Evolution of Banking Sector –

The term "banking" as we know it today originated in the Western world. It was
introduced to India by British rulers in the 17th century. Since then, a number of
changes have occurred due to the evolution of banking sector, and Indian banks are
now among the best in emerging market economics, with a strong focus on
globalisation.

Banks are regarded as the backbone of the country's financial system, and they also
play an important role in the nation's economic development. Today, commercial banks
in India are classified as Private, Public scheduled and non-scheduled banks, Regional
and Rural, and Cooperative Banks.

What is a Bank?

• A bank is a type of financial intermediary as it mediates between the savers and

borrowers. It does so by accepting deposits from the public and lending money to
businesses and consumers.
• Its primary liabilities are deposits and primary assets are loans.
• It essentially serves as a conduit between those with excess capital and those in need
of those funds. In general, a country's banking system improves the efficiency of
economic transactions.
• Banks are regulated by the country's central bank—in India, the RBI (Reserve Bank of
India).
• Banking sector in India truly reflects a mixed economy, with public, private, and
foreign banks.

Stages of Evolution
Phase I – Pre-Independence Phase (1786-1947)

• The "Bank of Hindustan," established in 1770 in the then-Indian capital of Calcutta,

was the country's first bank. However, this bank did not succeed and closed its doors in
1832.
• Over 600 banks were registered in the country during the pre-independence period, but
only a few survived.
• During British rule in India, the East India Company established three banks known as
the Presidential Banks: The Bank of Bengal, the Bank of Bombay, and the Bank of
Madras.
 • These three banks were eventually merged into a single bank in 1921, which was
known as the “Imperial Bank of India.”
• The Imperial Bank of India was later nationalised and renamed The State Bank of
India, which is now the largest public sector bank in India.
• In the history of Indian banking, the Oudh Commercial Bank was the country's first
commercial bank.
• Other banks founded in the nineteenth century, such as Allahabad Bank (Est. 1865)
and Punjab National Bank (Est. 1894), have withstood the test of time and continue to
exist today.

Phase II – Post Independence Phase (1947-1991)

• At the time of India's independence, all of the country's major banks were privately led,
which was a source of concern because people in rural areas were still reliant on
money lenders for financial assistance.
• To address this issue, the then-Government decided to nationalise the banks. The
Banking Regulation Act of 1949 was used to nationalise these banks.
• The Reserve Bank of India, on the other hand, was nationalised in 1949.
• Following the formation of the State Bank of India in 1955, another 14 banks were
nationalised between 1969 and 1991. These were the banks with more than 50 crores
in national deposits.
• Another six banks were nationalised in 1980, bringing the total to twenty.
• Aside from the aforementioned 20 banks, seven SBI subsidiaries were nationalised in
1959.
• Except for the State Bank of Saurashtra, which was merged in 2008, and the State
Bank of Indore, which was merged in 2010, all of these banks were merged with the
State Bank of India in 2017.
• In addition to nationalising private banks, the Indian government established a few
financial institutions between 1982 and 1990 to achieve specific goals.
o EXIM Bank – a bank that promotes both imports and exports.
o The National Housing Board – It is responsible for funding housing projects
across the country.
o National Bank for Agriculture and Rural Development (NABARD) – for
agricultural development.
o Small Industries Development Bank of India (SIDBI) – for lending money to
small-scale Indian businesses.

Phase III – LPG Era (1991-Till Date)

• Once the banks have been established in the country, regular monitoring and
regulations must be followed in order to maintain the profits generated by the banking
sector.
• The final or ongoing phase of the banking sector's development is critical.
 • To ensure the stability and profitability of the Nationalised Public Sector Banks, the
Government decided to form a committee led by Shri. M Narasimham to oversee the
various banking reforms in India.
• The introduction of private sector banks in India was the most significant development.
• The Reserve Bank of India granted licences to ten private sector banks to establish
themselves.
• Other notable changes and developments during this time period included:
o Foreign banks such as Citibank, HSBC, and Bank of America established
branches in India.
o The nationalisation of banks has come to a halt.
o The Reserve Bank of India and the government treated public and private sector
banks equally.
o Payments banks were established.
o Small finance banks were allowed to open branches across India.
o Banks began to digitalize transactions and other banking operations.

State Bank of India

• The State Bank of India is India's largest commercial bank and occupies a unique
position in the country's modern commercial banking system.
• It was established on July 1, 1955, following the nationalisation of the Imperial
Bank of India.
• In 1921, the Imperial Bank of India was formed by the merger of the three Presidency
Banks of Madras, Bombay, and Bengal.
• Until the establishment of the Reserve Bank of India in 1935, the Imperial Bank of India
performed certain central banking functions in addition to its normal commercial
banking functions.
• It used to serve as the government's banker, as a banker's bank, and as a clearing
house.
• Following the establishment of the Reserve Bank of India, the Imperial Bank of India
relinquished its central banking functions but continued to act as the Reserve Bank's
agent in areas where the latter did not have branches.
• The Imperial Bank of India was nationalised and renamed the State Bank of India in
1955, following the recommendations of the Rural Credit Survey Committee, through
the State Bank of India Act 1955.

Nationalisation of Banks

• The nationalisation of banks altered the history of India's banking system.

• The 14 largest commercial banks were nationalised by then-Prime Minister Indira
Gandhi in 1969.
 • Nationalization is the process of converting a private stake into a public stake,
essentially increasing the government's share of the banking sector.
• The primary goal of this move was to reduce the concentration of power and wealth in
the hands of a few families who owned and controlled these financial institutions.
• There were other reasons for nationalisation as well, such as:
o To assist India's agricultural sector
o To mobilise individual savings
o To grow India’s banking network by opening more branches
o To boost priority sectors by providing banking services

Merger of Banks

• The Banking Regulation Act of 1949 specifies the procedures for bank consolidation.
• The idea of bank mergers has been floating around since 1998, when the M.
Narasimham Committee recommended to the government that banks be merged into a
three-tiered structure.
• Any two public sector banking entities may initiate merger talks, but the merger
scheme must be finalised by the government in consultation with the central bank and
voted on in Parliament.
• The scheme may be modified or rejected by Parliament. Parliamentary approval is also
required in the case of a merger between a public sector bank and a private bank.
• Most bank mergers have resulted from the central bank's efforts to safeguard the
financial system and depositors' funds.
• Some are also motivated by the need for consolidation and growth.

Narasimham Committee - I

• The Narasimham Committee laid the groundwork for the Indian banking sector's
reform.
• The Committee, which was formed in 1991, issued two reports in 1992 and 1998, both
of which focused on improving the efficiency and viability of the banking sector.
• The mission of Narasimham Committee - I was to investigate all aspects of the
financial systems' structure, organisation, functions, and procedures in order to
recommend improvements in their efficiency and productivity

Narasimham Committee - II

• The Narasimham Committee - II was guided by the fundamental philosophy that

competition is a harsh taskmaster with no room for laxity in its vocabulary.
 • As a result, this committee insisted on significant legal and technological reforms in
order to increase the efficiency of Indian banks and make them more globally
competitive.

Conclusion
In India, the banking sector is critical to the country's economic development. Numerous changes
have occurred within this industry over the centuries, ranging from technological advancement to
the diversification of financial services and products.