Pariksha SaathiLesson 1 of 10 · Banking and Financial Awareness
Indian Banking System: History, Nationalisation and Structure
Drafted with AI assistance and fact-checked on 28 October 2026; not yet read line by line by a human editor. Spotted a mistake? Tell us. Editorial standards & corrections
How the system grew
India's banking system was built in layers over about two and a half centuries. European agency houses opened the first banks, the government backed the Presidency banks, the Swadeshi movement produced Indian-owned banks, and after Independence the state took control of most of the system through SBI and the nationalisations of 1969 and 1980. Liberalisation after 1991 let new private banks in, and from 2014 the RBI allowed specialised banks. Most layers survive, which is why the structure looks complicated.
Early banks
The Bank of Hindustan (1770, Calcutta) and the General Bank of India (1786) were among the earliest banks, and both later closed. The three Presidency banks, the Bank of Bengal (1806, first called the Bank of Calcutta), the Bank of Bombay (1840) and the Bank of Madras (1843), worked under government charters. Allahabad Bank was founded in 1865, and the Oudh Commercial Bank (1881) is often cited as the first bank with limited liability managed by Indians. Punjab National Bank was founded in Lahore in 1894, and the Swadeshi movement inspired Bank of India (1906) and Central Bank of India (1911), the latter often called the first bank fully owned and managed by Indians.
Imperial Bank to SBI
In 1921 the three Presidency banks were merged into the Imperial Bank of India, which did commercial banking and also served as banker to the government until the RBI began work in 1935. After Independence the All India Rural Credit Survey Committee, chaired by A.D. Gorwala, recommended a state-partnered bank to carry credit to rural India. Under the State Bank of India Act 1955, the Imperial Bank became the State Bank of India on 1 July 1955. Banks of former princely states became its associate banks under the SBI (Subsidiary Banks) Act 1959; the remaining associates and the Bharatiya Mahila Bank were merged into SBI on 1 April 2017.
Nationalisation
On 19 July 1969 the government of Prime Minister Indira Gandhi nationalised 14 major commercial banks, each with deposits of Rs 50 crore or more, through an ordinance, later given final legal form by the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970. On 15 April 1980 six more banks with deposits above Rs 200 crore were nationalised. The aims were to take credit to agriculture, small industry and backward regions, to open branches in villages and to end the control of a few business houses over banks. In 1993 New Bank of India, one of the 1980 batch, was merged into Punjab National Bank, the first merger of two nationalised banks.
Scheduled and non-scheduled banks
A scheduled bank is one listed in the Second Schedule of the RBI Act 1934. Under section 42(6) of that Act a bank qualifies if its paid-up capital and reserves are at least Rs 5 lakh and its affairs are not conducted against the interests of depositors. Scheduled banks keep the cash reserve ratio with the RBI and in return can borrow from it and use its clearing facilities. Banks outside the Second Schedule are non-scheduled; most of them are small co-operative banks. Commercial banks are grouped by ownership and licence: public sector banks (SBI and the nationalised banks, where the government holds a majority), private sector banks, foreign banks working through branches or wholly owned subsidiaries, regional rural banks, small finance banks and payments banks.
Rural, co-operative and differentiated banks
Regional rural banks (RRBs) came from the Narasimham Working Group of 1975. The first, Prathama Bank at Moradabad in Uttar Pradesh, opened on 2 October 1975 under an ordinance replaced by the Regional Rural Banks Act 1976. Their capital is shared by the central government, a sponsor bank and the state government in the ratio 50:35:15. Co-operative banks are owned by their members; the rural short-term structure has state co-operative banks at the top, district central co-operative banks in the middle and primary agricultural credit societies in villages, while urban co-operative banks serve towns. Their management has traditionally come under the Registrar of Co-operative Societies and their banking functions under the RBI. Following the Nachiket Mor Committee (2013), which proposed payments banks, the RBI issued guidelines in November 2014 for small finance banks, which take deposits and lend mainly to small borrowers, and payments banks, which accept small deposits and offer remittances and debit cards but cannot lend or issue credit cards.
The law and mergers
The Banking Regulation Act 1949 came into force on 16 March 1949 as the Banking Companies Act and was renamed in 1966, when it was also extended to co-operative banks. It lets the RBI licence banks (section 22), set SLR (section 24), inspect banks and issue binding directions. Mergers are a policy choice: the Narasimham Committees of 1991 and 1998 argued for a few large, strong banks able to fund big projects and absorb losses. Supporters cite economies of scale, wider reach and stronger capital; critics cite the difficulty of joining staff, technology and work cultures, and the risk of banks becoming too big to fail. A weak bank can also be merged into a strong one to protect its depositors.
Key facts
- Presidency banks: Bank of Bengal (1806), Bank of Bombay (1840) and Bank of Madras (1843) merged in 1921 into the Imperial Bank of India, which became the State Bank of India on 1 July 1955.
- SBI was created by the SBI Act 1955 on the advice of the All India Rural Credit Survey Committee chaired by A.D. Gorwala.
- First nationalisation: 19 July 1969, 14 banks with deposits of Rs 50 crore or more; second: 15 April 1980, 6 banks with deposits above Rs 200 crore.
- Punjab National Bank was founded in Lahore in 1894; Central Bank of India (1911) is often called the first bank fully owned and managed by Indians.
- A scheduled bank is one in the Second Schedule of the RBI Act 1934; it keeps CRR with the RBI and can borrow from it.
- Regional rural banks: Narasimham Working Group 1975; first RRB Prathama Bank, Moradabad, 2 October 1975; RRB Act 1976; capital shared 50:35:15 by Centre, sponsor bank and state.
- Payments banks were proposed by the Nachiket Mor Committee (2013); RBI guidelines for small finance banks and payments banks came in November 2014; payments banks cannot lend or issue credit cards.
- Banking Regulation Act 1949: in force 16 March 1949 as the Banking Companies Act; renamed and extended to co-operative banks in 1966.
- New Bank of India was merged into Punjab National Bank in 1993, the first merger of two nationalised banks.
Quick revision
Bank of Hindustan 1770; Presidency banks 1806, 1840, 1843 merged into Imperial Bank 1921, which became SBI on 1 July 1955 (Gorwala committee); PNB 1894 Lahore; nationalisation 19 July 1969 (14 banks) and 15 April 1980 (6 banks); scheduled bank = Second Schedule of RBI Act 1934; first RRB Prathama Bank 2 October 1975, RRB Act 1976, capital 50:35:15; SFB and payments bank guidelines November 2014 (payments banks proposed by Nachiket Mor); BR Act 1949, renamed 1966.