1

Project on-

NATIONALIZATION OF BANKS IN INDIA

SUBMITTED TO

Mrs. KIRAN KORI

(FACULTY, BANKING LAW)

BATCH XIII

DATE OF SUBMISSION-26TH SEPTEMBER, 2016

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Acknowledgements

I would like to acknowledge the able guidance and constant support of our Honble Vice
Chancellor, Dr. (Prof.) Sukh Pal Singh whose help from the starting to the finishing of the
project enabled me to develop an understanding of the subject.

I would specially like to thank my teacher, mentor Mrs. Kiran Kori without whose constant
support and guidance this project would have been a distant reality.

This work is an outcome of an unparalleled infrastructural support that I have received from
Hidayatullah National Law University, Raipur.

It would never have been possible to complete this study without an untiring support from my
family, specially my parents.

This study bears testimony to the active encouragement and guidance of a host of friends and
well-wishers.
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Table of Contents

1. INTRODUCTION4
2. OBJECTIVE OF STUDY.6
3. RESEARCH METHODOLOGY6
4. OBJECTIVES BEHIND NATIONALIZATION OF BANKS..7
5. THE ROLE OF ECONOMISTS.8
6. NATURE OF BANKING IN INDIA9
7. HISTORY OF BANKING IN INDIA.10
8. CONCLUSION..10
9. REFERENCES.11
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INTRODUCTION
After independence, India adopted a socialist pattern of society as its goal. This means, in
non-technical language, a society with wealth distributed as equitably as possible without
making the Country a totalitarian State. The goal is purported to be achieved through
democratic processes. With this aim in view, a mixed pattern of panning is evolved. The two
sectors, private and public, are allowed in function independently of each other. The public
sector is wholly owned and controlled by the Government. The private sector is regulated
through a system of regulations, licenses, controls and legislative acts. The public sector is
made to grow by nationalisation of industries and institutions.

The banking institutions are the custodians of private savings and a powerful instrument to
provide credit. They mobilise the resources of the country by accepting deposits and
channelize them for industrial and national development by granting advances. In 1955, the
Imperial Bank of India was nationalised and its undertaking was taken over by the State Bank
of India. As regards the scheduled banks, there were complaints that Indian commercial
banks were directing their advances to the large and medium scale industries and big business
houses and that the sectors demanding priority such as agriculture, small-scale industries and
exports were not receiving their due share. This was one of the chief reasons for the
imposition of school control by amending the Banking Regulation Act with effect from 1-2-
1969.

Although steps had been taken in January, 1969, by amending the Banking Regulation Act,
for the purposes of imposing social control with a view to remedy the basic weaknesses of
the Indian banking system and to ensure that banks would cater to the needs of the hitherto
neglected and weaker sections of the community instead of big businesses and those
connected with them, it was felt that the imposition of social control had not changed the
position very much and there were complaints that the Indian commercial banks continued to
direct their advances to large and medium scale industries and that sectors demanding priority
such as agriculture, small scale industries and imports were not receiving the attention due
to them of the banks.

On 19th July, 1969 fourteen major banks viz., The Central Bank of India Ltd., The Bank of
India Ltd., The Punjab National Bank Ltd., The Bank of Baroda Ltd., The United
Commercial Bank Ltd., Canara Bank Ltd., United Bank of India Ltd., Dena Bank Ltd.,
Syndicate Bank Ltd., The Union Bank of India Ltd., Allahabad Bank Ltd., The Indian Bank
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Ltd., The Bank of Maharashtra Ltd., The Indian Overseas Bank Ltd., each having deposits of
more than Rs. 50 crores and having between themselves aggregate deposits of Rs. 2,632
crores with 4,130 branches were nationalized and taken over. The nationalisation of the
commercial banks was a revolution in the Indian banking system. This revolution did not
merely signify a change of the ownership of these banks but it was the beginning of a co-
ordinated endeavour to use an important part of the financial mechanism for the
couTherefore, the Government of India issued an ordinance Banking Companies
(Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalised the 14 largest
commercial banks with effect from the midnight of July 19, 1969. These banks contained 85
percent of bank deposits in the country. Within two weeks of the issue of the ordinance,
the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking)
Bill, and it received the presidential approval on 9 August 1969. A second dose of
nationalization of 6 more commercial banks followed in 1980. The stated reason for the
nationalization was to give the government more control of credit delivery. With the second
dose of nationalization, the Government of India controlled around 91% of the banking
business of Indias economic development.
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OBJECTIVES

The main objective of the project is to study:-

To study the history of nationalization of banks in India

To study the merits and demerits of banks in India

RESEARCH METHODOLOGY

The Project is descriptive and analytical in nature. Secondary and Electronic resources have
been largely used to gather information and data. Books and other reference as guided by
Faculty of economics have been primarily helpful in giving the project a firm structure.
Websites have also been referred.
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Objectives behind Nationalisation of Banks in India

The nationalisation of commercial banks took place with an aim to achieve following major
objectives.1

1. 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.

2. 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.

3. 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.

4. 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:

5. Priority Sector Lending : In India, the agriculture sector and its allied activities were
the largest contributor to the national income. Thus these were labeled 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.

6. 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.

1
http://www.bankingawareness.com/banking-gk/nationalised-banks-in-india/
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THE ROLE OF ECONOMISTS IN BANKS

The crucial role of bank economists in transforming the banking system in India. Economists
have to be more mainstreamed within the operational structure of commercial banks. Apart
from the traditional functioning of macro-scanning, the inter-linkages between treasuries,
dealing rooms and trading rooms of banks need to be viewed not only with the day-to-day
needs of operational necessity, but also with analytical content and policy foresight. Today,
operational aspects of the functioning of banks are attracting intensive research by
professional economists. In particular, measuring and modeling different kinds of risks faced
by banks, the behavior of risk-return relationships associated with different portfolio mixes
and the impact of fluctuations in financial markets on the financial performance of banks are
areas which lend themselves to analytical and empirical appraisal by economists and
econometricians. They, in turn, are discovering the degrees of freedom and room for
analytical maneuver in high frequency information generated by the day-to-day functioning
of banks. It is vital that we develop an environment where these synergies are nurtured so as
to serve the longer-term strategic interests of banks. Even in real time trading and portfolio
decisions, the fundamental analysis of economists provides an independent assessment of
market behaviour reinforcing technical analysis.2

A serious limitation of the applicability of standard economic analysis to banking relates to

the inadequacies of the data-base. Absence of long time series data storage in the banking
industry often poses serious problems to the quest for the formal analytical relationships
between variables. Even if such data exist, the presence of structural breaks may blur
meaningful analysis based on traditional formulation. Economists need to think innovatively
to overcome this problem. Use of panel regression, non-parametric method sand multivariate
analyses could go a long way in understanding and validating behavioural relationships in
banking.3

2
http://forbesindia.com/article/independence-day-special/economic-milestone-nationalisation-of-banks-
(1969)/38415/1
3
http://kalyan-city.blogspot.in/2010/09/nationalisation-of-banks-in-india.html
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NATURE OF BANKING IN INDIA

A banking company in India has been defined in the banking companiesact,1949 as one
which transacts the business of banking which means the accepting,for the purpose of
lending or investment of deposits of money from the public,repayable on demand or
otherwise and withdraw able by cheque, draft, order orotherwise. Most of the activities a
Bank performs are derived from the above definition. Inaddition, Banks are allowed to
perform certain activities which are ancillary to thisbusiness of accepting deposits and
lending. A bank's relationship with the public,therefore, revolves around accepting deposits
and lending money. Another activity whichis assuming increasing importance is transfer of
money - both domestic and foreign -from one place to another. This activity is generally
known as "remittance business" inbanking parlance. The so called forex (foreign exchange)
business is largely a part of remittance albeit it involves buying and selling of foreign
currencies.4

Functioning of a Bank is among the more complicated of corporate operations.Since Banking

involves dealing directly with money, governments in most countriesregulate this sector
rather stringently. In India, the regulation traditionally has been verystrict and in the opinion
of certain quarters, responsible for the present condition of banks, where NPAs are of a very
high order. The process of financial reforms, whichstarted in 1991, has cleared the cobwebs
somewhat but a lot remains to be done. Themultiplicity of policy and regulations that a Bank
has to work with makes its operationseven more complicated, sometimes bordering on
illogical. This section, which is alsointended for banking professional, attempts to give an
overview of the functions in assimple manner as possible. Banking Regulation Act of India,
1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of
money from thepublic, repayable on demand or otherwise and withdraw able by cheques,
draft, and orderor otherwise."

4
http://www.mbaskool.com/business-articles/finance/112-indian-banking-system.html
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HISTORY OF BANKING IN INDIA

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 andcalled it Presidency Banks. These
three banks were amalgamated in 1920 and ImperialBank of India was established which
started as private shareholders banks, mostlyEuropeans 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. Between1906 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 periodicfailures between 1913 and 1948. There were approximately 1100 banks,
mostly small. Tostreamline the functioning and activities of commercial banks, the
Government of Indiacame up with The Banking Companies Act, 1949 which was later
changed to BankingRegulation 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 theCentral Banking Authority. During those days public has lesser confidence in the
banks.As an aftermath deposit mobilization was slow. Abreast of it the savings bank
facilityprovided by the Postal department was comparatively safer. Moreover, funds
werelargely given to traders.5

Government took major steps in this Indian Banking Sector Reform afterindependence. In
1955, it nationalized Imperial Bank of India with extensive bankingfacilities 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 Unionand State Governments all over
the country.Seven banks forming subsidiary of State Bank of India was nationalized in
1960on 19th July, 1969, major process of nationalization was carried out. It was the effort
of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in
thecountry were nationalized.6

Second phase of nationalization Indian Banking Sector Reform was carried out in1980 with
seven more banks. This step brought 80% of the banking segment in Indiaunder Government

5
http://kalyan-city.blogspot.in/2010/09/nationalisation-of-banks-in-india.html
6
http://www.gktoday.in/blog/brief-history-of-banking-in-india-3/
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ownership. The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country7:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank Indiarose to
approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the
sunshine of Government ownership gave the public implicit faith andimmense confidence
about the sustainability of these institutions.

This phase has introduced many more products and facilities in the banking sectorin its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committeewas set up
by his name which worked for the liberalization of banking practices.The country is flooded
with foreign banks and their ATM stations. Efforts arebeing put to give a satisfactory service
to customers. Phone banking and net banking isintroduced. The entire system became more
convenient and swift. Time is given moreimportance than money. The financial system of
India has shown a great deal of resilience. It is sheltered from any crisis triggered by any
external macroeconomics shock as other East Asian Countries suffered. This is all due to a
flexible exchange rate regime,the foreign reserves are high, the capital account is not yet fully
convertible, and banksand their customers have limited foreign exchange exposure

7
http://www.allbankingsolutions.com/Banking-Tutor/Nationalised-banks-vs-public-sector-banks.htm
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CONCLUSION

Nationalised banks dominate the banking system in India. The history of nationalised banks
in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under
the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on
19th July 1960, its seven subsidiaries were also nationalised with deposits over 200 crores.
These subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank of
Hyderabad (SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank of
Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore
(SBT). However, the major nationalisation of banks happened in 1969 by the then-Prime
Minister Indira Gandhi. The major objective behind nationalisation was to spread banking
infrastructure in rural areas and make cheap finance available to Indian farmers. The
nationalised 14 major commercial banks were Allahabad Bank, Andhra Bank, Bank of
Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India,
Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of
Commerce (OBC), Punjab and Sind Bank, Punjab National Bank (PNB), Syndicate Bank,
UCO Bank, Union Bank of India, United Bank of India (UBI), and Vijaya Bank. In the year
1980, the second phase of nationalisation of Indian banks took place, in which 7 more banks
were nationalised with deposits over 200 crores. With this, the Government of India held a
control over 91% of the banking industry in India. After the nationalisation of banks there
was a huge jump in the deposits and advances with the banks. At present, the State Bank of
India is the largest commercial bank of India and is ranked one of the top five banks
worldwide. It serves 90 million customers through a network of 9,000 branches.

Though the nationalisation of commercial banks was undertaken with tall objectives, in many
senses it failed in attaining them. In fact it converted many of the banking institutions in the
loss making entities. The reasons were obvious lethargic working, lack of accountability, lack
of profit motive, political interference, etc. Under this backdrop it is necessary to have a
critical look to the whole process of nationalisation in the period after bank nationalisation.
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REFERENCES

http://kalyan-city.blogspot.in/2010/09/nationalisation-of-banks-in-india.html

http://lawwprojects.blogspot.in/2013/11/project-on-nationalisation-of-banks.html