Banking Growth

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CHAPTER V

PROGRESS OF THE BANKING SECTOR IN INDIA AND THE UNION TERRITORY OF PONDICHERRY. 5,l Introduction

Banks constitute an important segment in financial arena of all countries whether developed or developing or underdeveloped. Economic development of every country depends upon financial sector particularly commercial banks. In fact economic development and financial infrastructure go hand in hand. From time immemorial, the conventional banker, an indispensable pillar of Indian society, giving and taking of credit in one form or another, must have existed as earlier as the Vedic period. Money lending was one of the recognised occupations under Manu's laws'

.

The history of modem Indian banking2 goes back to 1683 when the first Indian Bank was established on western lines in Madras. The establishment of the Bank

of Calcutta in 1806 marked the beginning of the modern banking era in India. Two more Presidential Banks, namely, Bank of Bombay and Bank of Madras were set up in 1840

and 1843 respectively. With the launching of Swadeshi movement in 1905, there were outbursts of banking activities. Many banks like Bank of Burma (1904), Bank of India

(1906), Canara Bank (1906), Bank of Rangoon (1906), Indian Specie Bank (1906),

N.K. Thingalaya, "Manu, Chanakya and the Rate of Interest", Pigmy Economic Review, Vol. 36, Aug - Oct, 1994, pp. 1-5..

1

'c. Kugumakara Hebbar, "Growth of Banking in India Before Independence", Pigmy Econgmic Review, August 1989, pp .3-4.

Indian Bank (1 9061, Bank of Baroda (1908) and Central Bank ( 1911) had their operation with a paid up capital of Rupees Five lakhs and above. But the present Indian banking system had developed considerably since 1935. RBI has started its operation in 1935 through an Act. A critical review of the growth of banking in India in the preindependence period reveals that the banking system had neither a definite shape nor policy except the creation of RBI in 1935. With the enactment of the Banking Companies Act in 1949, the Indiaii banking system had undergone substantial changes structurally, geographically and functionally. Banking in India broadly falls under two categories: (a) Commercial banks and (b) Co-operative banks. Commercial banks are the major players as far as industry and trade sectors are concerned whereas co-operative banks cater to the needs of rural economy particularly agriculture sector. Commercial banks fall under two distinct categories, namely, Scheduled commercial banks and non-scheduled Commercial banks. Scheduled commercial banks means the banks which are listed in the Second Schedule of RBI Act, 1934. Under section 42 (1) of the Act, scheduled commercial banks are expected to maintain cash balance to a minimum of three per cent of their net demand and time liabilities, The cash reserve ratio is subject to upward / downward revision by

RBI. The scheduled commercial banks enjoy certain special privileges like availing financial assistance under section 17 of the RBI Act. Non-scheduled Commercial banks

are not listed and they do not have any large network. As of now only, one nonscheduled bank is functioning in India as compared to 16 nos on the eve of bank nationalisation.

5.2 Progress of Banking in India

The progress of Commercial banking in India can be categorised under the following four distinct phases: Phase I (1 860-1 946 ); Phase I1 (1947-1968 ); Phase 111 (1969-1 990); Phase IV (1991- till date).

5.2.1 Progress of Banking

- Phase I (1860 - 1946)

With the advent of British rule in India, the business of the indigenous bankers had declined. The banks on western model have come into existence. Financial transactions were handled by them. It was only in 1850's, the British bank actually reached India. The first western type thrift institution introduced in India was the Savings department of the Presidency Bank which, opened in the 1840's and was followed in 1870 by District Savings Bank...
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