BANKS: EVOLUTION, 1 TYPES & FUNCTIONS BANK: DEFINITION The word bank is derived from Latin word ‘bancus’, French word ‘banque’, Italian word ‘banca’, meaning "table"; German word ‘banc’, meaning bench or counter. Benches were used as makeshift desks or exchange counters during the Renaissance by Jewish bankers, who used to make their transactions atop desks covered by green tablecloths. The Indian Banking Regulations Act, 1949 defines the term Banking as the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. According to the Indian Banking Regulations Act, 1949 a Banking Company means any company which transacts the business of banking. Thus, a company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking. The activities specified in the Act as banking activities are lending, borrowing, accepting and discounting of bills, dealing in foreign currency, deposit lockers, transfer of money etc. The Act prohibits a bank from buying and selling goods and also from holding immovable property. EVOLUTION OF BANKING There was no such word as ‘banking’ before 1640, although the practice of safe-keeping and savings flourished in the temple of Babylon as early as 2000 B.C. The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157 to finance the monarch in his wars. But modern banking began with the English goldsmiths only after 1640. It was the ‘merchant banker’ who first evolved the system of banking by trading in commodities than money. Their trading activities required the remittances of money from one place to another by issuing ‘hundis’. The next stage in the growth of banking was the goldsmith. Due to the nature of his work a goldsmith had to take special precautions against theft of gold and jewellery. Thus merchants started leaving their bullion, money and ornaments in his care. As this practice spread, the goldsmith started charging some fees for taking care of the money and bullion and issued receipts as an evidence of receipt of the valuables. Since gold and silver coins had no marks of the owner, the goldsmith started lending them. As the goldsmith was prepared to give the holder of the receipt and equal amount of money on demand, the goldsmith receipt became like cheques as a medium of exchange and a means of payment. The next stage in the growth of banking is the moneylender. The goldsmith found that on an average the withdrawals of coins were much less than the deposits with him. So he started advancing the coins on loan by charging interest. As a safeguard, he kept some money in the reserve. Thus the goldsmith-money- lender became a banker who started performing the two functions of modern banking that of accepting deposits and advancing loans. 2 Banking & Financial Institutions HISTORY OF BANKING IN INDIA Chanakya, in his Arthashastra written in about 300 B.C., mentioned about the existence of powerful guilds of merchant bankers who received deposits, and advanced loans and issued hundis (letters of transfer). The Jain scriptures mention the names of two bankers who built the famous Dilwara Temples of Mount Abu during 1197 and 1247 A.D. During pre-independence period banking was mainly carried out by indigenous bankers and money lenders. Indigenous bankers are individuals or firms dealing in hundies and sometimes accept deposits. The merchant bankers in India were known as ‘Seths’. The First Bank The first bank in India was the ‘Bank of Hindustan’ started in 1770 by Alexander & Co., an English agency house in Calcutta under European Management which failed in 1782 with the closure of the agency house. It was liquidated during the period 1829-1832. The Presidency Banks The first bank in the modern sense was established in the Bengal Presidency as the Bank of Calcutta in 1806. It was renamed Bank of Bengal in 1809. This was one of the three banks funded by a presidency government (British Govt), the other two were the Bank of Bombay in 1840 and the Bank of Madras in 1843. These banks were given the right to issue notes in their respective region. Bank of Calcutta 1806 Bank of Bengal 1920 1809 Acted As Central J.M. State Bank of India Bank of Bombay Imperial Bank Keynes 1840 of India 1921 1955 Bank of India Bank of Madras 1843 Imperial Bank of India The three presidency banks were merged in 1921 to form the “Imperial Bank of India” on the advice of J. M. Keynes, It acted as Central Bank of India (or) Quasi-central bank till the establishment of RBI in 1935. The State Bank of India After India's independence, Imperial Bank of India became the State Bank of India in 1955. In 1960, the State Bank of India was given control of eight state-associated banks (State Bank of India (SBI), State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBN), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS) and State Bank of Travancore (SBT)) under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks. Banks: Evolution, Types and Functions 3 The First Joint Stock Bank – Allahabad Bank Allahabad Bank (est. 1865) is the oldest Joint Stock Bank in India. A joint stock bank is a bank which is a public company with shares owned by investors rather than a government. The First Indian Bank with Indian Capital – Punjab National Bank Lala Lajpat Rai founded Punjab National Bank on 19th May 1894, Lahore, Pakistan. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. The First Indian Bank - Oudh Commercial Bank (1881 – 1958) The first entirely Indian bank, Oudh Commercial Bank, was established in 1881 in Faizabad, but failed in 1958. General Bank of India (1786 – 1791) General Bank of India was another Indian bank that was formed in 1786. It was however unsuccessful and finally dissolved in 1791 Alliance Bank of Shimla (1874 – 1923) The Alliance Bank of Shimla was a British-run though India-registered bank that commenced operations in Shimla 1874 under the management of Mr. James Walker. It was established to take over the business of the United Bank of India, established in 1866, with operations in Simla and Umballa. Its board put the United Bank of India in voluntary liquidation on Saturday 21 March, and Alliance Bank commenced operations on Monday, 23 March. The Alliance Bank failed on 27 April 1923 due to speculation by its management. At the time that it failed it had 36 branches, including ones in Lahore, Lucknow, Peshawar, Rawalpindi, and Rangoon. The Central Bank of India The Central Bank of India was established on 21 December 1911 by Sir Sorabji Pochkhanawala with Sir Pherozeshah Mehta as Chairman, and claims to have been the first commercial Indian bank completely owned and managed by Indians. The Bank of India: First Bank in India to have Overseas Branch Founded in 1906, the Bank of India is a commercial bank with headquarters at Bandra Kurla complex, Mumbai. It is the first Bank in India to have opened an overseas branch: London (1946), Paris (1974). The Bank of Baroda: Among the Indian banks it has the most number of branches abroad Bank of Baroda (BoB) is an Indian state-owned International banking and financial services company headquartered in Vadodara (earlier known as Baroda) in Gujarat, India. The bank was founded by the Maharaja of Baroda, Maharaja Sayajirao Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat. 4 Banking & Financial Institutions Union Bank of India Union Bank of India (Union Bank) was registered on 11 November 1919 as a limited company in Mumbai and was inaugurated by Mahatma Gandhi. DIFFERENT TYPES OF BANKS IN INDIA NATIONALIZED BANK Indian Banking System witnessed a major revolution in the year 1969 when 14 major commercial banks in the private sector were nationalized on 19th July, 1969. Most of these banks having deposits of above Rs. 50 crores were promoted in the past by the industrialists. These banks were First round (19 July, 1969)- 1. Allahabad bank 2. Bank of Baroda 3. Bank of India Banks: Evolution, Types and Functions 5 4. Bank of Maharashtra 5. Central bank of India 6. Canara bank 7. Dena bank 8. Indian bank 9. Indian overseas bank 10. Punjab national bank 11. Syndicate bank 12. UCO bank 13. Union bank 14. United bank of India In 1980, another six more commercial banks with deposits of above Rs. 200 crores were nationalized: Banks which were nationalised on 15th April, 1980- (6 Banks) 1. Punjab and Sind bank 2. Vijaya bank 3. Oriental bank of India 4. Corporate bank 5. Andhra bank 6. New bank of India - (Later it was merged with PNB) Thus, in total 20 banks were nationalised. Out of these New Bank of India was merged with PNB in 1993. Now strictly speaking 19 nationalized banks are in existence. The nationalization of banks resulted in rapid branch expansion and the number of commercial bank branches have increased many folds in Metro, Urban, Semi – Urban and Rural Areas. The branch network assisted banks to mobilize deposits and lot of economic activities have been started on account of priority sector lending.