Three phases of the Indian Banking system

India’s financial industry has a long list of notable accomplishments during the last 30 years. The most noticeable feature is its broad reach. It is no longer limited to India’s metros or sophisticates. In reality, the Indian financial system has touched even the country’s most rural residents. But, this was not the case before independence, during which the barter system had prevailed. Read on to know more about the three phases of the Indian banking system. 

A Barter Economy was prevalent in ancient culture, because of the lack of a single unit of currency or the lack of notion of money. The products and services were swapped for goods and services. The principle of ‘exchange of commodities with goods’ is central to the barter system, in which people traded their commodities or services with others in return for the items they desired. However, the barter system was a failure due to many reasons. 

In the eighteenth century, ‘Paper Money’ was proposed in British India. With King George VI, as the head, the Rupee became the main currency of India’s colonies. The Indian currency was issued with a mark of Mahatma Gandhi’s face as well as the Ashok Pillar, in 1987.

A Bank

A bank is a financial institution that receives money that may be retrieved on demand and provides money to those who want it in the form of loans. The banking system is the foundation of any country’s economy. The Bank of Hindustan, founded in 1770 in Calcutta by the East India Company (EIC), was the first bank to be created, from which the financial system can be traced. The banking system in India has progressed through three stages.

1) The first phase ( 1786 -1969)

2) The second phase (1969 -1991)

3) The third phase (1991 – today)

The three phases of the Indian banking system

The first phase ( 1786- 1969 )

The significant advances in India’s modern financial system occurred between 1786 and 1986. The financial system began in 1770 with the establishment of the Bank of Hindustan, which lasted until 1830. 

The East India Company founded three presidency banks: 

1. the Bank of Calcutta (1806) 
2. the Bank of Bombay (1840) 
3. the Bank of Madras (1843), 

All of these banks amalgamated in 1921 to become the Imperial Bank of India, which was subsequently renamed the ‘State Bank of India,’ or SBI. As a result, SBI is regarded as one of India’s oldest banks. Following the 1857 uprising, numerous additional banks arose, including Allahabad Bank (1865) and Punjab National Bank (1894), both of which had their headquarters in Lahore. Due to the lack of a supervisory agency, several banks arose between 1885 and 1913 and were eventually destroyed. The Reserve Bank of India was then founded on April 1, 1935, in compliance with the RBI  Act, 1934. The RBI’s mission is to run India’s currency and credit systems.

Although the RBI was initially owned by the private sector, it was nationalised on January 1, 1949, rendering it an autonomous agency. On payment of reasonable compensation, all of the Bank’s shares in the capital were considered passed to the Central Government. The RBI reports directly to the Ministry of Finance, and it has always been required to confer with the government before making policies.

After the framework of the Indian Companies Act of 1913 was judged insufficient and unsatisfactory to govern the banking operations in India, the Banking Companies Act was created in 1949. It was later renamed to Banking Regulation Act 1949. The RBI was given a range of regulation and supervision responsibilities over other banks as a result of this Act. The Act established the RBI as the Indian banking system’s statutory and regulatory authority.

The second phase after independence (1969 – 1991)

The Indian government has taken significant measures to develop a robust banking sector. Commercial banks & cooperative banks make up the Indian banking system structure. Banks that provide service to the public are known as commercial banks. It also comprises public sector banks like SBI and BOI, private banks such as ICICI and Kodak, international institutions such as City Bank and HSBC, as well as regional rural banks. Corporate banks, on the other hand, are banks created under the Co-Operative societies act with the primary goal of not making a profit via banking. It can be both a city and a state cooperative.

The nationalisation of banks altered the course of India’s financial sector. The 14 main commercial banks were nationalised by then-Prime Minister Indira Gandhi in 1969. Nationalisation is the process of converting a private interest into a public one, thus boosting the government’s participation in the banking industry. The goal was to disrupt the bank’s ownership by a few families, as well as the wealth concentration and economic strength of a few people.

With the nationalisation of the Imperial Bank of RBI in 1955, the federal government joined the banking market, taking a 60% interest and forming a new bank, SBI. In the long run, the process of nationalisation contributed to economic stability and benefited India’s economy. However, it was heavily condemned because it was published at a period when India had been at war with Pakistan and China, causing political unrest. 

The third and final phase (1969- 1991)

The current phase is included in the third phase. The Indian government has taken the banking industry to a new level by allowing international participation and modernising the transition process. 

The emergence of ATMs, online banking, E-banking, and mobile banking has given the financial sector a new lease on life, as we all know. The government allowed foreign and private investors to openly invest in Indian industry. It has also introduced several initiatives to assist small company owners and startups.

NABARD was founded in 1982 to provide finance to farmers to help them with their agricultural endeavours. India’s Small Industry Development Bank (SIDBI) and the Exchange Bank was founded to facilitate the selling and acquisition of foreign currency via internal trade.

Conclusion

Indian banks significantly altered the country’s gloomy financial environment throughout the three phases of the Indian banking system, to support the country’s booming economy. Even now, the Indian financial sector is unquestionably responsible for keeping the country’s economy running. As India’s banking system develops, so does its potential to give solid assistance to a country that is always eager for financial progress.