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Nationalisation of Banks in India

Nationalization of Banks in India

More radical measures regarding increasing role of government in the banking sector were taken in July, 1969 with the nationalization of the 14 major banks (with deposits exceeding Rs. 50 crores each).

The rational given for nationalisation was that the banks, primarily controlled by a few industrialists and business magnates, had failed to play significant role in the planned development of the nation.

The main objectives to be achieved through nationalisation, according to Prime Minister Mrs. Indira Gandhi were as follows:

  • Removal of control by a few
  • Provision of adequate credit for agriculture, small industries and export
  • Giving a professional best to management
  • Encouragement of a new class of entrepreneurs and
  • The provision of adequate training as well as terms of service for bank staff
  • The nationalisation of banks for 6 additional banks was carried on in 1980, thus increasing the total number of nationalized banks to 20.New bank of India was subsequently merged with Punjab National Bank bringing the number to 19. These are in addition to the SBI and its 5 associate banks. Besides, other public sector banks are IDBI and Bharitya Mahila Bank.  Nationalization of Banks in India
  • The nationalization was followed by tremendous growth in the number of branches, particularly those in rural areas. The total number of branches increased from 8,262 in June 1969 to 60,650 in 1991. By June 2009, the number has increased to 80,514. Rural branches as a proportion of total branches increased from just 22% in 1969 to 54% in 1991. However, this proportion has decline thereafter and was just 40% in 2009.
  • The total amount of bank credit has also increased consistently since 1969. The total bank credit was Rs. 4,690 crores in 1970-71 which increased to a level of Rs. 1,16,300 crores in 1990-91 and stood at a level of Rs 27,75,549 crores in 2009.
  • The adoption of “Lead Bank Scheme” after nationalisation was the main reason behind the branch expansion. This scheme was proposed by the Gadgil Study Group and the Nariman Committee.
  • Under this scheme, all the nationalized banks were allotted certain districts and they were assigned the development responsibility of these districts. The Lead Bank of every district was required to undertake a socio-economic survey of the district in order to assess the development potential and how such potential could be tapped through credit expansion.  Nationalization of Banks in India
  • Another post-nationalisation initiative in the banking sector was in the form of “Priority Sector Lending”.
  • This was introduced mainly to channelize more credit to agriculture, small industries, and small transport operators. In the course of time, other priority sectors like retail trade, professional and self-employed persons, education, housing loans for weaker sections and consumption loans were also added.

The directive on priority sector lending issued by RBI in 1980 included the following aspects:

  • Priority sector lending should constitute 40% of aggregate bank credit.
  • At least 40% of the priority sector lending should be provided to agriculture.
  • Direct advances to the weaker sections in agriculture and allied activities in rural areas should form at least 50% of the total direct lending to agriculture.
  • The rural artisans, village craftsman and collage industries should get at least 12.5% of the total credit to small scale industries.
  • About 12% of bank credit should go to the exporters.

The priority sector lending as a percentage of total credit for the public sector banks has increased from 15% in 1969 to about 45% in 2008.

Total advance to agriculture, and Micro and Small Enterprises as a proportion of total credit in 2008 was 18.3% and 11.1% respectively.

Since 1988, the commercial banks have adopted the “Service Area Approach” under which semi-urban and rural branch of a commercial bank was assigned a specific area comprising a cluster of villages within which it was asked to operate, adopting a planned approach for economic growth.  Nationalization of Banks in India



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