History of Indian Banking and Reforms
Early Banking in India (18th-19th Century)
- Modern banking in India started in the 18th century with British trading companies (called "Agency Houses") in Calcutta and Bombay.
- In the 19th century, three major banks were established:
- Bank of Bengal (1806)
- Bank of Bombay (1840)
- Bank of Madras (1843)
- These banks later merged in 1921 to form the Imperial Bank of India, which functioned like a regular commercial bank and also took on some responsibilities of a central bank.
Pre-Independence Banking (Before 1947)
- By the time India became independent in 1947, there were over 600 banks operating in the country.
- However, most of these banks focused on giving loans to large businesses and traders, neglecting farmers and small businesses.
- To fix this, the government nationalized the Imperial Bank of India in 1955, turning it into the State Bank of India (SBI) to serve more people, especially in rural areas.
Bank Nationalization (1969 & 1980)
- Even after SBI was created, private banks still mostly served big industries. To ensure fair distribution of banking services:
- In 1969, the government took control of 14 major banks that had deposits above ₹50 crores.
- In 1980, another 6 private banks were nationalized (with deposits over ₹200 crores).
- This increased government control over 92% of total bank deposits in the country.
Impact of Nationalization
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Positive Outcomes:
- More bank branches opened in rural and urban areas.
- More loans were given to farmers, small businesses, and weaker sections of society.
- Banks played a crucial role in funding government programs and economic development.
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Negative Outcomes:
- Government control over banks led to inefficiency, unprofitability, and poor risk management.
- Banks had to keep a large portion of their money locked up in government securities (CRR and SLR requirements increased sharply).
- Interest rates were controlled by the government, making banking less competitive.
Banking Reforms & Economic Crisis (1991)
- By the late 1980s, India's banking system was in trouble:
- Banks were not profitable and struggled due to excessive government regulations.
- Strict rules forced banks to lend to unprofitable projects.
- The 1991 economic crisis forced India to rethink its financial policies.
- This led to banking sector reforms in the 1990s, including:
- Reducing government control over banks.
- Encouraging private and foreign banks to enter the market.
- Lowering CRR and SLR rates to free up money for better investments.
- Making banks more efficient and competitive.
Conclusion
India’s banking system has evolved significantly from British rule to independence, through nationalization, and later through economic reforms. While nationalization helped in expanding banking services, too much government control led to inefficiencies. The 1991 reforms aimed to modernize and improve India's banking system, making it more competitive and sustainable.