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“ History and Nationalisation of

Banks in India ”

“The difficulty of the task of the Reserve Bank of India in dealing with the
banking system in the country does not lie in the multiplicity of banking units
alone. It is aggravated by its diversity and range. There can be no standard
treatment in practice although in theory the same law governs all’’

-A Retrospect”, Speech by Shri C.D Deshmukh


Bank Failures and Liquidation/Consolidation of Smaller Banks:

 The partition of the country hurt the banking sector as well.

 The average capital of the failed banks between 1947 and 1955 was
significantly lower than the average size of paid-up capital of reporting
banks in the industry.

suggesting that normally it was small banks that failed.


Bank Failures and Liquidation/Consolidation of Smaller Banks:

 1948- worst years for the relatively larger banks-45 institutions were
closed down

 Bank deposits mobilised by commercial banks were largely lent out to

security based borrowers in trade and industry.

• India after independence started economic planning with social objective

• 1st 5 year plan was made in 1951

• There were 430 commercial banks at that time, but they failed to help the

• Banks were controlled by Business houses, failed to cater need of cottage

industry , poor people etc.

• the Reserve Bank was also not completely State owned until it was
nationalised in terms of the Reserve Bank of India (transfer to Public
Ownership) Act, 1948.
Objectives Behind Nationalisation
of Banks in India

• Social Welfare : It was the need of the hour to direct the funds for the
needy and required sectors of the Indian economy. Sector such as
agriculture, small and village industries were in need of funds for their
expansion and further economic development.

• Controlling Private Monopolies : Prior to nationalisation many banks

were controlled by private business houses and corporate families. It was
necessary to check these monopolies in order to ensure a smooth supply of
credit to socially desirable sections.

• Expansion of Banking : In a large country like India the numbers of banks

existing those days were certainly inadequate. It was necessary to spread
banking across the country. It could be done through expanding banking
network (by opening new bank branches) in the un-banked areas.
Objectives Behind Nationalisation
of Banks in India...
•Reducing Regional Imbalance : In a country like India where we have a
urban-rural divide; it was necessary for banks to go in the rural areas where
the banking facilities were not available. In order to reduce this regional
imbalance nationalisation was justified:

•Priority Sector Lending : In India, the agriculture sector and its allied
activities were the largest contributor to the national income. Thus these
were labelled as the priority sectors. But unfortunately they were deprived
of their due share in the credit. Nationalisation was urgently needed for
catering funds to them.

•Developing Banking Habits : In India more than 70% population used to

stay in rural areas. It was necessary to develop the banking habit among such
a large population.
Objectives Behind Nationalisation
of Banks in India...

•Monetisation issue: Commercial banks accumulate deposits from the

public. Therefore, they are in a position to bring changes in the supply of
money. Such an important power should not be in the private sector. It is the
public sector that should have the control over money supply.

•Integration issue: Central Banks are established by the Govt, for overall
monetary control in the economy and is not aiming at profit. But commercial
banks were started mainly to earn profit. Thus, there are contradicting
objectives between Central Bank and commercial banks.
In this situation, the Central Bank may find it difficult to implement its
policies when the commercial banks oppose them. Therefore, in the interest
of coordination and cooperation between them, commercial banks were
Implementation Of Nationalisation
• The Government nationalized 14 banks with deposits of over Rs.50 crore
by promulgating the Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance, 1969.
• These banks were the Central Bank of India, Bank of Maharashtra, Dena
Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas
Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United
Bank of India, UCO Bank and Bank of India.
• Making banking facilities available in the then unbanked areas. This was
done in following steps:-
i. by designing a specific branch license policy
ii. by initiating specific schemes like the Lead Bank Scheme (LBS)
Implementation Of Nationalisation
• Lead Bank- responsible for taking lead role in surveying the credit needs
of the population, development of banking and of credit facilities in the
district allotted to it.
• Allotment Of Districts- all the districts of the country allotted to 22 public
sector banks (SBI and its 7 associates banks and 14 nationalized banks)
and three private sector banks (Andhra Bank Ltd., Bank of Rajasthan Ltd.
and Punjab and Sind Bank Ltd).
• Branch Licensing Policy- In 1977, banks were given the incentive of a
license to open one branch in metropolitan and one in urban areas, as an
incentive for opening four branches in rural areas.
• Credit-Deposit Ratio- each rural and semi-urban bank should maintain a
credit-deposit ratio of at least 60 per cent.
Implementation Of Nationalisation
• Credit Planning- A broad credit plan tuned to the overall plan and
monetary requirements was drawn up, taking into account the national
priorities, the anticipated pace of deposits accretion, general economic
situation and likely developments in the different economic sectors.
• Estimates For Key Sectors- Separate estimates made for the busy and
slack seasons, particularly in respect of sectors susceptible to seasonal
changes. Consequently, individual credit plan of each bank was framed.
• Deposit Mobilization- after the nationalization, confidence in the banking
sector increased, reflected by the sharp increase in the share of bank
deposits in household savings and financial savings of households in their
total saving.
Merits Of Nationalisation Of Banks
• Removal of barriers- There were no longer any barriers, social, economic
or political between the bankers and customers. This enabled in a massive
quantitative expansion in customer base and also helped improve the
• Enabled the bank to widen its growth- There was no more concern for
profitability and there was expansion in the rural areas. With this the
economy also expanded and employment opportunities were created.
• Expansion of branch network- During the last 28 years of nationalization,
the branches of the public sector banks rose 800 per cent from 7,219 to
57,000, with deposits and advances taking a huge jump by 11,000 per cent
and 9,000 per cent.
• Reorientation of bank lending- accelerated the process of development,
especially of the priority sectors of the economy, which had not previously
received sufficient attention from the commercial banks.
Demerits Of Nationalisation Of Banks
• Inadequate banking facilities : Even though banks have spread across the
country; still many parts of the country are unbanked. Especially in the
backward states such as the Uttar Pradesh, Madhya Pradesh, Chhattisgarh
and north-eastern states of India.
• Lowered efficiency and profits : After nationalization banks went in the
government sector. Many times political forces pressurized them. Banking
was not done on a professional and ethical grounds. It resulted into lower
efficiency and poor profitability of banks.
• Political and Administrative Inference : Many public sector banks badly
suffered due to the political interference. It was seen in arranging loan
meals. It ultimately resulted in huge non-performing assets of these banks
and inefficiency.
Demerits Of Nationalisation Of Banks

• Increased expenditure : Due to huge expansion in a branch network, large

staff administrative expenditure, trade union struggle, etc. banks
expenditure increased to a dangerous levels.
• Limited resources mobilized and allocated : The resources mobilized after
the nationalization is not sufficient if we consider the needs of the Indian
economy. Some times the deposits mobilized are enough but the resource
allocation is not as per the expansions.
Central Bank Of India :

The Reserve Bank of India was established on April 1, 1935 under

the Reserve Bank of India Act, 1934

The preamble prescribes the objectives as :

1) to secure monetary stability within the country
2) to operate the currency an credit system to the advantage of the

• To formulate , implement and monitor the monetary policy.

• To issue and exchange or destroy currency and coins not fir for

• To perform merchant banking functions for the central and the state

• To maintain banking accounts of all the scheduled banks.

• To facilitate external trade and payment.

• Maintenance of foreign exchange market in India.


• Corporate governance.

• Interest Rate.

• Prudential Norms : refers to the ideal norms issued by the RBI that
are followed by the banks to strengthen
their Balance Sheets.

• CRR and SLR : Cash Reserve Ratio and

Statutory Liquidity Ratio.

• Annual Online : RBI undertakes this to

Inspection assess their financial health.


The current state of online banking
• User Id and password:This is the most popular
and common method, which involves asking
users to enter their User Id and password.
• Two-factor authentication: This method verifies users’ identity
based on something that they know (user name and
password) and something else that they have.
Alternate models of authentication

Introduce a third factor of identity verification:

• Finger print
• Retinal image
• Voice recognition