Banking in India has its origin as early as the vedic period.
It is believed that the transistion from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.
An Indian soldier climbs the steps to the world's highest automatic teller machine (ATM) in Thegu, Sikkim.
During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce.
During the days of the East India Company, it was the turn of the agency houses to carry on the banking business.
The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843.
These three banks also known as Presidency Banks, were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India.
The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. The Reserve Bank of India is the sole authority for issuing bank notes and the supervisory body for banking operations in India . It supervises and administers exchange control and banking regulations, and administers the government's monetary policy. It is also responsible for granting licenses for new bank branches.
In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd.
On July 19, 1969, 14 major banks of the country were nationalised and in 15th April 1980 six more commercial private sector banks were also taken over by the government.
Today the commercial banking system in India may be distinguished into:
- Public Sector Banks (State Bank of India and its associate banks called the State Bank group, 20 nationalised banks, regional rural banks mainly sponsored by public sector banks
- Private Sector Banks (Old generation private banks, new generation private banks, 25 foreign banks, scheduled co-operative banks, non-scheduled banks
India has an extensive banking network, in both urban and rural areas. All large Indian banks are nationalized, and all Indian financial institutions are in the public sector.
Foreign banks in India are subject to the same regulations as scheduled banks. They are permitted to accept deposits and provide credit in accordance with the banking laws and RBI regulations. Currently about 25 foreign banks are licensed to operate in India. Foreign bank branches in India finance trade through their global networks.
The Reserve Bank of India lays down restrictions on bank lending and other activities with large companies. These restrictions, popularly known as "consortium guidelines" seem to have outlived their usefulness, because they hinder the availability of credit to the non-food sector and at the same time do not foster competition between banks.
Most Indian banks are well behind foreign banks in the areas of customer funds transfer and clearing systems. They are hugely over-staffed and are unlikely to be able to compete with the new private banks that are now entering the market. While these new banks and foreign banks still face restrictions in their activities, they are well-capitalized, use modern equipment and attract high-caliber employees.
All commercial banks face stiff restrictions on the use of both their assets and liabilities. Forty percent of loans must be directed to "priority sectors" and the high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending.The RBI requires that domestic Indian banks make 40 percent of their loans at concessional rates to priority sectors' selected by the government. These sectors consist largely of agriculture, exporters, and small businesses. Since July 1993, foreign banks have been required to make 32 percent of their loans to these priority sector. Within the target of 32 percent, two sub-targets for loans to the small scale sector (minimum of 10 percent) and exports (minimum of 12 percent) have been fixed.
Foreign banks, however, are not required to open branches in rural areas, or to make loans to the agricultural sector. Commercial banks lent dols 8 billion in the Indian financial year (IFY, April-March) 1997/98, up sharply from dols 4.4 billion in the previous year.