History of Banking in India

Ancient Period

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The Vedas, ancient Indian texts, mention the concept of usury, using the term “kusidin” to refer to a usurer. The Sutras (700–100 BCE) and the Jatakas (600–400 BCE) also discuss usury. During this period, texts condemned the practice: Vasishtha forbade the Brahmin and Kshatriya varnas from engaging in usury. However, by the 2nd century CE, usury became more socially acceptable. The Manusmriti viewed usury as a legitimate means of acquiring wealth or making a living, though it considered lending money above a certain rate, with different ceiling rates for different castes, a serious sin.

The Jatakas, Dharmashastras, and Kautilya also reference the existence of loan deeds, known as rnapatra, rnapanna, or rnalekhaya.

During the Mauryan period (321–185 BCE), an instrument called “adesha” was used, which functioned as an order on a banker to pay a sum to a third person, similar to a modern bill of exchange. The extensive use of these instruments has been documented. In large towns, merchants also issued letters of credit to one another.

Medieval period

During the Mughal era, the practice of using loan deeds continued, known as dastawez in Urdu/Hindi. Two types of these loan deeds were prevalent: the dastawez-e-indultalab, which was payable on demand, and the dastawez-e-miadi, which was payable after a specified period. Royal treasuries also utilized payment directives known as barattes. Indian bankers were noted for issuing bills of exchange on foreign countries during this time. Additionally, the evolution of hundis, a type of credit instrument, began during this era and has persisted in usage since then.

Evolution of Banking in Colonial India

Union Bank of Calcutta

  • Established in 1829 by merchants during the British rule, the Union Bank of Calcutta replaced the earlier Commercial Bank and the Calcutta Bank. However, it faced insolvency and ultimately failed in 1848, despite being incorporated in 1845.

Allahabad Bank and the Emergence of Foreign Banks

  • The Allahabad Bank, established in 1865, is the oldest Joint Stock bank in India. It was preceded by the Bank of Upper India, established in 1863, which survived until 1913. Foreign banks, including Grindlays Bank, Comptoir d’Escompte de Paris, and HSBC, also began operating in India during the 1860s.

Indian Joint Stock Banks and the Swadeshi Movement

  • The Oudh Commercial Bank, established in 1881, was the first entirely Indian joint stock bank, but it failed in 1958. The Punjab National Bank, established in 1894 in Lahore, has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911 saw the establishment of banks inspired by the Swadeshi movement, including the Catholic Syrian Bank, The South Indian Bank, Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank, and Central Bank of India.

Banking Segmentation and Challenges

  • The presidency banks, exchange banks, and Indian joint stock banks operated in different segments of the economy. This segmentation led to observations about the inefficiencies in the banking system. The years between 1914 and 1947 were particularly challenging for Indian banking due to the impact of the First and Second World Wars.

Reserve Bank of India (RBI) and Leadership

  • The RBI was established on April 1, 1935, with Sir Osborne Smith as the inaugural officeholder. C. D. Deshmukh became the first Indian governor on August 11, 1943. Shaktikanta Das, who previously served as the finance secretary with the Government of India, took charge as the new RBI Governor on December 12, 2018.
YearsNumber of banks
that failed
Authorised Capital
(₹ Lakhs)
Paid-up Capital
(₹ Lakhs)
19131227435
191442710109
191511565
1916132314
191797625
191872091