Banking Revolution in India

In ancient India, the ancient Hindu scriptures like the Vedas, refer to the existence of the banking and money-lending system during the Vedic period. References to the existence of powerful guilds of merchant bankers receiving deposits, lending advanced loans, and carrying out various other functions of banks have been made in Chanakya's Arthasasthra (circa. 300 BCE). It is suggested that the rate of interest on the money lent by the Shresthis or indigenous bankers varied not according to the nature of the transaction but on the basis of the caste to which the borrower belonged. Hundi or the inland bill of exchange was the major instrument of credit.

The history of banks in India starts with the establishment of ‘The Bank of Hindoostan’ or ‘Bank of Hindustan’ in the year 1770. However, this bank did not last for a long time and got liquidated by 1835. The roots of the modern banking system in India, thus, could be traced to the foundation of the Bank of Calcutta (now Kolkata) in 1806. Bank of Calcutta was later renamed 'Bank of Bengal'. Bank of Bombay and Bank of Madras, two other presidency banks were set up in 1840 and 1843 respectively. However, all three presidency banks were amalgamated to form a new bank 'Imperial Bank of India' in the year 1921. Until 1921, all paper notes/currency were issued by the Presidency Banks, which was relinquished by the Paper Currency Act, 1861, and the function was then transferred to the Government bank. A number of Indian-owned banks were established, the first of which was the Allahabad Bank set up in 1865, followed by Punjab National Bank in Lahore in 1895, and Bank of India in Mumbai in 1906. Moreover, in 1906, the Swadeshi Movement gave impetus to the development of many commercial banks including the Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore. The Swadeshi Movement also brought about the establishment of four banks in the undivided Dakshin Kannada district of Karnataka (erstwhile South Canara) which revolutionized the district and it came to be known as the 'Cradle of Indian Banking.'

Early Banks of India

Bank of Bengal was established as Bank of Calcutta in 1806 to meet the need of funds by the East India Company for its wars against rulers like Tipu Sultan and others. It was later renamed as Bank of Bengal in 1809. The Government of India, who had invested around 20% of the capital in the bank, was given the authority to nominate 3 directors on the board of Bank of Bengal. Along with this, the bank was also given the right to issue its own currency notes. In fact, one of the oldest surviving bank notes in India is the Bank of Bengal note issued in 1812.

Bank of Bengal
Bank of Bengal Seal and Note

The other two Presidency banks, besides the Bank of Bengal, included the Bank of Bombay and the Bank of Madras. Both these banks also issued currency notes. Bank of Bombay was established in 1840 and its headquarters was in Bombay (modern-day Mumbai). Bombay had already developed as a commercial center by the middle of the 19th century 2022. Bank of Bombay also issued notes but it carried the vignettes or images of the Town Hall, the statues of the Governors of Bombay, Mountstuart Elphistone, and John Malcolm. However, the Bank of Bombay had to face liquidation in 1868 due to the crisis arised by the boom in the cotton industry boom after the American Civil War of the 1860s. The last presidential bank was the Bank of Madras, established in 1843. This bank issued notes with the vignette of Sir Thomas Munroe, Governor of Madras (1817-1827). All these Presidency Banks were finally amalgamated in 1921 to form the Imperial Bank of India.

Bank of Bombay - Cheque
Bank of Bombay - Building
Bank of Madras - Seal and Note