This article on ‘Evolution of the Banking System: All You Need to Know’ was written by Shruti Korgaonkar, an intern at Legal Upanishad.
Banking is one of the oldest industries in the world. They are regarded as the foundation of a developed economy. The financial infrastructure required for thriving economies is provided by sound financial systems, which are at the forefront of technological development. Since the days of the commodities banks, banking has undergone a substantial transformation, and contemporary financial organisations are constantly evolving to address the most challenging problems.
The banking system prevailed before the invention of money, the history of banking and the history of money is intimately intertwined. Grain was the primary material found in deposits at first, followed by other products like cattle, farm equipment, and eventually valuable metals like gold in the form of lightweight compacted plates The first prototype banks of merchants from the ancient world, which are said to have existed in Assyria and Babylonia m around 2000 BC, provided grain loans to farmers and traders transporting products between cities.
Later, lenders located in temples offered loans and introduced two crucial innovations: the acceptance of deposits and the changing of money. This occurred in ancient Greece and during the Roman Empire. Ancient Chinese and Indian archaeology from this time period demonstrates the existence of money-lending activity.
This article discuss the evolution of the banking system in India from the Vedic Period to nationalisation of 14 major banks on July 19, 1969, and later.
Evolution of the Banking System in India
In India, banking has a history that predates even the Vedic Civilization. For instance, rnapatra or rnalekhya loan deeds were common in the Vedic era. Usury and interest rates were both common in Vedic India. The fact that Manusmriti sets the minimum and maximum interest rates and views money lending above a particular rate as a grievous sin serves as evidence of institutional money lending. However, it establishes several caste-specific ceiling rates. For instance, the interest rate for Brahmins was 24 percent, compared to 36 percent, 48 percent, and 60 percent for Kshatriyas, Vaishyas, and Shudras.
Similar to the Vedic period, the Buddhist, Mauryan, and Mughal eras are likewise noted for having produced a variety of these instruments. The Kautilya Arthashastra indicates the existence of bankers during the Mauryan era. The “Adesha” instruments, which are analogous to modern bills of exchange, existed during the Mauryan era.
Numerous references to an indigenous financial system that supported the nation’s trade and commerce can be found in ancient Indian literature. Since ancient times, bankers by the names of Shroffs, Seths, Sahukars, Mahajans, Chettis, etc. have operated in the industry. These native bankers ranged from shroffs with substantial operations to very minor moneylenders, conducting a large and specialised business that was even greater than that of banks.
The British’s ascent to power marked the beginning of modern banking in India. After defeating Tipu Sultan, the British solidified their position of dominance and rose to the top of the Indian political hierarchy.
The European Agency Houses served as bankers prior to the establishment of the three Presidency Banks. As the Agency Houses had prospered, they also wanted to run Banks. In the 1770s, a renowned agency house named Alexander & Company began overseeing the Bank of Hindustan. It is unknown when exactly that bank was founded.
The other Agency Houses in Bengal founded the Bengal Bank and the General Bank of India in the eighteenth century. The Agency Houses floated the Commercial Bank in 1819 and the Calcutta Bank in 1824. These banks were neither legitimate joint stock institutions nor did they have limited liability.
They had unrestricted liability and were partnership firms. The 1860 Companies Act was the first piece of legislation to codify limited liability. Up to that point, banks had to either operate under unlimited liability or get a special Charter from the Crown. The Bank of Bengal was founded in 1806 as a successor to the Bank of Calcutta.
The Swadeshi Movement, which inspired Indians to launch several new organisations, also served as inspiration for the launch of numerous new banks. During the 1906–13 economic boom, there was a notable growth in the number of joint stock banks. The Bank of India, The People’s Bank of India Ltd. During this time, the Bank of Baroda, Indian Bank Ltd., and the Central Bank of India were founded.
The Imperial Bank of India Act of 1920 combined the three Presidency Banks in Calcutta, Bombay, and Madras into the Imperial Bank in 1921. Although this bank was not authorised to issue bank notes, it was allowed to run the clearing house and hold government budget balances The Reserve Bank of India was established to serve as the Central Bank with the passage of the Reserve Bank of India Act in 1934. It obtained the ability to print money and served as the government’s banker in place of the Imperial Bank. The Imperial Bank was given permission to represent the Reserve Bank of India in locations where there were no Reserve Bank branches, nevertheless.
NATIONALISATION OF BANKS
The nationalisation of 14 major banks on July 19, 1969, is without a doubt the most significant historical event in India’s financial history since independence. As the government believed that. Nationalization was seen as a major step toward achieving the socialistic pattern of society. The nationalised banks were expected to enhance lending to government-important sectors and to use their resources to further the interests of society as a whole. For these banks, a detailed plan of objectives, regulations, management, etc. was created.
Nationalization was a realisation of the bank system’s capacity to further more general economic goals. The banks needed to go out and broaden their network in order to prioritise mass banking over class banking. The expansion of finance in rural areas was a top priority. The advantages of nationalisation have been significant. The branch network of these banks has virtually covered the entire nation, particularly in rural and formerly unbanked areas.
Indian banks have over time altered the nation’s depressing financial environment to support its expanding economy. There is no question that the Indian banking sector supports the nation’s economy even now.
The 2016 demonetization of currency notes is a good illustration. Almost overnight, existing currency notes were destroyed, causing havoc throughout the country. By enabling citizens all around the country to swap obsolete banknotes, banks assisted in the economy’s recovery from the blow. The capacity of India’s banking sector to sustain a country that is constantly hungry for financial development grows as the sector develops.
• History of Bankingm Lucknow University, available at: https://www.lkouniv.ac.in/site/writereaddata/siteContent/202004051341563589anurag_sriv_History_banking.pdf
• What is earliest evidence of Banking in Ancient India?, GK Today, 27 February 2015, available at: https://www.gktoday.in/topic/banking-in-ancient-india/#:~:text=The%20History%20of%20Banking%20in,Kusidin%20refers%20to%20an%20usurer