History of Banking in India | Evolution of Banking in India

History of Banking

History of banking in India has many evidences that banking system was in practice of human beings since prehistoric age. Study of banking system in India reveals the story of evolution of banking in India.

A vast chronicle of Indian banking history describes that people was banking on concept of barter system.

In trade, Barter system is a system of exchange of goods and services in opposition of other goods and services. Barter system depends on double coincidence of wants, in which both participants do direct trade as per their needs.

Barter for the exchange to occur, people started to keep record of need, requirements of other people and started to keep stock of particular goods like salt, metal etc.

As per barter system, ancient type of money was grain money, food money, cattle money. Barter system had limitations like difficulty in identifying the coincidence bilateral / multilateral wants, there was not any standard unit for valuation, Lack of universal standards, lack of resources.

Such limitations in barter system automatically forced the economy towards monetary system. Now banking system transformed from barter system to monetary system.

Definition of Bank

The word “bank” comes from Italian word banca. Banca means “bench, counter, and table”. In ancient age merchants of the world, who used to give grain loans to farmers and traders who carried goods between cities, were used to do banking on benches. Italy was the country who gave the name “Bank” and “Banking system” to the world.

Worlds first bank was “Bank of Venice” which was established in 1157 in Italy.

History of Banking in India

Origin of Banking in India: As per banking regulation act 1949 under section 5(B) definition of bank is:

“Bank is a financial institution which can accept deposit of money from the public, lend to the public and repayable to the public on demand”.

“As per banking regulation act 1949 under section (7) any financial institution which is registered with Reserve Bank of India under 2nd schedule as per RBI Act 1934 section 2(e) is a bank and only can use the name “Bank”.

Section (7) of banking regulation act 1949 gives the permission of using the name “Bank”.

As over the time there was tremendous evolution of banking system in India. Origin and growth of commercial banks in India tells the story of different types of Banks in India are regulated by Reserve Bank of India.

Evolution of banking in India tells the story starting from “Bank of Hindostan” to new generation banks in India now a days.

Origin and Development of Banking System in India

Banking system in India has existence since very long period of time. Indian banking system has many stages of evolution.

Evolution of Banking in India can be broadly divided into three phases.

  • First phase before independence (Before 1947)
  • Second phase Nationalisation of banks (1947-1991)
  • Third phase liberalization in banking system (1991-till date)

First phase before independence (Before 1947)

As per history of banking in India , banking system was introduced by Europeans.

Alexander and company was the first European company who introduced banking system in India.

  1. In history of banking in India, first bank was “Bank of Hindostan”. Bank of Hindostan was established in year 1770 in calcutta by “Alexander and Company” which was European company. Bank of Hindostan served the banking services to the people for 62 years only. In year 1832 Bank of Hindostan shut its operation and banking services due to banking crisis.
  2. In Indian banking history,”The Bengal Bank” was founded on 1 April 1784. The bank was the fourth oldest bank in India.The bank became defunct on March 31st, 1791.
  3. “The Bengal bank” introduced cheque book in banking system. Introduction of cheque book was the revolutionary step in history of banking system in India.
  4. “Bank of Calcutta” was established on June 2, 1806. The Bank of Calcutta was renamed as Bank of Bengal on January 2, 1809.
  5. The Bank of Bombay ” was established on April 15, 1840.
  6. Bank of Madras was established on July 1, 1843.
  7. All three banks (Bank of Bengal, Bank of Bombay, Bank of Madras) were known as “presidency bank”. After the revolutionary introduction of cheque book, now this was the time of second evolution in Indian banking. First time in history of banking in India “Saving Account” as a banking product service was introduced by presidency bank in year 1833. The Imperial Bank of India came into existence on 27 January 1921 through the reorganization and amalgamation of all three Presidency Banks.
  8. After independence on 1 July 1955 the Indian government and RBI did nationalisation of imperial bank of India and renamed the bank as State Bank of India as per SBI Act 1955.
  9. Evolution of Commercial Banks in India: was started in year 1865 Allahabad Bank was established by 7 Europeans friends. Head quarter of Allahabad Bank was in Allahabad at the time of foundation. At present head quarter of Allahabad Bank is in Kolkata. Allahabad bank is known as India’s oldest first commercial Bank. It is also known as oldest joint stock Bank of India. The oldest existing Public Sector Bank in India is Allahabad Bank.
  10. Allahabad Bank was the first joint stock bank of India whereas State Bank of India was the first joint stock bank of British India.
  11. Oudh commercial bank was established in Awadh (Uttar Pradesh) in year 1881. Oudh commercial bank was first limited liability bank of India. After providing banking services to people for 77 years, in year 1958 bank was defunct.
  12. On 19 May 1894 Punjab National Bank was founded in Lahore, Pakistan. Late Shree Lala Lajpat Rai was the founder of Punjab National Bank. Since 12 April 1985 PNB was functional. After independence and separation, head quarter of Punjab National Bank was shifted from Lahore to Delhi. Punjab National Bank was the first bank of India which was started with solely Indian capital investment. Punjab National Bank was first swadeshi bank managed by Indians, but owned of britishers.
  13. On 21 Dec 1911 Central Bank of India was established by Sir Sorabji Pochakhanwala with Sir Pherozeshah Mehta. The Central Bank of India was the first Indian commercial bank owned and managed by Indians with solely Indian capital investment.
  14. Union Bank of India was inaugurated by Mahatma Gandhi in 1919.

Second phase: Nationalisation of banks (1947-1991)

What is nationalisation?

Nationalisation is the process in which government takes the control on private companies, industries, or assets. To convert any private sector entity into public sector on issues of public interest is called Nationalisation.

Nationalisation of State Bank of India: Formation of SBI

The Imperial Bank was formed as a joint-stock bank on 27 January 1921 by amalgamating the Presidency Banks of Bombay, Calcutta, and Madras. The Imperial Bank had the status of a quasi-central bank, and was carrying the responsibility of handling banking functions for the Government of British India and other banking institutions and managing the rupee debt of the government, undertaking until the formation of the Reserve Bank of India in 1935. After formation of Reserve Bank of India, Imperial bank was doing banking functions for public only.

After independence, a committee was formed by Government of India named as “The All India Rural Credit Survey Committee, commissioned in August 1951 headed by A.D. Gorwala. Recommendation of Gorwala committee, Government of India and Reserve Bank of India took decision of nationalisation of imperial bank. On provisions of State Bank of India Act 1955, The Government of India took control of the Imperial Bank of India in 1955 with reserve bank of India taking a 60% stake. On 1 July 1955, the Imperial Bank of India was nationalized and renamed as the State Bank of India.

In year 2008, the Government of India acquired the Reserve Bank of India’s stake in SBI so as to remove any conflict of interest because the RBI is the country’s banking regulatory authority. Role and Function of RBI is different from any scheduled Bank.

In Year 1959, the government passed the State Bank of India (Subsidiary Banks) Act. That was called attachment Act 1959. Under this act eight banks were associated as subsidiary banks of SBI. This was the time of the First Five Year Plan, which prioritised the development of rural India. Aim of SBI and its associate bank was to expand its rural outreach. As per history of merger of banks in India, in year 1963 SBI merged its two associate banks, State Bank of Jaipur (est. 1943) and State Bank of Bikaner (est.1944), and renamed as State Bank of Bikaner and Jaipur (SBBJ).

List of Associate Banks of SBI and Merger year of associate banks in SBI

Sr. No.Associate BankYear of merger in SBI
1State Bank of SaurashtraOn 13 August 2008 merged with SBI
2State Bank of IndoreOn 26 August 2010 merged with SBI
3State Bank of Bikaner and JaipurOn 1 April 2017 merged with SBI
4State Bank of HyderabadOn 1 April 2017 merged with SBI
5State Bank of Mysore On 1 April 2017 merged with SBI
6State Bank of Patiala On 1 April 2017 merged with SBI
7State Bank of Travancore On 1 April 2017 merged with SBI
8Bhartiya Mahila BankOn 1 April 2017 merged with SBI

Nationalisation of Banks in 1969

Extensive evolution in banking in India was first time bulk Bank Nationalisation was done on July 19, 1969, 14 major lenders that accounted for 85% of bank deposits in the country at that time were nationalized. For nationalisation, net demand and time liability was 50 crore and above.

List of nationalized Banks in year 1969

Allahabad BankBank of BarodaBank of India
Bank of MaharashtraCentral Bank of IndiaCanara Bank
Punjab National BankSyndicate Bank 
Dena BankIndian BankIndian Overseas Bank
UCO BankUnited Bank of IndiaUnion Bank

Nationalisation of Banks in 1980

Revolutionary evolution of banking in India was second time again bulk Bank Nationalisation was done in year 1980, 6 banks were nationalized. For nationalisation, net demand and time liability was 200 crore and above.

Punjab and Sind BankVijaya BankOriental Bank of India
Corporate BankAndhra BankNew Bank of India

On 4 Sept 1993, one bank was merged in Punjab National Bank that was New Bank of India. After merger only 19 banks were left which were nationalized bank.

These banks were nationalized under Banking Company Act 1970 and 1980.

Nationalisation of banks was the historical development of banking institutions in India.

Third phase: liberalization in banking system (1991-till date)

Third phase in history of banking in India was liberalization: In year 1991 for reforms in Indian economy contemporaneous Finance minister Sh. Manmohan singh took a step on a policy of liberalization licensing of small number of private banks. These new banks were known as New Generation tech-savvy banks. Global Trust Bank was the first of such new generation bank, which later amalgamated with Oriental Bank of Commerce.  IndusInd Bank, UTI Bank (renamed as Axis Bank), ICICI Bank and HDFC Bank were the example of new generation bank.  This move revitalised the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

Public Sector banks amalgamations and merger:

Sr. No.Name of BankYear of mergerMerger with Bank
1Dena Bank1 April 2019Bank of Baroda
2Vijaya Bank1 April 2019Bank of Baroda
3Oriental Bank of Commerce1 April 2020Punjab national Bank
4United Bank of India1 April 2020Punjab national Bank
5Syndicate Bank1 April 2020Canara Bank
6Andhra Bank1 April 2020Union Bank
7Corporation Bank1 April 2020Union Bank
8Allahabad Bank1 April 2020Indian Bank

History of Banking in India : Some Important facts

  1. In 1996, Canara Bank became the first Indian Bank to get ISO certification for “Total Branch Banking” for its Seshadripuram branch in Bangalore.
  2. Bank of India was the first Indian bank to open overseas branch. Bank of India established a branch in London in year 1946.
  3. Central Bank of India was the first bank who launched the first bank credit card in year 1980, which was followed by Andhra Bank in year 1981.
  4. In year 1860, the Comptoir d’Escompte de Paris opened a branch in Calcutta. This was the first foreign bank in India.
  5. Industrial Credit and Investment Corporation of India (ICICI) was the first Indian bank who introduced Internet-Banking (in year 1996) and Mobile ATM facilities to Indian banking system first time.
  6. The first ATM in India was set up in 1987 by HSBC in Mumbai.
  7. In 2012, Union Bank of India unveiled India’s first accessible and Talking ATM in Vastrapur, Ahmedabad, Gujarat on 6 June 2012 for the visually and physically challenged people.