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Banking in India - Part 1

Bankers Corner

Banking in India

  • The earliest evidence of Banking in India is found in Vedic texts where the concept of “usury” is mentioned. Usury is defined as the practice of making unethical or Immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors.
  • The Modern banking system has its origin in the Western world to which India was introduced by the British rulers, way back in the 17th century.
  • The first bank in India was ‘Bank of Hindustan” started in 1770 and liquidated in 1829 – 32. First successful bank in India was the bank of Calcutta set up on 2 January 1806, mainly to fund General Wellesley’s wars against Tipu Sultan and the Marathas. It was renamed as Bank Of Bengal on 2 January 1809.
  • The bank of Bengal and two other presidencies banks the Bank of Bombay and the Bank of Madras amalgamated on 27 Jan 1921 and the reorganized banking entity assumed the name “Imperial Bank of India”
  • The Reserve Bank of India, which is the central banking Organisation of India, in the year 1955, acquired a controlling interest in the Imperial Bank of India and the Imperial Bank of India was renamed on 30 April 1955 as the State Bank of India followed by the formation of its 07 associates in 1959.
  • Oudh commercial bank was established in 1881 in Faizabad. It was the first commercial bank in India having limited liability and an entirely Indian board of directors.
  • The two important steps taken after Independence in 1949 which changed the complete picture of Banking sector of India are:-
    1. Nationalisation of Reserve Bank of India with effect from 1st Jan 1949 on the basis of RBI Act, 1948.
    2. Enactment of Banking Regulation Act, 1949 which empowered RBI to regulate banking sector in the country.
  • The Punjab National Bank, established in Lahore in 1895, has survived to the present and is now one of the largest banks in India.
  • The step toward social banking was taken with the nationalization of 14 commercial banks were nationalised on August 15, 1980.


  • In general, bank refers to a financial institution where we deposit our savings, withdraw our money in case of emergency and take loans. But a bank can be better defined by the various functions performed by it.
  • Definition of a bank given by the Banking Regulation Act, 1949. Sec 5(b) of the Banking Regulation Act, 1949 defines banking as “Accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, drafts, orders or otherwise”.
  • From this definition it is clear that a bank accepts deposits from the public and its main purpose is to invest this money in profitable avenues. The banker is under obligation to repay the money to the depositor as and when demanded by the depositor. The depositor can withdraw his money through cheques, drafts etc.

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