Small beginnings, big advances

Leading up to independence and till 1969, banks were primarily controlled by business houses or communities. For instance, Punjab National Bank was set up Lala Lajpat Rai, Central Bank of India by the Parsis. Functioning largely within their narrow identity-based boundaries, they became self-serving vehicles of finance and failed to acquire any kind of mass appeal or spur economic development. Worse, indiscriminate lending and the absence of regulatory supervision resulted in many small banks going bust, prompting the Government to take control.

In 1969, 14 big banks were nationalised, six more in 1980. Armed with greater regulatory powers, the Reserve Bank of India (RBI) merged or liquidated about 200 banks between 1960 and 1982. Under the aegis of the state, cooperative banks and regional rural banks became a movement.

Social objectives shaped policy and severe regulatory controls were applied on every aspect of banking. The concept of ‘branching’ took shape in this period, but it was directed — for every branch they opened in urban areas, banks had to open four in rural and semi-urban areas. Similarly, loans were dictated by directives on who to lend to, how much and at what rate.

The financial crisis India found itself in 1991 acted as a catalyst for economic change, an integral part of which was deregulating the banking sector. On the one hand, licences were given to private players. On the other, the painstaking task of strengthening existing banks was undertaken in four steps. First, deposit and lending rates were freed in phases, which let banks set rates based on commercial...