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Banking Awareness study material for IBPS 2015-2016,SBI, IBPS PO, IBPS CLERK, SBI, PDF FOR BANKING AWARENESS,  Banking awareness - History of Banking, Pre-independence., Post-independence. Exclusive Banking awareness Booster for Ibps exams 2015.

Banks constitute an important segment in financial arena of all countries whether developed or developing or underdeveloped. Economic development of every country depends upon financial sector particularly commercial banks. In fact economic development and financial infrastructure go hand in hand. From time immemorial, the conventional banker, an indispensable pillar of Indian society, giving and taking of credit in one form or another, must have existed as earlier as the Vedic period. Money lending was one of the recognized occupations under Manu's laws

Globally, the story of banking has much in common, as it evolved with the moneylenders accepting deposits and issuing receipts in their place. According to the Central Banking Enquiry Committee (1931), money lending activity in India could be traced back to the Vedic period, i.e., 2000 to 1400 BC. The existence of professional banking in India could be traced to the 500 BC. Kautilya’s Arthashastra, dating back to 400 BC contained references to creditors, lenders and lending rates. Banking was fairly varied and catered to the credit needs of the trade, commerce, agriculture as well as individuals in the economy.

Banking history of India is divided into Two major categories –

Pre-Independence Banking History

Post-Independence Banking History

 

Pre-Independence Banking History:

 

The history of modem Indian banking  goes back to 1683 when the first Indian Bank was established on western lines in Madras. The western variety of joint stock banking was brought to India by the English Agency houses of Calcutta and Bombay (now Kolkata and Mumbai). Bank of Bombay was the first bank of a joint stock variety which was established in 1720 in Bombay1. This was followed by Bank of Hindustan in Calcutta, which was established in 1770 by an agency house. This agency house, and hence the bank was closed down in 1832. The General Bank of Bengal and Bihar, which came into existence in 1773, after a proposal by Governor (later Governor General) Warren Hastings, proved to be a short lived experiment. The first ‘Presidency bank’ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50 lakh.

The Bank of Bombay was the second Presidency bank set up in 1840 with a capital of Rs.52 lakh, and the Bank of Madras the third Presidency bank established in July 1843 with a capital of Rs.30 lakh. These banks were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters. The Presidency banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government. The first formal regulation for banks was perhaps the enactment of the Companies Act in 1850. This Act is based on a similar Act of 1844 in Great Britain. With the collapse of the Bank of Bombay, the New Bank of Bombay was established in January 1868. The three Presidency banks came under the Presidency Bank Act, (1876) and it imposed some restrictions on their business. It prohibited them from dealing with risky business of foreign bills and borrowing from abroad.

The pre-independence period was largely characterised by the existence of private banks organised as joint stock companies. Most banks were small and had private shareholding of the closely held variety. They were largely localised and many of them failed. They came under the purview of the Reserve Bank that was established as a central bank for the country in 1935. But the process of regulation and supervision was limited by the provisions of the Reserve Bank of India Act, 1934 and the Companies Act, 1913. The indigenous bankers and moneylenders had remained mainly isolated from the institutional part of the system. The usurious network was still rampant and exploitative. Co-operative credit was the only hope for credit but the movement was successful only in a few regions.

With the launching of Swadeshi movement in 1905, there were outbursts of banking activities. Many banks like Bank of Burma (1904), Bank of India (1 906), Canara Bank (1 906), Bank of Rangoon (1 906), Indian Specie Bank (1 906), Indian Bank (1 9061, Bank of Baroda (1 908) and Central Bank ( 191 1 ) had their operation with a paid up capital of Rupees Five lakhs and above.

The first Indian owned bank was the Allahabad Bank which was set up in Allahabad in 1865, followed by Punjab National Bank in 1895 in Lahore, and Bank of India in 1906 in Mumbai. All these banks were established under private ownership.

The Reserve Bank of India Act 1934 was enacted for the setting up of the Reserve Bank of India. The reason of bank failures and the need for catering to the requirements of agriculture were the two prime reasons for the establishment of the Reserve Bank. The banking sector came under the purview of the Reserve Bank in 1935. At the time of setting up of the Reserve Bank, the joint stock banks constituted the largest share of the deposits held by the banking sector, followed by the Imperial Bank of India and exchange bank. .

But the present Indian banking system had developed considerably since 1935. RBI has started its operation in 1935 through an Act. A critical review of the growth of banking in India in the preindependence period reveals that the banking system had neither a definite shape nor policy except the creation of RBI in 1935. With the enactment of the Banking Companies Act in 1949, the Indiaii banking system had undergone substantial changes structurally, geographically and functionally.

 

Pre-Independence Banking :- Important points

The origin of modern Banking in India dates back to the 18th century.

Bank of Hindusthan was established in 1770 and it was the first bank at Calcutta underEuropean management.

Banking Concept in India was brought by Europeans.

In 1786 General Bank of India was set up.

On June 2, 1806 the Bank of Calcutta established in Calcutta. It was the first Presidency Bank during the British Raj.

Bank of Calcutta was established mainly to fund General Wellesley’s wars against Tipu Sultan and the Marathas.

On January 2, 1809 the Bank of Calcutta renamed as the Bank of Bengal.

In 1839, there was a fruitless effort by Indian merchants to establish a Bank called Union Bank but it failed within a decade.

On 15th April, 1840 the second presidency Bank was established in Bombay – Bank of Bombay.

On 1 July 1843 the Bank of Madras was established in Madras, now Chennai. It was the third Presidency Bank during the British Raj.

Allahabad Bank which was established in 1865 and working even today.

The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years is Allahabad Bank. Allahabad bank is also known as one of India’s Oldest Joint Stock Bank.

These Presidency banks worked as quasi central banks in India for many years under British Rule.

The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860.

HSBC established itself in Bengal in 1869

Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

The Oldest Joint Stock bank of India was Bank of Upper India established in 1863 but this bank was become defunct in 1913.

In 1881,  Oudh Commercial Bank was established at Faizabad it was the first Bank of India with Limited Liability to be managed by Indian Board. After Independence, In 1958 this bank failed.

In 1895 Punjab National Bank was established in Lahore in Punjab province of Undivided India. It was the first bank purely managed by Indian. PNB has not only survive but also become the second largest public sector bank in India.

The first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911.

Central bank of India was also called India’s First Truly Swadeshi bank.

The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community.  The period between 1906 and 1911 thousands of Banks were established in India. Many of those banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

At least 94 banks in India failed between 1913 and 1918 due to economic crisis during World War I.

In 27th January, 1921 Bank of Calcutta, Bank of Madras and Bank of Bombay were amalgamated  to form Imperial Bank of India.

In 1926 Hilton-Young Commission submitted it’s report.

In 1934 Reserve Bank of India act was passed.

On the recommendation of Hilton-Young Commission, On 1st April 1935 Reserve Bank of India was established.

RBI was established with initial share capital worth Rs. 5 crore with 5 Lakh Rs. 100 share dividend.

 

Conclusion

The phase leading up to independence laid the foundation of the Indian banking system. The initial phase (up to 1947) was a difficult period for the banking sector. In Pre- independence period most banks were small and had private shareholding, they were largely localised and many of them failed. They came under the purview of the Reserve Bank that was established as a central bank for the country in 1935. The Swadeshi Movement during this phase saw the establishment of many Indian banks, most of which continue to operate even now. In this phase, which was marked by the two World Wars and the Great Depression, many banks failed. Most of the small banks were local in character and had low capital base. As a result, they were not resilient enough. Apart from the global factors, one of the major reasons for failures of small banks was fraudulent manipulation by directors and managers and interconnected lending. Also, several banks that failed had combined trading functions with banking functions. Partly, in order to address the problem of bank failure, the Reserve Bank was set up in 1935. In fact, central banks in several other countries, including the US, were also set up to address the problem of bank failure.

Post-Independence Banking History:

Immediately after the Independence, the partition of India in 1947 adversely impacted the economies of Punjab and West Bengal by paralyzing banking activities for months.With end of British rule in India marked the end of a regime of the Laissez-faire for the Indian banking sector.

The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. To streamline the functioning and activities of commercial banks, the government of India has came up with the Banking Companies act, 1949. The Reserve Bank of India, India’s central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.  The Reserve Bank of India was vested with major powers for the supervision of banking inn India as he central banking authority.

The Banking Regulation Act. 1949 provided the much needed framework for proper supervision under RBI the Boards of directors of PSB,  there was a nominee represented from RBI and Government of India. This period witnessed the disappearance of many smaller banks due to tight inspection by RBI. Bigger banks' growth was facilitated by winding of business by smaller ones. This period witnessed consolidation and growth of larger banks. There were attempts at correcting the regional maldistribution in branch network, which was marked by heavy concentration of branches at larger urban centres. Through effective branch licensing policy, many banks were opened in rural unbanked centres. This period witnessed the nationalisation of Imperial Bank, now called as the SBI and its Associate banks in 1955.

Between 1955 and 1968, the SBI and its Associates opened many branches. About 80 per cent of 1608 branches opened by SBI and its Associates during 1955 - 1968 were at rural and semi-urban centres. Though there were welcome signs in increasing more number of bank branches and intensive banking network, in the absence of policy compulsion. Large private sector banks controlled by a few big industrial business houses failed to meet the requirements of small borrowers in agriculture. activities allied to agriculture, trade. small scale industries, transport operations. Between 1961-7 1. the number of borrowal accounts had come down. Flow of credit to industrial sector was greater whereas agricultural sector was languishing for want of funds. Official recognition of the need to have a closer look at the functioning of the Commercial banking system has necessitated the Social Control of banks in 1968 by the NCC. The first meeting of the NCC in March, 1968 discussed and generally agreed on matters like deposit mobilisation and deployment of credit to the targeted groups in the form of PSL with special reference to agricultural sector.

Post-Independence Banking History can be classified into two major categories:

  • Bank Nationalization in India
  • Bank Liberalization in India

 

Note:-In day-2 session we will discuss following

  • 1.Bank Nationalization in India
  • 2.Bank Liberalization in India

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