Evolution of the Banking System: First Phase

India had a fairly well-developed commercial banking system in existence at the time of independence in 1947. The RBI was established in 1935. While the RBI became a state-owned institution from 1 January 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity.

The first step towards the nationalisation of commercial banks was the result of a report (under the aegis of the RBI) by the Committee of Direction of All India Rural Credit Survey, 1951, which is the locus classicus on the subject till date. The Committee recommended one strong integrated State-partnered commercial banking institution to stimulate banking development in general and rural credit in particular. Thus, the Imperial Bank was taken over by the Government and renamed the State Bank of India (SBI) on 1 July 1955, with the RBI acquiring the overriding substantial holding of shares. A number of erstwhile banks owned by princely states were made subsidiaries of the SBI in 1959 as a result of the reorganisation of the princely states. Thus, the beginning of the Plan era also saw the emergence of public ownership of one of the most prominent of the commercial banks. In 1962, the Deposit Insurance Guarantee Corporation was established to provide insurance cover to bank depositors.

The second evaluation of the role of banking in India was undertaken during 1966 as the private banks were still not providing the required support in the form of credit disbursal, more particularly in the unorganised sector.