Nationalization of Banks

At present, our banking sector is arranged in such a manner that we have three broad categories of banks. They are Commercial Banks, Regional Banks and Co-operative Banks. The commercial banks are further sub-categorized into public sector banks and private sector banks. Before this categorization came into existence, India witnessed the largest ever reform of nationalization of banks and it marked the most important event in the history of banking sector of India. The nationalization of banks made way for India to become an emerging global economic super-power in the world. 

It has been 50 years since the nationalization of banks was introduced to the banking sector of India. It all started under the leadership of the then Prime Minister, Mrs. Indira Gandhi. The reform was brought about with the nationalization of 14 major lenders that accounted for 85% of the total bank deposits in the country. Later, six more banks were nationalized in the year 1980. The main objective behind the process of nationalization was to synergize the priority sectors during that time, when large businesses majorly dominated the credit profiles of the banks.

There are three primary phases which account for the banking arrangement in India. Firstly, the pre-independence phase prior to 1947, secondly the phase from 1947-1991 and thirdly, the phase from 1991 and beyond.

The first phase witnessed the establishment of the banking system in India and it began with the foundation of Bank of Hindustan in 1770, which operated until 1832. The main events during this time were the merger of banks, wherein, Bank of Madras, Bank of Bombay, and Bank of Bengal merged and formed an imperial bank of India which was later named as the reserve bank of India. 

The second phase is primarily known as the nationalization of banks in India and it was considered as the foundation of India’s economic planning. 

The third phase was prominently marked by the development of banks. This was due to the liberalization of economic policies that were brought into force and it was during this time that many large and private banks came into the picture.

Objectives of Nationalization of Banks in India- Steps Taken by Indira Gandhi

In the year 1969, the Indian government decided to take the major decision to nationalize 14 major commercial banks with a minimum of 50 crore of deposits. In 1980, the second phase of nationalization was brought into force and 6 more banks were nationalized. After the second phase, the Government of India got control of over 91% of the banking business in India and started control over credit delivery.

The banks that were nationalised included Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank and United Bank of India. 

In 1980, six more banks that were nationalised included Punjab and Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank, Andhra Bank and New Bank of India.

Some of the main objectives of nationalization of banks in India were: 

1. Social Welfare: Indian economy is an agriculture-based economy and most of the small and medium village industries needed support funds for their growth and expansion. This focus was shifted only after the nationalization of banks and when the Government got control over the credit disbursement.
2. Controlling Private Monopolies: Prior to nationalization, the majority of the banks were owned and controlled by the private sector and corporate families. It was thus, very necessary for the government to keep a check on this arrangement of growing monopolies so that credit is diverted to where it is genuinely required.
3. Expansion of Banking: It was necessary to expand the banking business across the country. The nationalization of banks was in one way, a necessary step to expand the banking network to the non-banking areas.
4.  Reducing Regional Imbalance: It was absolutely necessary to introduce banks in rural areas where banking facilities were not available. This regional imbalance was needed to be abolished so that the rural areas could also take advantage of the banking services.
5. Developing Banking Habits: Maximum population of India resides in the rural areas which was unreachable by the banking services for a very long period of time. It was necessary to develop the banking habit among such a large population of country and nationalization was the only way to achieve this goal. 
6. Priority Sector Lending: Agriculture sector and its associated ancillary activities are still the largest contributor to the national income and have been so since decades. Therefore, they are called the priority sectors of the country. But unfortunately, the agriculture sector was deprived of their due share in the credit. Nationalization of banks was thus necessary to offer a smooth credit supply to this sector for its growth and development.

Reasons for Nationalization of Banks

• To synergise the priority sectors of the country, especially in those times when the majority of banking business was controlled and dominated by the large business houses and corporate families.
• There were 361 private banks that failed across the country between 1947 to 1955, and it accounted for an average of over 40 banks per year. This resulted in depositors losing a lot of their hard-earned money as they were not offered any guarantee by the respective banks.
• Commercial banks were only interested in favouring and catering to the needs of large industries and businesses, completely ignoring the agricultural sector. This imbalance and disparity were required to be abolished.
• In 1950, only 2.3% of the bank loans were channelized to farmers, and the figure declined to 2.2% by 1967.
• Nationalisation of banks aimed at mobilizing and channelize the savings of people for productive purposes and socially beneficial causes.
• Even though the banks lent credit, the disbursal to the rural areas and small- scale businesses were very less as compared to the industry. All this was taking place despite the Banking Regulation Act, 1949.
• The loans by commercial banks to industries doubled between 1951-1968 from 34 to 68 per cent, but the agriculture sector received less than 2 per cent. 
• The government started to realise that the banks failed to support the socio-economic objectives and hence, it should increase its control over them.

Benefits of Nationalization of Banks to The Nation

Following are the ten ways by which the nation benefitted from the nationalisation:

1. 1.Abolition of Monopoly

Before the nationalization of banks, corporate families controlled the banking systems in India. They ensured a strict monopoly over the capital. With banks nationalization, the economy became more equitable and bank credit delivery started to reach people, without any prior favours and connections.

1. 2. Bringing down Regional Imbalance

Bank nationalisation helped in more equitable and justified regional growth since prior to nationalization, the banking system was concentrated only to the urban areas.

1. 3. Improvement of working conditions

As per RBI records, there were 1833 banks operating in the rural areas, in the year 1969, which increased to 33,004 by 1995 and continued to grow over the next few decades. Government banking not only helped in smooth credit delivery but also significantly improved the working conditions of the employees. The state ensured higher wages, security of services and other fringe benefits to its employees.

1. 4. Protecting the Public Interest

Unhealthy competition amongst the industrialists hampered the public interest which was measured and mitigated only by state ownership of the banking system.

1. 5.Centralised Management

Centralised management was possible due to the coordination of nationalised banks. It brought about significant changes in providing uniform services throughout the country. It also proved as a great aid to enable state to solve the problem of organisation, capital, labour operation and marketing.

1. 6. Utilisation of Surplus Profit

Under state ownership, the profit earned through banking business could be utilised for greater public benefit. It also helps in supporting and monitoring the economic policies framed and implemented by the Government.

1. 7. Uniformity in Services Offered

Nationalisation of banks ensured uniformity in banking services across the country without any disparity between the rural and urban, between the small and large businesses. With this, the banking services reached every corner of the country with utmost uniformity. Banking services were made to reach the deepest roots of the rural areas, so that dependence on moneylenders could be reduced.

1. 8. Lending to Core Sectors

Private banks were not favouring the credit facilities to agriculturists or to the core sectors of steel and coal, which required huge investment. Nationalisation made funds available to these sectors.

1. 9.Increase in Standard of Living

Nationalization increased the number of banks in rural and semi-urban areas and led to a significant increase in deposit mobilisation. As the deposits with the banks increased, it further led to the expansion of disbursement of personal loans for consumption in the economy.

1. 10. Developing the Habit of Banking Facilities

RBI records show that per capita deposits increased from Rs. 88 in 1969 to Rs. 4242 by 1995 and have further increased with time.

Tentative questions to be asked in the competitive exams like Banks, SSC, Railways, and others

Q1) When was the event of nationalization of banks conducted for the first time:

a) 19th August, 1969

b) 19th October, 1969

c) 19th July, 1969

d) None of The Above

Q2) Reserve Bank of India was established on

a) May 2, 1943

b) April 1, 1935

c) November 13, 1941

d) None of the above

Q3) How many banks were nationalized on 19 July, 1969:

a) 13

b) 14

c) 15

d) None of The Above

Q4) Which of the following is not a direct impact of Nationalisation?

a) Improved efficiency in the Banking system since the public confidence got boosted

b) Sectors like Agriculture, small and medium industries started to receive funds for their growth

c) Flow of FDIs

d) Increased reach of Bank branches in the rural areas

Q5) Scheduled Banks are classified into what types:

a) Regional Rural Banks

b) Nationalized Banks

c) State Bank of India and its Associates

d) All of the Above

Q6) Which of the following is the first commercial bank?

a) State Bank of India

b) Oudh Commercial Bank

c) Indian Bank

d) Union Bank of India

Q7) Second Phase of Nationalization of five banks were conducted in which year:

a) 1980

b) 1985

c) 1975

d) None of The Above

Q8) Full form of GATT stands for:

a) General Agreement on Tariffs and Trade

b) General Agreement on Tradition and Trade

c) General Agreement on Tariffs, Tradition and Trade

d) None of The Above

Q9) How many banks were nationalized in 1980:

a) 5

b) 6

c) 7

d) None of The Above

Q10) Which among the following is true regarding Bank of Hindustan:

a) The bank was established in Kolkata under the leadership of European management.

b) It was liquidated between 1829 – 32.

c) Both of Above

d) None of The Above

Q11) ______bank was established in 1786:

a) Bank of Bengal

b) Reserve Bank of India

c) General Bank

d) None of The Above

Q12) Which is the Largest and Oldest Bank in existence:

a) Punjab National Bank

b) State Bank of India

c) Reserve Bank of India

d) None of The Above

Q13) Which among the following is true:

a) State Bank of India was first originated as Bank of Calcutta in June 1806.

b) “Bank of Calcutta” was renamed as “Bank of Bengal”

c) Both of Above

d) None of The Above

Q14) Which among the following banks formed the “Imperial Bank of India” in the year 1921:

a) Bank of Bombay

b) Bank of Bengal 

c) Bank of Madras

d) All of the Above

Q15) Reserve Bank of India was established under which act:

a) Reserve Bank of India Act 1921

b) Reserve Bank of India Act 1934

c) Reserve Bank of India Act 1930

d) None of The Above

Q16) SBI was established in which year:

a) 1 April, 1940

b) 1 April, 1935c) 1 April 1948

d) 1 July 1955

Q17) In which year, SBI was given control of 8 state associated banks?

a) 1960

b) 1965

c) 1979

d) None of The Above

Q18) Regional Rural Banks were established on

a) July 3, 1970

b) April 14, 1971

c) November 23, 1978

d) October 2, 1975

Q19) First Bank established in India was:

a) Bank of India

b) General Bank of India

c) Bank of Hindustan

d) None of The Above

Q20) In 1993, a Nationalized bank was merged with Punjab National Bank (PNB), what is the name of that Bank?

a) Bank of Baroda

b) Global Trust Bank

c) Bank of India

d) New Bank of India

Answers:

1. 1. (c )
   2. (b)
   3. (b)
   4. ( c )
   5. (d)
   6. (b)
   7. (a)
   8. (a)
   9. (b)
   10.  ( c )
   11. ( c )
   12. ( b )
   13. ( c )
   14. ( d )
   15. (b)
   16.  (d)
   17.  (a)
   18.  (d)
   19.  ( c )
   20. (d)

Also Read: Negotiable Instrument (NI)