Banking in India – History, Importance, Types of Banks

India’s banking legacy is quite extraordinary. From merchants and money lenders to modern banks using highly sophisticated and advance platforms, India has seen a revolution in banking.
This article will highlight the history of banking in India, Importance of banking to the nation and its people, the workings of a bank, functions of a bank, and much more. Let us begin.

• History of Banking in India
• Importance of Banking
• How Does Banking Work?
• Functions of a Bank
• Types of Banks
• Banks Customer Support
• Banks Working Hours
• List of Public and Private Banks in India

History of Banking in India

The history of banking in India is a long and interesting one. It traverses through the tapestry of time, from the early derivatives of banking during the Indus Valley period to modern day CBS banking. Let us have a look at the history of banking in India:

• Early Derivatives of Banking: The earliest evidence of banking was identified in the Indus Valley Civilization around 2500 BCE. The Indus Valley Civilization was an extremely advanced civilization for its time and money lending practices were identified during that time.
• Shroffs during the Mauryan Empire: Shroffs were sophisticated money handlers and lenders during the Mauryan period. These money lenders facilitated trading during the Mauryan period. Chanakya himself has many a time mentioned the role and responsibilities of bankers in his book called the Arthashastra.
• Hundis of Medieval Period: The medieval period brought with it the introduction of Hundis or negotiable financial instruments. These Hundis were used to partake in trade across long distances.
• Introduction of Western Banking by British: The Madras Bank was founded in 1683 during the British rule. Subsequent banks include Bank of Bombay setup in 1720, Bank of Hindostan, setup 191 years ago in 1770, General Bank of Bengal and Bihar, General Bank of India, Carnatic Bank, and more. These banks acted with the intention to serve the British colonial empire and aid their activities.
• Post-Independence Banking: Post-Independence banking included the nationalization of banks with the intention of increasing credit access to the Indian people as well as participating in effective allocation of credit with the intention of growth and welfare of the Indian people. Some of the notable initiatives during the time were the Lead Bank Scheme and Regional Rural Banks (RRBs).
• Modern Banking: Modern banking in India began with the liberalization and privatization of the Indian economy. These initiatives began in the early 1990s and had a profound impact on the economy or India. The major drivers of growth in India were the effective lending practices of private sector banks like HDFC Bank, Axis Bank, ICICI Bank and more.  Foreign banks were also welcome in India and major foreign banks like HSBC Bank, Citi Bank, Standard Chartered Bank initiated their banking operations in the nation. Indian Banking underwent another revolution in the early 2000s with the adoption of CORE Banking Solutions – CBS. The latest revolution in banking and lending in India was the emergence of Unified Payment Interface or UPI. UPI allows people to instantly transfer money between two different bank accounts using a mobile phone.

Important Functions of Banking

Banking can be considered as the lifeblood of an economy, and there is good reason for this. Let us talk about the most important functions and benefits of banking:

• Effective Allocation of Credit: Effective credit allocation is the most important role of a bank. It is only through effective allocation of credit that growth and innovation in an economy can be expedited. Credit is the lifeblood of business and industry, and banks provide it.
• Exchange of Funds: It is a core activity of banks to facilitate exchange of funds. It is only because of this exchange of value any kind of trade or commerce takes place.
• Store of Value: Banks also act as a store of value where they keep their customer’s valuables like cash, jewellery, and valuables with them for safekeeping.
• Foreign Exchange and Trading: Banking facilitates the flow of money from one nation to another by the way of foreign exchange as well as other financial instruments like letters of credit.
• Monetary Policy: The central bank of a nation uses commercial banks as a tool to increase as well as decrease the flow of capital in an economy. They serve as tools to either increase or decrease inflation in an economy.

How Does Banking Work?

A bank will typically work in the following way:

• First, it will accept deposits from the public by the way of savings account deposits, term deposits, recurring deposits, current account deposits and more. The banks will pay the depositors a % of interest on these deposits.
• Next, the bank will identify profitable scenarios where it can invest these deposits and collect interest for the same. A bank collects deposits from customers at a lower interest rate and use these deposits to disburse loans at a higher interest rate. The difference in the borrowing rate of interest and the lending rate of interest is the profit spread of the bank.
• A bank may also use part of their deposits to engage in highly complex and sophisticated trading like futures and options trading, hedging, and more.
• Finally, a bank also charges a host of fees for their services. Some of the common fees charged are account management charges (AMC), ATM charges, transaction fees, wire transfer fees, and more.
• Lastly, a bank also makes a sizable portion of their profits by up-selling health and life insurance products. Other financial products like mutual funds, structured products and wealth management services are offered by banks.

Types of Banks

There are many types of banks in India. Let us examine all of them below:

• Reserve Bank of India (RBI): The RBI is the central bank of India. It is the role of the RBI to regulate credit in the economy, formulate regulations, ensure stability in the banking sector, and maintain financial stability.
• Commercial Banks: Commercial banks engage in the activity of borrowing and leading with the intention to make a profit. Commercial banks are classified into public sector banks (owned by the government), private sector banks (owned by private companies), and foreign banks.
• Cooperative Banks: Cooperative banks are made on the principle that the customers of the bank are also the shareholders of the bank, with the objective of facilitating lending and borrowing of its members or shareholders.
• Regional Rural Banks (RRBs): RRBs are setup by the government with the role of disbursing credit to rural areas of India. It is the role of an RRB to ensure that there is penetration of capital to the rural and poorer sections of India.
• Development Banks: A development bank will provide long term capital to highly capital intensive infrastructure projects such as hydro-power projects, road transport projects, energy projects, and more. Industrial Development Bank of India (IDBI) is an example of a development bank.
• Small Finance Banks: Small finance banks provide credit to small businesses. The loan size of small finance banks is generally quite small as they partake in small and micro-finance lending.
• Payments Banks: A payments bank can accept deposits but cannot lend. The role of a payments bank is to initiate transfer of money and charge a fee for the same.

Banks Customer Support

Private sector banks customer support:

Public sector banks customer support:

Banks Working Hours

Mentioned below are the working hours of some of the most major banks in India.

List of Banks in India