The transformation of contemporary Indian banking can be categorized into three distinct phases:
Phase I (1786-1947): The Colonial Period
The foundation was laid down in the eighteenth century with the establishment of the General Bank of India in 1786 and the Bank of Hindustan in 1790. The East India Company established the Bank of Bengal in 1806, the Bank of Madras in 1843, and the Bank of Bombay in 1868, also known as presidency banks. India's oldest Joint Stock bank, The Allahabad Bank, was established in 1865. The Reserve Bank of India was established in 1935, and it took over some of the primary functions of Imperial Bank. During the period between 1913 and 1949, banks were governed by the Indian Companies Act,1913, and the growth was very sluggish, facing periodic failures. Approximately 1,100 small banks were functioning, identified by low deposit mobilization, lesser public confidence, and unequal lending patterns, ignoring the desperate needs of the masses and fragile money market instruments.
Phase II (1947-1991): The Period of Nationalization and Social Control
The Banking Companies Act, 1949, was later renamed the Banking Companies Regulation Act, 1966. After this, the RBI was nationalized in 1949, strengthening the banks' central supervision. SBI resulted from the nationalization of the Imperial Bank of India in 1955, and in 1959, SBI took over eight state-associated banks.
Some of the notable, drastic events in this phase were:
- 361 banks failed in 1947 and 1955
- Agricultural credit was severely neglected – only 2.3% of loans went to farmers in 1950, dropping to 2.2% by 1967.
- 14 major private banks were nationalized in 1969, followed by six more in 1980.
- In 1993, the New Bank of India merged with PNB.
- Profitability declined, capital bases weakened, and Non-Performing Assets rose.
Phase III (1991 onwards): The Period of Banking Sector Reforms
Due to the regulated interest rates, high statutory requirements (SLR), opaque accounting, low competition, and restrictions on private/foreign banks. The 1991 economic crisis triggered reforms to improve efficiency, productivity, and competition, marking a transformation in Indian banking.
Structure of Commercial Banking in India
State Bank of India
In 1959, the government passed the State Bank of India (Associate Banks) Act, which constituted eight banks that previously belonged to princely states as subsidiaries of SBI. SBI became one of the top 50 banks globally in terms of assets after Bharatiya Mahila Bank merged on April 1, 2017.
Nationalized Banks
These banks are under government control. When were the major banks of India nationalized? On July 19, 1969, 14 private banks were taken over; In April 1980, six more banks were added; In 1993, the New Bank of India merged with Punjab National Bank (PNB), reducing the number of nationalized banks to 19 (excluding SBI).
Private Sector Banks
The banking sector reforms of the 1990s aided Private sector banks in gaining prominence in the country. There are 21 private sector banks with more than 33,000 branches across the country.
Foreign Banks
These banks initially came to India in the 1800s, where the Oriental Banking Corporation was the first one in 1842. For a long period until independence, they were strong, powerful, holding a considerable portion of deposits, but after independence, their influence shrank. Liberalization in the 1990s and new RBI policies in 2013 supported them again. However, with more restricted rules, new banks must set up as Indian subsidiaries with a ₹500 crore capital base and follow all the Indian lending norms. They play a crucial role in trade and business financing, but they operate under stricter regulations to keep them on par with Indian banks.
Regional Rural Banks
These were established in 1976 after the working group of rural banks recommended it. The RRBs were formed as a part of a multi-agency approach to rural credit. The RRBs are owned by the Central Government, the State Government, and the Sponsor Bank, whose shares are held in the ratio of 50,15 and 35%, respectively. The government may look at options to merge RRBs operating within the same state, and it has urged state-owned banks to explore these options.
Local Area Banks
These were established in August 1996. LABs are small private banks, and they were expected to bridge the gaps in the credit availability and strengthen the institutional credit framework in the rural and semi-urban areas. They are formed to provide efficient and competitive services by rallying rural savings and, simultaneously, to make them available for investments.
Small Finance Banks
The "Report of the Committee on Financial Sector Reforms – A 100 Small Steps," guided by Raghu Ram Rajan in 2009, recommended the formation of small finance banks. These banks are intended to undertake basic banking activities of acceptance of deposits and lending to unserved people, undeserved sections such as small business units, marginal farmers, micro and small industries, and unorganized sector entities.
Payment Banks
The committee, which the RBI constituted in September 2013 on "Comprehensive financial services for small businesses and low-income households," headed by Dr Nachiket Mor, recommended the formation of Payment Banks. It doesn't involve any credit risk and operates on a smaller scale. It cannot advance loans or issue credit cards. It offers banking services like ATM/debit cards, net banking, third-party transfers, etc.
Cooperative Banking
These provide financial services to agricultural and allied activities, small–scale industries, and self-employed workers. These bring people from far-stretched areas under the formal banking network. The cooperative credit in India can be traced back to 1904, when credit societies were formed under the Cooperative Societies Act, 1904. The Act was amended in 1912 to facilitate the organization of non-credit societies. The members control these banks, and the board of directors is voted on democratically. It can be divided into two segments.
1. Urban Cooperative Banks
These serve the urban and semi-urban areas. The first urban credit society was registered in Kajiwara, in the Madras province, in October 1904. They finance urban areas under self-employment, industries, small-scale units, home finance, consumer finance, personal finance, etc.
2. Rural Cooperatives
The rural cooperative banks are divided into short term structure wherein the State Cooperative Banks are the apex level institutions, District Central Cooperative Banks at district level, and the Primary Agricultural Credit Societies at village level; and long term structures wherein, the State Cooperative Agriculture and Rural Development Banks (SCARDBs) at State level and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) operating at district/block level.