KINDS OF BANKS AND THEIR FUNCTIONS

INTRODUCTION

A bank is a financial institution which performs the deposit and lending function. A bank
allows a person with excess money (Saver) to deposit his money in the bank and earns an
interest rate. Similarly, the bank lends to a person who needs money (investor/borrower) at an
interest rate. Thus, the banks act as an intermediary between the saver and the borrower. The
bank usually takes a deposit from the public at a much lower rate called deposit rate and
lends the money to the borrower at a higher interest rate called lending rate. The difference
between the deposit and lending rate is called ‘net interest spread’, and the interest spread
constitutes the banks income.

Indian Banking System for the last two centuries has witnessed numerous developments. The
businessmen of the ancient times, such as Sharoffs, Seths, Sahukars, Mahajans, Chettis, etc.,
ran the indigenous banking systems. The standard functions of lending money to traders and
craftsmen and sometimes financing the wars by placing funds at the disposal of kings were
performed by these indigenous bankers. The native bankers could not develop the system of
obtaining deposits from the public, which is an important function of modern banks. It was in
the last decades of the 18th century that modern banking in India originated. The General
Bank of India started in 1786, and the Bank of Hindustan was the first bank. After that, three
presidency banks, the Bank of Bengal (originally started in the year 1806 as Bank of Calcutta
and then became the Bank of Bengal in the year 1809), the Bank of Bombay and the Bank of
Madras were set up. The Presidency banks for many years, acted as quasi-central banks. The
Imperial Bank of India was formed by the merger of these three banks in 1925. The Union
Bank in 1839 was established by the Indian merchants in Calcutta. It failed in 1848 as a
consequence of the economic crisis of 1848-49. Bank of Upper India was established in 1863,
but that too failed in 1913. The oldest survived Joint Stock bank in India is The Allahabad
Bank established in 1865. Oudh Commercial Bank was established in 1881 in Faizabad and
failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which
is now one of the largest banks in India. The Swadeshi movement encouraged local
businessmen and political figures to establish banks of and for the Indian community during
1906 to 1911. Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India have survived to the present. The main landmark in Indian banking
history took place in 1934 when a resolution was taken to establish ‘Reserve Bank of India

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 KINDS OF BANKS AND THEIR FUNCTIONS

‘which started functioning in 1935. RBI, since then has been the regulating banking system of
the country as the central bank.

HISTORY OF INDIAN BANKING

Country’s economy cannot develop without banks. You can find aspect of the banking in our
everyday life. Banking system of the country is lifeline of the economy of the country.

The Banking system of the country is the base of the economy and economic development of
the country. It is the most leading part of the financial sector of the country as it is
responsible for more than 70 % of the funds flowing through the financial sector in the
country.

The banking system in the country has three primary functions:

 Operations of Payment system

 Depositor and protector of people’s savings
 Issue loans to individual and Companies

The Banking system in India can be categorised in two phases

 Pre-Independence Phase (1786-1947)

 Post- Independence Phase (1947 to till date)

The post-Independence period may further be divided into three phases-

 Pre-nationalisation Period (1947 to 1969)

 Post nationalisation Period (1969 to 1991)
 Liberalisation Period (1991 to till date)

Pre-Independence Phase (1786-1947)

The origin of the Banking system in India can be traced with the foundation of Bank of
Calcutta in 1786. The Banking in India originates in the last decade in the 18th century with
the foundation of the English Agency houses in Bombay and Calcutta (now Kolkata).

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 KINDS OF BANKS AND THEIR FUNCTIONS

 Three presidency banks Bank of Bengal, Bank of Bombay and Bank of

Madras established in the 19th Century under the charter of the British East India
Company.
 In 1935, the presidency banks merge together and formed a new bank named Imperial
Bank of India.
 The Imperial Bank of India subsequently named the State Bank of India.
 The first Indian-owned Allahabad Bank was set up in 1865 in Allahabad.
 In 1895, the Punjab National Bank was established in 1895.
 The Bank of India founded in 1906 in Mumbai.
 Many more commercial banks such as Canara Bank, Indian Bank, Central Bank of
India, Bank of Baroda and Bank of Mysore were established between 1906 and 1913
under Indian ownership.
 The central Bank of India, RBI establish in 1935 on the recommendation of Hilton-
Young Commission.

At that time, the Banking system was only covered the urban population and need of rural
and agriculture sector was totally neglected.

Post- Independence Phase (1947 to till)

 At the time independence, the entire Banking sector was under private ownership. The
rural population of the country had to dependent on small money lenders for their
requirements. To solve these issues and better development of the economy the
Government t of India nationalised the Reserve Bank of India in 1949.
 In 1955 the Imperial Bank of India was nationalised and named the State Bank of
India.
 The Banking Regulation Act enacted in 1949.

Nationalisation Period (1969 to 1991)

 In 1969, Government of India nationalised 14 major banks whose national deposits

were more than 50 crores.

1. Allahabad Bank
2. Bank of India

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 KINDS OF BANKS AND THEIR FUNCTIONS

3. Punjab National Bank

4. Bank of Baroda
5. Bank of Maharashtra
6. Central Bank of India
7. Canara Bank
8. Dena Bank
9. Indian Overseas Bank
10. Indian Bank
11. United Bank
12. Syndicate Bank
13. Union Bank of India
14. UCO Bank

The Indian Banking system immensely developed after nationalisation but the rural and
weaker section of the society was still not covered under the system.

To solve these issues, the Narasimham Committee in 1974 recommended the establishment
of Regional Rural Banks (RRB). On 2nd October 1975, RRBs were established with
an objective to extend the amount of credit to the rural section of the society.

 Six more banks further nationalised in the year 1980. With the second wave of
nationalisation, the target of priority sector lending was also raised to 40%.

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6. Vijaya Bank

Liberalisation Phase (1990 to till)

In order to improve financial stability and profitability of Public Sector Banks, the
Government of India set up a committee under the chairmanship of Shri. M. Narasimham.
The committee recommended several measures to reform banking system in the country.

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 The major thrust of the recommendations was to make banks competitive and strong
and conducive to the stability of the financial system.
 The committee suggested for no more nationalisation of banks.
 Foreign banks would be allowed to open offices in India either as branches or as
subsidiaries.
 In order to make banks more competitive, the committee suggested that public sector
banks and private sector banks should be treated equally by the Government and RBI.
 It was emphasised that banks should be encouraged to abandon the conservative and
traditional system of banking and adopt progressive function such as merchant
banking and underwriting, retail banking, etc.
 Now, foreign banks and Indian banks permitted to set up joint ventures in these and
other newer forms of financial services.
 10 Privates players got a license from the RBI to entry in the Banking sector. These
were Global Trust Bank, ICICI Bank, HDFC Bank, Axis Bank, Bank of
Punjab, IndusIand Bank, Centurion Bank, IDBI Bank, Times Bank and Development
Credit Bank.

The Government of India accepted all the major recommendation of the committee.

Recent Development in Indian Banking Sector:

 Kotak Mahindra Bank and Yes Bank got a license from RBI to entry in the system in
the year 2003 and 2004.
 In 2014, RBI grants in-principle approval to IDFC and Bandhan Financial
Services to set up banks.

Today, Indian Banking industry is one of the most growing flourishing industries. Banking
systems of any country need to be effective, efficient as it plays the active in the economic
development of the country.

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KINDS OF BANKS AND THEIR FUNCTIONS