History of Banking in India: Nationalisation, RBI and PYQs

Banking in India began as private trade finance and grew into the arm of the State that reaches every village. Examiners like the subject because its landmarks are dates and names: the year a bank was founded, the commission that recommended the Reserve Bank, the two rounds of nationalisation and the committees that opened the industry again after 1991. This chapter takes the story in order and fixes the dates worth memorising.

Agency houses and the presidency banks

The first bank on Indian soil was the Bank of Hindustan, started at Calcutta in 1770 by the agency house Alexander and Company; it failed in 1832. The General Bank of India followed in 1786 and lasted only a few years. Both were European ventures that financed trade rather than served the public.

The banks that mattered were the three presidency banks, set up under charters obtained from the East India Company. The Bank of Calcutta was established in 1806 and renamed the Bank of Bengal in 1809; the Bank of Bombay came in 1840 and the Bank of Madras in 1843. They issued notes, held government balances and acted as bankers to the government of their presidency. On 27 January 1921 the three were amalgamated into the Imperial Bank of India, which worked as the country's central bank in everything but name until 1935.

The swadeshi banks

Allahabad Bank, founded in 1865, is the oldest joint stock bank in India. Punjab National Bank, registered in 1894 and opened at Lahore, was the first bank floated with wholly Indian capital and Indian management, and Lala Lajpat Rai was among the men behind it. The swadeshi movement of 1905 onwards produced a crop of banks that are still household names: Canara Bank and Bank of India in 1906, Indian Bank in 1907, Bank of Baroda in 1908, founded by Maharaja Sayajirao Gaekwad III, and Central Bank of India in 1911, founded by Sorabji Pochkhanawala and described as the first entirely Indian-owned commercial bank. A run of failures between 1913 and 1917 showed that banks needed a regulator.

The Reserve Bank of India

The Hilton Young Commission, formally the Royal Commission on Indian Currency and Finance, recommended in 1926 that currency and credit be placed in the hands of a single central bank. The Reserve Bank of India Act was passed in 1934 and the Bank commenced operations on 1 April 1935, taking over note issue from the Controller of Currency and the management of government accounts and public debt from the Imperial Bank. It began as a shareholders' bank with its central office at Calcutta, and the office moved to Bombay in 1937. Sir Osborne Smith was the first Governor and C. D. Deshmukh the first Indian Governor. Under the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 the Bank was nationalised, and from 1 January 1949 it has been owned by the Government of India. The same year Parliament passed the Banking Companies Act, since renamed the Banking Regulation Act, 1949, which gave the RBI the power to license, inspect and wind up banks.

From the Imperial Bank to the State Bank of India

The All India Rural Credit Survey Committee, headed by A. D. Gorwala, reported that rural credit needed a bank with reach across the country. Parliament passed the State Bank of India Act, 1955, and on 1 July 1955 the Imperial Bank of India became the State Bank of India. The State Bank of India (Subsidiary Banks) Act, 1959 brought in the banks of the former princely states as its subsidiaries; they were merged into the parent, along with Bharatiya Mahila Bank, on 1 April 2017.

Nationalisation: 1969 and 1980

On 19 July 1969 the Government, with Indira Gandhi holding both the Prime Minister's and the Finance Minister's offices, issued an ordinance nationalising the fourteen largest Indian scheduled commercial banks, those with deposits of ₹50 crore or more. A second round on 15 April 1980 took over six more banks, each with deposits of ₹200 crore or more. New Bank of India, one of the six, was merged into Punjab National Bank in 1993. Nationalisation was followed by branch expansion into unbanked districts, priority sector lending targets and the Lead Bank Scheme of 1969, under which one bank takes charge of banking development in a district.

Banks for the village

Cooperative credit is older than commercial banking in the countryside: the Cooperative Credit Societies Act was passed in 1904. Regional Rural Banks were recommended by the Narasimham Working Group and the first five opened on 2 October 1975, the earliest being Prathama Bank at Moradabad, sponsored by Syndicate Bank; the Regional Rural Banks Act followed in 1976. The National Bank for Agriculture and Rural Development, recommended by the Sivaraman Committee, was set up on 12 July 1982 as the apex institution for rural credit. IDBI had been established in 1964, EXIM Bank in 1982 and SIDBI in 1990.

Reform, private banks and differentiated banks

The Narasimham Committee of 1991 asked for fewer controls, prudential norms and entry for private capital, and the Narasimham Committee of 1998 followed with reforms of capital and supervision. RBI guidelines of 1993 let new private banks in, and UTI Bank, now Axis Bank, opened in 1994, followed by ICICI Bank and HDFC Bank. The rupee had already been de-linked from the pound sterling in 1975 and tied to a basket of currencies. In the 2010s the RBI licensed differentiated banks on the lines suggested by the Nachiket Mor Committee: payments banks, which accept deposits up to a ceiling but cannot lend, and small finance banks, which lend to small borrowers. India Post Payments Bank started on 1 September 2018. On the public sector side the movement went the other way: amalgamations notified for 1 April 2019 and 1 April 2020 reduced the number of public sector banks to twelve.