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'Stability and predictability are being replaced by uncertainty, complexity and rapid change'

The experience gained so far through the evolution and progress of banking the world over can provide an insight and be of tremendous help to the Indian banks in coping with the challenges likely to emerge over a longer time horizon.

The history of banking is as old as the history of money. As new and more sophisticated instruments of currency evolved, so did banking. It evolved as business expanded and barter system gave way to money which needed safe deposit. In its simple from, it originated from temples and royal palaces around 1000 BC in Babylon, as the strongest faith of people was in the places of worship and royal houses as safe places for keeping money and valuables. The practice of depositing personal valuables at these places which were also functioning as treasuries against a receipt, was perhaps the earliest from of ''banking''.

When coins made of precious metals like gold and silver emerged as commonly accepted forms of wealth, lending activity at an interest began. Goldsmiths were probably the initial bankers and their receipts for money received -- ''guaranteed payments'' or ''goldsmith's receipts'' -- were the earliest forms of ''bank instruments''.

With the expansion of trade and commerce, the concept of banking gained importance. The handling of banking gradually transcended from individuals to groups to companies. With the Industrial Revolution of the 18th and 19th centuries, it attained a more significant place in the area of lending.

Banks in their first primitive beginnings and later in more developed forms did not enjoy a steady and harmonious development. Banking emerged and evolved through various phases adapting itself continuously to meet the increasing needs of trade and commerce.

A money economy existed in India since the days of Buddha. Usury was widespread and money lending did not incur the reprobation of Hindu moralists as it did in medieval Christianity and Islam. Even in the Rig Veda, we read about indebtedness and the earliest dharma shastras lay down rates of interest and regulations governing debts and mortgages.

Trade guilds acted as bankers both for receiving deposits and issuing loans. The larger temples served as bankers and in South India, the village communes occasionally advanced loans to peasants. The emergence of Vaishyas as indigenous bankers and hundi as the earliest form of Indian bill of exchange were two important landmarks in the history of Indian banking.

Indigenous bankers played a very important role in lending money for trade and commerce. Every town, big or small, had a Sheth, a Shah, a Shroff or a Chettiar, who performed a number of banking functions.

Modern banking in India started at the end of the 18th century with the establishment of Bank of Calcutta in 1806. The new banks established around this time were managed by bankers mostly from Scotland. Their practices and policies got ingrained into the Indian banking system. Basic accounting practices and systems taught by Scottish bankers were in vogue in India.

The Scottish bankers taught Indian banking two things. The first was the ''cash credit system'', which was peculiar to the Scottish and not to the English system. It is still prevalent in Indian banking. The second was the rule that the banker must say ''no'' whenever there comes a request for a loan. In the last 30 years or so, Indian banks sometimes have gone to the other extreme of this rule. Instead of saying ''no'', they said ''yes'' even before a request was made.

The Swadeshi movement gave a fillip to Indian joint stock banking and several of the present leading banks were established around this time. By 1913 there were 41 Indian banks in the field.

This article is excerpted from a lecture Bank of Baroda Chairman and Managing Director K Kannan delivered in Bombay last fortnight.