Banking in India

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Modern banking in India has its roots in the mid-18th century with the establishment of pioneering institutions such as the Bank of Hindustan (1770), which operated until its liquidation between 1829 and 1832, and the General Bank of India (1786), which ceased operations in 1791.

Establishment of State Bank of India (SBI)

The largest and oldest bank still in existence in India is the State Bank of India (SBI). It began operations as the Bank of Calcutta in mid-June 1806, and in 1809, it was renamed the Bank of Bengal. This bank was one of three founded by a presidency government, with the other two being the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks merged in 1921 to form the Imperial Bank of India, which became the State Bank of India in 1955 after India’s independence. For many years, the presidency banks and their successors acted as quasi-central banks until the establishment of the Reserve Bank of India in 1935 under the Reserve Bank of India Act, 1934.

In 1960, the State Bank of India (SBI) was granted control over eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959. However, the merger of these associated banks with SBI became effective on April 1, 2017. In 1969, the Government of India nationalised 14 major private banks, including the Bank of India. In 1980, an additional six private banks were nationalised. These nationalised banks now constitute the majority of lenders in the Indian economy, dominating the banking sector due to their large size and extensive networks.

Evolution and Nationalization

The three presidency banks merged in 1921 to form the Imperial Bank of India, which later became the State Bank of India in 1955 after India gained independence. Subsequent developments included the nationalization of major private banks by the Government of India in 1969 and 1980.

Banking Sector Classification

The Indian banking sector is broadly classified into scheduled and non-scheduled banks. Scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India Act, 1934. They are further divided into nationalised banks, the State Bank of India and its associates, Regional Rural Banks (RRBs), foreign banks, and other Indian private sector banks. Following the merger of its associate banks on April 1, 2017, SBI became the largest bank in India, achieving a global ranking of 236 on the Fortune 500 index. The term “commercial banks” encompasses both scheduled and non-scheduled commercial banks, which are regulated under the Banking Regulation Act, 1949.

Current Landscape and Initiatives

The Indian banking sector, dominated by nationalized banks, plays a crucial role in the economy. Efforts have been made to expand banking reach, particularly in rural areas, through initiatives such as the expansion of branch networks by the State Bank of India and support for microfinance provided by the National Bank for Agriculture and Rural Development (NABARD).

Economic Impact and Financial Preferences

The banking sector significantly influences the Indian economy, with a large portion of household financial assets held in the form of bank deposits. Research indicates that Indians historically prefer bank deposits due to perceived safety and security, with a majority of consumers choosing to keep their money in bank accounts.