​How Has Banking Evolved in India? Read This to Understand.

Indian banking facilities consist of private, commercial, rural, regional, and cooperative banks. Here in this blog, you will learn the evolution of banks, the distinct categories and what impact this had on the nationalized banks. 

The first phase – Pre-independence phase

There almost were 600 banks in India before its independence. One of the first banks to be started in Calcutta by the name Bank of Hindustan in the year 1770. This closed in the year 1832. Next, the Oudh Commercial Bank was one of the first commercial Indian banks. Few other banks like the Bank of Madras, Bank of Bengal, and Bank of Bombay were introduced between the early and mid-1800s. All three banks were merged to form the Imperial bank, which now is addressed as the State Bank of India. At this phase, you had to visit SBI as per the SBI bank timings for all your banking-linked chores and stand in long queues in the branch office to get your banking work done. 

The second phase – Post independence phase

Around 1970, the Indian news daily india Government nationalized the banks in India under the Act of Banking Regulation, 1949. A total of fourteen banks in India were nationalized. Around 1975, the Indian Government recognized that there were several groups that were financially not included. In the period from 1982 to 1990, there are several banks created with specialized functions. 

• SIDBI (Small Industries Development Bank of India) – To finance small-scale industries. 
• National housing board – Created to fund housing projects. 
• EXIM (Export-Import Bank of India) – Introduced in the year 1982 to promote import and export. 
• NABARD (National Bank for Agriculture & Rural Development)– Introduced in the year 1982 to support various agricultural activities. 

The third phase – The LPF era (1991 until date)

From the year 1991 onwards, in the Indian economy, there were several changes. Indian government invited several private investors to make an investment in India. Note that 10 private banks were approved by the Reserve Bank of India (RBI). A few crucial names which exist now are HDFC bank, ICICI Bank, Axis Bank, IndusInd Bank and DCB. 

Note that between the early and middle of 2000, two other financial institutions namely Yes Bank (2004) and Kotak Mahindra Bank (2001), got their licenses. Bandhan and IDFC FIRST banks were even given licenses between 2013-14. Other notable developments and changes during this specific era were – 

• Foreign banks such as HSBC, Bank of America and Citibank set up branches in India. 
• Indian Government and RBI treated private and public banks equally. 
• Small finance banks (SFBs) were given permission to set up their branches across India. 
• Banks began digitizing transactions and different other linked banking operations. 

Crucial reasons why the banks were nationalized?

To understand why the nationalization of the banking industry was done in India, read on – 

• For energizing the priority sector – Banks collapsed at a swift rate. Note that 361 banks failed from 1957 to 1955, which made the customers lose the hard-earned money that they stored in such banks. 
• For recognition of the agricultural sector – Banks favoured huge businesses as well as businesses and avoided the rural sector. Nationalisation came with the pledge to support the agricultural sector. 
• Expansion of the branches – Nationalization facilitated the introduction of new branches. This ensured maximum coverage of the banks across the country. 
• Mobilization of the savings – Nationalizing the banks allowed people to access the banks easily and encouraged all of them to invest as well as save, injecting additional revenue into a cash-strapped economy. 
• Political and economic parameters – The 2 wars in 1962 as well as 1965 put a considerable burden on the Indian economy. The nationalisation of banks in India endowed the economy with the right boost through enhanced deposits.

What are the positive impacts of nationalization?

The nationalization of banks in India was looked upon as one of the crucial events in the evolution of Indian banks. Here are some of the ways that nationalization brought benefits to the economy. 

• Enhanced savings – There was a rapid enhancement in savings with new branches in India. As national income increased in the year the 1970s, the gross domestic savings doubled. 
• Ameliorated efficiency – This enhanced efficiency and boosted the public confidence in you. 
• Empowering small-scale industries (SSIs) – Small-scale industries received a great boost leading to proportionate improvement in the economy. 
• Financial inclusion – The statistics of the banking sector as well as the Indian economy showed marked amelioration. This reflected parameters like a share of deposits in bank to GDP, advances share to DGP, gross savings rate and the gross rate of investment between 1969 and 1991. 
• Better outreach – Banks now were no longer just restricted to the metropolitan regions. Many of the branches were opened in the remotest areas of India. 
• Surge in public deposits – Enhanced outreach to banks assists small industries, the export sector and the agriculture sector to grow. This specific growth was accompanied by a proportionate enhancement in public deposits. 
• Elevating the green revolution – Green revolution was one of the major priorities of the Indian government. Nationalising the banks, helped boost this agenda of the government.  

What were the drawbacks of nationalization in India?

To give an unbiased viewpoint on this subject, here are some of the downsides you must know – 

• Socioeconomic impacts and challenges – Banks were not able to offer adequate support to reduce poverty or offer sufficient funding to the society’s grassroots level. This specifically was obvious for the rural areas in India. 
• Competition from the private banks – Despite the support of the Indian government and enhancement in the impetus via the rise in deposits, PSUs were not able to exceed the private sector banks in performance. 
• Failure to attain financial inclusion – While financial inclusion was the main goal of nationalizing banks, it was enabled adequately. This was just attained to a specific limited extent post the launch of the government campaign known as Jan Dhan Yojana. 

Bank list in India Pre-Independence

Here’s the list of banks pre-independence

1. Allahabad bank
2. Bank of India
3. Punjab National Bank
4. Canara Bank
5. Bank of Baroda
6. Central Bank of India

So, at that time as net banking was not developed, you were supposed to visit the bank physically to conduct your bank transactions. For instance, if you had an account in the Bank of Baroda, then you were supposed to visit the bank physically at the Bank of Baroda timings to get your bank work done. However, now the development of technology and the rise of digitization allows you to conduct most of your banking-related work from the comfort of your home.