NATIONALISATION OF BANKS

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Nationalisation of banks in india

1.     1. Presentation “ History and Nationalisation of Banks in India ”

2.     2. Introduction “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

3.     3. Introduction Bank Failures and Liquidation/Consolidation of Smaller Banks: Ø The partition of the country hurt the banking sector as well. Ø 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. Øsuggesting that normally it was small banks that failed.

4.     4. Introduction Bank Failures and Liquidation/Consolidation of Smaller Banks: Ø 1948- worst years for the relatively larger banks-45 institutions were closed down Ø Bank deposits mobilised by commercial banks were largely lent out to security based borrowers in trade and industry. Introduction Bank Failures and Liquidation/Consolidation of Smaller Banks:

5.     5. Introduction • 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 objective • 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.

6.     6. 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.

7.     7. •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...

8.     8. 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 nationalised.

9.     9. 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)

10.                        10. 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.

11.                        11. 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.

12.                        12. 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.

13.                        13. 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.

14.                        14. 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.

15.                        15. The 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 country

16.                        16. FUNCTIONS OF THE RBI: • To formulate , implement and monitor the monetary policy. • 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. • To maintain banking accounts of all the scheduled banks. • To facilitate external trade and payment. • Maintenance of foreign exchange market in India.

17.                        17. GOVERNANCE OF BANKS BY RBI • 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. • OSMOS : refers to OFF-SITE SURVEILLANCE and MONITORING SYSTEM.

18.                        18. The current state of online banking authentication • 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.

19.                        19. Alternate models of authentication Introduce a third factor of identity verification: • OTP • Finger print • Retinal image • Voice recognition

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