INTRODUCTION: Banking in India has its origin as early as the Vedic period. It is believed that the transaction from money lending to banking must have occurred even before the great Hindu jurist, who has devoted a section of his work to deposit his advances and laid down rules relating to rate of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trend commerce. During the day of East India Company, it was the turn of the agency houses to carry on banking business. The general bank of India was the first joint stock bank to be established in the year 1786, the other which followed where the bank of Hindustan and Bengal bank. The bank of Hindustan is reported to have continued till 1906 while the other two failed in mean time. In the first half of the 19 century the East India Company established three banks, the bank of Bengal in 1809, the bank of Bombay in 1840,the bank of Madras in 1843.
These three banks also known as residency bank, where independent units and functioned well. These tree banks where amalgamated in 1920 and new bank, the imperial bank of India was established on 27th jan,1921.with passing of the State Bank of India Act in 1955 the undertaking of the imperial bank of India was taken by the newly constituted State Bank of India. The reserve bank which is the central bank was created in 1935 by passing reserve bank of India act1934.
In the wake of the Swadeshi movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd. Canara Bank Ltd, Indian Bank Ltd, Bank of Baroda Ltd, Central Bank of India Ltd. On July 19,1969,14 major banks of the country were nationalized and 15th April 1980 six more commercial private industry banks were also taken over by the government.
HISTORY OF BANKING IN INDIA
There are three different phases in the history of banking in India.
- Pre-Nationalization Era
- Nationalization Stage
- Post Liberalization Era
1) Pre-Nationalization Era:
In India the business of banking and credit was practiced even in very early times. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The N.R.Institute of Business Management Page 5
Hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.
The modern type of banking, however, was developed by the Agency Houses of Calcutta and Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries.
During the early part of the 19th Century, the volume of foreign trade was relatively small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the East India Company took interest in having its own bank. The government of Bengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was established in 1800. In 1840, the Bank of Bombay and in 1843, the Bank of Madras was also set up.
These three banks also known as “Presidency Bank”. The Presidency Banks had their branches in important trading centers but mostly lacked in uniformity in their operational policies. In 1899, the Government proposed to amalgamate these three banks into one so that it could also function as a Central Bank, but the Presidency Banks did not favor the idea. However, the conditions obtaining during world war period (1914-1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up in 1921. The Imperial Bank of India acted like a Central bank and as a banker for other banks.
The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the Country. In 1949, the Banking Regulation Act was passed and the RBI was nationalized and acquired extensive regulatory powers over the commercial banks. In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.
2) Nationalization Stage:
After Independence, in 1951, the All India Rural Credit survey, committee of Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and ten others banks into a newly established bank called the State Bank of India (SBI).
The Government of India accepted the recommendations of the committee and introduced the State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and N.R.Institute of Business Management Page 6 got the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the State Bank of India.
The main objective of establishing SBI by nationalizing the Imperial Bank of India was “to extend banking facilities on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes.”
3) Post-Liberalization Era:
By the beginning of 1990, the social banking goals set for the banking industry made most of the public industry resulted in the presumption that there was no need to look at the fundamental financial strength of this bank. Consequently they remained undercapitalized.
Revamping this structure of the banking industry was of extreme importance, as the health of the financial industry in particular and the economy as a whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the initiation of the real industry reform process in 1992. the reforms have enhanced the opportunities and challenges for the real industry making them operate in a borderless global market place. However, to harness the benefits of globalization, there should be an efficient financial industry to support the structural reforms taking place in the real economy. Hence, along with the reforms of the real industry, the banking industry reformation was also addressed.
The route causes for the lackluster performance of banks, formed the elements of the banking industry reforms.
Some of the factors that led to the dismal performance of banks were.
- Regulated interest rate structure
- Lack of focus on profitability
- Lack of transparency in the bank’s balance sheet
- Lack of competition
- Excessive regulation on organization structure and managerial resource.