The History of Commercial Banks in India

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Ancient Indian writings mention banking practiced by Vaishya, the merchants and landowners, who are ranked third of four among the castes. By the time of Buddha, circa 500 BCE, even top-ranked Brahmins were involved in banking. After economic liberalization in the 1990s, more than 50 major domestic and foreign commercial banks operate in India, as well as many state-owned banks, co-op banks and smaller commercial banks. Post liberalization, state-run banks are divesting government capital.

East India Company

In 1786, British East India Company’s employees in Calcutta formed India’s first corporate venture, the General Bank. Calcutta was the capital of British India. By 1790, the Bengal Bank operated for Europeans in the same market. Both banks had local officers and corporate board management structure. In 1791, General Bank became General Bank of India, but India’s early banks had difficulties branching. When possible, local boards were formed in branch cities. More often, branches opened under an appointed manager who received a commission on profits.

Punjab Bank

An act to allow formation of “joint stock” banks as limited liability corporations passed in 1860. By 1863, the Punjab Bank was the first native Indian bank, formed at Rawul Pindee by Punjabi Hindus, with branches in Peshawur, Mooltan and Poona. It was capitalized at 5 million rupees by 5,000 shares sold at 100 rupees each. In 1891, the Calcutta Review noted that this bank had long been “wound up” (closed).

Presidency Banks

After 1766, the East India Company’s Calcutta administration was known as the Bengal Presidency. The Banks of Bengal, Bombay and Madras, established from 1809 to 1843, were Presidency Banks, which was 20 percent government owned. Treasury deposits were their largest capitalization. By 1835, “chartered” Presidency banks standardized national currency, and “unchartered” commercial banks lost their regional currency exchange income. In 1861, currency issue became the exclusive right of government. In 1862, Presidency banks entered an agreement to distribute currency, receiving treasury deposits at any place where they would open branches.

Privatization

By 1876, each Presidency bank had about 15 branches, meeting the needs of main commerce centers. That year, the Presidency banks were privatized. Treasury reserves were established for government funds. Government could loan treasury funds, but the banks had no right to those funds. Without government deposits to capitalize new branches, expansion slowed. The Presidency banks became the main financiers for the industrial growth of India in the next three decades.

Nationalization

The Presidency banks merged in 1921 to form the Imperial Bank of India, a commercial bank that acted as a government bank until the establishment of the Reserve Bank of India in 1935. After that year, the Imperial Bank continued to act as a central bank for other banks, and was an agent for the Reserve Bank at some locations. After India’s independence from Britain, the Imperial Bank was not immediately responsive to development needs in rural areas. In 1955, Parliament established the State Bank of India, which included the nationalized assets of the Imperial Bank.

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