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History of Banking System in India

The institution of Banking is of great importance and is playing a predominant role in the economy of every country in the world. The word ‘Banker’ is derived from the Latin word ‘Bancho’ or ‘Banque’ which means “a heap or mound”. Similarly, it is derived from the German word ‘Bane’ or ‘Banco’ which means “joint stock fund”. A Banker is one, who carries on banking business. Therefore the world “BANK’ denotes any person/individual or firm or company, who/which transacts banking business”. In simple words, the word ‘Banking’ means “carrying on business with money”. No economy in this world can function and there can be no growth and development of the nation without proper system of banking.

The institution of banking was prevalent as early as 2000 B.C. in India during Vedic period. In those days, merchants used to carry on business with people by accepting safe deposits and also to lend money to needy people. The Greek temples were used as depositories for people’s surplus funds and were used as lending centers for lending at higher rates of interest against gold and silver, which had been left for safe custody. In India, during Vedic period, the ancient Hindu scriptures relate to the money lending transactions. Later, during the Smrity period, banking business was carried on by the people of Vaish community by accepting deposits and granting advances. During the Buddhist period, money lending business was well spread. Buddha and Mahavir considered money lending a sin and denounced it. During the3 Muslim period, money lending business in India was declined due to the strict Quranic injunctions.

In England, the first modern bank known as “Bank of England” was established in the year 1694. The first modern bank known as “The Hindustan Bank” was established at Calcutta in 1770. The first Presidency bank was established in 1806 and it was changed as the Ban k of Bengal. Later the Presidency Bank of Bombay and the Presidency Bank of Madras were established in 1840 and 1843 respectively. These two banks were amalgamated into one bank, known as the “Imperial Bank of India”. The Imperial Bank of India was nationalized in 1920 with change of its name as the State Bank of India, the largest bank in India at present, and is next to the Reserve Bank of India. By the end of 19th century, there were about none banks. In course of time, several banks have been established.

The Reserve Bank of India was established on 1st January 1935 under the Act called, The Reserve Bank of India Act, 1934 as the Central Bank of India. The Reserve Bank of India is playing a predominant role in regulating the banking business in India. The banking industry in India witnesses tremendous growth and development. 14 major commercial banks in 1969 and 6 commercial banks in 1982 were nationalized. The Government of India during the term of Shri P.V. Narsimha Rao in 1991 adopted privatization in trade, commerce and banking and as such number of private commercial banks viz. HDFC bank, Global Trust Bank Ltd, Hyderabad etc. have been established. With regard to the banking legislation in India the Joint Stock Companies Act, 1850 was the first legislative enactment and the first commercial bank established under this Act in 1901 was the Oudh Commercial Bank. After independence in 1947, the banking industry in India witnessed tremendous growth and development the banking system, organizational problems and to control the credit created by the commercial banks. The Act has been amended several times so as to meet the changing conditions and requirement in the banking industry.

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