History of Indian Banking – Ancient to Modern | UPSC Notes

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History of Indian Banking – Ancient to Modern | UPSC Notes

History of Indian Banking

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Ancient and Medieval Period

Banking activities in India can be traced back to ancient times, including:
- Adesha (Mauryan period): An order on a banker to pay a sum to a third party.
- Moneylenders and indigenous bankers (Seths, Sahukars, Mahajans) operated widely.
During medieval times, Hundis (traditional bills of exchange) were common instruments for credit and trade.

Modern Banking Beginnings

1770s–1800s: Early European Banks
- Bank of Hindustan (1770) was the first bank in India, established in Calcutta by Alexander and Co. (ceased operations in 1832).
- Other early attempts included the General Bank of India (1786) and the Bengal Bank (1784).
1806–1843: Presidency Banks
- Bank of Calcutta (1806) ➔ renamed Bank of Bengal (1809).
  - It was the first joint-stock bank of British India sponsored by the Government of Bengal
- Bank of Bombay (1840)
- Bank of Madras (1843)
- These three became the pillars of banking in colonial India.
- The three presidency banks were mainly Anglo-Indian institutions that emerged either due to the requirements of imperial finance or the needs of local European trade, rather than being arbitrarily introduced from outside to modernise India’s economy.
- These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.
1921: Imperial Bank of India
- The Presidency Banks merged to form the Imperial Bank of India, which acted as:
  - A quasi-central bank: Initially, as per itsroyal charter, it acted as the central bank for India prior to the formation of theReserve Bank of India(RBI) in 1935
  - Banker to the government.
  - Banker’s bank.
- Hence, the Imperial Bank of India carried out all the typical functions of a commercial bank. In addition, since India did not have a central bank until 1935, it also undertook several responsibilities that are usually performed by a central bank.
- This later became the State Bank of India (SBI) in 1955 after nationalisation.

Post-Independence

Post-Independence

1947: Over 600 commercial banks existed.
1955: Imperial Bank nationalized into State Bank of India (SBI) to expand rural banking.

Bank Nationalization Phases

1969: 14 large private banks nationalized to:
- Control the “commanding heights” of the economy.
- Expand branch networks and priority sector lending.
1980: 6 more banks nationalized, raising public sector banks’ share of deposits to ~92%.

Key Outcomes (1969–1991)

Rapid growth in branches, deposits, and credit.
Expanded access in rural areas.
Increased lending to agriculture and small industries.
BUT: Banks became unprofitable, inefficient, and financially unsound due to:
- Excessive regulatory requirements (high SLR/CRR).
- Concessional directed lending.
- Administered interest rates.
- Lack of competition.

Banking Sector Problems by 1991

Banks were a captive source of funds for government deficits.
Over 50% of deposits were pre-empted through SLR and CRR.
40% of the remaining credit had to go to priority sectors.
Severe structural inefficiencies.

Major Banking Reforms:

Narasimham Committee – I (1991)
- Key Recommendations:
  - Reduce SLR to 25%.
  - Deregulate interest rates gradually.
  - With the deregulation of interest rates, the RBI should rely more on open market operations, such as buying and selling securities, rather than frequently adjusting the Cash Reserve Ratio (CRR) to control the secondary expansion of credit.
  - The directed credit programme, which mandates lending a minimum amount to specific sectors at prescribed or concessional interest rates, should be gradually phased out or redefined.
  - Create Asset Reconstruction Company (ARC) for bad debts.
  - The duality of control over the banking system between the RBI and the Ministry of Finance should be eliminated, making the RBI the sole primary authority for regulating the banking sector.
Narasimham Committee – II (1998)
- Key Recommendations:
  - Greater autonomy for public sector banks.
  - Reduce GOI shareholding to 33% for for increased autonomy.
  - The committee recommended merger of large Indian banks to make them strong enough for supporting international trade.
  - Strengthen capital adequacy norms:The Narasimham Committee also recommended that the government consider increasing the prescribed capital adequacy ratio to enhance banks’ financial strength and risk-taking ability.
  - The Committee recommended that, as the regulator of the monetary system, the Reserve Bank should not own banks, to avoid any potential conflict of interest. In line with these recommendations, the RBI transferred its shareholdings in public institutions such as SBI, NHB, and NABARD to the Government of India.
- Outcome: Most reforms implemented, including deregulation of rates, improved prudential norms, and recapitalization.
Financial Inclusion – Nachiket Mor Committee (2013–14)
- The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households was established by the RBI in September 2013, with Nachiket Mor as its Chairman.
- Recommendations:
  - Every Indian resident above 18 years of age should have an individual, full-service, safe, and secure bank account.
  - Aadhaar should serve as the primary enabler for the rapid expansion of bank account coverage.
  - Every resident should be within a 15-minute walking distance of a payment access point.
  - All low-income households and small businesses should have access to financial service providers offering appropriate investment and deposit products at affordable charges.
P.J. Nayak Committee (2014)
- Key Recommendations
  - The Committee recommended that the Government establish a Bank Investment Company (BIC) under the Companies Act, 2013. The Government should transfer its current ownership of Public Sector Banks (PSBs) to the BIC. All PSBs would then be incorporated as subsidiaries of the BIC and registered under the Companies Act, becoming limited companies.
  - The Committee suggested that the Government, through the BIC, should reduce its stake in PSBs to below 50% over time.
  - The Bank Investment Company (BIC) would serve as a holding company fully owned by the Government of India.
  - Interim Measure:Since repealing the existing Acts of 1955 and 1970 and setting up the BIC will take time, the Government can, in the interim, establish a Banks Board Bureau (BBB) through an executive order. The BBB would be responsible for selecting and appointing directors and top management in public sector banks and other public financial institutions such as NABARD, SIDBI, and LIC. Once the BIC becomes operational, the BBB would be dissolved.

Major Banking Reforms

Narasimham Committee – I (1991)
- Key Recommendations:
  - Reduce SLR to 25%.
  - Deregulate interest rates gradually.
  - With the deregulation of interest rates, the RBI should rely more on open market operations, such as buying and selling securities, rather than frequently adjusting the Cash Reserve Ratio (CRR) to control the secondary expansion of credit.
  - The directed credit programme, which mandates lending a minimum amount to specific sectors at prescribed or concessional interest rates, should be gradually phased out or redefined.
  - Create Asset Reconstruction Company (ARC) for bad debts.
  - The duality of control over the banking system between the RBI and the Ministry of Finance should be eliminated, making the RBI the sole primary authority for regulating the banking sector.
Narasimham Committee – II (1998)
- Key Recommendations:
  - Greater autonomy for public sector banks.
  - Reduce GOI shareholding to 33% for for increased autonomy.
  - The committee recommended merger of large Indian banks to make them strong enough for supporting international trade.
  - Strengthen capital adequacy norms:The Narasimham Committee also recommended that the government consider increasing the prescribed capital adequacy ratio to enhance banks’ financial strength and risk-taking ability.
  - The Committee recommended that, as the regulator of the monetary system, the Reserve Bank should not own banks, to avoid any potential conflict of interest. In line with these recommendations, the RBI transferred its shareholdings in public institutions such as SBI, NHB, and NABARD to the Government of India.
- Outcome: Most reforms implemented, including deregulation of rates, improved prudential norms, and recapitalization.
Financial Inclusion – Nachiket Mor Committee (2013–14)
- The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households was established by the RBI in September 2013, with Nachiket Mor as its Chairman.
- Recommendations:
  - Every Indian resident above 18 years of age should have an individual, full-service, safe, and secure bank account.
  - Aadhaar should serve as the primary enabler for the rapid expansion of bank account coverage.
  - Every resident should be within a 15-minute walking distance of a payment access point.
  - All low-income households and small businesses should have access to financial service providers offering appropriate investment and deposit products at affordable charges.
P.J. Nayak Committee (2014)
- Key Recommendations
  - The Committee recommended that the Government establish a Bank Investment Company (BIC) under the Companies Act, 2013. The Government should transfer its current ownership of Public Sector Banks (PSBs) to the BIC. All PSBs would then be incorporated as subsidiaries of the BIC and registered under the Companies Act, becoming limited companies.
  - The Committee suggested that the Government, through the BIC, should reduce its stake in PSBs to below 50% over time.
  - The Bank Investment Company (BIC) would serve as a holding company fully owned by the Government of India.
  - Interim Measure:Since repealing the existing Acts of 1955 and 1970 and setting up the BIC will take time, the Government can, in the interim, establish a Banks Board Bureau (BBB) through an executive order. The BBB would be responsible for selecting and appointing directors and top management in public sector banks and other public financial institutions such as NABARD, SIDBI, and LIC. Once the BIC becomes operational, the BBB would be dissolved.

📘 FAQs on History of Banking in India

Q1. When did modern banking begin in India?

Modern banking began in the 18th century, starting with the establishment of the Bank of Hindustan in 1770 in Calcutta. This was followed by other early European banks and the Presidency Banks in the 19th century.

Q2. What were the Presidency Banks?

The three Presidency Banks were:

Bank of Bengal (1806),
Bank of Bombay (1840),
Bank of Madras (1843).

They were merged in 1921 to form the Imperial Bank of India, which later became the State Bank of India in 1955.

Q3. Why were banks nationalized in India?

The Government nationalized major banks in two phases:

1969: 14 large private banks were nationalized to expand credit to agriculture and small industries.
1980: 6 more banks were nationalized to further strengthen control over credit delivery.

The aim was to “control the commanding heights of the economy” and promote financial inclusion.

Q4. What problems did bank nationalization lead to?

Despite expanding banking services, nationalized banks suffered from:

Low profitability
Inefficiency
Rigid regulations (high SLR/CRR requirements)
Excessive directed lending
Lack of competition

Q5. What were the Narasimham Committee reforms?

Two committees chaired by M. Narasimham recommended:

Reducing SLR to 25%
Deregulating interest rates
Strengthening capital adequacy norms
Allowing greater autonomy and competition
These reforms modernized and liberalized Indian banking post-1991.

Q6. What is the P.J. Nayak Committee known for?

The P.J. Nayak Committee (2014) proposed:

Creating a Bank Investment Company (BIC) to hold Government stakes in PSBs
Reducing Government shareholding below 50%
Establishing the Banks Board Bureau (BBB) as an interim step to improve governance.

Q7. What did the Nachiket Mor Committee recommend?

It focused on financial inclusion and recommended:

Universal bank accounts for all adults
Using Aadhaar as the key enabler
Expanding payment access points within walking distance.

Q8. What is the significance of the Imperial Bank of India?

Before the RBI was created in 1935, the Imperial Bank of India acted as:

Banker to the government
Banker’s bank
Quasi-central bank for India

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