Banking in India is indeed as old as Himalayas. But, the banking functions became an effective force only after the first decade of 20th century. To understand the history of modern banking in India, one has to refer to the “English Agency Houses” established by the East India Company.
These Agency Houses were basically trading firms and carrying on banking business as part of their main business. Because of this dual functions and lack of their own capital (Agency Houses depend entirely on deposits for their capital requirements) they failed and vanished from the scene during the third decade of 18th century.
The East India Company laid the foundations for modern banking in the first-half of the 19th century with the establishment of the following three banks:
(i) Bank of Bengal in 1809
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(ii) Bank of Bombay in 1840
(iii) Bank of Madras in 1843
These banks are also known as “Presidency Banks” and they functioned well as independent units.
During the last part of 19th century and early phase of 20th century, the ‘Swadeshi Movement’ induced the establishment of a number of banks with Indian Management.
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For example, Punjab National Bank Ltd. in 1895, The Bank of India Ltd. in 1906, The Canara Bank Ltd. in 1906, The Indian Bank Ltd. in 1907, The Bank of Baroda Ltd. in 1908, The Central Bank of India Ltd. in 1911 and many other banks were established on the same line.
But most of the weak banks went bankrupt due to wrong policy decisions taken by the management and due to severe banking crisis during 1913-18, the period of World War I. However, the stronger and well managed banks like those mentioned above survived the crisis.
In 1920, the “Imperial Bank of India Act” was passed for amalgamating the three Presidency Banks. As such, the ‘Imperial Bank of India’ was established in 1921. It was given power to hold government funds and manage the Public debt. The branches of the bank were functioning as clearing houses (Agency for effecting settlement of funds among banks). However, it was not authorized to issue currency.
Even though the need for a Central Bank was felt in the 18th century, it could materialize only in the 20th century. On the basis of the recommendations of the Banking Enquiry Committee, the Reserve Bank of India Act was passed in 1934.
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Accordingly the Reserve Bank of India was constituted in 1935 to regulate the issue of Bank notes, securing monetary stability in India and to operate the currency and credit system of the country to its economic development. Initially, it was constituted as a private shareholders’ bank with a fully paid up capital of Rs. 5 crore.
After independence, there was a general attitude towards its nationalization. Thus, the ‘Reserve Bank of India’ (Transferred to public ownership) Act was passed in 1948. Accordingly, the entire Share Capital of the bank was acquired by the Central Government from the private shareholders against compensation and it was nationalized on January 1, 1949.
The total value of compensation paid by Government amounted to Rs. 5.54 crore or Rs. 118.63 per share of Rs. 100 paid up. It is interesting to note that the paid up capital of Reserve Bank continues to remain at Rs. 5.00 crore even now.
In 1955, the ‘State Bank of India Act’ was passed. Accordingly the ‘Imperial Bank’ was nationalized and ‘State Bank of India’ emerged with the objective of extension of banking facilities on a large scale, specifically in the rural and semi-urban areas and for various other public purposes.
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In 1959, the ‘State Bank of India’ (Subsidiary Banks) Act was passed by which the public sector banking was further extended. The following banks were made the subsidiaries of State Bank of India:
(i) The State Bank of Bikaner
(ii) The State Bank of Jaipur
(iii) The State Bank of Indore
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(iv) The State Bank of Mysore
(v) The State Bank of Patiala
(vi) The State Bank of Hyderabad
(vii) The State Bank of Saurashtra
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(viii) The State Bank of Travancore
In 1963, the first two banks were amalgamated under the name of “The State Bank of Bikaner and Jaipur”. In 1969, fourteen major Indian commercial banks were nationalised.
These banks are Allahabad Bank, Bank of Baroda, Bank of India, 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, United Commercial Bank and Vijaya Bank.
And in 1980 six more banks were nationalised. These banks constitute the public sector banks while the other scheduled banks and non-scheduled banks are in the private sector.