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Banking in India

Phase I Pre-independence
Phase (up to 1947)

India had centuries old tradition of


indigenous Banking.

There existed many evidences showing that


the concept of Banking was not new to
India.

As Chanakyas Arthashashtra about 3000


B.C. showed facts that Banking was already
there in powerful existence in India.

Bank of Hindustan to Presidency


Banks

The Bank of Hindustan was established in


1770 and due to the financial crisis, it was
closed in 1832.

Emergence of three Presidency Banks: Bank


of Bengal (1809), Bank of Bombay (1840)
with a capital of Rs.52 lakhs, and Bank of
Madras (1843)

Bank of Calcutta

TheBank of Calcuttawas founded on 2


June 1806, mainly to fundGeneral
Wellesley's wars against Tipu Sultanand
theMarathas.

It was the first bank of India and was


renamed Bank of Bengal on 2 January 1809.

Bank of Madras

TheBank of Madras
was one ofIndia's three
Presidency Banks.

The Bank of Madras was formed in 1843 as


a joint stock company with a capital of3
million.

Bank of Bombay

Bank of Bombaywas the second of the


three presidency banks of theRaj period.

It was established, pursuant to a charter of


the British East India Company, on 15th
April, 1840.

The bank was headquartered inBombay,


now calledMumbai.

Imperial Bank of India


All three Presidency banks were
incorporated asjoint stock companiesand
were the result ofroyal charters.
These three banks received the exclusive
right to issue paper currency till 1861 when,
with the Paper Currency Act, the right was
taken over by the Government of India.
The Presidency banks amalgamated on 27
January 1921, and the re-organised banking
entity took as its nameImperial Bank of
India.

State Bank of India

Pursuant to the provisions of the State Bank


of India Act of 1955, theReserve Bank of
India, which isIndia's central bank, acquired
a controlling interest in the Imperial Bank of
India.
On 1 July 1955, the Imperial Bank of India
became the State Bank of India.
In 2008, thegovernment of India acquired
the Reserve Bank of India's stake in SBI so as
to remove any conflict of interest because
the RBI is the country's banking regulatory
authority.

Associate Banks

In 1959, the government passed the State


Bank of India (Subsidiary Banks) Act, which
made eight state banks associates of SBI. A
process of consolidation began on 13
September 2008, when theState Bank of
Saurashtramerged with SBI.

RBI

The Reserve Bank of India was founded on 1 April 1935


to respond to economic troubles after theFirst World
War.

RBI was conceptualized as per the guidelines, working


style and outlook presented by DrB. R. Ambedkaras
written in his book The Problem of the Rupee Its
origin and its solution. in front of the Hilton Young
Commission.

The bank was set up based on the recommendations of


the 1926 Royal Commission on Indian Currency and
Finance, also known as the HiltonYoung Commission.

RBI
The original choice for the seal of RBI was The East
India CompanyDouble Mohur, with the sketch of the
Lion and Palm Tree.
However it was decided to replace the lion with the
tiger, the national animal of India.
The Preamble of the RBI describes its basic functions

to regulate the issue of bank notes,


keep reserves to secure monetary stability in India, and
generally to operate the currency and credit system in the
best interests of the country.

The Central Office of the RBI was established in


Calcutta (now Kolkata), but was moved to Bombay
(now Mumbai) in 1937.

RBI
The RBI also acted as Burma's central bank,
except during the years of theJapanese
occupation of Burma(194245), until April 1947,
even though Burma seceded from the Indian Union
in 1937.
After thePartition of Indiain 1947, the bank
served as the central bank forPakistanuntil June
1948 when theState Bank of Pakistancommenced
operations.
Though set up as a shareholders bank, the RBI
has been fully owned by theGovernment of
Indiasince its nationalization in 1949.

RBI

The Reserve Bank does not deal directly with the members of public
but acts as bankers bank maintaining deposit accounts of all other
banks and advances money to banks whenever needed.

It regulates the volume of currency and credit, and has powers of


control and supervision over all banking institutions.

The Reserve Bank also acts as goverment banker and maintains the
record of goverment receipts, payments and borrowings under various
heads.

It advises the government on monetary and credit policy, besides


deciding on the rate of interest on bank deposits and bank loans.

It is the custodian of currency reserves consisting of foreign exchange,


gold and other securities.

Phase II-Pre-nationalization
Phase (1947-1969)

At the time of independence, there were 648


Banks in the Indian Union with a total of 4820
Branch Offices.

In January 1949, the Reserve Bank of India was


nationalized.

Reserve Bank of India assumed extensive


regulatory and supervisory powers under the
Banking Companies Act 1949, later renamed as
Banking Regulation Act.

Nationalization Phase

The Government of India, under Indira Gandhi issued an ordinance ('Banking


Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and
nationalizedthe 14 largest commercial banks with effect from the midnight of
19 July 1969.
These banks contained 85 percent of bank deposits in the country.

Within two weeks of the issue of the ordinance, theParliamentpassed the


Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it
received thepresidentialapproval on 9 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
Government of India controlled around 91% of the banking business of India.

Politics behind
Nationalisation

Nationalisation of banks was a purely


political and populist act in the midst of
power struggle within the Congress party.

It was Indira Gandhis masterly counterstroke on the Syndicate of Congress party


bosses and Morarji Desai who had suddenly
combined in an effort to oust her from the
office of Prime Minister.

Legal Aspects:

Bank is an institution which deals in money


and credit.

It accepts deposits from the public and


grants loans and advances to those who are
in need of funds for various purposes.

Banking

Banking is an activity which involves


acceptance of deposits for the purpose of
lending or investing.

In addition to accepting deposits and lending


funds, banking also involves providing various
other services alongwith its main banking
activity.

These are mainly agency services, but include


several general services as well.

Banking as defined under BR


Act, 1949

The Banking Regulation Act, 1949 defines


banking as an activity of accepting funds
from the public for the purpose of lending or
investment.

Primary and Subsidiary


Functions

The essential features of banking activities are as follows:i) accepting deposits from public;
ii) lending or investment of such deposits;
iii) incidental to the activities of accepting deposits for lending or
investing, banks undertake activities like

a) Promoting and mobilizing savings of the public;

b) Providing funds to trade and industry by way of discounting bills, overdraft,


cash credit facility, and transfer of funds from one place to another;

c) Providing agency services to customers, such as

collection of bills,
payment of insurance premium,
purchase and sale of securities, etc.,
issue of travellers cheques,
credit cards,
locker facility, etc;

Types of Banks in India

Commercial banks

Industrial Banks

Foreign Exchange Banks

Development Banks (IDBI, IFCI, SFC)

Regional Rural Banks

Co-operative Banks/Society

Unorganised Banking Sector