Development of Banking in India

Modern Banking in India

Modern banking in India began in the middle of the 18th century. Among the earliest banks were the Bank of Hindustan, established in 1770, which was later liquidated between 1829 and 1832, and the General Bank of India, established in 1786 but failed in 1791. The oldest and largest bank still in existence today is State Bank of India. It started as the Bank of Calcutta in June 1806 and was renamed the Bank of Bengal in 1809. It was one of the three presidency banks established during British rule, the other two being the Bank of Bombay in 1840 and the Bank of Madras in 1843. In 1921, these three banks were merged to form the Imperial Bank of India, which later became the State Bank of India in 1955 after India gained independence. Before the establishment of the Reserve Bank of India in 1935 under the Reserve Bank of India Act, 1934, the presidency banks and the Imperial Bank performed many functions similar to a central bank.

In 1960, SBI was given control over eight associated state banks under the State Bank of India (Subsidiary Banks) Act, 1959. These associate banks were eventually merged with SBI on 1 April 2017, creating the largest bank in India and significantly improving its global ranking. As of 2025, SBI ranks 163rd on the Fortune Global 500 list. The Indian government also nationalised 14 major private banks in 1969, including Bank of India, and later nationalised six more private banks in 1980. These nationalised banks became the backbone of India’s banking sector because of their large branch networks and dominant role in lending.

The Indian banking system is broadly divided into scheduled and non-scheduled banks. Scheduled banks are those listed under the Second Schedule of the Reserve Bank of India Act, 1934. These include nationalised banks, SBI and its associate banks, Regional Rural Banks (RRBs), foreign banks, and private sector banks. Commercial banks include both scheduled and non-scheduled banks and are regulated under the Banking Regulation Act, 1949.

Today, banking services in India are well developed in terms of product range, supply, and reach, although providing banking access in rural areas and to poorer sections of society remains a challenge. To improve financial inclusion, the government and RBI have taken several initiatives. National Bank for Agriculture and Rural Development (NABARD) plays an important role in supporting rural banking and microfinance, while SBI has expanded its branch network across rural India.

Indian households traditionally prefer bank deposits because they are considered safe and secure. According to the Reserve Bank of India, India has more than 24.23 million fixed deposits with over ₹103 trillion deposited in them. This amount is higher than the money held in current and savings accounts combined. Research studies and surveys, including those conducted by Securities and Exchange Board of India (SEBI), show that more than 95% of Indian consumers prefer keeping their money in bank accounts, while only a small percentage invest in equities or mutual funds. This reflects the long-standing preference of Indian households for safe and liquid financial assets such as bank deposits.

History of Banking in India

Banking in India has a long and rich history that dates back to ancient times. Ancient Indian texts such as the Vedas mention the concept of usury, where the word “kusidin” referred to a money lender or usurer. Other ancient texts including the Sutras and Jatakas also discussed lending and borrowing practices. During this period, charging excessive interest was often criticized, and some texts prohibited certain social groups, especially Brahmins and Kshatriyas, from engaging in usury. However, by the 2nd century CE, money lending became more socially acceptable, and the Manusmriti recognized it as a legitimate way of earning a livelihood, though it imposed different limits on interest rates for different castes. Ancient Indian literature such as the Jatakas, Dharmashastras, and Kautilya’s Arthashastra also mention loan documents known as rnapatra, rnapanna, and rnalekhaya.

During the Mauryan Empire (321–185 BCE), banking practices became more advanced. An instrument known as “adesha” was used, which worked like a modern bill of exchange. It was an order issued by a banker directing payment to a third person. Merchants in large towns also used letters of credit to facilitate trade and financial transactions.

In the medieval period, especially during the Mughal era, the use of loan deeds continued and such documents were called “dastawez.” Two common types existed: dastawez-e-indultalab, which was payable on demand, and dastawez-e-miadi, which was payable after a fixed period. Royal treasuries used payment orders called “barattes,” and Indian bankers also issued bills of exchange for foreign trade. During this time, the use of hundis, a traditional credit instrument, became widespread and continued to remain important in Indian trade and banking.

Modern banking in India began to develop during the British colonial period. In 1829, merchants established the Union Bank of Calcutta, which later became incorporated in 1845 but failed in 1848 due to financial problems. The Allahabad Bank, founded in 1865, is the oldest joint stock bank in India that is still functioning today, although the Bank of Upper India, established in 1863, was actually the first joint stock bank. Foreign banks also entered India during the 1860s. Banks such as Grindlays Bank, HSBC, and Comptoir d’Escompte de Paris opened branches mainly in Calcutta, which had become an important trading and banking center because of British trade activities.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in Faizabad in 1881, though it failed in 1958. Punjab National Bank, founded in Lahore in 1894, successfully survived and later became one of India’s largest banks. During the early 20th century, India experienced relative economic stability, and many small banks emerged to serve different religious and ethnic communities. However, banking remained divided among presidency banks, exchange banks, and Indian joint stock banks, with Indian banks often lacking sufficient capital and experience to compete with foreign-owned institutions.

The Swadeshi Movement between 1906 and 1911 encouraged Indian entrepreneurs and political leaders to establish banks for Indians. Several important banks were founded during this period, including Bank of Baroda, Canara Bank, Bank of India, Indian Bank, Central Bank of India, The South Indian Bank, and Catholic Syrian Bank. The Dakshina Kannada region, earlier known as South Canara, became famous as the “Cradle of Indian Banking” because several major banks originated there.

The Reserve Bank of India was established on 1 April 1935 as India’s central bank. Sir Osborne Smith became its first Governor, while C. D. Deshmukh later became the first Indian Governor in 1943. In recent years, Shaktikanta Das took charge as RBI Governor on 12 December 2018 after succeeding Urjit Patel.

The period from the First World War to the Second World War was very difficult for Indian banking. Many banks collapsed due to economic instability, despite some indirect economic benefits from war-related activities. Between 1913 and 1918, at least 94 banks failed in India, showing the fragile condition of the banking sector during that time.

Post-Independence Banking in India

After India gained independence in 1947, the banking sector underwent major changes. Between 1938 and 1946, the number of bank branches increased rapidly to 3,469 and bank deposits rose to ₹962 crore. However, the partition of India in 1947 badly affected the economies of Punjab and West Bengal, causing serious disruption to banking operations for several months. Independence also marked the end of the laissez-faire system in Indian banking. The Government of India started taking an active role in economic development, and the Industrial Policy Resolution of 1948 introduced the concept of a mixed economy. This increased government involvement in important sectors such as banking and finance.

Several important reforms were introduced after independence. The Reserve Bank of India, which had been established in 1935, was nationalised on 1 January 1949 under the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. In the same year, the Banking Regulation Act, 1949 was enacted, giving the RBI powers to regulate, inspect, and control banks in India. The Act also made it compulsory for banks to obtain RBI approval before opening new branches, and it prevented two banks from having common directors.

Bank Nationalisation in 1969

Although banking regulations had become stricter, most banks in India, except State Bank of India (SBI), were still privately owned during the 1950s and 1960s. By the 1960s, banking had become an important tool for supporting India’s economic development. At the same time, banks had become large employers, and discussions about nationalising banks gained momentum. Prime Minister Indira Gandhi strongly supported bank nationalisation to ensure that credit reached agriculture, small industries, and weaker sections of society.

On 19 July 1969, the Government of India nationalised 14 major commercial banks that had deposits of more than ₹50 crore. These banks controlled nearly 85% of the country’s total deposits. The nationalised banks were:

  • Allahabad Bank (now merged with Indian Bank)
  • Bank of Baroda
  • Bank of India
  • Bank of Maharashtra
  • Central Bank of India
  • Canara Bank
  • Dena Bank
  • Indian Bank
  • Indian Overseas Bank
  • Punjab National Bank
  • Syndicate Bank
  • UCO Bank
  • Union Bank of India
  • United Bank of India

Second Round of Nationalisation in 1980

In 1980, the Government of India nationalised six more commercial banks to gain greater control over the flow of credit in the economy. After this second phase of nationalisation, the government controlled around 91% of India’s banking business. The banks nationalised in 1980 were:

  • Punjab and Sind Bank
  • Vijaya Bank
  • Oriental Bank of Commerce
  • Corporation Bank
  • Andhra Bank
  • New Bank of India

Later, in 1993, New Bank of India was merged with Punjab National Bank, reducing the number of nationalised banks from 20 to 19. This was the first merger among nationalised banks in India.

Liberalisation and Banking Reforms in the 1990s

In the early 1990s, India adopted economic liberalisation policies, which brought major reforms to the banking sector. The government allowed the establishment of new private sector banks, popularly called “new generation banks.” These banks introduced modern technology and customer-friendly services into Indian banking. Important private banks established during this period included IndusInd Bank, Axis Bank (earlier UTI Bank), ICICI Bank, and HDFC Bank.

The reforms transformed Indian banking from the traditional “4-6-4” banking model into a technology-driven and customer-focused system. Banks introduced internet banking, ATMs, mobile banking, and retail banking products such as home loans, vehicle loans, and credit cards. Foreign investment norms were also gradually relaxed, allowing greater participation by foreign investors in Indian banks.

Mergers and Consolidation in Indian Banking

From the 2000s onwards, India witnessed major mergers and consolidation in the banking sector. ICICI Bank merged with its parent institutions in 2002. State Bank of India merged with State Bank of Saurashtra in 2008 and State Bank of Indore in 2010.

In 2017, SBI merged its five associate banks — State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore — along with Bharatiya Mahila Bank into itself. This created India’s largest bank with a stronger global presence.

In 2019 and 2020, the Government of India announced another major consolidation exercise among public sector banks. Important mergers included:

  • Dena Bank and Vijaya Bank merged with Bank of Baroda.
  • Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank.
  • Syndicate Bank merged with Canara Bank.
  • Andhra Bank and Corporation Bank merged with Union Bank of India.
  • Allahabad Bank merged with Indian Bank.

These mergers were aimed at creating stronger banks with better capital strength and improved operational efficiency.

Rescue and Reorganisation of Banks

During the 2020s, RBI and the government took several steps to rescue weak banks and maintain financial stability. In 2020, SBI, along with other private banks such as ICICI Bank and HDFC Bank, helped rescue Yes Bank after it faced financial problems.

In the same year, DBS Bank India took over the troubled Lakshmi Vilas Bank after RBI intervention. Similarly, Punjab and Maharashtra Co-operative Bank was taken over by Unity Small Finance Bank in 2022 following a financial crisis.

The RBI also encouraged consolidation among small finance banks. In 2023, Fincare Small Finance Bank merged with AU Small Finance Bank. Later, RBI gave in-principle approval for AU Small Finance Bank to become a universal private sector bank in 2025.

Financial Inclusion and Modern Banking

The Indian government launched several schemes to expand banking services to rural and poor populations. One of the most important initiatives was the Pradhan Mantri Jan Dhan Yojana launched by Prime Minister Narendra Modi in 2014. The scheme aimed to provide bank accounts to every household. On the very first day, around 15 million bank accounts were opened. By July 2015, more than 169 million accounts had been opened under the scheme.

India also introduced new categories of banks to improve financial inclusion:

  • Payments Banks: These banks can accept small deposits and provide digital payment services but cannot issue loans.
  • Small Finance Banks: These banks focus on providing banking services to small businesses, farmers, and low-income groups, especially in rural and unbanked areas.

Current Banking Scenario in India

Today, the Indian banking sector is one of the largest in the world. It includes scheduled commercial banks, cooperative banks, regional rural banks, private banks, and foreign banks. Banking services in India have expanded rapidly due to economic growth, digital banking, mobile banking, and government reforms.

By 2013, Indian banks employed more than 1.17 million people and operated over 109,000 branches across the country. Indian banks managed deposits of more than ₹67 trillion and provided bank credit exceeding ₹52 trillion. The banking sector continues to play a key role in India’s economic growth, financial inclusion, and digital transformation.

India has also faced challenges such as loan recovery disputes, bank frauds, and cyber security threats. One major example was the 2016 debit card data breach, in which around 3.2 million debit cards issued by banks such as State Bank of India, HDFC Bank, ICICI Bank, Axis Bank, and Yes Bank were compromised, making it one of the largest banking data breaches in India’s history.