5: Details of Compensation Paid by the Government

during First Phase of Nationalisation
Sl. No.

Name of the Bank

Amount of Compensation paid by

Government (Rs. In Lakhs)

1.

Central Bank of India Ltd.

1750

2.

Bank of India Ltd.

1470

3.

Punjab National Bank Ltd.

1020

4.

The Bank of Baroda Ltd.

840

5.

The United Commercial Bank Ltd.

830

6.

Canara Bank Ltd.

360

7.

United Bank of India Ltd.

420

8.

Dena Bank Ltd.

360

9.

Syndicate Bank Ltd.

360

10.

The Union Bank of India Ltd.

310

11.

Allahabad Bank Ltd.

310

12.

The Indian Bank Ltd.

230

13.

The Bank of Maharashtra Ltd.

230

14.

The Indian Overseas Bank Ltd.

250

Source: M.Y. Khan (2000), Indian Financial System, Tata McGraw Hill, New Delhi, p. 27.

10

Gyanpratha - Vol. 7 | Issue 1 | June 2015

Table 6: Details of Compensation paid by the Government

during Second Phase of Nationalisation
Sl. No.

Name of the Bank

Compensation
(Rs. in Lakhs)

1.

The Andhra Bank Ltd.

610

2.

The Punjab and Sind Bank Ltd.

180

3.

The New Bank of India Ltd.

510

4.

The Vijaya Bank Ltd.

100

5.

The Corporation Bank Ltd.

210

6.

The Oriental Bank of Commerce Ltd.

240

Source: M.Y. Khan, Indian Financial System, Tata McGraw Hill, New Delhi, 2000, p. 29.
Domestic private banks and foreign banks were
allowed to coexist with the public sector banks
(PSBs), but their activities were closely monitored
and highly restricted trough regulated entry and
strict branch licensing. With the nationalisation of
banks, a large number of regulating measures
were adopted by the RBI to achieve a desired
sectoral allocation of credit, e.g., subsidised
lending rates to priority sectors, provision of
refinance facilities set up credit guarantee
schemes, rural and semi-urban branching, ceiling
on deposit rates and differential lending rates
depending on borrowers level of income and
type of loan. These measures lead to a
phenomenal growth of the banking systems,
especially that of the PSBs. In fact, during the early
1990s, PSBs owned nearly 90 per cent of total
business in the banking industry. Table 2.8 shows
that at the time of nationalisation of six more
commercial banks in 1980, the percentage share of
branches, deposits and advances of public sector
bank account 89.7 per cent, 94.7 per cent and 95.4
per cent, etc. Indian Banking underwent a major
structural transformation after the nationalisation
of banks. A phenomenal expansion of the branch
network occurred particularly in the hitherto

under-banked rural areas. The Reserve Bank

geared its branch licensing policy to the objectives
of ensuring an expansion of offices both in
unbanked centres and in under-banked states as
well as in the urban and metropolitan centres. As
a result of the bank nationalisation, it is time that
the branch network expanded many folds
especially in rural and uncovered areas. Each
bank office served 64,000 in 1990 (Table 7). There
was an increase of about 51,000 bank offices
between the year 1969 and the year 1990 out of
which as many as 33,600 were in the rural areas
and 7,900 in semi-urban areas. Thus, 80 per cent of
the total branch expansion during this period was
in rural and semi-urban areas of the country. Not
only the expansion of bank branches increased
many folds, it did also extend to almost all the
states in the country. In 1969, 5 states
(Maharashtra, Gujarat, Tamil Nadu, West Bengal
and Punjab) accounted for approximately half of
the total number of bank offices. By the year 1990,
share of other states had risen to nearly 80 per cent
reflecting an even distribution across the country.
Table 8 Status of Bank Branches/Offices during
Pre-Reform Period.

Table 7: Position of Scheduled Commercial Banks at the End of 1980

Sl.
No.
1.
2.

Name of the Bank

State Bank of India
State Bank Associates

Total Branches
(No. in lakh)
5,169
(25.8)
2,563
(12.8)

Total Deposits
(Rs. in Crore)
9,295.02
(22.3)
2,410.35
(5.8)

Total Advances
(Rs. In Crore)
7,212.50
(27.4)
1,490.29
(5.6)

11

Origin of Commercial Banks in India with Respect to Foreign Banks

3.

14 Nationalised Banks

4.

6 Banks Nationalised on 15th

April 1980
Regional Rural Banks

5.
6.

3,119
(15.5)
2,674
(13.3)
2,675
(13.3)
3,864
(19.3)
20,064
(100.0)

Other Scheduled Commercial

Banks
Total:

24,697.45
(59.3)
2,781.39
(6.8)
213.61
(0.5)
2,240.78
(5.3)
41,638.60
(100.0)

14,609.40
(55.4)
1,575.43
(6.0)
253.46
(1.0)
1,217.38
(4.6)
26,358.46
(100.0)

Note: Figures in parentheses indicate the percentage to the total.

Source: RBI, Statistical Tables, Relating to Banks in India, Bombay, 1981.

Table 8: Status of Bank Branches/Offices during Pre-Reform Period

Sl.
No.
1.

1951

1961

1969

1980

1990

Number of Commercial Banks (a+b)

566

292

89

80

78

(a)

92
474
-

82
210
-

73
16
-

75
5
73

74
4
196

4151

5012

8262

32419

59756

87

88

64

21

14

10.5

13.2

13.7

32.6

42.5

Scheduled Commercial Banks

(b) Non-Scheduled Comm. Banks

(c)

Regional Rural Banks

2.

Number of Offices in India

3.

Population per office (in 000)

4.

Bank Deposits as % of GDP at current

prices

Source: RBI, Statistical Tables relating to Banks in India, various issues.

BANKS

Public
Sector

State Bank
of India

Private
Sector

Cooperatives

Joint Stock Bank

Exchange Bank

Subsidiaries
of SBI
Foreign Bank

Figure 1: Banking Scenario in India Prior to 1969

12

Gyanpratha - Vol. 7 | Issue 1 | June 2015

BANKS
BANKS

Public
Sector

Cooperative
Banks

Private
Sector

Rural
Cooperatives

Companies
SBI

Nationalised
Banks

Regional
Rural Banks

Urban
Cooperatives

Foreign Banks

Five Subsidiaries
of SBI

Figure 2: Banking Scenario in India After 1970

BANKS

NonScheduled

Scheduled

Cooperative
Banks
Commercial

Cooperative
Local Area
Banks

Public Sector

Nationalised

Private Sector

SBI &
Associates

Foreign
Banks

Regional
Rural Banks

Old
New
FIs Converted
to Banks

Figure 3: Banking Scenario in India After 2003

13

Origin of Commercial Banks in India with Respect to Foreign Banks

SCHEDULED BANKS IN INDIA

Scheduled Commercial
Banks

Public
Sector
Banks (27)

Private
Sector
Banks (30)

Nationalised
Banks (19)

State Bank of
India and its
Associates (8)

Scheduled Urban
Cooperative Banks
(52)

Foreign
Banks in
India (40 )

Old Private
Banks (22)

Scheduled State
Cooperative
Banks (16)

Regional
Rural Banks
(196)

New Private
Banks (8)

Figure 4: Scheduled Banking Structure in India (As on March 2002)*

* As indicated in the Second Schedule of the Reserve Bank of India Act, 1934
Note: Figures in brackets indicate number of banks in each group.
Source: Report on Trend and Progress of Banking in India, 2002, RBI, Mumbai.

14

Gyanpratha - Vol. 7 | Issue 1 | June 2015

Commercial
Banks

Cooperative Credit
Institutions

Scheduled
Commercial Banks

Non-Scheduled Commercial Banks

Local Area Banks (4)

Public Sector Banks

State Bank of India and

its Associates (8)

Nationalised
Banks (20)

Urban Cooperative
Banks (1,853)

Scheduled
UCBs (55)

Multi-State
(24)

Private Sector Banks

Regional Rural
Banks (133)

Foreign
Banks (29)

Rural Cooperative Credit

Institutions (1,09,924)

Non-Scheduled
UCBs (1798)

Operating in
Single-State (31)

Multi-State
(10)

Indian Private
Banks (27)

Short-Term
(1,09,177)

State Cooperative
Banks (31)

Operating in
Single-State
(1788)

Long-Term
(747)

Dist. Central
Coop Banks (367)

SCARDBs
(20)

Figure 3: Banking Scenario in India After 2003

SCARDBs: State Cooperative Agriculture and rural Development Bank
PCARDBs: Primary Cooperative Agriculture and Rural Development Bank
Note: Figures in brackets indicate the number of institutions at end-March 2006.
However, for rural cooperative credit institutions, the number is at end-March, 2005.
Source: RBI Monthly Bulletin, 2007.

Primary
Agricultural Credit
Societies (1,08,779)

PCARDBs
(727)

15

Origin of Commercial Banks in India with Respect to Foreign Banks

However, this rapid growth, owing to excessive

focus on quantitative achievements made many
banks inefficient, unprofitable and
undercapitalised. Recognising these problems,
the RBI launched the banking sector reforms in
1992 on the recommendations of the first
Narasimham Committee on Financial Sector
Reforms (1991). The areas of reform were entry
deregulation, branch de-licensing, deregulation
of interest rates and allowing PSBs to raise up to 49
per cent of equity in the capital market. Other
areas of change, regarding statutory norms, were
a gradual reduction of the Cash Reserve Ratio
(CRR) and the Statutory Liquidity Ratio (SLR),
setting capital adequacy norms of a minimum 8
per cent Capital to Risk-Weighted Assets Ratio
(CRAR), and imposition of stringent income
recognition and provisioning norms. While these
reforms were underway, there were some
important developments taking place in the
world economy, especially a movement towards
global focus on the need for adequate regulation
and supervision of banks, in view of the SouthEast Asian Crises and the Basel Committee
recommendations, the report of the Second
Narasimham Committee (April 1998) paved the
way for the second generation reforms in the
Indian banking industry. The Committee laid
stress on prudential measures like higher CRAR,
allowing market risk on government securities,

stricter Non-Performing Assets (NPAs) norms,

introduction of assets-liabilities management and
risk management guidelines. Around the same
time (May 1998), the working group for
harmonising the role and operations of
Development Finance Institutions (DFIs) and
banks (the Khan Committee) recommended a
consolidation of the banking system through a
more towards universal banking, mergers
between banks and DFIs and harmonising the
role operations and regulatory frameworks of the
two. The Banking Sector reforms in India,
initiated since 1992 was intended to impart
enhanced efficiency, productivity and
profitability into the system. Hence, it is
important to weigh the gains against losses
incurred by the industry over a sufficient long
time horizon encompassing the period of reforms.

Current Scenario of Indian Banking System

The present structure of Indian banking system is
set out below in Table 9. It may also be noted from
the table that there are 28 public sector banks
having 49,906 branches all over the country,
representing over 80 per cent of total bank
branches in the country. On the contrary, there are
24 banks in private sector having 7067 branches
and 29 foreign banks have only 72 branches
operating in the country.

Table 9: Number of Indian Commercial Banks as on June 30, 2007

Sl.
No.

Bank Group

No. of
Banks#

As on June 2006@

As on June
2007@

1.

State Bank of India and Associates

13,879

14,058

2.

Nationalised Banks

19

34,299

35,412

3.

Other Public Sector Banks

181

436

4.

Old Private Sector Banks

16

4,658

4,341

5.

New Private Sector Banks

2,000

2,726

6.

Foreign Banks in India

29

262

272

16

Gyanpratha - Vol. 7 | Issue 1 | June 2015

7.

Regional Rural Banks**

96

14,496

14,506

8.

Non-Scheduled Commercial Banks

(Local Area Banks)

26

30

181

69,801

71,781

Total:

#: As on June 30, 2007

@: Population group-wise classification of branches is based on 2001 Census.
** : No. of Regional Rural Banks as on June 30, 2007 was 96, after effecting the
amalgamation of RRBs, that have taken place.
Note: 1. Number of branches data exclude administrative offices.
2. Data for June 2006 are revised and that for June 2007 are provisional.
Source: Report on Trends and Progress of Banking in India, 2006-07, RBI.

Origin And Growth Of Foreign Banks In

India
The Indian banking system has also witnessed
certain visible structural changes in the postliberalisation period. One of the important
changes that took place is the dilution of
government equity in public sector banks, apart
from mergers / amalgamations and entry of new
private and foreign banks. In three PSBs, the
government equity holding has come down to
about 51 per cent. The changes in ownership
structure along with consolidation and entry of
private and foreign banks are expected to have an
impact on the overall competition in the banking
sector in post liberalisation period. The number of
foreign banks operating in India has actually
declined from 42 during 1997-98 to about 29 in
2007. While this was partly due to mergers
between the Indian branches of foreign banks,
there were also closures of some foreign banks in
this period. Foreign banks in India account for
roughly 6.5% of the banking industrys assets and
there has not been any change in their market
share over the years. The total number of foreign
banks operating in India was 31 as on December
2007 with 273 branches. The few foreign banks
operational history are Standard Chartered
started its Indian operations by opening its first
branch in Kolkata in April 1858, a year after the socalled first war of Independence in which sepoys
of the British East India Companys army rebelled
against the rulaers. With around Rs.1 trillion of
assets, Standard Chartered now has 94 branches
spread over 37 centres. Hongkong and Shanghi

Banking Corp. Ltd, or HSBC, has been in India

even longer. Its origin can be traced back to
October 1853, when Mercantile Bank of India,
London and china was founded in Mumbai with
authorised capital of Rs.50 lakh. By 1855,
Mercantile Bank had offices in London, Chennai,
Colombo, Kandy, Kolkata, Singapore, Hong
Kong, Guangchow and Shanghai. It was acquired
by HSBC in 1959. With close to a Rs.1 trillion asset
book, HSBC has 47 branches and three new
branch licences in India. Citibank NA, which has
the biggest asset base among all foreign banks in
India, is 107 years old. It has 42 branches across 29
centres. Among other foreign banks, ABN Amro
Holding NV, which came to India in 1920 (again,
Kolkatta was the first port of call), has 31 branches
and deutsche Bank AG, 30 years old in India, is
present in 12 centres through 13 branches.
Barclays Bank Plc, which launched its India
operations in November 2006, has seven
branches. Foreign banks will play a critical role in
raising money for them, connecting them with a
global clientele and consumers. At the same time,
they need to look at Indian business opportunities
differently. A corollary to this finding is that if
banking sector is further opened up, the pressure
of competition will intensify and put further
strain on the bottom lines of existing banks for
improving performance. One of the primary
reasons for allowing foreign banks to enter in a
country is to improve the quality and the
efficiency of banking services and to bring more
efficiency and transparency in the financial sector.
Across the world, the entry of foreign banks in a
country has usually been found to benefit the end

Origin of Commercial Banks in India with Respect to Foreign Banks

consumers as it has led to increased credit

availability, more efficient banking and a higher
rate of economic growth. The entry of foreign
banks has especially benefited developing
countries where the foreign entrants are more
efficient than the local banks and raise the overall
level of competition. However, the implications of
foreign bank entry on the stability of the domestic
banking sector have been widely debated. This is
especially the case for developing countries
where the financial sector is still not very robust
and economic crisis have occurred in the past.
Foreign banks are considered detrimental to the
stability of the economy because they expedite
capital flight during troubled times and worsen
economic crisis scenarios.
However, the opening of twenty-nine private
banks and thirty-one foreign banks by December
2007 has been a major milestone in the history of
the banking sector in the country. The entry of
such banks has several benefits. Indian banks
have been forced to become more competitive as
they have to compete with extremely efficient
services provided by the foreign banks. These
banks originated from 19 countries in addition to
34 foreign banks operated in India through
representative offices. Indian banks continued to
rapidly expand their existence overseas. During
2006-07, nine PSBs and two new private sector
banks operated with ten branches, two
subsidiaries with six representative offices and
one joint venture unit mainly in the Asian and
Middle-East countries. The Bank of Baroda,
among all other Indian banks, has largest
operating units functioning abroad. In addition to
the private sector banks, foreign banks are also
operating in India. The total number of foreign
banks operating in India was 31 as on December
2007 with 273 branches. Such foreign banks are:
(1) ABN-AMRO Bank N.V., (2) Abu Dhabi
Commercial Bank Ltd., (3) American Express
Bank Ltd., (4) Antwerp Diamond Bank, (5) Arab
Bangladesh Bank Ltd., (6) Bank International
Indonesia, (7) Bank of America NA, (8) Bank of
Bahrain & Kuwait B.S.C., (9) Bank of Ceylon, (10)
Bank of Nava Scotia, (11) Bank of TokyoMitsubishi Ltd., (12) Barclays Bank PLC, (13) BNP
Paribas, (14) Calyon Bank, (15) Chinatrust

17

Commecial Bank, (16) Citi Bank NA, (17)

Deutsche Bank Ag, (18) Development Bank of
Singapore Ltd., (19) HSBC Ltd., (20) ING Bank
N.V., (21) JP Morgan Chase Bank., (22) Krung Thai
Bank Public Co. Ltd., (23) Mashreqbank PSC, (24)
Mizuho Corporate Bank Ltd., (25) Oman
International Bank S.A.O.G., (26) Shinhan Bank,
(27) Societe Generale, (28) Sonali Bank, (29)
Standard Chartered Bank, (30) State Bank of
Mauritius Ltd. and (31) UFJ Bank Ltd. Almost all
the foreign banks operating in India are
multinationals. Indian business forms only a
small fraction of their entire global business.
From Indias point of view, the entry of foreign
banks has several benefits. The most important
thing that the Indian banks have been forced to
become more competitive as they have to compete
with extremely efficient services provided by the
foreign banks. There is an inflow of new banking
technology and also new financial products
which in the normal course may not be available
for the borrowers and investors in this country.
Moreover, foreign banks have great access to the
international network which facilitates import of
ideas and systems regarding the financial
environment available internationally and the
extent to which it can be adopted in the host
country. The foreign banks can also have positive
impact on the levels of foreign investment in
India. The branch of the foreign banks operating
in India can often act as an important determinant
for foreign corporations wishing to invest in
India. Foreign investors usually rely on bankers
judgement for overseas investment. Such banks
are an important medium for projecting the
countrys image abroad. Thus, foreign banks have
provided Indian operations access to foreign
collaborations as well as introduced foreign
companies to Indian bankers. Presence of foreign
banks also helps Indian corporations and
government agencies to have access to
international capital markets.

Conclusion
The banking sector in India has undergone
remarkable changes since the economic reforms
initiated in 1991-92. The period has been marked
by a slew of reforms in the sector, which provided

18

Gyanpratha - Vol. 7 | Issue 1 | June 2015

the much needed impetus for the growth of the

sector as a whole. The major reform initiatives
during this period include deregulation of
interest rates, adoption of prudential norms in
terms of capital adequacy, asset classification and
provisioning, lowering of reserve requirements in
terms of Statutory Liquidity Ratio (SLR) and Cash
Reserve Ratio (CRR), dilution of government
equity holding in public sector banks, opening of
the sector to private participation, permission to
foreign banks to expand their operations through
subsidiaries, introduction of universal banking,
greater emphasis on risk management by
allowing banks to participate in instruments such
as interest rate swaps, cross country forward
contracts, liquidity adjustment facility,
liberalisation of FDI norms in banks and the
introduction of Real Time Gross Settlement
(RTGS), among others. Those measures along
with Reserve Bank of Indias (RBI) efforts to adopt
international banking standards and best
practices as prescribed in the Basel Accords have
no doubt helped enormously the banking
industry to enter a new era. In February 2005, RBI
had stated in its Road Map for Presence of
Foreign Banks in India that it would revisit the
policy in 2009 and explore allowing Foreign banks
a larger play locally (giving national treatments
and market access within WTO norms) subject to
interests of all stakeholders. RBI has been much
more liberal in its policies towards foreign banks
vis--vis developed countries.

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