Static Banking Awareness Course: Origin & Development of Banking in India

Hello everyone, we have come up with an exciting announcement regarding the static banking awareness. Before going

to the announcement, I want to tell what our static banking awareness course is all about for people who are not aware

of it. So if you see the static banking is the core and the current affairs that we cover on a regular basis is the layer

upon the code. So you have to know about the static concepts in order to have a wholesome learning of the current news

are covered and explained to you. Say suppose there is a news about PSL. Say suppose the Reserve Bank of India has

increased the target of PSL for one particular sector from this percentage to this percentage. Okay. So this we

would have covered in our current affairs. So you will know the old percentage as plus the new percentage.

But if you want to know what is PSL, who initiated it, why it was initiated and is it applicable to all types of bank

and what if the bank fail to meet the target, what will happen? So all this if you see we have covered in our static

banking awareness course. So here it is updated up to 2025 and this course if you see it is applicable and relevant to

all banking exams starting from RRB, IBPS, SBA and also the regulatory bodies. Now okay coming up to the

exciting announcement. So here in the upcoming days if you see we are going to upload the videos of the static concepts

one by one in our YouTube channel for free to our subscribers. So you can go watch the video of the static concepts

and if you're interested you can log to our applications go to all courses and there you can purchase our static

banking awareness course. So here if you see while purchasing you can also use a discount code that is RS10 to avail an

additional 10% discount during the purchase of the course. Thank you. Today we will be covering the origin and

development of banking India. So how banking process started in India and how it developed from which stage to which

stage all this will be covered in this topic. So before knowing the banking concept we need we need to know the

circular flow of income. Now consider there are three entities in the system. One is the government, next is the

private player and the third is the household. So the government if you see the ultimate aim or the uh ambition of

the government is to improve the economic of the country. to improve the economic welfare or

economic development of the nation or the state is the first priority of any government. So for that if you see what

is required economic activity has to take place that is nothing but the production of goods and services

only then the economic activity or the economic development will take place in any country and for that purpose huge

amount of capital is required right so huge amount of capital required for both acquiring of land for construction of

the building for acquiring of big big missionaries for everything huge capital is required so for this capital is

required Next is the private player. Here the private player main ambition is to make profit. That is the ambition or

that is the focus of any private player. So here if you see they are the integral part of the prices of the goods and

services. So they play a a very vital role in deciding the prices of the goods and services which is mostly dependent

upon the demand and supply in the market system. So to meet the demand one should produce more goods and services. So if

their demand is high in the market then eventually more goods and services should be provided right. So for

creating more goods and services again what is required? Capital is required. So again here also the private player

requires capital. Now coming to the third entity. Third entity here is the household. So individual household. So

the individual household if you see it will be employed by these private firms as the employees. So they will

participate in the production of goods and services. They will be as workers in the production of the goods and services

and this uh this activity that is after production this will generate income for both the private player and as well as

for the uh individual households. Now this again it can be sent the income of the private player the private player

will get income from the sale um from the sale of goods and services and from that it will provide wages to the

individual households and these individual households will then be used in maybe purchasing various goods and

also for sale. So if you see this is the circular flow of income. So on one hand if you see it

is the government and the private player who require capital huge amount of capital or money for the development

purpose. On the other hand if you see the individual household who are ready to provide labor support for the

production activity. So here if you see the demand and supply comes into place and when the demand and supply gap is

filled the economy will start to run. So the capital formation is a very important part. Now how to get this

capital? How to to whom should we ask the capital? That is when the financial system comes into place. So the

financial system if you see it majorly consists of the financial institutions and financial regulators, financial

instruments, financial market and the financial services. Financial institutions like banks,

NBFC, these all are financial institutions. Financial regulators are the one who regulates these financial

institutions. So if you see uh RBI, SEBIT, they are all regulators. X is financial

instruments. So these are the instruments that are traded in the market like certificate of deposit,

treasury, rebuilds, the shares, the bonds. So all these are financial instruments. Financial market is where

these financial instruments are traded. That is like primary market or in the secondary market.

When is when it is issued for the first time it is done in the primary market when uh it is already in the existing in

the market and uh second trading happens that is between the various buyers then it happens in the secondary market. This

is what financial market. Next is financial services like they will give you mutual fund advisory services around

right mutual fund it is a financial service and also investment advisory services is also provided right by the

investment bankers that is a financial service. So these all together constitute this financial system is not

just the financial institution. Financial institutions, regulators, instruments, financial markets and the

financial services together constitute this financial system. Now we'll concentrate on the banking

institution. This banking institution majorly consists of two types. One is the normal banking situ institution. The

next is the development financial institution. Now we look into the normal banking institution. So say there is a

bank. Okay. So how will they operate? There is a depositor. He comes and deposits money in the bank. Okay. So so

that he could earn interest from the deposits and also his money is safe. Main purpose of deposit money is

interest and also the money will be safe in the bank. That is the main purpose of depositing money by the depositors. Next

another person he will come another person is there a and she has come back to the bank to request for loan. Okay so

if you see now bank what will do is now a depositor A had come and let this be B and a loan borrower B. So depositor A

had deposited some money and B wants to borrow some money. This money from the bank it will go to the

borrower. This is how the bank works. It acts like a bridge between the depositors and the

borrowers. So it'll collect the interest from the it'll give the interest to the depositors and it'll collect the

interest to the borrower. So this is how the bank works and this is the traditional working of a bank. Okay. Now

let us go to the development financial institution. The developmental financial institution from the name itself you can

guess that what is the purpose of it. So for developmental activities it is very easy to guess from the name itself main

aim was to improve the entire development of the country. So previous thing we saw that in case of normal

banking institutions the main one of the main aim is to get profit and also here the target customers in non-banking

institutions are resident people like normal individuals or the business people. Okay. But here development

financial institution is to provide loans that is huge huge crores and crores amount of loans for the

development infrastructure for the factory setting of factories for the improvement of highways which requires a

huge lock in period. Here if you see the development will take place would take 10 to 20 or even 30 years. development.

If you see it is a huge locking period and so since a huge amount of money is provided to the borrower, it is very uh

difficult to get a high interest right it will not be uh very easy for the borrower to pay high interest. So they

will be given at a reduced at a economic interest rate. the developmental financial institutions they will provide

loans to the borrowers at a um reduced or an economic interest rate because the purpose of the loan is to improve the

infrastructure that is for the entire development of the country that is why so if you see

main purpose of this development financial institution is to promote the economic development

social welfare of the country to provide long-term financing like hundreds and thousands of crores will be provided for

the improvement of the infrastructure and also the factories and also for the economic development. So for that

purpose reduced interest rates will be provided. So example of this development financial institution is like XM bank

and also napid these and all if you see they will

provide huge set of loans at a reduced interest rate. These are development financial institutions. In previous uh

previous slide we saw like uh normal banking institutions right those are nothing but like SBI HDFC

Punjab National Bank ICICIC bank these are all non uh normal banking institutions this is the main difference

between developmental and financial institution and normal banking institution

majorly who owns the banks in India if you see there are majorly two types two categories under this one is the public

sector banks the other is the priv Private sector bank from the name itself you can find out that the public sector

bank the major shareholder is a government and the private sector bank the major shareholder is the private

player. So if you see public sector banks more than 51% of the shares are held by the government of India and

private sector more than 51% it is held by the private sector players. So these are the major shareholders of

these public sector and the private sector banks. Next is the history of banks in India. To learn about the

history of banking system in India, it can be that is the banking system can be majorly divided into three time gaps.

First one is before 1947 that is before the independence era. How was the banking system then? Next is

between 1947 and 1991 and next is after 91 when the economic or the financial crisis or the reforms had been done in

India. So why it has been divided into three major? Because from in each period different or major changes have been

brought into that is why learning of banking system is uh is divided into three major time gap that is before 1947

between 1947 to 1991 and after 1991. Now let us see before 1947 period. So if you see before 1947 Bank of Hindustan

was the first bank of India. The first bank established in India and it was established in 1770. But unfortunately

it was liquidated in 1832 due to crisis. Later on after bank of Hindustan, Central Bank of India was initiated was

formed in 19 1786. And the next bank is the Bank of Kolkata which was which was established in the

year 1806 and Bank of Kolkata if you see it was renamed to Bank of Bengal in the year 1809. So these are the banks if you

see New Delhi. Next if you see the main purpose of the banks established then was to trade provide

trade services to the British that was the main reason for providing for creating banks and if you see presidents

banks there are totally three presidents bank that existed in India one is the bank of Bengal next is the bank of

Bombay and third is the bank of madras so these were the three presidency banks that existed in India that is bank of

Bengal bank of Bombay and bank of madras and these presidents mergency bands were merged together and then it formed the

imperial bank of India in the year 1921. 1921 this imperial bank of India was formed by merging three presidency bank

that is bank of Bengal, Bombay and Bengal, Bombay and Madras.

So in 1840 if you see Oriental Bank Corporation was established mainly to service the Indian traders to provide

loans to the Indian traders. Next in 1865 Alahaba Bank Alahabad Bank was introduced. So if you see this was the

oldest public sector bank and now we know that Alahab Bank has been merged with the Indian bank. So Alahabad Bank

does not exist anymore. It has been merged with the Indian bank. So let us cover the era from 1947 to

1991. This was after the independence. So if you see after the independence nationalization of bank took place. What

does nationalization of bank major banks were private sector? They were privately owned. So it was realized that

government should have a majority share in this private sector banks that is privately owned banks. So majority of

the shareholding passes to the hands of the government. Now why was this decision taken? It was because to

provide banking services to accessible to more masses and to promote economic growth and reduce the inequality. If you

see since the banks were privately owned they were giving loans majorly to the industrialist

to the high net individual to their own relatives. So they were trying because their main aim was profit maximization

and due to this only people who were easily already accessible to loans only they were getting loans and people who

were in need of loans like the farmers or for the education purpose all these people were deprived of loans that is

why this decision of nationalization was taken. So if you see first in 1955 State Bank

of India was nationalized. Next around 14 private sector banks were nationalized in the year 1969. Next six

private sector banks were nationalized in the year 1980. Remember the timeline is very important. 1955 banks were

nationalized in sorry State Bank of India was nationalized in 1955. 197 69 private sector banks around 14 banks

were nationalized and in 1980 six banks were nationalized. Now what was the positive and the negative side of this

uh nationalization? So every decision that has been taken it always has a positive and a negative side. Now let us

cover the positive side. The first one if you see this helped the growth of the economy.

Okay. It helped in the entire growth of the economy and mainly the pri loan was prior given to the priority sector

that is to agriculture, small scale industries. The exports small not major scale on

small scale people do exports right for those people and not the loans were provided under the priority sector and

also if you see this promoted growth in all the sectors. So previously when it was privately owned only few sectors

were seen growing because loan were permitted only in few sectors. Loan were given to only few sectors. Now after the

nationalization all sectors were seen all sectors witnessed growth. So that was these were the positives of the

nationalization. Similarly, what are the negative side of the nationalization? First is the lack of

autonomy. What is this lack of autonomy? So, if you see these were since the banks after

nationalization, they were primarily owned and controlled by the government. So, major decision making process was

not done by the bankers but it involved the government people a lot. A lot of interference happened from the

government side. That is why lack of autonomy was observed as a negative thing. And also if you see lack of

competition only when when they were privately owned they had

to compete with each other. But now if you see the major shareholders were the bank were the government itself that is

why a lack of competition was observed. Next is increase in NPA. NPA we know that they are non-performing assert. So

these are the assets whose principle and interest were not repaid for like 90 days. When you do not pay the interest

or principal for straight 90 days then that loan becomes an NPA and after this nationalization the NPA in the bank

started piling up. The government owned banks if you see they were often directed to certain sectors and that

sectors failed to repay and that led to the increase in NPA which increased the burden on the government because they

were the major shareholder of the banks. Next is drain government's resources started to drain.

So how this you know that huge capital is required for any business even for banking business huge capital is

required. So who puts this capital? The owners. In this case, if you see the major shareholder is the government. So

when banks need capital, the government has to provide the capital from their side. So this led to the drain on the

government's resources because it had they had to invest significant [laughter] amount of public funds in the

bank and this if you see which could have been used for other development projects that fund has been used in

this. That is why a drain a huge drain of government resources was observed and these all comes under the negative side

of the national uh nationalization of the banks. Next is after 1991. So 1991 we know that

the economic reforms happened. So uh India we know that the forest the foreign reserves almost drained. So we

did not even have enough money to import for the next two weeks, two or three weeks. That time we had to go and borrow

money from the IMF, international monetary fund. So when we had to borrow money from the international monetary

fund, there were certain conditions stated by the IMF that had to be fulfilled in order to provide money to

the country. So these were mainly if you see LPG reforms were in. LPG is liberalization, privatization,

globalization. So these LPG reforms were introduced in India. So LPG we know that L stands for liberalization, P

privatization and G globalization. Globalization is when the Indian economy was open to the world. So the uh the

heavy restrictions on the import and export was reduced and privatization if you see this especially increased

competition among the banks. Many private sector banks were welcomed. So many private sector banks started to

open the base in India and also the maximum investment if you see there was a limit foreign direct investment in the

banks. So that cap was increased to 74%. FTI foreign direct investment it was increased to 74% so that foreign

investors can come and invest the money in our banking system and also private sector players then come and open the

banks in the open their banks in the India so this increased competition this increased efficiency of both private

sector banks and public sector banks as they were competing with each other so this increased the overall health of the

banking system LPG reforms increase the overall health of the

banking system. This was the impact on the uh banking system in India. Foreign direct investment in short FDI if you

see it is permitted both in public sector banks and in private sector banks but the limit varies in public sector

banks if you see the limit is 20%. up to 20% of FDI investment is allowed in public sector banks. Whereas in private

sector banks 74% is allowed and under 74% also there is two categories. Okay. One under the automatic route and

another under the government route. So under the automatic route of the foreign direct investment up to 49% is allowed

and above 49% up to 74% it is allowed under under the government route. Okay. See the difference between the automatic

route and the government route is that under the automatic route you do not require prior approval from the Reserve

Bank of India or from the government of India. Okay, prior approval is not required. Whereas under the government

route, a prior approval is required from the Reserve Bank of India. Okay, that is the only difference between the

automatic route and the government route. And you should remember the limit is 20% in case of public sector banks

and in case of private sector banks is maximum of 74% of FDI is allowed.