Nationalization of Banks - Full Details (IBPS PO & SBI PO Exam Oriented)
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Nationalization of Banks
The Government of India nationalized 14 major banks in the country in July 1969 and another 6 banks in 1980. The nationalization of banks was described as �historic�, �momentous,� �bold� and �timely� by certain sections of the people. The State Bank of India and its seven subsidiaries had already been nationalized. The regional rural banks from their very inception are in the public sector. Thus about 90% of the country�s commercial banking system is now in the public sector.
4.1. Achievements of Nationalised Banks
A banking revolution occurred in the country during the post-nationalization era. There has been a great change in the thinking and outlook of commercial banks after nationalization. There has been a fundamental change in the lending policies of the nationalized banks. Indian banking has become development-oriented. It has changed from class banking to mass-banking or social banking. This system has improved and progressed appreciably.
Various achievements of banks in the post-nationalization period are explained below.
1. Development-oriented Banking: Historically, Indian banks were mainly concerned with the growth of commerce and some of the traditional industries such as, cotton textile and jute. The banks were concentrated in the big commercial centers. They mostly granted short-term commercial loans. They were unwilling to venture into new fields of financing. But after nationalization of banks, the concept of banking has widened from acceptance of deposits and mere lending to development oriented banking. Banks are increasingly catering to the needs of industrial and agricultural sectors. From short- term lending, banks have been gradually shifting to medium and even long-term lending. From well-established large industries and business houses, banks are positively shifting to assisting small and weak industrial units, small farmers, artisans and other neglected groups of people in the country. They have adopted the Lead Bank Scheme. Under this scheme, all the districts of the country are allotted to some bank or the other. The lead bank of district is actively engaged in:
(a) Opening bank branches in all important localities.
(b) Providing maximum credit facilities for development in the district, and
(c) Mobilizing the savings of the people in the district.
2. Branch Expansion: Rapid economic development pre-supposes rapid expansion of commercial banks. Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion gained momentum after nationalization of top commercial banks and the introduction of �Lead Bank Scheme.� The Lead Bank Scheme has played an important role in the bank expansion Program. The number of branches of all scheduled commercial banks increased from 8,260 in 1969 to 64,240 in 1998. Thus within 38 years after bank nationalization, there was over 800 per cent increase in the number of branches. There had been a significant increase in bank branches in the rural, under banked and unbanked areas. The number of branches in rural areas increased from 1860 in 1969 to 32,880 in 1998. With the progress of branch expansion Program, the national average of population per bank office has declined from 63,800 to 15,000. M. Gopalkrishnan says �the single striking feature of the post-nationalization banking scene is the rapidity with which the branch network has multiplied itself. The rate of branch expansion has been unparalleled any where else in the world.� Thus, the overall growth of bank branches in the last 30 years has been remarkable in its geographical coverage and removal of
regional imbalances in the country.
3. Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial growth in the deposits of commercial banks. Thus bank deposits had increased by 150 times. Development of banking habit among people through publicity, extensive branch banking and prompt service to the customers led to increase in bank deposits. To attract deposits, Indian banks have introduced many attractive saving schemes. To attract deposits from widely scattered areas, mobile bank�s branches have been introduced by a number of banks.
A number of banks have started evening branches, Sunday branches for the benefit of their customers. Apart from the quantitative increases in deposits, there has been an impressive qualitative shift. The number of small account holders with the banks has been increasing day-by-day. Aggregate deposits are composed to time deposits and demand deposits. Earlier there was predominance of demand deposits. Now there is predominance of time deposits. The ratio of time deposits to total deposits has been increasing.
4. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before. Credit is the pillar of development. Bank credit has its crucial importance in the context of development and growth with social justice.
5. Investment in Government Securities: The nationalized banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years.
6. Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The bank lending to priority sector was, however, not uniform in all states.
It was quite low in many backward states like U.P., Bihar and Rajasthan. Under the new banking policy stress is laid on the weaker and under-privileged groups in the priority sector �weaker sections� refer to all persons who became suppressed, depressed and oppressed because of socio-political, socio-economic or socio-religious reasons. The concept of profitability has been substituted by �social purposes� with
regard to lending to weaker sections of the society. Quantitatively, banks have done well in priority lending. But overdues and bad debts have been a serious problem faced by banks in respect of advances made to the weaker sections of the society. There is always the problem of ensuring the effective end use of the loans given to the priority sectors.
7. Social Banking -Poverty Alleviation Program: Commercial banks, especially the nationalized banks have been participating in the poverty alleviation Program launched by the government.
(a) Differential Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate the government introduced the �Differential interest rates scheme� from April 1972. Under this scheme, the public sector banks have been providing loans at 4% rate of interest to the weaker sections of the society.
(b) Integrated Rural Development Program (IRDP): This is a pioneering and ambitious Program to rectify imbalances in rural economy and also for all- round progress and prosperity of the rural masses. Under this Program banks has assisted nearly 1.8 million beneficiaries during 1997-98 and disbursed a total amount of Rs. 1990 crores as loan. Out of the beneficiaries, over 1 million belonged to scheduled castes and scheduled tribes and 0.7 million were women. Other important scheme introduced by the government of India and implemented through the banking system includes
(a) self-employment scheme for educated youth,
(b) self-employment Program for urban poor, and
(c) credit to minority communities.
8. Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance. Thus banking system in India has turned from class-banking to mass-banking.
9. Innovative Banking: In recent years, commercial banks in India have been adopting the strategy of �innovative banking in their business operations.� Innovative banking implies the application of new techniques, new methods and novel schemes in the areas of deposit mobilization, deployment or credit and bank management. Mechanization and computerization processes are being introduced in the day-to-
day working of the banks.
10. Diversification in Banking: The changes which have been taking place in India since 1969 have necessitated banking companies to give up their conservative and traditional system of banking and take to new and progressive functions. The government had been encouraging commercial banks to diversify their functions. As a result, commercial banks have set up merchant banking divisions and are underwriting new issues, especially preference shares and debentures. There are now eight commercial banks which have set up mutual funds also. Commercial banks have started lending directly or indirectly
for housing. Venture capital fund is also started by one public sector bank. State Bank of India and Canara Bank have set-up subsidiaries exclusively for undertaking �factoring services.� In future all commercial banks can be expected to diversify their functions and adopt new technologies.
11. Globalization: The liberalization of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Indian banking system.
