“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’’
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.
1948- worst years for the relatively larger banks-45 institutions were
closed down
• There were 430 commercial banks at that time, but they failed to help the
objective
• 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.
•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.
•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
nationalised.
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
services
• 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
• To issue and exchange or destroy currency and coins not fir for
circulation.
• To perform merchant banking functions for the central and the state
government.
• 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.