Commercial Banks- Origin and Growth
Economists used to distinguish between commercial banking, investment banking mixed banking systems. England was the home of the pure commercial banking. Pure commercial banking is one where commercial banks mobilise deposits is to lend for short periods only. Industries require short-term capital to purchase raw materials, intermediate products and so on. The pure theory of banking is based on one important assumption. That is, a commercial bank cannot freezw its funds which are mostly short-term deposits in permanent capital investment in business undertakings.
Indian banking came into existence in a small way during 19th century. Some industrialists established a few banks at that time. In the early years of 20th century the swadeshi movement gave a stimulus for the setting up of banks in India by Indian national. In the begining banks faced severe financial crisis. Particularly during and after the First World War, about 87 banks liquidated. During great depression in 1930s the bank failure in India was very severe. During 1937-48, as many as 620 banks failed. Thus the development of banking in India before independence was lopsided. It was characterised as a crop of bank failures.
The Second World War brought a revolutionary change in the Indian banking system. In the wake of huge war expenditure, deposits of the banks increased. Branches were opened in Public sector and self-employment were to receive their due share in obtaining bank finance.
Apart from this the banks are required to reconstitute their board of directors. The government set up National credit council in 1968. The Finance Minister was the chairman and the Governor of the Reserve Bank was the vice chairman of the council.
The main functions of the National credit council were:
assessing the volume of credit required for the economy as a whole.
providing guidelines for the distribution of credit to the priority sector.
ensuring equitable distribution of credit in the economy.
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