The history of banking in India dates back to ancient times. References to money lending and usury can be found in the Vedas, Sutras, and Jatakas. In early Indian society, lending money on interest was known as usury, and while some religious texts initially discouraged the practice, it gradually became an accepted means of earning a livelihood. The Manusmriti recognized money lending as a legitimate source of income but imposed limits on interest rates and prescribed different rates for different social groups. Ancient texts such as the Jatakas, Dharmashastras, and Kautilya’s Arthashastra also mention written loan agreements known as rnapatra, rnapanna, and rnalekhaya, indicating the existence of organized financial transactions.
During the Mauryan Empire (321–185 BCE), banking practices became more advanced. Financial instruments known as adesha were used, which functioned similarly to modern bills of exchange. These were written orders directing a banker to pay a specified amount to a third party. Merchants in major trading centers also exchanged letters of credit to facilitate trade and reduce the risks associated with carrying cash. These practices highlight the sophistication of financial systems in ancient India.
In the medieval period, particularly during the Mughal era, the use of loan documents continued and evolved. These documents, known as dastawez, were of two types: dastawez-e-indultalab, payable on demand, and dastawez-e-miadi, payable after a specified period. Payment orders issued by royal treasuries, known as barattes, were also widely used. Indian bankers issued bills of exchange for transactions involving foreign countries, and the hundi system emerged as an important credit instrument. Hundis facilitated trade and financial transactions across regions and continued to be used for centuries.
The modern banking system in India developed during the British colonial period. In 1829, merchants established the Union Bank of Calcutta, which later became a joint-stock company but failed in 1848 due to financial difficulties. The Allahabad Bank, founded in 1865, became the oldest joint-stock bank in India that continues to function today. Foreign banks such as Grindlays Bank, the Comptoir d’Escompte de Paris, and HSBC established branches in India during the 1860s, particularly in Calcutta, which had emerged as a major commercial and banking center due to its importance in British trade.
The first fully Indian-owned joint-stock bank was the Oudh Commercial Bank, established in Faizabad in 1881. Although it eventually failed in 1958, it paved the way for Indian banking institutions. The Punjab National Bank, established in Lahore in 1894, successfully survived and grew into one of India’s largest banks. During this period, the banking industry was segmented into Presidency Banks, exchange banks, and Indian joint-stock banks. The Presidency Banks dominated domestic banking, while exchange banks mainly financed foreign trade. Indian banks often lacked sufficient capital and experience to compete effectively with these institutions.
The Swadeshi Movement between 1906 and 1911 played a significant role in promoting indigenous banking. Inspired by nationalist sentiments, Indian entrepreneurs and community leaders established several banks to serve Indian customers. Many of these institutions, including Bank of India, Bank of Baroda, Canara Bank, Indian Bank, Central Bank of India, The South Indian Bank, and Catholic Syrian Bank, continue to operate today. The Dakshina Kannada region of present-day Karnataka became a major center of banking activity and earned the title “Cradle of Indian Banking” due to the large number of banks founded there.
A major milestone in India’s banking history was the establishment of the Reserve Bank of India (RBI) on 1 April 1935 as the country’s central bank. Sir Osborne Smith became its first Governor, while Sir C. D. Deshmukh became the first Indian Governor in 1943. In later years, several distinguished individuals served as RBI Governors, including Shaktikanta Das, who assumed office in December 2018.
The period between the First World War and India’s independence was challenging for the banking sector. Although wartime activities provided some economic benefits, many banks suffered severe financial stress and failed. Between 1913 and 1918, a total of 94 banks collapsed in India due to weak financial structures, inadequate regulation, and economic uncertainty. These failures highlighted the need for stronger banking supervision and laid the foundation for future reforms in India’s banking system.