Nationalization of Banks

Currently, the Indian banking system is divided into commercial banks, cooperative banks, regional banks, etc. In commercial banks, there are two types of banks, public banks, and private banks. The important event in the history of Indian banks is the nationalization of banks. This made the way for India to become the leading economy of the world. In this article, we will give you a brief on the nationalization of banks in India. 

Any Bank where the Government of a country has a stake of 51% or higher is called a Nationalized Bank. This means that the Government calls many of the shots and policies for the bank and also has a big role or say in appointments of directors, and even in decisions on loans.

In India several banks have between 80 - 95% shareholding by the Government of India and all are Nationalized Banks.

The reason they are all called Nationalized Banks is that the Government forcibly bought their majority shareholdings in the year 1969 and Nationalized them from their private status. 

The first bank in India to be nationalized was the Reserve Bank of India which happened in January 1949. Further, 14 other banks were nationalized in July 1969.

Bank of India, PNB, and many others were part of this nationalization. While the next phase of nationalization saw 6 other commercial banks were nationalized in 1980. These included Vijaya bank, a new bank of India, Corporation Bank, and others.

The need for the nationalization of banks arose due to many reasons. These were catering to the needs of big business houses and large industries.

Further, sectors such as exports, agriculture, and small-scale industries were lagging behind. The moneylenders used to export the poor masses in India. These all were taken into consideration during the nationalization of banks.

Also, for a rural section of India, the regional rural banks (RRBs) were formed. The objective was to serve large masses of the unreserved rural population.

Further, the specific requirements of sectors like foreign trade, housing, and agriculture were met. This was met by establishing NABARD, NHB, SIDBI, and EXIM.

Objectives:-

1. To reduce monopoly practices: Initially, a few leading industrial and "business houses had close association with commercial banks. They exploited the bank resources in such a way that the new business units cannot enter any line of business in competition with these business houses. The nationalization of banks, thus, prevents the spread of the monopoly enterprise.

2. Social control was not adequate: The 'social control' measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, nationalization was necessitated by the failure of social control.

3. To reduce misuse of savings of general public: Banks collect savings from the gen­eral public. If it is in the hand of the private sector, the national interests may be neglected, besides, in Five-Year Plans, the government gives priority to some specified sectors like agriculture, small industries, etc. Thus, the nationalization of banks ensures the availability of resources to the plan-priority sectors.

4. Greater mobilization of deposits: The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion, there is possi­bility to mobilize rural savings

5. Advance loan to agriculture sector: If banks fail to assist agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population de­pends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalized.

6. Balanced Regional development: In a country, certain areas remained backward for lack of financial resources and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalization helps to pro­vide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.

7. Greater control by the Reserve Bank: In a developing country like India there is a need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about coordinated credit control. This necessitated the nationalization of banks.

8. Greater Stability of banking structure: Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalized banks will impart greater stability to the banking structure.

Impacts

Due to the nationalization of banks, the efficiency of the banking system in India improved. This also boosted the confidence of the public in banks.

The sectors that were lagging behind like small-scale industries and agriculture got a boost. This led to an increase in funds and thus an increase in the economic growth of India.

The nationalization of banks also increased the penetration of banks. This was mainly seen in the rural areas of India.

Conclusion

 

The banking system has proven to be of significant asset to India's economic growth and development. in recent times, there is an increased call for privatization of banks to solve the current problems faced by the banking sector. The privatization of banks is not a panacea. Systematic comprehensive governmental reforms must be initiated to resolve the NPA crisis and creation of free-market to revive the investments into the economy. This, if done correctly, would ensure the economic prosperity of the country.