History and evolution of banking in India

1. Banking elsewhere: the short version

Lending and deposit-keeping are older than the word “bank”. Temples in Babylon and Greece kept valuables and lent at interest. The word is usually traced to the Italian banco, the bench on which money-changers in Lombardy did business; a banker who failed had his bench broken, the banca rotta from which we get “bankrupt”.

• Italian and Dutch banks. The Bank of Venice (twelfth century) and the Bank of Amsterdam (1609) took deposits and settled payments between merchants by transfer in their books, which is the origin of the current account.
• English goldsmiths. In seventeenth-century London merchants deposited gold with goldsmiths, who issued receipts. The receipts began to circulate as money, and the goldsmiths found they could lend part of the gold because depositors never all came back at once. That is fractional reserve banking, and the goldsmith's receipt is the ancestor of the bank note and the cheque.
• Central banking. The Bank of England (1694) began as a lender to the Crown and became, through the nineteenth century, the banker to other banks and the lender of last resort. Every later central bank, the RBI included, copies that model.

2. Indigenous banking in India

India had banking long before the British. The Arthashastra and the Smritis regulate interest and deposits, and Manu fixes rates of interest by caste of the borrower. The indigenous bankers — shroffs, sahukars, mahajans, Chettiars and Marwari bankers — took deposits, lent to traders and farmers, and above all dealt in hundis, the indigenous bill of exchange, by which money was remitted across the country without moving coin. The Jagat Seths of Murshidabad were bankers to the Nawabs of Bengal and to the East India Company.

Their features, which examiners like listed:

• they combined banking with trade, which a modern bank may not do (s.8 of the Banking Regulation Act, 1949 now prohibits trading);
• they kept no published accounts and were family firms;
• they charged high interest, often secured on land or jewellery;
• they were flexible, quick and close to the borrower, which is why they survived long after joint stock banks came.

The hundi is still recognised: s.1 of the Negotiable Instruments Act, 1881 saves local usages relating to hundis, and s.31 of the Reserve Bank of India Act, 1934 bars anyone other than the RBI and the Central Government from issuing a hundi or note payable to bearer on demand.

3. The agency houses and the Presidency Banks

European banking in India began with the agency houses of Calcutta and Bombay, trading firms that also took deposits. The Bank of Hindostan (1770) is usually named as the first bank on the European pattern. Most agency houses collapsed in the commercial crisis of 1829–32.

The next stage was the three Presidency Banks, chartered by the Company and partly owned by government: the Bank of Bengal (1806, as the Bank of Calcutta), the Bank of Bombay (1840) and the Bank of Madras (1843). They issued notes until the Paper Currency Act, 1861 gave that right to government. In 1921 they were amalgamated into the Imperial Bank of India, which did commercial banking and also acted as banker to government.

4. Swadeshi banks, failures and the RBI

The first bank of limited liability managed by Indians was the Oudh Commercial Bank (1881), followed by the Punjab National Bank (1894). The swadeshi movement after 1905 produced many more: Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank. Many were small and badly managed, and there were waves of failures, especially in 1913–17 and again in the 1940s. There was no banking law worth the name; banks were simply companies.

Two statutes changed that.

• Reserve Bank of India Act, 1934. On the Hilton Young Commission's recommendation the RBI was set up as a central bank and began work on 1 April 1935. It was a shareholders' bank until the Reserve Bank (Transfer to Public Ownership) Act, 1948 nationalised it from 1 January 1949.
• Banking Regulation Act, 1949 (first called the Banking Companies Act). It gave the RBI power to license, inspect and direct banks. It was extended to co-operative banks in 1966.

5. Social control and nationalisation

After Independence the State took over the commanding heights in stages.

• 1955. The Imperial Bank was taken over and became the State Bank of India under the State Bank of India Act, 1955, on the All-India Rural Credit Survey's recommendation that a State-owned bank should carry credit to the villages.
• 1959. Eight State-associated banks became subsidiaries of SBI.
• 1968. “Social control” under the Banking Laws (Amendment) Act, 1968: boards to have a majority of persons with special knowledge, a whole-time chairman, a and, alongside it, a National Credit Council to steer credit towards priority sectors.
• 19 July 1969. Fourteen banks, each with deposits above ₹50 crore, were nationalised by an Ordinance, later the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969.
• 1980. Six more banks were nationalised under the 1980 Act of the same name.

The 1969 Act was challenged at once. In Rustom Cavasjee Cooper v. Union of India, 1970 INSC 18, (1970) 1 SCC 248, the eleven-judge Bench (Shah J. for the majority) held that Parliament had competence to acquire the banks, but struck the Act down. Two grounds matter. First, the Act was hostile discrimination under Article 14: it barred the fourteen named banks from carrying on banking business at all, while other banks, including foreign banks, could. Second, the compensation provisions offended Article 31(2) because they ignored important items of the undertakings and did not give compensation in the constitutional sense. The Court also rejected the old view that Article 19 and Article 31 were mutually exclusive, asking instead what the direct effect of the law was on the right.

Parliament responded with the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, which acquired the same fourteen banks with fixed compensation, and with the Twenty-fifth Amendment (1971), which replaced “compensation” by “amount” in Article 31(2). Article 31 itself was later deleted by the Forty-fourth Amendment.

6. Liberalisation and after

Nationalisation spread branches into rural areas and directed credit to agriculture and small industry, but by 1991 the banks carried heavy bad debts. The Narasimham Committee (1991, and again in 1998) recommended prudential norms on income recognition and provisioning, capital adequacy on the Basel pattern, a lower CRR and SLR, entry of new private banks, and a special recovery machinery. Its results are in this syllabus: new private banks licensed from 1993, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now the Recovery of Debts and Bankruptcy Act, 1993), and the SARFAESI Act, 2002.

Later steps: Regional Rural Banks (1976, under the Regional Rural Banks Act, 1976); payments banks and small finance banks (licensed from 2015); amalgamation of public sector banks into twelve (completed 2020); the Insolvency and Bankruptcy Code, 2016; and the Banking Laws (Amendment) Act, 2025, which modernised governance, nomination and reporting provisions.

How this is examined

As an essay: “Explain the origin and evolution of banking institutions in India” (June 2025) or “Explain on nationalisation of banks in India” (January 2026). As a short note: “Origin of banking institutions in India.” Write it in the six phases above. For nationalisation, give the 1955, 1969 and 1980 steps, the objects (spreading credit, ending control by industrial houses, priority sectors), R.C. Cooper with both grounds, the 1970 Act, and one paragraph on the post-1991 reversal through private banks and consolidation.