Banking in India

“Money plays the largest part in determining the course of history.”

-Karl Marx

A bank is a financial body that accepts deposits and channels them into lending through loans or capital markets. Banks thus, connect customers with lack of funds and those with extra capital.

The word ‘bank’ was borrowed from European languages, literally meaning bench’ or ‘counter’. Banking system evolved in the 14th century in Italy. By the 18th century, merchants of London had started storing their gold with goldsmiths who charged a fee and issued receipts.

A banker is a person who discharges his dduties in the form of operating customer accounts and, paying and collecting cheques.

Banks borrow money by accepting the money deposited in current accounts, by accepting term deposits and issuing securities on banknotes and bonds. They also create new capital by giving loans. Banking activities can be for retail, in which the customers and small businesses are involved directly with the bank; for businesses; for large corporate houses and for investments.

There are various types of banks such as commercial banks (which are engaged solely in banking activities), investment banks (for capital market activities), cooperative banks (non-profit banks), postal savings banks (associated with postal systems) and private banks (managing the assets of high net worth people).

In India, banking has its origin in the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who laid down rules relating to rates of interest. During the Mughal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce.

The first bank in India, though elemental, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are-Early Phase from 1786 to 1969 of commercial banks; Nationalisation of Commercial Banks upto 1991, prior to Indian banking sector reforms and New Phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

The General Bank of India was set-up in the year 1786. The East India Company established the Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, for mostly European shareholders.