The bank commenced banking business on 4 July 1939 and was considered the first of its nature and composition as a state-owned bank in the country. The bank was established as a semi-state bank with participation in capital by state and the public under the control of state government. The bank had to face serious problems at the time of independence when out of its total of ten branches two branches of Muzaffarabad, Rawalakot and Mirpur fell to the other side of the line of control (now Pakistan administered Kashmir) along with cash and other assets.