Banking in India

1. Historical Aspects

• Early Banking in India:

  • The earliest form of banking in India can be traced back to the 17th century with the establishment of the Bank of Hindustan (1770).
  • The Bank of Bengal (1773) and Bank of Bombay (1786) were established under the East India Company.
  • These banks were primarily used for facilitating trade and managing the finances of the British East India Company.

• Formation of the Imperial Bank of India:

  • In 1921, the Imperial Bank of India was formed by merging the Bank of Bengal, Bank of Bombay, and Bank of Madras.
  • It was the first truly national bank in India and was later reorganized as the State Bank of India (SBI) in 1955.

• Post-Independence Banking Development:

  • After independence in 1947, the Indian government took steps to strengthen the banking system.
  • The Reserve Bank of India (RBI) was established in 1935 and became the central bank of India.

2. Current Stage

3. Types of Banks

A. Public Sector Banks

• Definition: Banks owned and controlled by the Government of India.
• Examples: State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Canara Bank, Union Bank of India.
• Role: Major contributors to economic growth, focus on lending to priority sectors like agriculture, MSMEs, and infrastructure.
• Key Features:
  • Operate under the Banking Regulation Act, 1949
  • Most of them are public sector undertakings (PSUs)

B. Private Sector Banks

• Definition: Banks owned by private entities or individuals.
• Examples: HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank.
• Role: Focus on customer service, technology, and innovation.
• Key Features:
  • Operate under the Banking Regulation Act, 1949
  • Most are publicly listed companies
  • Allowed to operate in all sectors except those reserved for public banks

C. Foreign Banks

• Definition: Banks incorporated outside India but operating in India.
• Examples: HSBC, Standard Chartered, Citibank, DBS Bank.
• Role: Provide international banking services, foreign exchange, and investment banking.
• Key Features:
  • Operate under the Foreign Exchange Management Act (FEMA), 1999
  • Subject to RBI regulations and prudential norms
  • Allowed to operate in India under the Automatic Route (up to 100% FDI)

D. Regional Rural Banks (RRBs)

• Definition: Banks established to provide credit and other financial services to rural areas.
• Examples: Vijaya Bank, Corporation Bank (now merged with SBI), etc.
• Role: Serve rural and semi-urban areas, focus on agricultural and small-scale industries.
• Key Features:
  • Operate under the RRB Act, 1975
  • Funded by the National Bank for Agriculture and Rural Development (NABARD)
  • Most RRBs have been merged with public sector banks in recent years

4. Banking Regulation Act of 1949

• Enacted in: 1949
• Objective: To regulate and control the banking business in India.
• Key Provisions:
  • Defines the term “bank” and the activities of a bank.
  • Regulates the establishment, functioning, and closure of banks.
  • Empowers the Reserve Bank of India (RBI) to supervise and regulate banking operations.
  • Provides for the Banking Companies Act, 1949 and the Banking Regulation Act, 1949 as separate acts.
• Significance:
  • Laid the foundation for a modern banking system in India.
  • Facilitated the nationalization of banks in 1969 and 1981.

5. Nationalization of Banks

A. First Nationalization (1969)

• Date: April 19, 1969
• Banks Nationalized:
  • 14 major commercial banks including:
    • Bank of India
    • Indian Bank
    • Punjab National Bank
    • Canara Bank
    • Indian Overseas Bank
    • United Bank of India
    • Bank of Baroda
    • Allahabad Bank
    • Punjab & Sind Bank
    • Corporation Bank
    • United Commercial Bank
    • New Bank of India
    • Oriental Bank of Commerce
    • Indian Bank
• Reasons:
  • To ensure equitable distribution of credit, especially to agriculture and small industries.
  • To control inflation and stabilize the economy.
  • To align the banking sector with the goals of planned economic development.

B. Second Nationalization (1981)

• Date: April 19, 1981
• Banks Nationalized:
  • 6 additional banks including:
    • Syndicate Bank
    • Andhra Bank
    • Vijaya Bank
    • UTI Bank
    • Lakshmi Vilas Bank
    • New India Assurance Company (later merged with other banks)
• Impact:
  • Further strengthened the public sector banking system.
  • Increased the role of public sector banks in economic development.
  • Led to the formation of National Bank for Agriculture and Rural Development (NABARD) in 1982.

6. Key Facts for Competitive Exams (SSC, RRB)

• First Bank in India: Bank of Hindustan (1770)
• Imperial Bank of India: Formed in 1921 by merging Bengal, Bombay, and Madras banks.
• State Bank of India (SBI): Established in 1955 from the Imperial Bank.
• Reserve Bank of India (RBI): Established in 1935, became the central bank in 1949.
• Nationalization of Banks (1969): 14 banks nationalized.
• Nationalization of Banks (1981): 6 more banks nationalized.
• RRB Act, 1975: Established Regional Rural Banks to serve rural areas.
• FDI in Banking: Allowed up to 100% under the automatic route.
• PMJDY: Launched in 2014 to promote financial inclusion.
• UPI (Unified Payments Interface): Launched by NPCI in 2016, now used by over 3 billion users.