Explain The Rationale For The Nationalization Of Banks

Rationale For Nationalization of Bank’s in India

Introduction •

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct.

• •

The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.

• •

The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

• •

Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions.

• •

•

After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980

Post-independence •

• • • • •

•

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969.

Reasons for Nationalization

1. 2. Commercial banks had facilitated the concentration of economic power in the hands of few and created monopoly in the country. 3. 4. The priority sector was neglected. Banks did not pay attention to credit needs to farmers, small scale industries 5. 6. Management lacked professional expertise. 7. 8. Resources of banks were misused for benefit of directors and their companies 9. 10.Bank credit was not made according to five year developmental plans.

• This was observed by the prime minister Indira Gandhi in 1969. She thought that these banks were not working for development of nation. So she thought of taking over banks into government undertaking.

Objectives of Bank

Nationalization

1. To allocate bank credit according to requirement of planned economic development. 2. 3. To spread and diversify banking services to underdeveloped and backward states. 4. 5. To make credit planning part of larger national plans. 6. 7. To foster new class of entrepreneurs. 8. 9. To provide bank credit to priority sectors. 10.

When Did it Happen ? • • • • • • • •

1955: Nationalization of State Bank of India. 1959: Nationalization of 7 SBI subsidiaries. February 1st 1969: Nationalization of 14 major banks with deposit of over 50 cores. 1980: Nationalization of seven banks with deposits over 200 crores.

Definition and Function of Banks • Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise.“ • Banks essentially perform the following functions : • Accepting Deposits from public/others (Deposits) • Lending money to public (Loans) • Transferring money from one place to another (Remittances) • Acting as trustees • Keeping valuables in safe custody • Government business •

Types of Banks •

1.Central Bank The Reserve Bank of India is the central Bank that is fully owned by the Government. It is governed by a central board (headed by a Governor) appointed by the Central Government. It issues guidelines for the functioning of all banks operating within the country. 2.Public Sector Banks

•

• • • • •

3.Private Sector Banks Old generation private banks New generation private banks Foreign banks operating in India Scheduled co-operative banks Non-scheduled banks

•

• • •

4 . Co-operative Sector The co-operative sector is very much useful for rural people. The co-operative banking sector is divided into the following categories. State co-operative Banks Central co-operative banks Primary Agriculture Credit Societies

Examples •

Public Sector Bank :- Central Bank of India, Corporation Bank, Bank of India, many more

• •

Private Sector Bank :- ICICI Bank, Axis Bank.

• •

Foreign Bank :- Citi Bank, ABN-AMRO Bank, Standard Charted Bank

•

Thank You