Reforms in Banking Sector in India

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CHAPTER-4

DEVELOPMENT AND REFORMS IN INDIAN BANKING
4.1 GROWTH OF BANKING SYSTEM IN INDIA : In order to understand present make up of banking sector in India and its past progress, it will be fitness of things to look at its development in a somewhat longer historical perspective. The past four decades and particularly the last two decades witnessed cataclysmic change in the face of commercial banking all over the world. Indian banking system has also followed the same trend. In over five decades since dependence, banking system in India has passed through five distinct phase, viz. (1) Evolutionary Phase (prior to 1950) (2) Foundation phase (1950-1968) (3) Expansion phase (1968-1984) (4) Consolidation phase (1984-1990) (5) Reformatory phase (since 1990) 4.1.1 EVOLUTION PHASE: (PRIOR TO 1950) Enactment of the RBI Act 1935 gave birth to scheduled banks in India, and some of these banks had already been established around 1981. The prominent among the scheduled banks is the Allahabad Bank, which was set up in 1865 with European management. The first bank which was established with Indian ownership and management was the Oudh Commercial Bank, I formed in 1881, followed by the Ajodhya Bank in 1884, the Punjab National Bank in 1894 and Nedungadi Bank in 1899. Thus, there were five Banks in existence in the 19th century. During the period 1901-1914, twelve more banks were established, prominent among which were the Bank of Baroda (1906), the Canara Bank (1906), the Indian Bank (1907), the Bank of India (1908) and the Central Bank of India (1911).

Thus, the five big banks of today had come into being prior to the commencement of the First World War. In 1913, and also l in 1929, the Indian Bank faced serious crises. Several banks succumbed to these crises. Public confidence in banks received a jolt. There was a heavy rush on banks. An important point to be noted here is that no commercial bank was established during the First World War, while as many as twenty scheduled banks came into existence after independence -- two in the public sector and one in the private sector. The United Bank of India was formed in 1950 by the merger of four existing commercial banks. Certain non-scheduled banks were included in the second schedule of the Reserve Bank in view of these facts, the number of scheduled banks rose to 81. Out of 81 Indian scheduled banks, as many as 23 were either liquidated or merged into or amalgamated with other scheduled banks in 1968, leaving 58 Indian schedule banks. It may be emphasized at this stage that banking system in India came to be recognized in· the beginning of 20 century as powerful instrument to influence the pace and pattern of economic development of the county. In 1921 need was felt to have a State Bank endowed with all support and resources of the Government with a view to helping industries and banking facilities to grow in all parts of the country. It is towards the accomplishment of this objective that the three Presidency Banks were amalgamated to form the Imperial Bank of India. The role of the Imperial Bank was envisaged as to extend banking facilities, and to render the money resources of India more accessible to the trade and industry of this country, thereby promoting financial system which is an indisputable condition of the social and economic advancement of India. Until 1935 when RBI came into existence to play the role of Central Bank of the country and regulatory authority for the banks. Imperial Bank of India played the role of a quasicentral bank. It was by making it the sole repository of all its funds and by changing the volume of its deposits with the Bank as and when desired by it, the Government tried to influence the base of

deposits and hence credit creation by Imperial Bank and by rest of the banking system. Thus, the role of commercial banks in India remained confined to providing vehicle for the community’s savings and attending to the credit needs of only certain...
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