Nationalisation

Introduction

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors

The Nationalization of Banks in 1969 has been one of the significant economic, political and social events of Post Independent India. Apart from the fact that it had the imprint of the personality of Mrs. Indira Gandhi, it has several significances which merit attention.

The first one was the intervention of the state in the functioning of the banking sector itself. The ownership of the State gave a new confidence to the savers and being backed by a sovereign the normal suspicions associated with the capabilities of the bankers in the private sector were gone.

Banking ceased to be selective. The entry barriers that existed for customers to bank, social economic and political were lowered. This resulted in a massive quantitative expansion of the bank customer base as well as in the nature of services provided. The reach of banking widened. Absence of concern for profitability and targeting made banks to expand rapidly in un-banked areas thereby the entire country was linked to banking activity.

The expansion of banks also expanded the economy. The entire infrastructure that required was built by themselves or by the citizens for their use. A large employment base was created. Young men and women mostly from middle and poorer sections of society but qualified with the requisites got into the banking system and we see the results today. Customers got acquainted with banking practices faster than it would otherwise have taken. The well intentioned policies channeled through the banks helped the borrower clientele with a generous disposition. The savings of the community had an efficient channel which otherwise would not have had the benefit of aiding transactions.

State intervention to some extent distorted the banking sector. The domination of the State has had a negative effect on the contribution of the banking sector as a whole to the economy. Absence of profitability, non-realization of its potential as a business and also the deterioration in service has all affected citizens. The intervention by the State and excessive domination and intervention by the bureaucracy and polity into the functioning of banks has led to deterioration on economic efficiency, which runs counter to the principles of a good Government.

Indian banking system

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

 Early phase from 1786 to 1969 of Indian Banks

 Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

 New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

During those day's public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

 1949: Enactment of Banking Regulation Act.

 1955: