Class 12 Banking : Notes Unit -1 Commercial Banking in India TOPIC – 1 : ORIGIN AND GROWTH OF BANKS IN INDIA Banking sector in India has got a long history and has traversed a long path to reach at the modern stage. The growth of banking industry and banking practices had not been easy. It involved many hurdles and impediments which appeared as obstacles in the path of its growth. • Between 2000 to 1400 B.C., during the Vedic era, records of saving money as deposits were found. • Manu, the Hindu Law giver, in ‘Manusmriti’ mentioned about rules of giving interest on savings and suggested for keeping money under the safe custody of a person with another who has - - good conduct/character - good family background - knowledge of the Law - many relatives - riches and wealth - honour & respect in society Growth of Banking Pre-Independence Vedic Period Moghul Period British Period Post-Independence Pre-Economic Reform Period Post- Economic Reform Period
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Class 12 Banking : Notes Unit -1 Commercial Banking in India
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Class 12
Banking : Notes
Unit -1
Commercial Banking in India
TOPIC – 1 : ORIGIN AND GROWTH OF BANKS IN INDIA
Banking sector in India has got a long history and has traversed a long path to reach at the
modern stage. The growth of banking industry and banking practices had not been easy. It
involved many hurdles and impediments which appeared as obstacles in the path of its growth.
• Between 2000 to 1400 B.C., during the Vedic era, records of saving money as deposits
were found.
• Manu, the Hindu Law giver, in ‘Manusmriti’ mentioned about rules of giving interest on
savings and suggested for keeping money under the safe custody of a person with another
who has -
- good conduct/character - good family background - knowledge of the Law
- many relatives - riches and wealth - honour & respect in society
Growth of Banking
Pre-Independence
Vedic Period
Moghul Period
British Period
Post-Independence
Pre-Economic Reform Period
Post- Economic Reform Period
• In the ‘Artha-Shastra’ written by Chanakya or Kautilya also mentioned about rules and
need of saving money and earn income on it.
• During the period of Mahabharata, there was practices of using Hundis.
• Indigenous bankers were lending money and financing trade activities.
• Hundis were used as trade instruments.
• ‘The House of Jagat Seth’, was a famous indigenous banker during Moghul period..
• Indigenous bankers gradually lost their importance.
• With East India Company’s growth in business, the requirement of bank was felt.
• Agency Houses emerged as organizations supporting East India Company’s business as
well as providing the basic banking services to the British and the company.
• Agency Houses combined banking with other trade-supporting activities, and it was a
difficulty due to which these couldn’t sustain longer.
Agency Houses during the colonial regime:
• M/s Alexander & Co.
• M/s Fergussan & Co.
• First bank started in Indiaunedr British rule was‘Bank of Hindostan’ in1770.
• This bank wasclosed/liquidated in 1832.
Year 1900
Growth of Banking
Pre-Independence
British Era
Year 2014
• After the closure of Bank of Hindostan, the British Govt. established 3 PRESIDENCY
BANKS in India: Bank of Calcutta which later was renamed as Bank of Bengal (1906),
Bank of Bombay (1840), Bank of Madras (1843)
• Principle of Limited Liability was introduced in 1860. This resulted in the emergence of
many banks.
• Banks started operating as Joint Stock Banks.
• SWADESHI MOVEMENT further prompted many Indians to start their own banking
activities by establishing small banks to finance their own requirements and avoid taking
services of the banks established by the British.
• Bank of Baroda, Central Bank of India,
Indian Bank, Bank of India etc. were set up at
that time.
• British Government felt the need of a central bank.
• On 27th January, 1921, The Imperial Bank of
India was established by merging the
3 presidency banks.
• Backed by a strong demand and requirement for a separate central bank of the country,
the British Government set up the Central Banking Enquiry Commission in 1931.
• This commission made a bill giving details about the process, need of establishing and
operating a central bank in the country.
• This Bill was passed and approved in the Legislative Assembly by the majority of the
members and then was approved by the then Governor General of India, and it became
the RBI Act, 1934.
• Based on this Act, the central bank of the country Reserve Bank of India was established
in 1935.
• All responsibilities of central bank were taken over
by RBI from the Imperial Bank of India post 1935.
• RBI Nationalisation – January, 1, 1949, and RBI became a Government organization
henceforth.
• Banking Regulation Act was passed – 1949 to regulate and control banking operations in
India.
• Nationalization of the Imperial Bank – July, 1, 1955.
• Imperial Bank was renamed as
• SBI became the largest commercial bank of the country.
• In 1959, SBI took over 8 state-owned banks as subsidiaries. Presently there are 5 of them
operating as the subsidiaries.
• Deposit Insurance Scheme – January, 1, 1962
• Establishment of Deposit Insurance Corporation of India.
• Social Control Scheme – To exercise Government’s (social) regulation and control over
the workings of the banks to ensure proper implementation of Government policies for
the development of the country.
• Failure of the scheme of Social Control Bank nationalisation.
• Bank Nationalisation – Government took over the ownership of private banks through
nationalisation.
• 1969 – 14 banks nationalised (1st Phase of Bank nationalisation)
• 1980 – 6 banks nationalised (2nd Phase of Bank nationalisation)
Growth of Banking
Post-Independence
Pre-Economic reform period
• Lead Bank Scheme – December, 1969
• Introduction of Lead Bank Scheme : In the year 1969 Indian Government launched the
Lead Bank Scheme where each district was allotted with a particular bank to work as the
lead bank. The prime role of the lead bank was to act as a leader and coordinator of all
the other banking institutions operating in that district and help RBI to pursue its role
easier.
• Establishment of Deposit Insurance Corporation of India.
• Deposit Insurance Corporation got merged with Credit Guarantee Corporation and
DICGC was formed.
• Regional Rural Banks– To develop the rural areas to facilitate these with the access of
banking services, RRBs were established in 1975 followed by passing of the RRB Act
(1976).
• Setting up of Development banks like IDBI, IFCI, SFC, NABARD etc.
ECONOMIC REFORM POLICY & INDIAN BANKING:
In the year 1990-91, Indian Government under the leadership of then Prime Minister P.V.
Narsimha Rao and Finance Minister Dr. Manmohan Singh took a major step to refine the
structure of Indian economy by introducing the new industrial policy which is also known as the
Economic Reform Policy. The three prime features and dimensions of the policy were L
(liberalization), P (Privatization) and G (Globalization). Hence, this policy is also known as the
LPG Policy. This policy brought many changes in the system of the economy and the way of
operations in many industries, including the banking industry. Liberalization policy removed the
trade barriers in between the countries and welcomed FDI into the sector. Few foreign banks
invested in India and set up their branches across the country. Eg: Citi Bank, Standard Chartered
Bank, HSBC India, Deutsche Bank, DBS Bank, Barclays Bank, Bank of America etc. to name a
few.
Growth of E-Banking:
The present phase of growth of banking reflects modernized way of banking through adoption of
e-banking services into banking practices. Electronic banking has many names like e banking,
virtual banking, online banking, or internet banking. It is simply the use of electronic and
telecommunications network for delivering various banking products and services. Through e-
banking, a customer can access his account and conduct many transactions using his computer or
mobile phone.
In India, since 1997, when the ICICI Bank first offered internet banking services, today, most new-
generation banks offer the same to their customers. In fact, all major banks provide e-banking
services to their customers.
Importance of e-banking for banks, individual customers, and businesses :
Banks
1. Lesser transaction costs – electronic transactions are the cheapest modes of transaction
2. A reduced margin for human error – since the information is relayed electronically, there is no
room for human error
3. Lesser paperwork – digital records reduce paperwork and make the process easier to handle.
Also, it is environment-friendly.
4. Reduced fixed costs – A lesser need for branches which translates into a lower fixed cost.
5. More loyal customers – since e-banking services are customer-friendly, banks experience
higher loyalty from its customers.
Customers
1. Convenience – a customer can access his account and transact from anywhere 24x7x365.
2. Lower cost per transaction – since the customer does not have to visit the branch for every