BCom 3rd Year History Development Indian Banking Money Financial System Study Material notes in Hindi
Table of Contents
BCom 3rd Year History Development Indian Banking Money Financial System Study Material notes in Hindi: First Stage Second Stage Third Stage Fourth Stage Nationalizations of Commercial banks Objectives of Nationalization Arguments Against Nationalization of banks Exercise Questions Long Answer Questions Short Answer Questions True false :
BCom 3rd Year Nature Importance Financial Money Study Material notes in Hindi
HISTORY OF THE DEVELOPMENT
OF INDIAN BANKING SYSTEM
The present form of Indian Banking System is much attractive and convenient, but it has a history of intense struggle. The history of its development can be classified into following categories :
1 First Stage (till A.D. 1806): There was Muslim rule in India before the reign of Britain. The banking task was mostly performed by the money lenders and traders during the Muslim rule. The British rule was established in India in the seventeenth Century A.D. British Banking System came into operation during this rule. This gave a big blow to moneylenders and merchants. The main factor responsible for this condition was that money lenders and merchants had no knowledge of English language. Moreover, their banking systems were different. Money lenders and merchants were not aware of the British Banking System; hence they were not able to modify themselves accordingly. The East India Company established some Agency Houses in Mumbai and Kolkata in the 18th century A. D. These were financially nourished by the East India Company. The banking functions were carried out by these agency houses. The main functions they performed were as follows:
(i) Accepting deposits from public
(ii) Issuing paper notes
(iii) Advancing loans for agricultural productions, and
(iv) Lending money to meet the army requirement of the East India Company.
“Bank of Hindustan’ the first Bank in India on the trend of the British Banking System, was founded by Alexander and Company at Kolkata in 1770. But this bank could not be very successful. Hence, there was no bank in India till May 1806.
2. Second Stage (From A.D. 1806 to A.D. 1860): The East India Company lost its commercial rights in 1813. Hence the agency houses established by them also began to decline. After this, the private shareholders started setting up banks in India. Bank of Calcutta was established on 2nd June, 1806 and it was renamed as Bank of Bengal on 2nd January, 1809. Again Bank of Bombay was established on 15th April, 1840 and Bank of Madras on 1st July, 1843. Though all these three banks were set up by private shareholders, the government had some shares in them. Thus, these three had the authority of government bankers. But the government of India withdrew their right of issuing notes after 1862. Due to the increasing nature of the government functions, the Imperial Bank of India was established in 1921, incorporating these three banks.
3. Third Stage (From A.D. 1860 to A.D. 1913): Joint Stock Company Act was passed in India in 1860. According to it, bank could be founded on the basis of the concept of limited responsibility. This legislation paved the way for the foundation of Indian Banks. Consequently many banks started getting established with the help of joint capital, viz. Allahabad Bank in 1865, Alliance Bank of Shimla and Awadh Commercial Bank in 1881, Punjab National Bank in 1894 and Peoples Bank of India in 1901. Out of these Punjab National Bank is the bank that was fully operated by Indians. These banks did not show much progress. The speed of banking progress was much slow in India up to 1900. It started showing some progress after this. The rapid proliferation of banks started taking place in India after A.D. 1906. Swadeshi Movement had taken birth in the country by that time. Indians started boycotting foreign banks and Indian banks run by Indian entrepreneurs started spreading their business. This gave a new life to Indian banks. Many small and big banks were established in this period, Of these, Bank of India in 1906, Bank of Baroda in 1908, Central Bank of India in 1911, and Bank of Mysore in 1913 were prominent.
4. Fourth Stage (A.D. 1913 to A.D. 1939): This stage of Indian Banking system is called the worse period of banking history. Reforms in banking area had just started when the developments of Indian banks was blocked during the First World War (1914-1918). Many banks were established in India due to Swadesi movement but many of these Banks were weak and were not following the banking principles properly. Consequently, the customers lost their confidence in these banks. Gradually, many banks collapsed.
Moreover, there was a lack of direct control over banks due to the absence of the Central Bank. Many banks showed their paid up capital more than what was real figure and thus misled their customers. The capital market was not well developed in the country by that time, and consequently there was no proper co-ordination among banks. These banks couldn’t gain any help from anywhere at the time of economic crisis.
History Development Indian Banking
But this condition did not last long. Some banks were able to win the confidence of the people through their work. Gradually, the banking atmosphere speeded up. Tata Industrial Bank was founded in 1917 with the objective of granting financial assistance to industries. Again, Imperial Bank of India was established in 1921 by incorporating the three Presidency Banks (Bank of Bengal, Bank of Bombay and Bank of Madras). It was nationalised in 1955 and renamed as State Bank of India. There was some improvement in the banking work after the establishment of Imperial Bank of India, but there was the need of more reforms. The government of India formed “Hilton Young Commission” in 1925 to give recommendations for the establishment of a separate Central Bank. The commission suggested the establishment of Reserve Bank of India as the Central Bank of the country. The government accepted this recommendation and presented ‘Gold Standard and Reserve Bank of Indian Bill’ in the legislature in January 1927, But this Bill could not pass due to some dissensions. Again in 1929, Central Investigation Committee strongly recommended the establishment of the Reserve Bank of India. Accordingly, one more bill was presented in the Indian Legisiature on 8th September, 1933 which was passed on 22nd December, 1933. Again, it was passed by Council of States’ on 16th February, 1934. The Reserve Bank of India Act, 1934 got passed on 16th March, 1934 after getting the approval of the Governor General and it started its function formally on 1st April, 1935.
5. Fifth Stage (A.D. 1939 to A.D. 1946): This was the golden period for the Indian banks in the field of banking development. A’good banking environment had developed in the country by that time. Banks had started proliferating in the country. People had surplus money due to the situation of inflation and consequently deposits with banks started increasing. The demand of loans had also started soaring up due to the development of industrial atmosphere. There was a balance in the banking system due to the rise of both deposits and credits. Many new banks proliferated their branches and at the same time many new banks were also founded in this period.
However, this was the period of the World War II. The World War II had some impacts on the banks in the initial phase. People started withdrawing! their deposits from banks, But the condition improved gradually. It was this shortcoming that resulted into an imbalance in the development of banks. Banks were mostly set up in cities. Moreover, banks were founded in those areas which already had it. As a result an unnecessary competition developed. There also took some basic changes in the investment policies of banks. Before the war, banks used to invest 54 per cent of their invest able money in government securities but it was raised to 61 percent during the war. Similarly they used to keep 1 percent of their deposits as a cash reserve before the war, but raise to 25 percent during the war.
6. Sixth Stage (From 1947 to present): The position of the country after the independence had bad consequences on Indian banks. Particularly in Punjab and Bengal even banks had to take shelter in India as refugee due to the partition of these states. Consequently, many banks collapsed. As the Reserve Bank of India had been established as the Central Bank of India, it had the responsibility of protecting banks. The Reserve Bank of India launched a new scheme to come up to its responsibility. According to this scheme, the scheduled banks were granted the facility of taking loans from RBI on the basis of accepted securities; and arrangements for the rehabilitation of refugee banks were also made. The government of India nationalised the Reserve Bank of India on Ist January, 1949 to strengthen it. The Banking Company Act was also passed in this year. Imperial Bank of India was nationalised in 1955 and it was renamed as the State Bank of India which started working formally from 1st July, 1955. By then, the condition of many banks had well-improved, but many banks had failed too. Only during a period of five years the period from 1947 to 1951, 242 banks had collapsed. Banking Company Act, 1949, was amended in 1962 and renamed as ‘Banking Regulation Act’. According to this Act many rules and sub-rules were added to banks working norms.
Before this, according to State Bank of India (Associates) Act, 1959, the term ‘State’ was added in the beginning of the names of eight banks and these were made the associate banks of the State Bank of India. Again, on 1st January, 1963, two of these State Bank of Bikaner and State Bank of Jaipur were merged to form State Bank of Bikaner and Jaipur. After this, there remained seven (7) associates’ banks of State Bank of India. But now State Bank of Saurashtra and State Bank of Indore have been merged with State Bank of India. So the number of associates’ banks of State Bank of India has remained just 5.
NATIONALISATION OF COMMERCIAL BANKS
14 such commercial banks which had more than 50 crores of rupees as deposits were nationalized on 19th July, 1969 under an ordinance. These banks included:
(1) Central Bank of India,
(2) Bank of India,
(3) Punjab National Bank
(4) Canara Bank,
(5) United Commercial Bank,
(6) Syndicate Bank,
(7) Bank of
(8) United Bank of India.
(9) Union Bank of India,
(10) Dena Bank
(11) Allahabad Bank,
(12) Indian Bank,
(13) Indian Overseas Bank and
(14) Bank of Maharashtra.
History Development Indian Banking
Again 6 such banks which had deposits of more than 200 crores were nationalised on 15th April, 1980. These banks included : (1) Andhra Bank (2) Punjab and Sindh Bank, (3) New Bank of India, (4) Vijaya Bank, (5) Corporation Bank and (6) Oriental Bank of Commerce.
Thus, in 1980, excluding State Bank of India, its associates, there were 20 nationalised banks in the country. But the government merged New Banks of India with Punjab National Banks on 4th September, 1993. This reduced the number of nationalised banks from 20 to 19. It again reached to 20 after the inclusion of I. D. B. I. Bank in the list of the Public Sector Banks.
OBJECTIVES OF NATIONALISATION
Following are objectives behind the nationalisation of Commercial bank in India:
(1) Collecting increased savings from public by developing faith in them and using it for the national development on the basis of priorities.
(2) Proliferating branches of banks in every part of the country and connecting more and more people with banking services.
(3) Controlling the use of bank loans for speculation and non-productive objectives.
(4) Providing proper training to bank officials to render services on proper conditions.
(5) To fulfill the legal requirement for granting sanction of loans to business and industry sector.
(6) Ending ownerships of a few persons on the banking sector.
(7) Promoting the rate of economic development and growth.
(8) Arranging credit for agriculture, cottage industries and exports.
(9) Bringing transparency in the banking sector.
(10) Eliminating the distance between the society and banks.
ARGUMENTS AGAINST NATIONALISATION OF BANKS
The nationalisation of 14 major banks in the first stage by the government of India is considered to be a good step. But a big section of population opposed this move. The main arguments against the nationalisation of banks are as follows:
(1) Hasty Decision : The critics held it that 14 major banks were nationalised in a haste in 1969. The bill which was presented in the Lok Sabha in this regard was not prepared with seriousness; that is why a new Bill had to be passed after the interference of the high court.
(2) Political Decision : It is said that the Congress Party which was in power at the time of nationalisation had been divided in two parts. Thus, it is supposed that it was a political decision instead of an economic decision.
(3) Influence of Politicians : It was supposed that the influence of politicians would increase on banks after their nationalisation. Its consequence would be visible as the policies of banks would keep changing according to the policies of ruling parties. It would have impacts on the economy of the country.
(4) Encouragement to Inflation : It was also blamed that the nationalisation would give boost to inflation. The running expenditure of banks would increase after the nationalisation, and to meet it, they would provide costly loans. This will give rise to inflation.
(5) Decrease in Efficiency : It was expected that the feeling of mpetitiveness would come to an end and bureaucracy would increase. This uld lower down the level of customer service.
Conclusion: Whatsoever arguments have been given against the ationalisation of banks, it is an established fact that the banks have been nationalised
History Development Indian Banking
EXERCISE QUESTIONS
Long Answer Type Questions
1 Trace the evolution of commercial banking in India before independence.
2. What were the arguments given against nationalisation of commercial banks ?
Short Answer Type Questions
1 Explain the objectives of the nationalisation of banks.
2. Write a note on nationalisation of commercial banks.
III. Objective Type Questions
Choose the correct option
1 Bank of Hindustan was founded in..
(a) A.D. 1770
(b) A.D. 1806
(c) A.D. 1813
(d) A.D. 1840
2. Bank of India was established in
(a) A.D. 1894
(b) A.D. 1906
(c) A.D. 1908
(d) A.D.1911
3. Which bank was setup in 1908 ?
(a) Bank of India
(b) Bank of Baroda
(c) Allahabad Bank
(d) Punjab National Bank
4. In which stage of banking development did the foundation of Bank of Mysore take
place?
(a) First Stage
(b) Second Stage
(c) Third Stage
(d) Fourth Stage
5. How many presidency banks were merged together to form Imperial Bank of India ?
(a) 2
(b) 3
(c) 4
(d) 5
6. Which bank has been merged with Punjab National Bank?
(a) Bank of Maharashtra
(b) Bank of India
(c) New Bank of India
(d) None
7. How many commercial banks were nationalised in 1969?
(a) 14
(b) 6
(C) 20
(d) 28
[Ans.: 1. (a), 2. (b), 3. (b), 4. (c), 5. (b), 6. (c), 7. (a)]
State whether the following statements are True or False :
1 The first Bank in India was ‘Bank of Hindustan’.
2. Bank of Hindustan’ was founded by Alexander and company at Kolkata in 1770.
3. Bank of Calcutta was established on 2nd June, 1806 and it was renamed as Bank of Bengal on 2nd January, 1809.
4. Imperial Bank of India was established in 1921 with the incorporation of five banks.
5. Punjab National Bank was established in 1894.
6. Bank of India was established in 1906.
7. Bank of Baroda was established in 1908.
8. Reserve Bank of India was nationalised on 1st January, 1935.
9. From AD 1860 to AD 1913 was the golden period for the Indian banks in the field of banking development.
10. Imperial Bank of India was nationalised in 1955 and it was renamed as the State Bank of India.
Ans.: 1. True, 2. True, 3. True, 4. False, 5. True, 6. True, 7. True, 8. False, 9. False 10. True.)
History Development Indian Banking
