History of Indian Banking Industry

The East India Company set up Bank of Bombay in 1720 with the objective of increasing trade. In 1786, the General Bank of India was floated, which claimed limited liability on the shareholders. Subsequently, other banks, viz., the Carnatic Bank (1788), the Madras Bank (1795), the British Bank (1795) and the Asiatic Bank (1804) were established as private institutions. The evolution of the modern commercial banking industry in India can be traced to 1806 with the establishment of the Bank of Calcutta, later renamed to Bank of Bengal in 1809. Three presidency banks were set up in Calcutta, Bombay and Madras. In 1860, the limited liability concept was introduced in banking, resulting in the establishment of joint stock banks.

In 1921, the three presidency banks were amalgamated to form the Imperial Bank of India, which took on the role of a commercial bank, a bankers’ bank and a banker to the Government. The establishment of the RBI as the central bank of the country in 1935 ended the quasi-central banking role of the Imperial Bank of India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state-associate banks. Accordingly, the State Bank of India (“SBI”) was constituted in 1955. Subsequently in 1959, the State Bank of India (Subsidiary Bank) Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries. In 1969, 14 private banks were nationalised followed by six private banks in 1980.

Until the 1980s, the Indian financial system was strictly controlled. Interest rates were administered, formal and informal parameters governed asset allocation, and strict controls limited entry into and expansion within the financial sector. Bank profitability was low, non-performing assets were comparatively high, capital adequacy was diminished, and operational flexibility was hindered.

The Government’s economic reform program, which began in 1991, encompassed the financial sector. The first phase of the reform process began with the implementation of the recommendations of the Committee on the Financial System, i.e., the Narasimham Committee I. This was followed by reports submitted in 1998 by other Committees, such as the second Committee on Banking Sector Reform, i.e., the Narasimham Committee II and the Tarapore Committee on Capital Account Convertibility, and the second phase of reforms relating to capital adequacy requirements, asset classification and provisioning, risk management and merger policies. The deregulation of interest rates, the emergence of a liberalised domestic capital market, and the entry of new private sector banks have progressively intensified the competition among banks.