History of Banking in India | Banking Awareness – Lesson 1

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Hello Friends,

We are going to learn about Banking in India and its importance, in this series . We welcome your suggestions and you can even suggest a specific topic to be covered.

In this first session, we will be seeing a boring topic but very much essential to get started.

We are going to learn about “What is banking and why it is so important in any country?”

So, let’s get started.

Why banks are started?

Before we know anything else, first of all we should know what is banking?

Banking is a business where deposits accepted from individuals or companies and lending the available money to eligible borrowers.

But nowadays this is only in theory,  modern banks do a ton of other works along this. But the underlying principle is same.

Lets co-relate banking with a Telephone.

Why was telephone is invented?

To communicate with the persons far away from us using radio frequencies.

But what the modern Smartphones are meant for?

Internet, Chatting, Multimedia, GPS, Gaming and a lot more. But whether will you accept a phone without calling facilities as a phone?..

No.. never. You always ask for a ton of features but that does not mean the basic necessity taken out.

The same is happening with today’s banking scenario.

Banks are doing Insurance, Mutual Funds, Central Schemes, Investments, Currency Excahnge, Gurantees, etc etc.. But If a bank is not doing the basic things that is accepting Deposits and lending it to the borrowers it is not at all a bank and it is to be classified as Non Banking Financial Corporation.

Well, that is a separate topic we will cover later.

Lets not go deep into this for now.

In simple words a bank is a financial institution operates for accepting money as deposits and lend the money as loans to borrowers by adding their margin.

The difference between a bank and any commercial establishment is commercial establishments buy and sell a commodity for a price  – and banks accept and lend money itself.

1.    Role of Banking in Indian Economy


Banks are playing a very important role in the economic development of any country.

Many developed countries such as United States, Japan, Germany had their own strong financial system including banking system.

In most of the growing economies including India, strong healthy banks are crucial for development.

The Four major roles are

  1. Financial Intermediary
  2. Money Lending
  3. Savings
  4. Financial Stability


Brief History :

The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881. Subsequently, Punjab National Bank was established in 1894. Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial banks. Banking crisis arised during 1913-1917 and 588 banks have failed in various parts of the country during the decade ended in 1949. This has created the need for regulating and controlling commercial banks.

The Banking Companies Act was passed in February 1949, which was subsequently amended to read as Banking Regulation Act, 1949. This Act provided the legal framework for regulation of the banking system in India.
The largest bank – Imperial Bank of India – was nationalised in 1955 and renamed as State Bank of India, followed by formation of its 7 Associate Banks in 1959. With a view to bringing commercial banks into the mainstream of economic development with definite social obligations and objectives, the Government of India issued an ordinance on 19 July 1969 acquiring ownership and control of major banks in the country. Six more commercial banks were nationalised from April 1980.

As certain rigidities and weaknesses were found to have developed in the banking system during the late eighties, the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy Accordingly, a high-level Committee on the Financial System (CFS) was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial systems. Based on the recommendations of the Committee (Chairman: Shri M.Narasimham), a comprehensive reform of the banking system was introduced in 1992-93.

In 1993, in recognition of the need to introduce greater competition, new private sector banks were allowed to be set up. Licenses were issued to 10 banks which had satisfied the necessary regulatory requirements. Subsequently in 2001, fresh guidelines for setting up new private sector were issued and two banks were issued license under those guidelines.

RBI has created two new kind of banks Small Banks and Payments banks to setup and run in India by 2015.

And most recently SBI’s all associate banks has been merged with SBI in 2017.


That’s all from this session. We know we have covered only a portion of the evolution of Indian Banking. Let us know if anything important that is missed from this lesson.


Important timeline:


Oudh Commercial Bank – 1881

Punjab National Bank – 1894

Nationalization of Reserve Bank of India: 1949 (January )

Enactment of Banking Regulation Act: 1949 (March)

Nationalization of State Bank of India: 1955

Nationalization of SBI Subsidiaries: 1959

Nationalization of 14 major Banks: 1969

Liberalization and banking reforms: 1991

New Private Sector Banks  : 1993

Payments Bank: 2015

SBI Group merger to SBI: 2017



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