The Evolution Of Banking In India & It’s Impact On Economy

Evolution of Banking in India_

Banking and the economy always go hand in hand… The more advanced the banking system… the more stable the nation! That’s the case in India as well. From simple beginnings to where we are now, banking has played a big role in shaping how we handle our finances. By understanding this journey, we can see how it is responsible for our country’s overall wealth and growth.

Evolution of Banking in India (Banking System)


So, let’s take a look at the evolution of Banking in India and dive into its impact on our economy!

Evolution of Banking in India

You will get a brief overview of the evolution of banking in India in the following table-

PhaseEra Description
Phase 11770–1969Early phase of banking in India. Around 600 banks existed before independence.
Phase 21969–1991The nationalization phase- major banks were nationalized in 1969 and 1980.
Phase 31991–presentLiberalization and banking sector reforms. Began in 1991 and continues to flourish.
Evolution of Banking in India

Now let’s dive into the details.

Phase 1: The Early Evolution of Banking in India (1770–1969)

In this section, we will see the evolution of banking in India from the grassroots level. This marks the formative period from 1770 to 1969. This period was under British colonial rule. Various banking institutions were established and the banking infrastructure was developed.

Events of Phase 1 (1770–1969)Description
Early PhaseDuring this period, banking in India was in its nascent stage. Various private and regional banks operated, with a total of around 600 banks existing before India’s independence.
Colonial InfluenceBritish colonial rule significantly impacted Indian banking. The establishment of the Bank of Bengal in 1770 marked the beginning of formal banking.
Presidency BanksThe Bank of Bengal, Bank of Bombay, and Bank of Madras (collectively known as the Presidency Banks ) played a crucial role in trade and finance.
Indigenous BanksAlongside the Presidency Banks, several indigenous banks operated, serving local communities.
Phase 1: The Early Evolution of Banking in India (1770–1969)

Back in the 1700s, India took its first steps into the world of banking. But back then, the main goal wasn’t to make lots of money. Instead, it was about setting up new banks and making sure banking became a part of everyday life in India. Before India became independent, around 600 banks were working together to make the country’s economy stronger by bringing in some big changes.

The Bank of Bombay was the very first bank in India, starting way back in 1720. Then there was the Bank of Hindustan, one of the earliest modern banks in India, which opened its doors in Calcutta in 1770 but sadly closed down in 1832. 

The East India Company set up three important banks called Presidency Banks. These were-

  • Bank of Bombay (started in 1840)
  • Bank of Madras (founded in 1843)
  • Bank of Calcutta (established in 1806) 

These banks were like the big players of their time, handling important financial stuff.

Now, here’s where things get interesting.

Evolution of Banking in India (Colonial Era)

These three banks eventually merged and formed a mega-bank called the Imperial Bank of India. Then, in 1955, this giant was given a new name—State Bank of India, or SBI for short. So, the SBI you know today has its roots in these historic banks.

But wait, there’s more to the story. 

While all this was happening, more banks were popping up, like the Punjab National Bank and the Allahabad Bank. It was no less than a banking boom!

However, things weren’t all smooth sailing. Between 1913 and 1948, there was a bit of a slowdown in India’s banking world. Growth was sluggish, and some banks even faced failures from time to time. 

People weren’t too confident in the banking system, which made it hard for the sector to grow. During this period, about 1100 banks were trying to make ends meet.

To sort out this mess and make things run smoother, the Indian Government stepped in. They introduced something called the Banking Regulation Act in 1949. Think of it like a rulebook to make sure banks followed certain standards and operated more efficiently.

Phase 2: Nationalization to Liberalization (1969–1991)

After India gained independence, there was a big change in the banking world. In 1969, the government took a bold step and nationalized 14 commercial banks. This means the government took control of these banks to make people feel more secure about their money. The idea was to reassure folks who were worried about private banks running things.

Nationalization didn’t just boost confidence; it also paved the way for more branches and a bigger banking network across India. Then, in 1980, six more banks were nationalized, adding to the government’s control over the banking sector.

Events of Phase 2 (1969-1991)Description
NationalizationIn 1969, the Indian government took a historic step by nationalizing 14 major banks. This move aimed to promote social welfare, financial inclusion, and economic development.
Second Wave of NationalizationIn 1980, an additional 6 banks were nationalized, bringing the total to 20 nationalized banks.
Priority SectorsNationalized banks were directed to focus on priority sectors such as agriculture, small-scale industries, and rural development.
Branch ExpansionThe network of bank branches expanded significantly during this phase, reaching even remote areas.
Phase 2: Nationalization to Liberalization (1969–1991)

In 1961. some of the nationalized banks were-

  • Central Bank of India
  • United Bank
  • Canara Bank
  • Indian Overseas Bank
  • Dena Bank
  • Union Bank of India
  • Bank of Baroda
  • Bank of India
  • Allahabad Bank

This was not the end. Some more banks continued to be nationalized viz.-

  • Corporation Bank
  • Punjab & Sindh Bank
  • New Bank of India
  • Vijaya Bank
  • Andhra Bank
  • Oriental Bank of Commerce

Financial Institutions

But that’s not all. To give banking a more focused approach, some new institutions were set up-

National Bank for Agriculture and Rural Development (NABARD)This bank was all about helping farmers and agricultural activities.
EXIMIts job was to boost exports and imports, helping India trade with other countries.
Small Industries Development Bank of India (SIDBI)This one was all about supporting small-scale industries in India.
National Housing BoardIt was there to fund housing projects, making it easier for people to buy homes.
Financial Institutions

As you can see, these banks were like specialized tools, each designed for a specific job to make the banking system work better for everyone.

Now, here comes the ATM (Automated Teller Machine). In 1987, Mumbai got its first ATM. Yep, that’s right! It was like a mini bank machine where people could take out cash anytime they needed. 

Since then, ATMs have become super popular, offering all sorts of services like checking your account balance, paying bills, and even depositing cash. It’s all about making banking easier and more convenient for you!

Phase 3: Post-Liberalisation Era (1991- Present)

Evolution of Banking in India_

Since 1991, the Indian banking industry has undergone some major changes. Firstly, the government allowed private investors to invest in India. This led to the approval of 10 private banks by the RBI after liberalization.

During this period, there were other significant changes too. The Indian government gave the green light for foreign investment, allowing international banks to open branches in India. Small finance banks were also permitted to set up branches all over the country, and payment banks came into existence. These changes, along with advancements in technology, have revolutionized the banking industry.

Events of Phase 3 (1991-Present)Description
Liberalization and ReformsThe 1991 economic reforms marked a turning point. India embraced liberalization, privatization, and globalization.
New Private BanksThe Reserve Bank of India (RBI) granted licenses to new private sector banks, leading to the emergence of institutions like HDFC Bank, ICICI Bank, and Axis Bank.
Technology AdoptionBanks adopted technology, including ATMs, online banking, and core banking solutions.
Foreign BanksForeign banks entered the Indian market, contributing to increased competition and improved services.
Payment SystemsThe introduction of NEFT, RTGS, and IMPS revolutionized payment systems.
Small Finance Banks and Payments BanksRecent developments include the establishment of small finance banks and payment banks to cater to specific needs.
Phase 3: Post-Liberalisation Era (1991- Present)

Note: We have already explained the “Top 10 Small Finance Banks of India” in detail. You can check out the article for detailed information.

Foreign Banks in India

Some of the major foreign  banks that entered India are-

  • HSBC
  • Citibank
  • Bank of America
  • Standard Chartered Bank
  • DBS Bank
  • Royal Bank of Scotland

Technological Development- An Integral Part of the Evolution of Banking 

Apart from that, modernization was a core part of the evolution of banking in India.

The introduction of core banking marked the beginning of modern technological developments in banking. With core banking, customers no longer need to visit their home branches for basic banking tasks. They can do these transactions at the nearest bank branch instead.

Technology has taken banking online, allowing customers to access banks 24/7 from anywhere. Digital and mobile banking support this by enabling customers to access various banking products, services, and facilities from their mobile devices. For banks, it means less need for human intervention, while for customers, it means being able to manage their finances conveniently.

The internet has also played a crucial role by providing information about financial products and services. 

For example, today, bank customers can settle their accounts, update passbooks, or send money without standing in long queues. These tasks can be completed with just a few taps. Even applying for loans has become easier with online loan facilities, without compromising a customer’s financial and personal data!

Different Types of Banks in India

In India, the banking landscape is diverse, with different types of banks catering to various needs and segments of society. Let’s explore the distinct categories of Banks in India-

Type of BanksDescriptionExamples
Commercial Banks Adhere to the Banking Regulations Act 1949. Accept deposits and provide loans to generate profits Private sector banks, Public sector banks, Regional rural banks, Foreign banks 
Small Finance BanksProvide financial assistance to underserved segments of society. Focus on small business units, micro industries, etc.AU Small Finance Bank, Equitas Small Finance Bank, Ujjivan Small Finance Bank, Utkarsh Small Finance Bank, Fincare Small Finance Bank
Cooperative BanksManaged by a committee. Operate to serve members rather than make profitsState cooperative banks, Urban cooperative banks
Payments BanksAccept limited deposits  Offer savings and current account services  Issue debit cards.   As per RBI regulations, they’re not eligible to offer credit cards or loansAirtel Payments Bank, Fino Payments Bank 
Different Types of Banks in India

You’ll notice that banks are always working hard to make sure you’re happy with their services. They’re constantly improving their online banking options, like mobile banking, to make things easier for you. This not only makes banking more efficient but also makes everything run smoother.

As technology keeps advancing, banking services are becoming more digital. This rapid shift towards digital banking and the smart strategies banks are using will be key in shaping the future of the banking sector. So, get ready to see even more changes ahead as banks continue to evolve to meet your needs better!

Impact of the Evolution of Banking on Indian Economy

Let’s dive into the impact of the evolution of banks in India on the Indian economy-

Aspect of EvolutionImpact on the Indian Economy
Introduction of Banking InstitutionsFacilitates financial inclusion by providing banking services to a larger portion of the population
Stimulates economic growth by mobilizing savings and channelizing them into productive investments
Enhances efficiency in capital allocation by providing credit to businesses and individuals based on their creditworthiness 
Encourages entrepreneurship and innovation through access to credit and financial services
Adoption of Technology Improves efficiency and convenience in banking operations through automation and digitization
Enhances accessibility to banking services, particularly in remote areas, through online and mobile banking 
Fosters financial inclusion by providing banking services to underserved populations, including rural communities 
Boosts transparency and accountability in banking transactions through the digitization of records and processes
Regulation and Policy InitiativesEnsures stability and integrity in the banking system through effective regulatory oversight and risk management practices
Promotes financial stability by implementing policies to mitigate systemic risks and prevent financial crises
Encourages innovation and competition in the banking sector through regulatory reforms and market liberalization
Enhances consumer protection and confidence in the banking system through regulatory measures 
Integration with Global MarketsFacilitates cross-border trade and investment by providing access to international banking services and foreign exchange markets
Encourages capital inflows and foreign direct investment by creating a conducive environment for foreign investors
Strengthens India’s position in the global financial system and promotes economic integration with the international community 
Impact of the Evolution of Banking on Indian Economy

The evolution of banks in India has far-reaching implications for the Indian economy, ranging from financial inclusion and technological advancement to regulatory stability and global integration. Each aspect contributes to fostering economic growth, resilience, and prosperity in the country.

Final Words on the Evolution of Banking in India

In a nutshell, the changes in how banking works in India have had a big effect on the country’s economy. Starting from basic banking to today’s high-tech services, banks have made it easier for people to manage their money, borrow for businesses, and invest in projects. These changes have not only boosted the economy but also helped more people get access to banking services. As technology keeps improving and rules get better, banking will keep playing a key role in India’s growth, making it easier for everyone to handle their finances and contribute to the country’s progress.

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Published By: Supti Nandi
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Khushi Hasija
Khushi Hasija
2 months ago

Bank journey from being basic to now fully technology driven, has really resulted in convenience and ease for bank purposes.