EVOLUTION OF BANKING BUSINESS IN INDIA

Final Draft submitted to Maharashtra National Law University Mumbai

In fulfilment of the requirement of Internal Evaluation for Banking Laws and NIA

FINAL DRAFT

SUBMITTED BY:

NAME- ATHARVA NIKAM

ENROLMENT NO.- 2019 056 (SECTION – A)

SUPERVISED BY:

PROF. MENAKA SHARMA

B.A. LL.B. (HONS.), FIFTH YEAR, NINTH SEMESTER

INTRODUCTION

Banking in India has a rich history that dates back to the Vedic period, which lasted from 2000 BC
to 1400 BC. During this time, loans, usury, and the practise of money lending were recognised as one
of the four honourable professions, along with farming, trade, and harvesting. Lending and banking
are also mentioned in ancient epics such as the Mahabharata and Ramayana, which span events
between 1000 and 700 BC. Banking had already become a well-established practise during this era,
encompassing various functions similar to modern banking, such as accepting deposits, granting
secured and unsecured loans, acting as a financial support for customers, providing loans to rulers in
times of crisis, and serving as a treasury and financial institution for the government.

Moneylenders or "Sharoffs" were present in practically every village during the Mughal dynasty in
India, promoting trade and commerce. However, the banking system suffered during this time period
as a result of religious limitations on charging interest, as taking interest was considered a sin. Modern
banking in India began in the early nineteenth century, with the establishment of the Bank of
Hindustan in 1770. Following that, three Presidency Banks were established: the Bank of Calcutta
(1806), the Bank of Bombay (1840), and the Bank of Madras (1843). In 1809, the Bank of Calcutta
was renamed the Bank of Bengal.

The merger of the three Presidency Banks in 1921 was a watershed moment in Indian financial
history. It represented a substantial advancement in the country's financial situation. This merger gave
birth to the Imperial Bank of India, a financial institution that was instrumental in developing India's
contemporary banking industry. The Imperial Bank of India underwent a transition following India's
independence. It was renamed the State Bank of India in 1955. This name represented not merely a
change in nomenclature, but also a new era in Indian banking, in line with the nation's aspirations and
economic prosperity. The State Bank of India now has a unique and distinguished position.

It has expanded to become India's largest and oldest banking institution, serving as a pillar of the
country's financial stability and progress. The State Bank of India continues to play a crucial role in
the economic life of the nation, helping enterprises, individuals, and the overall financial well-being
of the Indian population through a broad network of branches and a comprehensive range of financial
services.

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THE EVOLUTION

PRE AND EARLY POST-INDEPENDENCE ERA:

Banking has a long history in India, reaching back to the 1700s. During its early phases, however, the
major goal was to develop new banks and integrate the banking system into Indian society. During
the pre-independence period, nearly 600 banks collaborated to bolster the nation's economy through
significant advancement. The Bank of Bombay, founded in 1720, is often recognised as India's
pioneering bank. The Bank of Hindustan, considered one of India's early modern banks, was founded
in Calcutta in 1770 but discontinued operations in 1832. Several banks founded in the mid-1800s
merged to form the Imperial Bank of India. This collective body eventually evolved into what we
currently know as the State Bank.

During this time, several private banks were established, some of which are still in operation today.
Aside from the formation of the banking system, the emergence of commercial banks and bank
mergers were key milestones during that time period. In India, financial institutions catering to
various sectors of the economy proliferated. The Indian government established limits on the
admission and activities of private sector and international banks through branch licencing and
regulatory regulations. The nationalisation of the Reserve Bank of India (RBI) in January 1949 under
the RBI Act was a key action taken by the Indian government to oversee the banking sector. The
Banking Regulation Act of 1949 further stated that no new bank or branch of an existing bank could
be opened without a licence from the RBI. It also prevented the appointment of joint directors for two
banks. This historical narrative depicts the evolution of banking in India, as well as the vital role that
numerous banks had in defining the country's financial landscape.

LIBERALISATION AND GLOBALISATION

In the early 1990s, the Indian government implemented a wave of liberalisation initiatives, resulting
in the licencing of a large number of small private banks. This transition to liberalisation was a
watershed point in the country's financial system. Furthermore, the forces of globalisation have
enabled banks to reap enormous benefits, propelling them into an unprecedented period of growth. In
today's Indian financial scene, publicly held banks control more than 80% of the banking business,
with private sector banks controlling the remainder. However, the banking industry, both in the public
and commercial sectors, is undergoing fundamental change as a result of the overarching phenomena
known as "Globalisation."

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Other notable changes occurred during this time period. The Indian government approved foreign
investment, paving the way for international banks to open branches in the country. Small financing
banks were given permission to build offices across the country, and payment banks developed as a
new financial actor. Along with these legal developments, substantial technological advancements
have emerged, revolutionising and continuously altering the banking business. Liberalisation,
globalisation, and technological innovation have resulted in a paradigm shift in India's banking sector,
transforming it into a dynamic and varied terrain.

NATIONALIZATION

Nationalisation is the transfer of privately owned assets to the public sector under the management
and ownership of the federal or state governments. In the context of India, the banking system saw
significant changes when previously private-sector banks were nationalised, resulting in the
foundation of nationalised banks. This nationalisation process occurred in two distinct stages. Mrs.
Indira Gandhi's government began the first phase of bank nationalisation in 1969, taking over 14 of
the main commercial banks on July 19, 1969. The second phase began in 1980, when the government
expanded its influence over the banking sector even further, resulting in the government supervising
nearly 91% of the banking activity.

The government facilitated a significant merger between Punjab National Bank and New Bank of
India in 1993, lowering the number of nationalised banks from 20 to 19. This historical shift had far-
reaching consequences not only for the financial industry but also for the general public.

Several major factors influenced India's decision to nationalise banks:

• Priority Sector Revitalization: The banking sector was in crisis, with 361 bank failures
between 1947 and 1955, equating to an alarming rate of nearly 40 bank failures each year.
Depositors faced losing their savings with no chance of recovery.
• Neglected Agricultural Sector: Banks have primarily favoured large industries and
enterprises, ignoring the rural farming sector. With nationalisation came a promise to help and
improve the agriculture sector.

• Nationalisation permitted: The opening of new bank branches, ensuring greater coverage
across the country to reach underserved areas.

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 • Saves Mobilisation: The goal of nationalising banks was to make banking services more
available to the general public, encouraging saves and injecting more funds into an economy
facing financial difficulties.
• Economic and political factors: India was still dealing with the economic consequences of the
1962 and 1965 conflicts. Nationalisation of Indian banks was viewed as a way to stimulate
the economy by increasing deposits and economic stability.

In addition to this, it's imperative to recognize that the realm of banking is intertwined with a web of
legal frameworks, including the Law of Contract, the Law of Torts, and various branches of business
and common law. These legal facets impact banks much as they do any other entity. The legal
foundation of Indian Banking Law, to a substantial extent, draws inspiration from its English
counterpart.

During the era of British Rule in India, the English Law pertaining to negotiable instruments found
its application within Indian courts, especially in cases involving European parties. However, a
nuanced approach was adopted concerning Hindus and Mohammedans, where their respective laws
and customs were deemed relevant. In instances where the parties belonged to diverse communities,
the law and customs that governed the defendant were aptly applied. This intricate legal tapestry, with
its blend of English and indigenous laws, paints a vivid picture of the complexities that have
historically shaped the Indian banking landscape.

1. The Negotiable Instrument Act, 1881:- In the intricate realm of legislation concerning bills
of exchange and promissory notes, the Indian Legislature took a momentous step by enacting
Act 6 of 1840. While the foundations of a legal framework surrounding negotiable instruments
were initially laid in 1866, with the aim of bringing order and coherence to this area of law, it
wasn't until 1881 that it evolved into a fully-fledged Act, complete with several substantive
amendments. This historical progression underscores the intricate evolution of legal
constructs within the context of negotiable instruments in India, mirroring the complexities
that define the legislative landscape.

2. The Banker’s Book Evidence Act, 1891:- The Banker's Book Evidence Act of 1891 holds a
significant and exclusive place within the legislative framework of India. This specialized
enactment is meticulously crafted to cater specifically to the unique needs and challenges
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 faced by the banking sector. Within its provisions lie extraordinary privileges bestowed upon
bankers, particularly in the context of how they present and substantiate their entries in the
meticulously scrutinizing chambers of a court of law. This Act, born out of the intricate
interplay between legal nuances and the financial world, stands as a testament to the
complexities that define the realm of banking in India.

3. The Banking Regulation Act, 1949:- The legal framework governing banking in
contemporary India reflects the culmination of a gradual and methodical process that unfolded
before the year 1949. Notably, the Indian Companies Act of 1913 contained specific
provisions pertaining to banking entities. However, these provisions were deemed inadequate
and therefore underwent a comprehensive consolidation within the expansive legislation that
emerged in 1949 under the nomenclature 'Banking Companies Act, 1949.' This pivotal
legislation was enacted with the primary objectives of harmonizing and amending the legal
framework surrounding banking and delineating the scope of transactions that banks could
undertake within the Indian landscape.

It officially came into force on the 16th of March, 1949, marking a transformative moment in the
regulation of banking activities in India. Subsequently, on the 1st of March, 1966, the nomenclature
of this essential legal framework was altered, renaming it as the Banking Regulation Act, 1949,
signalling the evolution of this crucial legal instrument over time. This transition exemplifies the
intricate and dynamic nature of the legal landscape that shapes the banking sector in India, embracing
changes in nomenclature to reflect the evolving complexities of the industry.

In the domain of legal evidence, a fundamental principle dictates that the existence, condition, or
content of a document must be demonstrable in the presence of a court solely by presenting the
original records. However, there exists a notable exception to this rule, as stipulated in Section 65 of
the Indian Evidence Act. This exception grants the authority to introduce copies of documents before
a court even when the originals are at hand. The Banker's Book Evidence Act of 1891 stands as one
of the legal provisions facilitating the production of duly certified copies of documents, underscoring
the intricacies of evidence presentation within the realm of banking.

Over recent years, the government has embarked on a series of strategic measures aimed at fortifying
the banking sector. Notably, in 2016, the landmark Insolvency and Bankruptcy Code came into
existence, a legislative milestone designed to establish an efficient and time-bound mechanism for
addressing insolvency issues. This code offers a structured framework for the expeditious resolution
of financially stressed assets, extending essential safeguards to creditors in the process. Moreover, in
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2018, the government initiated a transformative phase by orchestrating mergers among several public
sector banks. This strategic consolidation has birthed larger and more streamlined banking entities,
aligning with the overarching objective of enhancing their operational efficiency and strengthening
their positions in the ever-evolving financial landscape.

CONCLUSION

The ever-evolving Indian banking sector has significantly enriched the entire customer experience
journey, encompassing everything from the initial account setup to accessing a wide array of financial
services. As the global community gradually emerges from the grip of the COVID-19 pandemic and
embraces even more advanced technologies, it's reasonable to anticipate that the banking landscape
will undergo further metamorphosis in the years ahead. It's evident that Indian banks find themselves
immersed in an increasingly competitive environment, prompting them to adapt, learn from past
missteps, and trace the footsteps of developed nations.

Despite the strides made, a substantial portion of the Indian populace still relies on banks to secure
their savings rather than resorting to illicit means, owing to persisting factors like illiteracy and deep-
seated concerns about tax evasion. There remains substantial work to be done to propel our nation's
economy into the driver's seat. Over the decades, the Indian banking sector has traversed a remarkable
journey since the pre-independence era, marked by concerted government efforts to oversee and
regulate the industry, advance financial inclusion, and stimulate rural sector development. In the wake
of recent reforms, the Indian banking sector is poised to become more agile and competitive, thereby
offering enhanced services to its clientele.

Moreover, the trajectory of banking in India has been one of constant adaptation to the dynamic
requirements of a burgeoning economy. These adaptations have not merely been transitions but have
sculpted a transformative and technology-driven ecosystem, with a resolute focus on fostering
inclusive economic growth. With the establishment of a robust network of banks across the nation, it
has become increasingly imperative to administer vigilant oversight and implement sound regulations
to optimize profitability within the banking sector. Acknowledging this, the government took a
decisive step by appointing a committee, helmed by Shri M. Narasimham, entrusted with the
monumental task of managing reforms within the Indian banking sector. This committee was further
tasked with instilling stability and enhancing the profitability of the nationalized public sector banks,
representing a pivotal juncture in the sector's journey.

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Undoubtedly, one of the most monumental developments in the Indian banking landscape was the
advent of private sector banks, marking a transformation that mirrored the intricate and ever-evolving
tapestry of the financial world in India.

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