The document discusses the origin and development of banking in India over three phases from 1786 to the present. It provides details on the key events and reforms that took place during each phase, including the establishment of early private banks in the late 18th century, nationalization of banks from the 1960s to 1980s, and liberalization reforms beginning in 1991 that opened the sector to private and foreign banks. It also outlines the role and importance of banks in promoting economic development through capital formation, monetization, financing innovations and priority sectors.

1. Principles of Banking
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4. Origin and Development of Banking
System
• History of Banking in India:The first bank in India,
though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System
can be segregated into three distinct phases:
• Phase I: The Early Phase which lasted from 1770 to
1969
• Phase II: The Nationalisation Phase which lasted from
1969 to 1991
• Phase III: The Liberalisation or the Banking Sector
Reforms Phase which began in 1991 and continues to
flourish till date

5. History of Banking in India

6. Phase 1 (1786 to 1969)
• The first bank in India, the General Bank of India, was set
up in 1786. Bank of Hindustan and Bengal Bank followed.
The East India Company established Bank of Bengal (1809),
Bank of Bombay (1840), and Bank of Madras (1843) as
independent units and called them Presidency banks.
These three banks were amalgamated in 1920 and the
Imperial Bank of India, a bank of private shareholders,
mostly Europeans, was established.
• Allahabad Bank was established, exclusively by Indians, in
1865. Punjab National Bank was set up in 1894 with
headquarters in Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank,
Indian Bank, and Bank of Mysore were set up. The Reserve
Bank of India came in 1935.

7. Continued…..
• During the first phase, the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1,100 banks, mostly small.
• To streamline the functioning and activities of commercial banks,
the Government of India came up with the Banking Companies Act,
1949, which was later changed to the Banking Regulation Act, 1949
as per amending Act of 1965 (Act No. 23 of 1965).
• The Reserve Bank of India (RBI) was vested with extensive powers
for the supervision of banking in India as the Central banking
authority.
• During those days, the general public had lesser confidence in
banks. As an aftermath, deposit mobilization was slow.
• Moreover, the savings bank facility provided by the Postal
department was comparatively safer, and funds were largely given
to traders.

8. Phase 2 (1969 to 1991)
• The government took major initiatives in banking sector reforms
after Independence. In 1955, it nationalized the Imperial Bank of
India and started offering extensive banking facilities, especially in
rural and semi-urban areas.
• The government constituted the State Bank of India to act as the
principal agent of the RBI and to handle banking transactions of the
Union government and state governments all over the country.
• Seven banks owned by the Princely states were nationalized in 1959
and they became subsidiaries of the State Bank of India. In 1969, 14
commercial banks in the country were nationalized.
• In the second phase of banking sector reforms, seven more banks
were nationalized in 1980. With this, 80 percent of the banking
sector in India came under the government ownership.

9. Phase 3 (1991 onwards)
• This phase has introduced many more products and facilities in the
banking sector as part of the reforms process. In 1991, under the
chairmanship of M Narasimham, a committee was set up, which
worked for the liberalization of banking practices. Now, the country
is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking
and net banking are introduced. The entire system became more
convenient and swift. Time is given importance in all money
transactions.
• The financial system of India has shown a great deal of resilience. It
is sheltered from crises triggered by external macroeconomic
shocks, which other East Asian countries often suffered. This is all
due to a flexible exchange rate regime, the high foreign exchange
reserve, the not-yet fully convertible capital account, and the
limited foreign exchange exposure of banks and their customers.

10. Nationalization of Banks
• Nationalization was a significant step in the
banking sector, and it helped improve people’s
confidence in the system.
• Small and critical industries started getting
access to capital that helped boost economic
growth.
• Additionally, the move added to the country’s
growth across the global banking sector.

11. The New Era of Banking
• 1991 saw a remarkable change in the Indian economy.
• The government opened up the economy and invited foreign and
private investors to invest in India. This move marked the entry of
private players in the banking sector.
• The RBI provided banking license to ten private entities of which
some of the notable ones survived such as ICICI, HDFC, Axis Bank,
IndusInd Bank, and DCB.
• Nearly after a decade, the third round of licensing took place. The
RBI in 2013-14, allowed a license for IDFC bank and Bandhan Bank.
• The story didn’t end here, with an aim to make sure that every
Indian gets access to finance, the RBI introduced two new set of
banks – Payments bank and small banks, and this marked the fourth
phase in the banking industry.

12. Structure of Banking in India
• Central Bank – Reserve Bank of India (RBI)
• Commercial Banks
– Public sector Banks
– Private Banks
– Foreign Banks
• Co-operative Banks
– Primary Credit Societies
– Central Co-operative Banks
– State Co-operative Banks
• Regional Rural Banks
• Development Banks
• Specialized Banks
– Export Import Bank of India
– Small Industries Development Bank of India
– National Bank for Agricultural and Rural Development
• Indian Bank-like financial institutions
– Microfinance institutions
– Development financial institutions

13. Categories of Banks in India
• Schedule Banks
• Non-Schedule Banks

14. Schedule Banks
• Scheduled Banks in India are those banks which constitute those banks,
which have been included in the Second Schedule of Reserve Bank of India
(RBI) Act, 1934.
• These banks should fulfill two main conditions:
1. Paid-up capital and collect funds should not be less than Rs.5 Lakh
2. Any activity of the Banks should not be detrimental or adversely affect
the interests of the customers
• It basically comprises Commercial Banks and Cooperative Banks.
Commercial Banks majorly comprises of scheduled and Non-scheduled
commercial banks regulated Banking Regulations Act 1949.
• Commercial Banks primarily works on a ‘Profit Basis’ and is engaged in the
business of accepting deposits for the purpose of advances/loans. We can
categorize scheduled commercial banks into four types:
• Public Sector Banks
• Private sector Banks
• Foreign Banks
• Regional Rural Banks

15. Non-scheduled bank
• Non- Scheduled Banks defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949), which is not a scheduled bank”.
• Reserve Bank of India is the only central bank of India and all Banks in
India are required to follow the guidelines as issued by RBI. We can also
classify Banks in India as:
• Public Sector Banks: These are those entities which are owned by Govt.
having more than 51% stake in the capital.
• Private Sector Banks: Private Banks are those entities which are owned
by private individuals/institutions and these are registered under the
Companies Act 1956 as Limited Companies.
• Regional Rural Banks (RRBs): These entities are completely under
government and work for the betterment of the rural sector of the society.
• Development Banks: These basically include Industrial Finance
Corporation of India (IFCI) which was established in 1948, Export-Import
Bank of India (EXIM Bank) which was established in 1982, National Bank
for Agriculture & Rural Development (NABARD) which was established in
1982, and Small Industries Development Bank of India (SIDBI) which was
established on 2nd April 1990

16. Role and importance of banks in
economic development
• Capital Formation: The rate of saving is generally
low in an underdeveloped economy due to the
existence of deep-rooted poverty among the people.
Even the potential savings of the country cannot be
realized due to lack of adequate banking facilities in
the country. To mobilize dormant savings and to
make them available to the entrepreneurs for
productive purposes, the development of a sound
system of commercial banking is essential for a
developing economy.

17. • Monetization: An underdeveloped economy is
characterized by the existence of a large non
monetized sector, particularly, in the backward and
inaccessible areas of the country. The existence of this
non monetized sector is a hindrance in the economic
development of the country. The banks, by opening
branches in rural and backward areas, can promote the
process of monetization in the economy.
• Innovations: Innovations are an essential prerequisite
for economic progress. These innovations are mostly
financed by bank credit in the developed countries. But
the entrepreneurs in underdeveloped countries cannot
bring about these innovations for lack of bank credit in
an adequate measure. The banks should, therefore,
pay special attention to the financing of business
innovations by providing adequate and cheap credit to
entrepreneurs.

18. • Finance for Priority Sectors: The commercial banks in
underdeveloped countries generally hesitate in extending
financial accommodation to such sectors as agriculture and
small scale industries, on account of the risks involved
there in. They mostly extend credit to trade and commerce
where the risk involved is far less. But for the development
of these countries it is essential that the banks take risk in
extending credit facilities to the priority sectors, such as
agriculture and small scale industries.
• Provision for Medium and Long term Finance: The
commercial banks in under developed countries invariably
give loans and advances for a short period of time. They
generally hesitate to extend medium and long term loans
to businessmen. As is well known, the new business need
medium and long term loans for their proper
establishment. The commercial banks should, therefore,
change their policies in favour of granting medium and long
term accommodation to business and industry.