History and development of the banking institutions, especially with reference to India

History and development of the banking institutions, especially with reference to India

Evolution and development of the banking institutions

Background of modern Indian Banking

The present banking institutions are modelled mainly on the British pattern. However, the banking system prevailed even in the days of yore. At the start, it had a rudimentary form. With the growth of population, it developed over the ages. The society expanded and so the economy and therewith the banking. Originating with merchant bankers, it has modernized well.

Early history- In the Epic Age (over 2000 B.C.) , the rudimentary banking system prevailed in Greece. Merchants did money business those days. This system continued in the Middle Ages also.

The first bank established in Bank of Venice in 1157 in Itlay. The bank served mostly the royal families. The next Bank came up in Geneva. In fact, modern banking may be traced to the money dealers in Florence who received deposits and lent those money. Bardi, Pitti, Peruzzi and Medici were few of the famous European bakers of the period.

Goldsmiths and Royal Exchangers played a vital role those days. Merchants kept their cash with goldsmiths for safety. The goldsmiths had their own strong rooms and watchmen. They helped quick development of “Deposit” and “Issue” banking. It paved the way for good business of other’s money at interest. This proved a fine profitable business. However, often Royal repudiations gave rude setback to the system. Even then these private bankers sustained banking. These were unit banks having one office mostly, independently owned and managed by one or more persons.

Modern Banking- The Tonnage Act was passed in England founding the Bank of England in 1694. The bank grew up as a formidable competitor to the private bankers. In 1708, the Bank got a monopoly of Notes-issue by an Act. Another Act passed in 1826 led to restriction upon this. Joint Stock Banking invaded London in 1833. Peels Act of 1844 marks another turning point in its history. Eventually came the Deposit Banking to supplant the Note Issue Banking. Cheque Currency System developed and the commerce got more independence on banking. Thus developed modern banking with ever expanding activities and multifarious functions, spread world over even.

Banking in India- Banking has been an indispensable pillar of the Indian society from time immemorial. Its evolution and development may be traced out in the following periodic studies:-

The Vedic Period- Our Vedas mention plenty of evidence of banking in the form of money-business. The Mahabharat and the Ramayana also contain such evidence. Of course, the transition form money-lending to banking took place before Manu.

The Smriti Period- During this period also, banking prevailed in an indigenous form. The banking meant mainly the money-lending. There were rules governing policy of loans and lending rates. Various research works support the fact.

The Buddhist Period- The period is said to be rich in banking business. However, Lord Buddha and Lord Mahavir both denounced the practice. Money lending was taken for a sin those days.  But the institutions did not cease their working. Kautilya has made special mention of this business and of the rates for the services rendered by such bankers.

The Muslim Period- Throughout India, bankers were used to money lending. They financed the needy people, kings and their wars even. But the Islamic reign restraining usury(soodkhori) gave a jolt to it. Even then, the banker remained the only reliable agency for deposits of jewellery, cash and hoardings in other forms. They had enough business.

The British Period- During the British Rule, the Indian  banking buisness developed on the western model. Many banks were started by foreigners and the Indians followed the course.  The Hindustan Bank in 1770 was the first to come up.  The Bengal Bank in 1785 and General Bank of India Ltd. in 1786 were started. All these were started in Calcutta but liquidated within years. The Presidency Banks were started at Calcutta in 1806, at Bombay in 1840 and at Madras in 1843. These three Presidency banks were amalgamated into one and named the Imperial Bank of India in 1920 (State Bank of India, now). Many banks had sprung up like mushrooms but failed mainly due to mismanagement, speculation and fraud. The great crisis of 1829-32 and of 1862-65 affected much this business. Private bankers sustained side by side by virtue of their goodness.

The Allahabad Bank in 1865 and Punjab National Bank in 1894 were started well. Then came up the Bank of India, Central Bank of India and Bank of Baroda during 1906-13. Numerous Agency Houses, Trading firms and Joint Stock Banks also got a start. They had a boom in early days but faced severe depression during the First World War (1913-24) and slump during 1929-35. There was a fatal combination of banking with commercial enterprise. This led to the founding of the Reserve Bank of India in 1934. The R.B.I. has been playing a pivotal role since 1.1.1935 (its inception) as the Central and Bankers Bank of the country.

Post Independence Period- After freedom from the Britishers, Indian banking has got a rapid and an all-round growth. The R.B.I. through its regional branches has been boosting Indian banking for an over-all development.

The Government of India imposed social control on banks from 1.2.1969. Co-operative banking has been toned up for the rural masses mainly. Nationalization of the Imperial Bank (S.B.I.) in 1950, other 14 major banks in July 1969 and 6 big banks in 1980 effected major developments.

The banking law is a part of the law merchant Lex Mircatoria. Both the English Banking and the Indian Banking are very largely based on the custom of bankers. Before Act 6 of 1840, the English Law relating to negotiable instruments was applied by Courts in India. The Negotiable Instrument Act was passed in 1881 and nextly came the Banker’s Books’ Evidence  Act in 1891. Since then many banking enactments have been passed and effected in India. Suitable amendments also are being made to cope with the situations.

The Banking Regulations Act of 1949 was well amended in 1983 to fulfill dire national demands in the banking arena. Regional Rural Banks were set up form September 1975. Several  Financial Corporations, NABARD, I.D.B.I., I.C.I.C.I., etc.  were set up for distinct banking activities. A good number of non-banking companies also has marked their appearance for varieties of works.

Our banking institutions have been imitating the fineness of foreign banks. Bankers have been performing numerous duties, viz., as lender, debtor, trustee, agent, guarantor, bailee, mortgagee, pledgee and others as per varied circumstances. A healthy competition amongst them has started yielding good results by adopting suitable diversification and technological changes.

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