Modern banking in India originated in the mid of 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.
The largest and the oldest bank which is still in existence is the State Bank of India (SBI). It originated and started working as the Bank of Calcutta in mid-June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three banks founded by a presidency government, the other two were the Bank of Bombay in 1840 and the Bank of Madras in 1843.
The three banks were merged in 1921 to form the Imperial Bank of India, which upon India’s independence, became the State Bank of India in 1955.
For many years, the presidency banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934.
Nationalisation of Banks in India
The Government of India, with the enactment of the SBI Act, 1955 partially nationalised the three Imperial Banks (mainly operating in the three Presidencies of past with their 466 branches) and named them the State Bank of India – the first public sector bank in India.
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy.
After successful experimentation in the partial nationalisations, the Government decided to go for complete nationalisation. With the help of the Banking Nationalisation Act, 1969, the Government nationalised a total number of 20 private banks in two phases:
The 14 banks with deposits more than 50 crore nationalised in July 1969. The following banks were nationalized in 1969:
Allahabad Bank (now Indian Bank)
Bank of India
Bank of Baroda
Bank of Maharashtra
Central Bank of India
Canara Bank
Dena Bank (now Bank of Baroda)
Indian Overseas Bank
Indian Bank
Punjab National Bank
Syndicate Bank (now Canara Bank)
Union Bank of India
United Bank of India (now Punjab National Bank)
UCO Bank
The 6 banks with deposits more than 200 crore nationalised in April 1980. The stated reason for the nationalization was to give the government more control of credit delivery.
With the second round of nationalizations, the Government of India controlled around 91% of the banking business of India. The following banks were nationalized in 1980:
Andhra Bank
Corporation Bank
New Bank of India
Oriental Bank of Comm.
Punjab & Sind Bank
Vijaya Bank
Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank.
Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959:
State Bank of Patiala
State Bank of Hyderabad
State Bank of Bikaner & Jaipur
State Bank of Mysore
State Bank of Travancore
State Bank of Saurashtra
State Bank of Indore
All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.
Need
After independence, the Government of India (GOI) adopted planned economic development for the country. Nationalisation was in accordance with the national policy of adopting the socialistic pattern of society.
Nationalization came at the end of a troubled decade. India has suffered many economic as well as political shocks.
There were two wars (with China in 1962 and Pakistan in 1965) that put immense pressure on public finances.
Two successive years of drought had not only led to food shortages but also compromised national security because of the dependence on American food shipments (PL 480 program).
Subsequently, a three-year plan holiday affected aggregate demand as public investment was reduced.
The decade of 1960-70s was the lost decade for India as the economic growth barely outpaced population growth and average incomes stagnated.
Industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of total credit.
Agriculture needed a capital infusion, with the initiation of the Green Revolution in India that aimed to make the country self-sufficient in food security.
Other reasons responsible for the nationalization of banks were:
As the banks were owned and managed by the private sector the services of the banking were having a narrow reach – the masses had no access to the banking service;
The Government needed to direct the resources in such a way that greater public benefit could take place;
The planned development of the economy required a certain degree of government control on the capital generated by the economy.
Reducing regional imbalance to curb the urban-rural divide
Priority Sector Lending: In India, the agriculture sector and its allied activities were the largest contributors to the national income.
Mobilization of savings: Nationalisation aimed at mobilizing the savings of the people to the largest possible extent and to utilize them for productive purposes.
Problems
Inadequate Banking Facilities: Even though banks have spread across the country; still many parts of the country are unbanked.
Lowered Efficiency and Profits: After nationalization banks under the control of government which meant political pressures thereby hampering professionalism. It resulted into lower efficiency and poor profitability of banks.
Political and Administrative Interference: Many public sector banks badly suffered due to the political interference. It was seen in arranging loan melas which resulted in huge non-performing assets.
Increased Expenditure: Huge expansion in a branch network , large staff administrative expenditure, trade union struggle, etc., lead to increased banks expenditure.
Advantages
Removal of Barriers: There were no longer any barriers, social, economic or political between the bankers and customers. This enabled in a massive quantitative expansion in customer base and also helped improve the services.
Enabled Banks to Widen their Reach: The banks began to expand into the rural areas. With this the economy also expanded and employment opportunities were created.
Expansion of Branch Network: During the last 28 years of nationalization, the branches of the public sector banks rose 800 per cent from 7,219 to 57,000, with deposits and advances taking a huge jump by 11,000 per cent and 9,000 per cent.
Reorientation of Bank Lending: Accelerated the process of development, especially of the priority sectors of the economy, which had not previously received sufficient attention from the commercial banks.
Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict control over credit created by banks. With nationalisation of banks RBI was able to control them in a better way.
Social Banking: Commercial banks, especially the nationalised banks have participated in the poverty alleviation program launched by the government.
Banking under government ownership gave the public implicit faith and immense confidence about the sustainability of the banks.
Impact of Nationalisation of Banks
This lead to an increase in funds and thereby increasing the economic condition of the country
Increased efficiency
Helped in boosting the rural and agricultural sector of the country
It opened up a major employment opportunity for the people
The Government used profit gained by Banks for the betterment of the people
The competition decreased, which resulted in increased work efficiency
