The Theory of Everything: Banking In India

By Avik Sarkar|Updated : January 13th, 2022

Banking in India: In India, banking is the foundation for the country's economic progress. With the growth of technology and consideration of people's demands, major changes in the banking system and administration have occurred over time. The history of banking in India extends back to before the country's independence in 1947, and it is a popular topic for questions on various government exams. The evolution of India's banking sector will be discussed in-depth in this article.

Banking Sector is the lifeline of the Indian Economy. The Indian banking sector had gone through different challenges and reformed itself as per the need to regulate money to enhance the life of every citizen of India. For a Banking Aspirant, it is essential to know about the timeline of Events in the Banking Sector.

The Theory of Everything: Banking In India

Ancient India

In India, references to banking and regulations were even found in our scriptures and ancient texts. Debt is even mentioned in our Vedic literature. The Vedas (2000-1400 BCE) is the earliest Indian texts to mention the concept of usury. The word kusidin is translated as a usurer. The Sutras (700-100 BCE) and the Jatakas (600-400 BCE) also mention usury. Also, during this period, texts began to condemn usury. Vasishtha forbade Brahmin and Kshatriya varnas from participating in usury. By the 2nd century CE, usury seems to have become more acceptable. The Manusmriti considers usury an acceptable means of acquiring wealth or leading a livelihood. It also considers money lending above a certain rate, different ceiling rates for different caste, a grave sin. Banking products are also found quoted in Chanakya’s Arthashastra (300 B.C.).Moving to the Modern-day banking system, the concept of banking is laid by the people of Italy under the name Banco.

The Jatakas also mention the existence of loan deeds. These were called rnapatra or rnapanna. Loans deeds were also called rnalekhaya.

Later during the Mauryan period (321-185 BCE), an instrument called adesha was in use, which was an order on a banker directing him to pay the sum on the note to a third person, which corresponds to the definition of a modern bill of exchange. In large towns, merchants also gave letters of credit to one another.

Medieval era

The use of loan deeds continued into the Mughal era and was called dastawez. Two types of loans deeds have been recorded. The dastawez-e-indultalab was payable on demand and dastawez-e-miadi was payable after a stipulated time. The use of payment orders by royal treasuries, called barattes, has been also recorded. There are also records of Indian bankers using issuing bills of exchange to foreign countries. The evolution of hundis, a type of credit instrument, also occurred during this period and remains in use.


Pre-Independence i.e. before 1947

  • This phase is characterized by the presence of a large number of banks (more than 600).

The banking system commenced in India with the foundation of the Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832. After that many banks came but some were not successful like -

  • General Bank of India (1786-1791)
  • Oudh Commercial Bank (1881-1958) - the first commercial bank of India.

Whereas some are successful and continue to lead even now like -

  • Allahabad Bank (est. 1865)
  • Punjab National Bank (est. 1894, with HQ in Lahore (that time))
  • Bank of India (est. 1906)
  • Bank of Baroda (est. 1908)
  • Central Bank of India (est. 1911)

While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India.

 Imperial Bank of India was later renamed in 1955

as the State Bank of India.


In April 1935, the Reserve Bank of India was formed based on the recommendation of the Hilton Young Commission (set up in 1926).

In this period, most of the banks were small in size and suffered from a high rate of failures. As a result, public confidence is low in these banks and deposit mobilization was also very slow. People continued to rely on the unorganized sector (moneylenders and indigenous bankers).

Post-Independence from 1947 to 1991

Broadly the main characteristic feature of this phase is the nationalization of banks. With the view of economic planning, nationalization emerged as an effective measure.


Need for nationalization in India:

a) The banks mostly catered to the needs of large industries, big business houses.

b) Sectors such as agriculture, small-scale industries, and exports were lagging.

c) The poor masses continued to be exploited by the moneylenders.

Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.

14 commercial banks were nationalized on 19th July 1969. Smt. Indira Gandhi was the Prime Minister of India, in 1969. These were -

1. Central Bank of India             

2. Bank of India                            

3. Punjab National Bank

4. Bank of Baroda                     

5. United Commercial Bank           

6. Canara Bank          

7. Dena Bank                              

8. United Bank                               

9. Syndicate Bank              

10. Allahabad Bank                 

11. Indian Bank                                   

12. Union Bank of India

13. Bank of Maharashtra           

14. Indian Overseas Bank

6 more commercial banks were nationalized in April 1980.

These were:

1. Andhra Bank              

2. Corporation Bank                    

3. New Bank of India

4. Oriental Bank of Commerce                             

5. Punjab & Sindh Bank               

6. Vijaya Bank.

Meanwhile, on the recommendation of the M.Narsimhan committee, RRBs (Regional Rural Banks) was formed on Oct 2, 1975.  The objective behind the formation of RRBs was to serve a large unserved population of rural areas and promote financial inclusion.

To meet the specific requirement from the different sectors (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also set up like

  • NABARD (est. 1982)
  • EXIM (est. 1982)
  • NHB (est. 1988)
  • SIDBI (est. 1990)

Impact of Nationalization:

a) Improved efficiency in the Banking system – since the public‘s confidence got boosted.

b) sectors such as Agriculture, small and medium industries started getting funds – led to economic growth.

c) increased penetration of Bank branches in the rural areas.


After 1991 and beyond

  • This period saw remarkable growth in the process of the development of banks with the liberalization of economic policiesEven after nationalization and the subsequent regulations that followed, a large portion of the masses is untouched by the banking services.
  • Considering this, in 1991, the Narsimhan committee gave its recommendation i.e. to allow the entry of private sector players into the banking system. Following this RBI gave licenses to 10 private entities, of which 6 are survived, which are- ICICI, HDFC, Axis Bank, IDBI, Indus, DCB.

             Note: IDBI at present is a government Bank

  • In 1998, the Narsimhan committee again recommended the entry of more private players. As a result, RBI gave license to
  • Kotak Mahindra Bank (1985)
  • Yes Bank (2004)
  • In 2013-14, 3rd round of bank licensing took place. And in 2014 IDFC Bank and Bandhan Bank emerged.
  • To further financial inclusion, RBI also proposed to set up 2 kinds of banks i.e. Payment Banks and Small Banks.


Some Important Facts - 

1. Allahabad Bank, established in 1865 - Allahabad Bank is the oldest Public Sector Bank in India having branches all over India and serving customers for the last 145 years.

2. Imperial Bank of India was later renamed in 1955 as the State Bank of India.

3. The first Bank of India with Limited Liability to be managed by the Indian Board was Oudh Commercial Bank. It was established in 1881 at Faizabad.

4. Punjab National Bank is the first bank purely managed by Indians, which was established in Lahore in 1895.

5. First Truly Swadeshi BankCentral Bank of India is called India’s First Truly Swadeshi bank, which was established in 1911 and wholly-owned and managed by Indians.

6.  Union Bank of India was inaugurated by Mahatma Gandhi in 1919.

7. Osborne Smith was the first governor of the Reserve Bank.

8. CD Deshmukh was the first Indian to be the governor of the Reserve Bank.

9. Savings account system in India was started by Presidency Bank, 1833.

10. The first Indian bank to open an overseas branch is the Bank of India. It established a branch in London in 1946.

11. ICICI Bank was the first Indian bank to provide an internet banking facility.

12. Central Bank of India was the first public bank to introduce Credit cards.

13. ICICI is the first bank to provide a mobile ATM.

14. Bank of Baroda has the maximum number of overseas branches.


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  • When the Reserve Bank of India (RBI) releases money into the economy, it circulates through transactions. The government has the authority to pay its employees, purchase products and services, and provide subsidies, among other things.

  • This enables institutions on the periphery to lend to riskier industries in need of credit without putting the system at risk. Banks are an important part of the Indian environment, and their proper operation is key to the economy's overall performance.

  • The Reserve Bank of India (RBI) oversees India's banking sector, which is governed by the Banking Regulation Act, 1949.

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