Nationalisation Of Banks
In a free enterprise economy, commercial banks operate like any other business and are mainly concerned with the maximisation of their private gains. Lacking any social purpose they, often channelise funds to business units in which the management has its interest and thus contribute in a big way to the growth of monopolies and concentration of economic and political power, Wine overall economic activity suffers because priority sectors/industries fail to get adequate funds. On July 19, 1969, fourteen commercial banks with deposits worth Rs. 50 crore or more were nationalised. This was hailed as a historic event by the people of the country. Some experts also supported it as a timely measure. In her broadest address of July 19, on bank nationalisation, Prime Minister Mrs Indira Ghandi stated that nationalisation was meant for an early realisation of the objectives of social control which were spelt out as (i) removal of control by a few, (ii) provision of adequate credit for agriculture and small industry and export, (ii) giving a professional bent to management, (iv) encouragement of a new class of entrepreneurs, and (U) the provision of adequate training as well as terms of service for bank staff. dish
The post-nationalisation period has witnessed unprecedented growth in the branch network of commercial banks. The banks in this period have given particular attention to providing banking facilities in underbanked regions and relatively developed regions at unbanked centres. This was due to the fundamental shift in the approach after the nationalisation. With the government takeover of all major commercial banks, the banking system was made to function as an instrument of development. “Lead Bank’ Scheme and Branch Expansion: The area approach in respect of bank financing proposed by the Gadgil Study Group towards the end of 1969, culminating in the Lead Bank Scheme. It had the backing of the Nariman Committee also. The Governor of the Reserve Bank had appointed a Committee of Bankers under the Chairmanship of F.K.F. Nariman in August 1969 to prepare a programme for creating adequate banking facilities, particularly in districts/regions where such facilities were lacking at the time of nationalisation. The Committee favoured a coordinated approach and was of the view that the banks should be allotted particular districts where they would take the lead in surveying the scope for banking development, particularly the expansion of credit facilities. The Reserve bank accepted the recommendations of the Nariman Committee and prepared the ‘Lead bank’ Scheme. The Scheme gave concrete shape to the ‘area approach’ to banking development advocated by the Gadgil Study Group. Under the ‘Lead bank,’ Scheme districts were allotted to the State Bank Group, 14 nationalised banks and 3 private Indian banks. The scheme covered virtually the whole country except greater Mumbai, Calcutta, Chennai and the Union Territories of Delhi, Chandigarh and Goa. While allotting particular districts to these banks under this scheme certain criteria were kept in mind.
In the first place, in the allocation of responsibility in terms of the number of districts allotted. • resources of various banks were taken into consideration. On this criterion, whereas State Bank of India Group (the biggest commercial banking group) was allocated 69 districts, the Bank of Rajasthan Ltd., a small private sector bank, got just one district and it shared the ‘Lead: responsibility in this district with United Commercial Bank. Secondly, the factor of contiquitus defined as clusters of districts was given weightage in allotting ‘Lead bank’ districts. Thirdly in most cases, the ‘Lead Banks’ were allotted particularly those districts where they already had the number of branches. Finally, the Scheme provided that except in some small States, each State would have at least two Lead Banks.
Evaluation Of Banking Since Nationalisation
The period since bank nationalisation is of great importance from the point of view of banking development as the size and the reach of the banking system has registered spectacular progress in this period. Aggregate bank deposits have risen from 11 per cent of GDP to around 67.2 per cent, (2010- 11) and the total number of branches from 8,262 to 98,591. Of these, around 36.9 per cent are now in rural areas as against less than 22.5 per cent at the time of nationalisation of major banks in 1969.
Ut Opening of rural branches has improved the mobilisation of savings in the rural sector. Presently rural deposits account for about 15 per cent of total deposits. Since bank nationalisation in this country, priority sector credit has increased from about 14 per cent of total bank credit to around 35 per cent (2012). Over the years development of banking has been faster in relatively less developed regions of the country, and as a result, regional disparities have declined and the concentration of banking business is now less. 5 moisten This performance of the banking system in India since the nationalisation of 14, banks is definitely impressive. The achievements of the banking sector as stated above are, however, nowhere near meeting the needs of the economy. Since the development-oriented policy of the banks eroded their profitability, it was used by the Narasimhan Committee to criticise directed credit programmes. The Committee argued that the directed investment and directed credit programmes together with mounting expenditures completely eroded the profitability of the banks. The fact is that in the later post-nationalization phase, the overall profitability of the banks was either low or even negative and their non-performing loans both as a percentage of total advances and as a percentage of assets were fairly high and their financial position was extremely weak. Commercial banks during the post-nationalization phase had a societal purpose and thus directed credit programme was pursued, though it eroded the profitability of the commercial banks. Banks were not regarded as profit-maximizing institutions. Hence, it is wrong to assess their performance in the terms of their profitability. Nevertheless in the process of ignoring profitability considerations, many commercial banks lost their financial viability and by the end of the 1980s, it had become clear that further neglect of profitability considerations could ultimately send banking institutions to their bankruptcy.
Check out these notes on Banking Sector Reforms.