the facts as tey are

1.)Tollygunj, a locality in Kolkata is where all the big-wigs of the Bangla
film industry stay and work
2.) Naturally Tollygunj became a short hand for Bangla films.
3.) A clever Bangla journalist noticed the similiarity between Tollygunj
and Hollywood and coined the new term Tollywood to refer to Bangla films
4.) This became widely popular in the press of WB
5.) Naturally, the most pressing and burning question among the Bhadralok of
Bongland became - "We have a good name for our industry, another name for
the American industry but what do we call the *Hindi* film industry?
6.) The natural answer, of course was Bollywood.
7.) This was eventually picked up the film press/English press BUT without
most of them being aware of how the term came into existence in the 1st
place.

Furthermore, it is NOT a derogatory or insulting term as many
including my man Amitabh choose to believe. It is, instead a term
of pride. When the Bongs came up with Tollywood and latter Bollywood,
implicit in the terms was the implication that the movies from these
industries were very much comparable with the very best (Hollywood)
that the world had to offer.

As far as I know and read in a few old (80s/ 90s) film magazines, the first time term Bollywood was used was in the late 70s or early 80s by a Film Journalist for New York based News Paper "India Abroad"