Money & Banking

Banking System of India

First bank -Bank of Hindustan (1770) (Alexander and Co.) at Kolkata

Presidency Banks

  • Bank of Bengal (1806),
  • Bank of Bombay (1840)
  • Bank of Madras (1843)

In 1861 all three banks got right to issue bank


It was created in Jan 1921 by amalgamation of 3 presidency banks, viz., Bank of Bengal, Bank of Bombay and Bank of Madras.

After nationalization in 1955, its name was changed to State Bank of India (SBI).

It is the biggest commercial bank in the public sector of India.

It has the largest number of branches in the world.

State Bank of India – SBI

SBI has 7 subsidiaries. These are:

State Bank of Bikaner and Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala

State Bank of Saurashtra

State Bank of Travancore


Banks in pre-independent India

  • Bank of Hindustan in 1707 (but management was with foreigners)
  • Allahabad bank in 1865
  • First bank managed by an Indian board was Oudh Commercial Bank1881,
  • In 1908 –bank of Baroda( gayekwad)
  • The first purely Indian bank was the Punjab National Bank (1894).

Region wise banks

  1. A) Punjab
    1. Punjab national bank-1894
    2. Punjab and sindh bank-1908
  • Oriental bank of commerce-1943
  1. Bengal
    1. United commercial bank-1943
    2. Union bank of India-1950
  2. Mumbai
    1. Bank of India-1906
    2. Central bank of India-1911
  • United bank-1919
  1. Bank of Maharashtra-1935
  2. Dena bank-1938
  1. Karnataka
    1. Corporate bank-1906
    2. Canara bank-1910
  • Syndicate bank-1918
  1. Vijay bank-1931
  1. Andhra Pradesh
    1. Andhra bank-1923
    2. Tamil nadu bank-1921
  • Overseas bank-1937

Limited banks were available only in the main business city and that too for foreign business only. There was another limitation to these bank due to money lenders and shroff and cartered merchants.



  • Central Bank of the country.
  • established on Apr 1, 1935
  • With a capital of Rs.5 crore.
  • On the recommendation of Hilton Young Commission
  • The ownership of almost all the share capital was with the non-government share-holders.
  • Nationalized on Jan 1, 1949.
  • Administration: 14 directors in Central Board of Directors besides the Governor, 4 Deputy Governors and one Government official. The Governor is the Chairman of the board and Chief Executive of the Bank.
  • Governors:
  • 1st Governor-Sir Smith (1935-37)
  • 1st Indian Governor : CD Deshmukh (1948-49)
  • Nationalized in 1949

RBI Act 1934 –Provided statutory basis of functioning of Bank



  • Issue of Notes: Regulates issue of bank notes above 1 rupee. It acts as the only source of legal tender money because the one rupee notes issued by Ministry of Finance are also circulated through it.
  • The Reserve Bank has adopted the Minimum Reserve System for the note issue. Since 1957, it maintains gold and foreign exchange reserve of Rs.200 crore, of which at least 115 crore should be in gold.
  • Banker to the Government: Acts as the banker, agent and advisor the Govt., of India. It also manages the public debt for the Government.
  • Banker’s Bank: The Reserve Bank performs the same function for other banks as the other banks ordinarily perform for their customers.
  • Controller of Credit: The Reserve Bank undertakes the responsibility of controlling credits created by the commercial banks. To achieve this objective, it makes extensive use of quantitative and qualitative techniques to control and regulate the credit effectively in the country.
  • Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the Reserve Banks buys and sells the foreign currencies and also protects the country’s foreign exchange funds.
  • It formulates and administers the monetary policy.
  • Acts as the agent of the Government of India in respect to India’s membership of the IMF and the World Bank.
  • No personal accounts are maintained and operated in RBI.
  • click here ti read about monetary policy in INDIA


Post independence banks in INDIA-

Cartered merchant and industrial house nexus with banks

Bank branches increased but only to carter industrial markets

No expansion in rural areas

No financial inclusion

No involvement in achieving fiver year plans targets

Hence to carter the need of rural banks government of India began nationalizing the banks




In order to have more control over the banks, 14 large commercial banks, the reserves of which were more than Rs.50 crore each, were nationalized on July 19, 1969.
The banks were:

  • The Central Bank of India
  • Bank of India
  • Punjab National Bank
  • Canara Bank
  • United Commercial Bank
  • Syndicate Bank
  • Bank of Baroda
  • United Bank of India
  • Union Bank of India
  • Dena Bank
  • Allahabad Bank
  • Indian Bank
  • Indian Overseas Bank
  • Bank of Maharashtra

Phase -2

On April 15, 1980, those 6 private sector banks whose reserves were more than Rs.200 crore each were nationalized.
These banks were:

  • Andhra Bank
  • Punjab and Sindh Bank
  • New Bank of India
  • Vijaya Bank
  • Corporation Bank
  • Oriental Bank of Commerce

Bank nationalization problem-

  • Administered interest rate by government
  • High reserve requirement
  • Political interference
  • Unions were made so rise in NPA

So in 1991 first NARSIMHAN COMMITTEE was formed to overhaul banking sector of India and to overcome this problem of NPA, lack of rural financial exposure ;

Narasimhan Committee


Recommendations on Financial Reforms

The Government of India constituted a 9-member committee under the chairmanship of Mr M Narasimhan, retired RBI Governor, on 14lh August 1991 for making recommendation on the existing financial system and to give suggestions for improving structure.

Its recommendations were as follows:

  • no bar to new banks being set up in the private sector.
  • There should be an Assets Reconstruction Fund (ARF) which could take over, from the banks and financial institution (FIs), a portion of their bad debts at a discount.
  • The banks and the financial institutions should be authorized to recover bad debts through special tribunals.
  • The public sector banks with profitable operations should be allowed to tap the capital market for enhancement of their share capital.
  • Licensing should be abolished and the option of opening of branches for the present should be left to the commercial judgment of individual banks.
  • There should be phased reduction Of CRR and SLR.
  • A liberal view should be adopted for allowing foreign banks in the country. Both foreign and domestic banks should be treated at par.
  • Primary targets for credits should be redefined and such credit should not be more than 10% of total credit.
  • Computerization of banks should be promoted.
  • The dual control of RBI and Finance Ministry on banks should be abolished
  • Need for professionalizing and depoliticizing the bank boards.


In Sept 1993, the New Bank of India was merged with the Punjab National Bank.
These nationalized banks, together with Regional Rural Banks (RRBs), come under the category of Public Sector Commercial Banks.
The other kind of commercial banks are private Sector Commercial Banks.
At present there are 20 nationalized banks besides the RBI.


Banking Sector Reforms

The major recommendations of the committee are:

  • Merger of strong banks which have a multiplier effect on industry. It has cautioned against merger of strong banks with weak banks as this will adversely affect the asset quality of strong banks.
  • Concept of narrow banking should be tried out to rehabilitate weak banks. If this was not successful the issue of closure should be examined.
  • Two or three large Indian banks should be given international character.
  • Small and local banks should be combined to states or clusters of districts in order to serve local trade, small industry and agriculture.
  • Functions of the board and management need to be reviewed so that boards remain responsible for enhancing shareholder’s value through corporation or corporate strategy.
  • Need to review minimum prescriptions for capital adequacy. RBI Act, Bank Nationalization Act, Banking regulation Act and State Bank of India Act are in urgent need of review.
  • Integration of NBFC’s lending activities into the financial system.
  • Review of recruitment procedures, training and remuneration policies in public Sector Banks.





Set up in 1975.

Their main objective

  • To develop the rural economy by providing credit and encouraging other productive activities in the rural areas.

The paid-up capital of each rural bank is Rs.25 lakh, fifty percent of which is contributed by the Central Government, 15 percent by the State Governments and 35 percent by the sponsoring public sector commercial banks which are responsible for the actual setting up of the RRBs.

The Reserve Bank of India Act, 1934 has classified the banks as Scheduled Banks and non-Scheduled Banks.


The Scheduled banks are those which have a paid-up capital and reserves of an aggregate value of not less than Rs.5 lakh and which satisfy RBI that their affairs are carried out in the interests of their depositors.

These banks have been entered in the Second Schedule of the RBI Act, 1934. All commercial banks-Indian and foreign, RRBs and State Co-Operative Banks are Scheduled banks.


All India Financial Institution-


Established in 1990; promotes small scale sector.



Established on Now 5, 1982; gives credit facilities to farmers.



Set-up on Jan 1, 1982; grants deferred credit to Indian exporters in order to operate in the international market.



The IDBI which was established as Development Finance Institution under IDBI Act, 1964 has been converted as a banking company. Parliament passed the Act so as to cancel out IDBI Act 1964 and to open the way for the registration of this new banking company.

IDBI was transformed into IDBI Ltd. on Oct 1, 2004, a company under the Companies Act, 1956 and a Scheduled Bank (on Oct 11, 2004) under the RBI Act, 1934.



Industrial Finance Corporation of India Ltd. was established in 1948 under a special Act on the recommendations of Central Banking Enquiry Committee.

The basic aim of IFCI is to arrange medium and long term credit for various industrial enterprises of the country. Since July 1, 1993 this corporation has been converted into a company and it has been given the status of a Ltd. company with the name Industrial Finance Corporation of India Ltd.



Formerly known as IRBI

IRBI was established on Mar 20, 1985 under Indian Industrial Reconstruction Bank Act, 1984 as a result of reconstituting Indian Industrial Reconstruction Corporation Ltd.

The basic aim of establishing IRBI was to revive sick and closed industrial units and to act as a prime loan and reconstruction agency. IRBI grants loans and advances to industrial institutions. It accepts stocks, shares, bonds and debentures and also provides guarantee on deferred payments.



National Housing Bank was established in July 1988 as wholly owned subsidiary of RBI. NHB is the apex banking institution providing finances for houses.

A major” activity of NHB includes extending financial assistance to eligible institutions in the housing sector by way of refinance and direct finance.



Non-Banking Financial entities comprise NBFCs, mutual benefit financial companies (Nidhi Companies), and mutual benefit companies (potential nidhi companies). Department of Company Affairs regulates the mutual benefit financial companies and mutual benefit companies leaving the regulation of NBFCs with the RBI.



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