There are three different phases in the history of banking in India.

1) Pre-Nationalization Era.
2) Nationalization Stage.
3) Post Liberalization Era.
1) Pre-Nationalization Era:
In India the business of banking and credit was practices even in very early times.
The remittance of money through Hundies, an indigenous credit instrument, was very popular. The hundies were
issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country. The modern
type of banking, however, was developed by the Agency Houses of Calcutta and Bombay after the establishment of
Rule by the East India Company in 18th and 19th centuries.
During the early part of the 19th Century, ht volume of foreign trade was relatively
small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the
East India Company took interest in having its own bank. The government of Bengal took the initiative and the first
presidency bank, the Bank of Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and
IN 1843, the Bank of Madras was also set up.

These three banks also known as “Presidency Bank”. The Presidency Banks had
their branches in important trading centers but mostly lacked in uniformity in their operational policies. In 1899, the
Government proposed to amalgamate these three banks in to one so that it could also function as a Central Bank, but
the Presidency Banks did not favor the idea. However, the conditions obtaining during world war period (1914-
1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up
in1921. The Imperial Bank of India acted like a Central bank and as a banker for other banks. The RBI (Reserve
Bank of India) was established in 1935 as the Central Bank of the Country. In 1949, the Banking Regulation act was
passed and the RBI was nationalized and acquired extensive regulatory powers over the commercial banks. In 1950,
the Indian Banking system comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banks
and Indian Joint Stock banks.

2) Nationalization Stages:
After Independence, in 1951, the All India Rural Credit survey, committee of
Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and ten
others banks into a newly established bank called the State Bank of India (SBI). The Government of India accepted
the recommendations of the committee and introduced the State Bank of India bill in the Lok Sabha on 16th April
1955 and it was passed by Parliament and got the president’s assent on 8th May 1955. The Act came into force on
1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of India was “to extend banking facilities
on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes.”
3 ) Post-Liberalization Era---Thrust on Quality and Profitability:
By the beginning of 1990, the social banking goals set for the banking industry
made most of the public sector resulted in the presumption that there was no need to look at the fundamental
financial strength of this bank. Consequently they remained undercapitalized. Revamping this structure of the
banking industry was of extreme importance, as the health of the financial sector in particular and the economy was
a whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the initiation
of the real sector reform process in 1992. the reforms have enhanced the opportunities and challenges for the real
sector making them operate in a borderless global market place. However, to harness the benefits of globalization,
there should be an efficient financial sector to support the structural reforms taking place in the real economy.
Hence, along with the reforms of the real sector, the banking sector reformation was also addressed. The route
causes for the lackluster performance of banks, formed the elements of the banking sector reforms. Some of the
factors that led to the dismal performance of banks were.

Entry of Private Sector Banks:

There has been a paradigm shift in mindsets both at the Government level in the
banking industry over the years since Nationalization of Banks in 1969, particularly during the last decade (1990-
2000). Having achieved the objectives of Nationalization, the most important issue before the industry at present is
survival and growth in the environment generated by the economic liberalization greater competition with a view to
achieving higher productivity and efficiency in January 1993 for the entry of Private Sector banks based on the
Nationalization Committee report of 1991, which envisaged a larger role for Private Sector Banks.

Current scenario
Currently (2007), overall, banking in India is considered as fairly mature in terms
of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the
Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector, the demand for banking services-especially retail banking, mortgages and investment services are
expected to be strong. M&As, takeovers, asset sales and much more action (as it is unraveling in China) will happen
on this front in India. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold
more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the
private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government
of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and
traded on stock exchanges) and 31 foreign banks.They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.

Role of Banks:
Banks play a positive role in economic development of a country as repositories
of community’s savings and as purveyors of credit. Indian Banking has aided the economic development during the
last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of
planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a
number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the
commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive
schemes to foster economic development. The activities of commercial banking have growth in multi-directional
ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward
area development, extended assistance to rural development all along helping agriculture, industry, international
trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid
economic development.

Co-operative Banks:
The Co-operative bank has a history of almost 100 years. The Co-operative banks
are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations
they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement
originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else
in the world. Their role in rural financing continues to be important even today, and their business in the urban areas
also has increased phenomenally in recent years mainly due to the sharp increase in the number of cooperative
banks.

There are two main categories of the co-operative banks.

(a) Short term lending oriented co-operative Banks – within this category there are three sub categories of banks viz
state co-operative banks, District co-operative banks and Primary Agricultural co-operative societies.

(b) Long term lending oriented co-operative Banks – within the second category there are land development banks
at three levels state level, district level and village level.

Broad Classification of Products in a bank:

The different products in a bank can be broadly classified into:
· Retail Banking.
· Trade Finance.
· Treasury Operations.
Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking
operations, which cover treasury operations, are at the hand office or a designated branch.

Common Banking Products Available

1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a credit
line-money made available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid
full by the end of the period, one is charged interest.
A credit card is nothing but a very small card containing a means of identification,
such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which
he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value.
Debit Cards quickly debit or subtract money from one’s savings account, or if one were taking out cash. Every time
a person uses the card, the merchant who in turn can get the money transferred to his account from the bank of the
buyers, by debiting an exact amount of purchase from the card. To get a debit card along with a Personal
Identification Number (PIN).
When he makes a purchase, he enters this number on the shop’s PIN pad. When
the card is swiped through the electronic terminal, it dials the acquiring bank system – either Master Card or Visa
that validates the PIN and finds out from the issuing bank whether to accept or decline the transaction. The
customer never overspread because the amount spent is debited immediately from the customers account. So, for
the debit card to work, one must already have the money in the account to cover the transaction. There is no grace
period for a debit card purchase. Some debit cards have monthly or per transaction fees.

3) Automatic Teller Machine: The introduction of ATM’s has given the customers the
facility of round the clock banking. The ATM’s are used by banks for making the customers dealing easier. ATM
card is a device that allows customer who has an ATM card to perform routine banking transaction at any time
without interacting with human teller. It provides exchange services. This service helps the customer to withdraw
money even when the banks ate closed. This can be done by inserting the card in the ATM and entering the
Personal Identification Number and secret Password.
ATM’s are currently becoming popular in India that enables the customer to
withdraw their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or
deposit funds, check account balances, transfer funds and check statement information. The advantages of ATM’s
are many. It increases existing business and generates new business. It allows the customers.
· To transfer money to and from accounts.
· To view account information.
· To order cash.
· To receive cash.

E-Cheaques: The e-cheaques consists five primary facts. They are the consumers, the merchant, consumer’s bank
the merchant’s bank and the e-mint and the clearing process. This cheaquring system uses the network services to
issue and process payment that emulates real world chaquing. The payer issue a digital cheaques to the payee ant
the entire transactions are done through internet. Electronic version of cheaques are issued, received and processed.

5) Electronic Funds Transfer (EFT): Many modern banks have computerised their
cheque handling process with computer networks and other electronic equipments. These banksare dispensing with
the use of paper cheques. The system called electronic fund transfer (EFT) automatically transfers money from one
account to another. This system facilitates speedier transfer of funds electronically from any branch to any other
branch. In this system the sender and the receiver of funds may be located in different cities and may even bank
with different banks. Funds transfer within the same city is also permitted. The scheme has been in operation
since February 7, 1996, in India. The other important type of facility in the EFT system is automated clearing
houses. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In
big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the computer to
credit an employee’s account with the person’s pay.

6) Telebanking: Telebanking refers to banking on phone services.. a customer can access information about his/her
account through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank.
Telebanking is extensively user friendly and effectivein nature.
· To get a particular work done through the bank, the users may leave his instructions in the form of message with
bank.
· Facility to stop payment on request. One can easily know about the cheque status.

7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of

mobile banking. On-line banking is now moving to the mobile world, giving everybody with a mobile phone access
to real-time banking services, regardless of their location. But there is much more to mobile banking from just on-
lie banking. It provides a new way to pick up information and interact with the banks to carry out the relevant
banking business. The potential of mobile banking is limitless and is expected to be a big success. Booking and
paying for travel and even tickets is also expected to be a growth area. According to this system, customer can
access account details on mobile using the Short Messaging System (SMS) technology6 where select data is pushed
to the mobile device. The wireless application protocol (WAP) technology, which will allow user to surf the net on
their mobiles to access anything and everything. This is a very flexible way of transacting banking business.
Already ICICI and HDFC banks have tied up cellular service provides such as
Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to their customers.

8) Internet Banking: Internet banking involves use of internet for delivery of banking
products and services. With internet banking is now no longer confirmed to the branches where one has to approach
the branch in person, to withdraw cash or deposits a cheque or request a statement of accounts. In internet banking,
any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time.
The Internet Banking now is more of a normal rather than an exception due to the fact that it is the cheapest way of
providing banking services. As indicated by McKinsey Quarterly research, presently traditional banking costs the
banks, more than a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents
approximately. ICICI bank was the first one to offer Internet Banking in India.