India's Banking Journey: From Colonial Rule to Digital Transformation

India's banking and finance journey has transformed from a quasi-central banking setup to a digitized and inclusive system. Key milestones include the establishment of the RBI in 1935, nationalization of banks in 1969 and 1980, and liberalization reforms in 1991. These reforms led to the emergence of private banks that adopted technology, customer service, and competitive practices, compelling public sector banks to modernize. The government also introduced ATMs, credit cards, and internet banking, further transforming the sector.

India's banking and finance sector has undergone a remarkable transformation, evolving from a quasi-central banking setup under colonial rule to a highly digitized and inclusive system. This evolution, guided by the Reserve Bank of India (RBI) and the Ministry of Finance, has been shaped by landmark institutional changes, decisive policy shifts, and rapid technological adoption.

The foundations of the modern Indian banking system were laid in the early 19th century with the establishment of Presidency Banks: the Bank of Calcutta in 1806, the Bank of Bombay in 1840, and the Bank of Madras in 1843. These institutions merged in 1921 to form the Imperial Bank of India, which functioned as a quasi-central bank until the RBI's establishment in 1935. Post-independence, the need for a strong, state-backed institution to extend credit to rural India led to the transformation of the Imperial Bank into the State Bank of India (SBI) in 1955 [1].

The nationalization of banks in 1969 and 1980 marked significant turning points. Prime Minister Indira Gandhi brought 14 major private commercial banks under government ownership, aiming to align banking with national development goals. This move channelled credit towards agriculture, small industries, and rural infrastructure. A second wave of nationalisation in 1980 added six more banks to the public sector, consolidating state control over the financial system [1].

The reforms of 1991 fundamentally reshaped the sector. Triggered by a balance of payments crisis, the government implemented sweeping liberalisation measures based on the Narasimham Committee's recommendations. Interest rates were freed from state control, statutory liquidity and reserve requirements were eased, and prudential norms were brought in line with global standards. This ushered in a new generation of private banks that embraced technology, customer service, and competitive practices, compelling public sector banks to modernise in response [1].

As the century turned, technology began to redefine how Indians interacted with money. The first ATM appeared in 1987, credit card usage expanded with the arrival of global players like Visa and Mastercard, and internet banking gave customers the ability to manage accounts remotely. The government's push for financial inclusion through the Pradhan Mantri Jan Dhan Yojana in 2014 brought millions of unbanked households into the formal system, creating a foundation for the next wave of digital transformation [1].

The Unified Payments Interface (UPI) launched in 2016 revolutionised digital payments. By enabling instant, real-time transfers between individuals and merchants using simple IDs or QR codes, UPI made India a world leader in real-time transaction volumes. Digital wallets, mobile banking, and QR payments became everyday tools, changing both consumer behaviour and the way businesses operate [1].

The financial ecosystem expanded beyond traditional banks. Non-Banking Financial Companies (NBFCs) like Bajaj Finserv and Muthoot Finance began serving small businesses and under-banked populations, while fintech firms like Paytm and PhonePe reimagined payments, lending, insurance, and wealth management. The Account Aggregator framework enabled secure, consent-based sharing of financial data, paving the way for personalised services, while credit bureaus like CIBIL standardised credit assessments and promoted responsible lending [1].

As of now, the sector stands on the brink of its next transformation: the RBI's Central Bank Digital Currency (CBDC), known as the digital rupee or e₹. Designed as a sovereign-backed legal tender in digital form, it offers the convenience of instant settlement and zero transaction costs, functioning like physical cash but stored in a secure digital wallet. Pilot programmes are already testing its use in both wholesale and retail contexts, signalling the start of a new era in India’s financial story [1].

References:
[1] https://m.economictimes.com/industry/banking/finance/independence-day-august-15-money-machines-india-banking-finance-transformative-story-upi-digital-rupee/articleshow/123253945.cms