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July 26, 2014

Banking Awareness : History of Commercial Banking System In India


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Friends, this is the Lesson 2 of our Banking Awareness study material for upcoming RBI Grade B and IBPS PO IV online exams. Please read the Introductory Lesson 1 from here before reading this.

The Government of India passed comprehensive Banking Regulation Act in 1949 for safeguarding the interest of depositors of Banking companies. According to the Act the definition of bank needs certain alterations, it now comprises acceptance of time liabilities and there is every reason for it to continue. The purpose of acceptance to deposits is strictly not relevant for the definition, though it is genuine for banking regulation. There is no need to distinguish between loans and deposits in the context of banking regulations. The definition of banking should cover all forms of acceptance of deposits from the public and banking regulations should deal with all types of banking.
The Reserve Bank of India was nationalized in 1949 (Note : RBI was created in the year 1935 and nationalized in 1949, don't be confused between these two years in exams) and playing a vital role in monetary and credit mechanism. The All India Rural Credit Survey Committee (1954) suggested that by  statutory provision, the Imperial Bank of India should be converted into State Bank of India, with the object of extending banking facilities in rural areas. Accepting the recommendations of the committee, the Govt. of India enacted the State Bank of India Act, 1955. Consequently on 1st July, 1955, the Imperial Bank of India was nationalized and in its place, the State Bank of India was established. Thus, it was considered as a landmark in the history of commercial banking in India.

Subsequently with the passing of the State Bank of India (Subsidiary Banks) Act, 1959, the State Bank of India took over as its subsidiaries. The following are the subsidiary banks to SBI.
  1. State Bank of Bikaner
  2. State Bank of Hyderabad
  3. State Bank of Jaipur
  4. State Bank of Indore
  5. State Bank of Mysore
  6. State Bank of Patiala
  7. State Bank of Saurashtra
  8. State Bank of Travancore
In 1963, the State Bank of Bikaner and the State Bank of Jaipur were amalgamated into a single bank and it was named as the State Bank of Bikaner and Jaipur. On 13th August 2008 the State Bank of Saurashtra merged with SBI, reducing the number of associate state banks from seven to six. Then on 19th June 2009 the State Bank of Indore merged into SBI (this process completed in the year 2010). Now SBI is planning to merge the remaining five subsidiary banks with itself as it prepares to fund the economy.

On 19th July 1969, 14 major private sector commercial banks (with deposits of over 50 crores) were nationalized by the Govt. of India with a view to serve the rural economy by expanding the branch network in rural areas. The names of thee banks are as under :
  1. The Allahabad Bank
  2. The Bank of Baroda
  3. The Bank of India
  4. The Bank of Maharashtra
  5. The Canara Bank
  6. The Central Bank of India
  7. The Dena Bank
  8. The Indian Bank
  9. The Indian Overseas Bank
  10. The Punjab National Bank
  11. The Syndicate Bank
  12. The Union Bank of India
  13. The United Bank of India
  14. The United Commercial Bank
As a result of nationalization, 85 percent of the banking business in terms of deposits was brought under public control. On 15th April 1980, six more private sector commercial banks (with deposits of over Rs. 200 crores) were nationalized. They are :
  1. The Andhra Bank
  2. The Corporation Bank
  3. The New Bank of India (merged with Punjab National Bank in 1993)
  4. The Oriental Bank of Commerce
  5. The Punjab and SIndh Bank
  6. The Vijaya Bank
Thus, 20 private sector commercial banks were nationalized and over 90 percent of banking activity in the country was brought under the public sector and it brought down the inequalities of income and wealth and to ensure greater social justice. In the year 1985, the name of United Commercial Bank was changed as UCO Bank. On 19th November 2013 on the occasion of the 94th birth anniversary of former Indian Prime Minister Indira Gandhi, the First women Bank of India "Bharatiya Mahila Bank" was established. 

Based on the recommendations of Narasimhan Committee (1975) report, the Govt. of India began to established a number of Regional Rural Banks (RRB's) from October 1975 and onwards. At present there are 56 RRB's in India.

Entry of Private Sector Banks

By accepting the recommendations of Narasimhan Committee (1991), the Reserve Bank of India permitted setting up of private banks in the country. UTI Bank is the first private sector commercial bank with its headquarters at Ahmedabad established on 2nd April 1994. Later, several other private banks like Global Trust Bank (presently merged with a public sector bank i.e., Oriental Bank of Commerce), HDFC Bank, ICICI Bank, Times Bank, IDBI Bank, Indus Indu Bank, Centurion Bank, Bank of Punjab etc were established. The decision of RBI to allow the private sector banks has evolved a mixed response. One major argument in favour of this decision was that the allowing of private sector commercial banks will strengthen the financial sector reforms. The major argument against allowing of the private sector commercial banks was negating the spirit of the nationalization of private sector commercial banks in 1969 and 1980.

That's all for now friends. In our next post we shall discuss about the types of banks. Happy Reading :)

Read complete Banking Awareness study material for IBPS PO VIII & Clerks VIII Exams from here

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  1. I have not downloaded application form of rrb clerks exam...
    Is it necessary to have that form print out
    Please help me out
    Thank u

  2. Rbi grade b quick reference pls

  3. what about Repco bank....missed the details of repco bank my dear admin.

    1. Repco is not nationalized bank. Its a cooperative bank.

  4. IDBI is a Govt. Bank..... Established in 1965 by the act of Parliament. Initially a fully own subsidary of RBI and later on RBI dissolve its share and became a Govt Undertaking Bank under GOI

  5. somewhere i had read that there are total 82 RRBs till now...

  6. In july 1964 idbi was setup as development bank.later rbi formed a committee under the chairmanship of s.h khan which recommended expanding of idbi as development bank to commercial, in 2003 under institution Development bank(transfer of undertaking and repeal) act idbi tranformed into idbi ltd. Subsequently in September 2004 rbi included idbi in the 2nd schedule of rbi act 1934.hence from 1st october 2004 idbi is a scheduled commercial bank.

  7. hello man,
    what is meant by nationalised??

    1. Nationlized Bank-- Nationalization is a process whereby a national government or State takes over the private industry, organisation or assets into public ownership by an Act or ordinance or some other kind of orders. This strategy has been frequently adopted by socialist governments for transition from capitalism to socialism.

      Why the Nationalization done ?

      --To raise public confidence in Banking system
      --Expansion of banking facilities in a uniform manner
      --Provide banking facility in rural and sub-urban areas.
      --Nationalization sought to end the monopoly control of big industrialists on upon the banking system
      --Nationalization aimed at giving more credit to priority sectors.
      --Nationalization sought to reduce regional economic inequalities
      --Nationalization was to ensure enough development funds for the planned growth of the country


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