Indian financial system (IFS) Historical evolution of IFS

1.  It evolved with the money lenders accepting deposits
and issuing receipts.
 According to the Central Banking Enquiry Committee
(1931), money lending activity in India could be traced
back to the Vedic period, i.e., 2000 to 1400 BC. The
existence of professional banking in India could be
traced to the 500 BC. Kautilya’s Arthashastra, dating
back to 400 BC
Evolution of banking in
India 1

2.  The western variety of joint stock banking was
brought to India by the English Agency houses.
1. Bank of Bombay, established in 1720 in Bombay.
2. Bank of Hindustan in Calcutta in in 1770.
3. The General Bank of Bengal and Bihar in 1773.
 The English Agency house and the bank,closed
down in 1832.
Evolution of banking in
India 2

3.  To fulfill the requirement of modern banking services,
uniform currency to finance foreign trade and
remittances by British army personnel and civil servants
 The Presidency banks were governed by Royal Charters.
1. Bank of Bengal established in Calcutta on June 2, 1806
with a capital of Rs.50 lakh.
2. The Bank of Bombay was the second Presidency bank
set up in 1840 with a capital of Rs.52lakh.
3. The Bank of Madras the third Presidency bank
established in July 1843 with a capital of Rs.30 lakh.
Evolution of banking in
India 3

4.  The first Indian owned bank was the Allahabad
Bank set up in Allahabad in 1865.
 The second, Punjab National Bank was set up in
1895 in Lahore.
 The third, Bank of India was set up in 1906 in
Mumbai.
 Central Bank of India, Bank of Baroda, Canara Bank,
Indian Bank, and Bank of Mysore were established
between 1906 and 1913.
 By the end of December 1913, the total number of
reporting commercial banks in the country reached
56 comprising 3 Presidency banks.
Evolution of banking in
India 4

5.  18 Class ‘A’ banks (with capital of greater than
Rs.5 lakh)
 23 Class ‘B’ banks (with capital of Rs.1 lakh to 5
lakh)
 12 exchange banks. Exchange banks were foreign
owned banks that engaged mainly in foreign
exchange business in terms of foreign bills of
exchange and foreign remittances for travel and
trade.
 Class A and B were joint stock banks.
Evolution of banking in
India 5

6.  The presidency banks were amalgamated into a
single bank, the Imperial Bank of India, in 1921.
 The Imperial Bank of India also functioned as a
central bank prior to the establishment of the
Reserve Bank in 1935.
 In 1930, the banking system, in all, comprised
1258 banking institutions registered under the
Indian Companies Act, 1913.
 Of the 1258 entities registered as banks in 1930,
while some were banks in genuine terms, others
were indigenous banks, nidhis and loan companies.
Evolution of banking in
India 6

7.  The Swadeshi Movement also provided impetus to
the co-operative credit movement and led to the
establishment of a number of agricultural credit
societies and a few urban co-operatives.
 The late Shri Vithal L Kavthekar pioneered the
urban co-operative credit movement in the year
1889 in the then princely State of Baroda.
 The first registered urban co-operative credit
society was the Conjeevaram Urban Co-operative
Bank, organized in Conjeevaram, in the then
Madras Presidency.
Evolution of banking in
India 7

8.  The world economy was gripped by the Great
Depression during the period from 1928 to 1934.
This also had an impact on the Indian banking
industry with the number of banks failing rising
sharply due to their loans going bad. The capital of
banks that failed, on an average, was lower than
the average size of the capital of reporting banks in
categories A and B, indicating that the banks that
failed were small.
 The issue of bank failures and the need for catering
to the requirements of agriculture were the two
prime reasons for the establishment of the Reserve
Bank.
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India 8

9.  The Reserve Bank of India Act, 1934 gave the
Reserve Bank powers to regulate issue of bank
notes, the custody of the commercial banks’ cash
reserves and the discretion of granting them
accommodation.
 In 1935, banks were required to maintain cash
reserves of 5 per cent of their demand liabilities
and 2 per cent of their time liabilities on a daily
basis. The task of managing the currency that was
assigned to the Controller of Currency came to the
Reserve Bank in March 1935 under Section 3 of the
RBI Act, 1934.
Evolution of banking in
India 9

10.  When the country attained independence, Indian
banking was entirely in the private sector.
 Commercial banks had a regional focus, as alluded
to earlier. West Bengal had the largest number of
scheduled commercial banks, followed by Madras
and Bombay. As regards the non-scheduled banks,
Madras had the largest number, followed by a
distant second and third by West Bengal and
Bombay, respectively
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India 10

11.  The year 1948 was one of the worst years for the
relatively larger banks as 45 institutions (out of
more than 637 banks) with paid-up capital
averaging about Rs.4 lakh were closed down.
 They failed as they had over-reached themselves
by opening more branches than they could sustain
on the strength of their resources and by making
large loans against property or inadequate security.
Some of these, however, had prudential issues as
they were functioning with very low capital base.
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India 11

12.  Between the period from 1960 to 1966, as many as
217 banks were amalgamated under different
provisions such as under Section 45 of the BR Act
1949 (compulsory amalgamation) and Section 44 A
of BR Act 1949 (voluntary amalgamation).
 The Government nationalized 14 banks with
deposits of over Rs.50 crore by promulgating the
Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance, 1969.
 Andhra Bank, Corporation Bank, New Bank of India,
Oriental Bank of Commerce, Punjab and Sind Bank,
and Vijaya Bank with deposit liabilities of Rs.200
crore and above, were nationalized in April 1980.
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India 12

13.  In January 1993, norms for the entry of new private
sector banks were announced.
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India 13

14. http://www.rbi.org.in/home.aspx
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India 14

15. Evolution of banking in
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