Page 38 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 3: Indian Banking System

banking system of India is no more confined to urbanites or cosmopolites of India but it has Notes
arrived even to the distant niches of the country.

3.1 History

The word ‘Bank’ is said to be derived from French word “Bancus” or “Banque”, i.e., a bench. It is
believed that the early bankers, the Jews Lombardy, transacted their business on benches in the
Market place. Others believe that it is derived from German word “Back” meaning a Joint Stock
Fund.
The Modern banking System started with the opening of Bank of England in 1964. Bank of
Hindustan was the first bank to be established in India in 1770. The earliest institutions that
undertook banking business under the British regime were agency houses which carried on
banking business in addition to their trading activities. Most of these agency houses were closed
down during 1929-32. Three Presidency banks known as Bank of Bengal, Bank of Bombay and
Bank of Madras were open in 1809, 1840 and 1843 respectively at Calcutta, Bombay and Madras.
These were later merged in to Imperial Bank of India in 1919 following a banking crisis.

The first bank of limited liability managed by Indians was Oudh Commercial Bank Started in
1881 earlier between 1865 and 1870, only one bank, the Allahabad Bank Ltd., was established.
Subsequently the Punjab National Bank started in 1894 with its office at Anarkali Market in
Lahore (now in Pakistan) Swadeshi movement, which started in 1906, prompted formation of a
number of commercial banks such as the peoples Bank of India Ltd., the Central Bank of India,
the Indian Bank Ltd. and the Bank of Baroda Ltd. Banking crisis between 1913-1917 witnessed the
failure of 588 banks. The Banking companies (inspection Ordinance) came in January 1946 and
the Banking companies (Restriction of Branches) Act was passed in February 1946. The Banking
Companies Act was passed in February 1946 which was later, amended to be known as Banking
Regulation Act, 1949.
Meanwhile, the RBI Act, 1934 was passed and the Reserve Bank of India became the first Central
bank of the country w.e.f. 01.04.1935, it took over the Central Banking activities from the Imperial
Bank of India. The RBI was nationalized on 1.1.1949. The Imperial Bank of India was partially
nationalized to form State Bank of India in 1955. In 1959, subsidiaries of the SBI namely, State
Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore,
State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore were established.
On July 19, 1969, the Govt. of India took over ownership and control of 14 major banks in the
Country with deposits exceeding ` 50 crore each. Again on 15th April 1980, six more banks with
Total time and demand liabilities exceeding ` 200 Crore were nationalised. On 1993, one of the
nationalized banks namely New Bank of India was merged with another nationalized bank i.e.
Punjab National Bank.

Self Assessment

Fill in the blanks:
1. The Imperial Bank of India was partially ……………….. to form State Bank of India in
1955.
2. The earliest institutions that undertook banking business under the British regime were
…………….. houses which carried on banking business in addition to their trading
activities.
3. Banking Companies Act was passed in February 1946 which was later amended to be
known as Banking ………………….. Act, 1949.
4. Banking crisis between 1913-1917 witnessed the failure of …………. banks.

LOVELY PROFESSIONAL UNIVERSITY 33