Modern banking in India could be traced back to the
establishment of Bank of Bengal (Jan 2, 1809), the first
joint-stock bank sponsored by Government of Bengal and
governed by the royal charter of the British India
Government. It was followed by establishment of Bank of
Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843).
These three banks, known as the presidency banks, marked
the beginning of the limited liability and joint stock banking
in India and were also vested with the right of note issue.
In 1921, the three presidency banks were merged to form
the Imperial Bank of India, which had multiple roles and
responsibilities and that functioned as a commercial bank, a
banker to the government and a banker’s bank. Following
the establishment of the Reserve Bank of India (RBI) in
1935, the central banking responsibilities that the Imperial
Bank of India was carrying out came to an end, leading it to
become more of a commercial bank. At the time of
independence of India, the capital and reserves of the
Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn
and advances at Rs 723 mn and a network of 172 branches
and 200 sub offices spread all over the country.
In 1951, in the backdrop of central planning and the need to
extend bank credit to the rural areas, the Government
constituted All India Rural Credit Survey Committee, which
recommended the creation of a state sponsored institution
that will extend banking services to the rural areas.
Following this, by an act of parliament passed in May 1955,
State Bank of India was established in Jul, 1955. In 1959,
State Bank of India took over the eight former state-
associated banks as its subsidiaries. To further accelerate
the credit to fl ow to the rural areas and the vital sections of
the economy such as agriculture, small scale industry etc.,
that are of national importance, Social Control over banks
was announced in 1967 and a National Credit Council was
set up in 1968 to assess the demand for credit by these
sectors and determine resource allocations. The decade of
1960s also witnessed significant consolidation in the Indian
banking industry with more than 500 banks functioning in
the 1950s reduced to 89 by 1969.
For the Indian banking industry, Jul 19, 1969, was a
landmark day, on which nationalization of 14 major banks
was announced that each had a minimum of Rs 500 mn and
above of aggregate deposits. In 1980, eight more banks
were nationalised. In 1976, the Regional Rural Banks Act
came into being, that allowed the opening of specialized
regional rural banks to exclusively cater to the credit
requirements in the rural areas. These banks were set up
jointly by the central government, commercial banks and the
respective local governments of the states in which these
are located.
The period following nationalisation was characterized by
rapid rise in banks business and helped in increasing
national savings. Savings rate in the country leapfrogged
from 10-12% in the two decades of 1950-70 to about 25 %
post nationalisation period. Aggregate deposits which
registered annual growth in the range of 10% to 12% in the
1960s rose to over 20% in the 1980s. Growth of bank credit
increased from an average annual growth of 13% in the
1960s to about 19% in the 1970s and 1980s. Branch
network expanded significantly leading to increase in the
banking coverage.
Indian banking, which experienced rapid growth following
the nationalization, began to face pressures on asset quality
by the 1980s. Simultaneously, the banking world
everywhere was gearing up towards new prudential norms
and operational standards pertaining to capital adequacy,
accounting and risk management, transparency and
disclosure etc. In the early 1990s, India embarked on an
ambitious economic reform programme in which the
banking sector reforms formed a major part. The
Committee on Financial System (1991) more popularly
known as the Narasimham Committee prepared the blue
print of the reforms. A few of the major aspects of reform
included (a) moving towards international norms in income
recognition and provisioning and other related aspects of
accounting (b) liberalization of entry and exit norms leading
to the establishment of several New Private Sector Banks
and entry of a number of new Foreign Banks (c) freeing of
deposit and lending rates (except the saving deposit rate),
(d) allowing Public Sector Banks access to public equity
markets for raising capital and diluting the government
stake,(e) greater transparency and disclosure standards in
financial reporting (f) suitable adoption of Basel Accord on
capital adequacy (g) introduction of technology in banking
operations etc. The reforms led to major changes in the
approach of the banks towards aspects such as
competition, profitability and productivity and the need and
scope for harmonization of global operational standards and
adoption of best practices. Greater focus was given to
deriving efficiencies by improvement in performance and
rationalization of resources and greater reliance on
technology including promoting in a big way
computerization of banking operations and introduction of
electronic banking.
The reforms led to significant changes in the strength and
sustainability of Indian banking. In addition to significant
growth in business, Indian banks experienced sharp growth
in profitability, greater emphasis on prudential norms with
higher provisioning levels, reduction in the non performing
assets and surge in capital adequacy. All bank groups
witnessed sharp growth in performance and profitability.
Indian banking industry is preparing for smooth transition
towards more intense competition arising from further
liberalization of banking sector that was envisaged in the
year 2009 as a part of the adherence to liberalization of the
financial services industry.
II. STRUCTURE OF THE BANKING INDUSTRY
According to the RBI definition, commercial banks which
conduct the business of banking in India and which (a) have
paid up capital and reserves of an aggregate real and
exchangeable value of not less than Rs 0.5 mn and (b)
satisfy the RBI that their affairs are not being conducted in
a manner detrimental to the interest of their depositors, are
eligible for inclusion in the Second Schedule to the Reserve
Bank of India Act, 1934, and when included are known as
‘Scheduled Commercial Banks’. Scheduled Commercial
Banks in India are categorized in five different groups
according to their ownership and/or nature of operation.
These bank groups are (i) State Bank of India and its
associates, (ii) Nationalised Banks, (iii) Regional Rural
Banks, (iv) Foreign Banks and (v) Other Indian Scheduled
Commercial Banks (in the private sector). All Scheduled
Banks comprise Schedule Commercial and Scheduled Co-
operative Banks. Scheduled Cooperative banks consist of
Scheduled State Co-operative Banks and Scheduled Urban
Cooperative Banks.
Banking Industry at a Glance
In the reference period of this publication (FY06), the
number of scheduled commercial banks functioning in India
was 222, of which 133 were regional rural banks. There are
71,177 bank XIV offices spread across the country, of which
43 % are located in rural areas, 22% in semi-urban areas,
18% in urban areas and the rest (17 %) in the metropolitan
areas. The major bank groups (as defined by RBI)
functioning during the reference period of the report are
State Bank of India and its seven associate banks, 19
nationalised banks and the IDBI Ltd, 19 Old Private Sector
Banks, 8 New Private Sector Banks and 29 Foreign Banks.
