The Evolution of Banking in India

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Susan Kelly

Jul 30, 2023

The banking sector in India has come a long way from its humble origins in the Freedom Struggle era. From being a largely paper-based system to incorporating some of the world’s most modern and cutting-edge technology, banking in India has evolved remarkably over time.

We explore the importance of this evolution for both professional stakeholders and common people, sharing insights into how traditional modes are giving way to new-age fintech solutions that fit today's digital landscape. We pinch to zoom out on how Indian banks' development reflects our own country's growth narrative - making transactions more efficient with fewer costs and better customer engagement mechanisms at play.

The Pre-Independence Phase

The earliest banks in India were established during the pre-independence or early colonial period. During this time, banking activities such as lending and accepting deposits were mainly done through indigenous bankers or mercantile banks.

The General Bank of India, established in 1786, was the first joint-stock bank in India, while the Bank of Hindustan and Bengal Bank were also founded during this period.

The Post-Independence Phase

After independence in 1947, several public sector banks were set up under the State Bank of India Act 1955. This post-independence phase provided a major thrust to the Indian banking system and helped bridge the gap between rural and urban areas. Other nationalized banks like Union joined the SBI group Bank of India, Punjab National Bank, and Canara Bank.

The government also established the Industrial Credit & Investment Corporation of India (ICICI) in 1955 to promote industrial growth.

The rapid growth of banking activities during this period was aided by technological advancements like computerization and the introduction of ATMs. Post-independence phase led to a significant drop in transaction costs while encouraging people to opt for formal banking channels instead of informal ones.

Moreover, stringent regulations ensured that banks followed higher standards regarding customer protection and safeguarding their deposits. As a result, public sector banks enjoyed unparalleled trust amongst customers during this time as they were considered reliable institutions with sound financials.

The Post-Independence Phase

The Post-Independence Phase brought about many positive changes in the Indian banking system. The introduction of computerization and ATMs reduced transaction costs, making banking services more accessible to people from all backgrounds. Stringent government regulations assured customers that their deposits were safe and secured.

Post-independence phase resulted in public sector banks enjoying immense trust among customers as they were deemed reliable financial institutions. Moreover, the rapid growth of banking activities enabled more efficient economic development for urban and rural areas. All these factors combined made the Post-Independence phase an important milestone in Indian banking history.

The LPG Era (1991 Till Date)

In the early 90s, India began to liberalize its economy and opened up sectors like banking for private players. LPG Era led to a new wave of growth in Indian banking, and many private banks, such as ICICI Bank, HDFC Bank, Axis Bank, etc., were established.

These banks adopted more customer-centric approaches than their public sector counterparts and began providing services such as Internet banking, mobile banking, credit/debit cards, etc., which had yet to be seen in India.

Introducing fintech solutions also revolutionized the industry as mobile wallets and online payment gateways became popular among customers due to their convenience and ease of use.

Reasons Why Banks Were Nationalised in India

The banking sector in India was nationalized in 1969 to provide a greater reach to financial services for underprivileged and rural populations. The main reasons behind this move were:

  • To increase access to credit for small businesses, farmers, and other low-income groups who often found it hard to obtain capital from private banks.
  • To expand banking services in rural areas with limited or no banking facilities available at the time.
  • To strengthen the Indian economy by giving more people access to formal banking channels, which encouraged savings deposits and would thus improve economic development overall.
  • To introduce uniformity across all branches of public sector banks regarding interest rates, charges, etc., ensuring fair competition and protecting customers from exploitation.

The nationalization of banks in India was a major milestone that improved the banking infrastructure and made it easier for people to access financial services. It has increased banking penetration, particularly in rural areas, established uniformity across all public sector banks, and given way to greater customer protection mechanisms. These benefits have ensured that India’s economy remains stable and strong even today.

Positive Effects of Nationalisation of Banks in India

Increased Access To Credit

The nationalization of banks has increased access to credit for small businesses, farmers, and other low-income groups who often find it hard to obtain capital from private banks.

Expansion Of Banking Services In Rural Areas

With nationalization, more banks have been opened up in rural areas with limited or no banking facilities available at the time, enabling them to access basic banking services.

Greater Economic Stability

The increased availability of banking services and access to credit has helped strengthen the Indian economy by giving more people access to formal banking channels, encouraging savings deposits, and improving economic development overall.

Uniformity Across All Branches

The uniformity across all public sector banks regarding interest rates, charges, etc., ensured fair competition between various banks and protected customers from exploitation by private banks.

Improved Banking Infrastructure

The nationalization of banks in India has greatly improved the banking infrastructure as more people now have access to basic financial services such as ATMs, mobile banking, Internet banking, credit/debit cards, etc., which were not easily available.

Customer Protection Mechanisms

With the introduction of stringent government regulations and customer protection policies, private lenders or banks can no longer take advantage of customers. This has increased customer trust and made them feel secure when dealing with financial institutions.

Drawbacks of Nationalisation of Banks in India

Inadequate Investment In Infrastructure

Although there has been significant improvement in the banking infrastructure since the nationalization of banks in India, there have still been instances of inadequate investment in technology and other resources. As a result, customers may face delays or discrepancies when using certain services, such as Internet banking or mobile banking.

Increased Government Control

With nationalization comes increased government control over public sector banks which can lead to poor decision-making and lack of innovation as bureaucrats instead of industry experts make decisions. Increased Government Control could hinder growth and progress within the industry.

Inefficient Use Of Resources

The lack of competition between public sector banks due to their nationalized status has led to inefficient use of resources as there is no incentive for them to be competitive.

Discrimination Against Private Banks

Private banks are often discriminated against due to their non-nationalized status. This has hampered their growth and development as they cannot access government funds or other financial services provided to public sector banks.

FAQS

What was the banking system in ancient India?

In ancient India, banking was done through barter, and traders used to accept deposits from customers in the form of grains or other valuable items. Some shroffs acted as money changers and bankers, helping to facilitate trade by providing loans and exchanging currencies.

When did banking start in India?

Banking started in India in 1786 when the General Bank of India was established in Calcutta. This was followed by the Bank of Hindustan and the Bengal Bank, established in 1790. These banks were primarily set up to finance trade between Europe and India.

Which is the first net banking in India?

The first net banking service in India was launched by ICICI Bank in 1996. They were the first bank to offer online services such as fund transfers, bill payments, merchant payments, and other financial transactions through its Internet banking platform.

Conclusion

With the introduction of private and foreign banks, India's banking sector has transformed tremendously, benefiting the country and its people. The Indian government will continue to support bank modernization for the foreseeable future as digitalization of banking services become increasingly prevalent. Ultimately, this evolution of banking in India has established an exceptionally resilient financial industry that enables greater access to resources for its citizens.


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