Banking in Ancient India
Banking activities in India can be traced back to ancient times. Early references to lending and interest appear in the Vedas, ancient Indian texts, where the word “kusidin” was used for a usurer (money lender).
Other ancient texts such as the Sutras (700–100 BCE) and Jatakas (600–400 BCE) also mention the practice of lending money with interest. However, during this period, some religious texts criticised or discouraged usury. For example, Vasishtha forbade members of the Brahmin and Kshatriya varnas from engaging in money lending.
By around the 2nd century CE, the practice of charging interest became more widely accepted. The Manusmriti described money lending as a legitimate way to earn wealth or earn a livelihood, although it warned that charging interest beyond certain limits was considered sinful.
Ancient texts such as the Jatakas, Dharmashastras, and Kautilya’s Arthashastra also mention written loan agreements called rnapatra, rnapanna, or rnalekhaya, showing that formal financial transactions already existed in early Indian society.
Banking Practices During the Mauryan Period
During the Mauryan Empire (321–185 BCE), more advanced financial instruments were used. One such instrument was called “adesha.”
An adesha was an order issued to a banker directing him to pay a specified amount to a third person. This instrument functioned in a way similar to a modern bill of exchange.
Historical records also show that merchants in large towns issued letters of credit to each other to facilitate trade. This indicates that organized financial systems were already developing in India during ancient times.
Banking in the Medieval Period
During the Mughal period, the use of loan documents continued. These documents were known as “dastawez” in Hindi and Urdu.
Two main types of loan documents were used:
- Dastawez-e-indultalab – payable on demand
- Dastawez-e-miadi – payable after a fixed period of time
Royal treasuries also issued payment orders known as “barattes.” These were instructions to make payments, similar to modern financial drafts.
Indian bankers during this time also issued bills of exchange for foreign trade, helping merchants conduct business with other countries.
Another important financial instrument that evolved during this period was the “hundi.” Hundis were widely used as credit instruments and money transfer tools, and some forms of hundis are still used in India today.
Banking During the Colonial Era
Modern banking institutions in India began to develop during the British colonial period.
In 1829, merchants established the Union Bank of Calcutta. Initially, it was created as a private joint stock association and later became a partnership. The bank was formed by the owners of the Commercial Bank and the Calcutta Bank. However, despite expansion efforts, the bank failed in 1848 due to insolvency.
Early Banks in India
One of the oldest banks that still exists today is Allahabad Bank (merged with Indian Bank), established in 1865. However, it was not the first joint stock bank in India. That distinction belongs to the Bank of Upper India, founded in 1863, which later failed in 1913.
During the 1860s, several foreign banks also started operating in India, especially in Calcutta, which had become an important trade center of the British Empire.
Some of the foreign banks that opened branches in India include:
- Grindlays Bank – opened a branch in Calcutta in 1864
- Comptoir d’Escompte de Paris – opened branches in Calcutta (1860) and Bombay (1862)
- HSBC – established operations in Bengal in 1869
Due to heavy trade activity, Calcutta became the main banking centre in India during this period.
First Indian Joint Stock Banks
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. However, the bank eventually failed in 1958.
Soon after, Punjab National Bank (PNB) was founded in 1894 in Lahore. PNB continues to operate today and is one of the largest banks in India.
Growth of Indian-Owned Banks
By the early 20th century, the Indian economy had entered a relatively stable phase. Infrastructure and industrial activity had improved since the Indian Rebellion of 1857, and Indian entrepreneurs began establishing small banks to serve specific communities.
However, the banking sector remained divided into different segments:
- Presidency Banks dominated domestic banking.
- Exchange banks, mostly owned by Europeans, focused on foreign trade financing.
- Indian joint stock banks mainly served local businesses but often lacked sufficient capital.
Because of this fragmented system, Lord Curzon once remarked that India’s banking system was outdated and divided into separate compartments.
Swadeshi Movement and New Banks
The Swadeshi Movement (1906–1911) played an important role in the development of Indian-owned banks. The movement encouraged Indian businessmen and political leaders to create banks for the Indian community.
Several banks established during this period still exist today, including:
- Bank of India
- Bank of Baroda
- Canara Bank
- Central Bank of India
- Indian Bank
- Corporation Bank (now merged with Union Bank of India)
- South Indian Bank
- Catholic Syrian Bank
Dakshina Kannada: Cradle of Indian Banking
The Dakshina Kannada and Udupi regions in present-day Karnataka became important centers for banking development. Many banks were established in this region, including four banks that were later nationalised and one major private sector bank.
Because of this strong banking tradition, the undivided Dakshina Kannada district is often called the “Cradle of Indian Banking.”
Establishment of the Reserve Bank of India
The Reserve Bank of India (RBI) was established on 1 April 1935 to regulate India’s banking and financial system.
- The first RBI Governor was Sir Osborne Smith, a British official.
- C. D. Deshmukh became the first Indian Governor of RBI in 1943.
- On 12 December 2018, Shaktikanta Das became the RBI Governor, succeeding Urjit R. Patel.
Challenges During World Wars
The period between World War I (1914–1918) and World War II (1939–1945) was very difficult for the Indian banking sector. Despite some economic growth during wartime, many banks faced financial instability.
Between 1913 and 1918, at least 94 banks in India failed, showing the fragile nature of the banking system during that time.
| Years | Number of banks that failed | Authorised Capital (₹ Lakhs) | Paid-up Capital (₹ Lakhs) |
|---|---|---|---|
| 1913 | 12 | 274 | 35 |
| 1914 | 42 | 710 | 109 |
| 1915 | 11 | 56 | 5 |
| 1916 | 13 | 231 | 4 |
| 1917 | 9 | 76 | 25 |
| 1918 | 7 | 209 | 1 |
Conclusion
The history of banking in India has evolved from ancient lending practices and trade finance instruments to a modern banking system regulated by the Reserve Bank of India. Over centuries, the sector has developed through merchant banking, colonial institutions, nationalist movements, and regulatory reforms, laying the foundation for India’s present-day financial system.