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In this article we will discuss about the nationalisation of commercial banks in India:- 1. Factors Responsible for Nationalisation of Banks in India 2. Evaluation of Commercial Banks after Nationalisation.
Factors Responsible for Nationalisation of Banks in India:
During pre-nationalisation period (1961-68), commercial banks in India were not very much interested in providing credit to priority sectors. Commercial banks completely neglected the agricultural sector and small industrial sector during this period.
Moreover, they considered the agricultural credit as unprofitable from commercial viewpoint and thus the amount of agricultural credit was slightly higher than 2 per cent only of the total bank credit advanced by these banks during that period.
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For some years, people were demanding strongly for the nationalisation of commercial banks in India on the following grounds:
(a) The commercial banks had owned and controlled by a very few number of persons.
(b) These banks were concentrating wealth and economic power in the hands of a few persons and helped creating monopolies and industrial empires.
(c) The commercial banks in India were discriminating against small industrial and business units completely ignored the agricultural sector.
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(d) The resources of the commercial banks were being misused by director for promoting only those industries in which they were interested instead of promoting common interest of the society.
(e) The commercial banks had freely advanced credit to promote antisocial activities like hoarding and speculation.
(f) The commercial banks could not implement the positive social and economic objectives of the Five Year Plan of the country.
Considering the situation the Government of India passed an act known as Banking Laws (Amendment) Act, 1968, to confer more powers to Reserve Bank for promoting social and economic objectives of planning. This was known as social control of banks.
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Under social control, bankers were asked particularly to meet the needs of the farmers, small industries and other neglected sectors. But as it was felt that social control would be slow to fulfil the needs of the society, the Government of India suddenly nationalized 14 major Indian commercial banks in July 1969.
Thus on July 19, 1969 the Government of India nationalized top 14 scheduled commercial banks by promulgating an ordinance. Since then these nationalized banks have been working as independent units and the Government is determining their credit policy.
Again on April 15, 1980 the Government of India nationalized six more commercial banks and with this total number of such banks has increased to 20. If we include the State Bank of India and its 7 subsidiaries which were nationalized in 1956, the total number of nationalized banks in India at present stands at 27 (New Bank of India has since merged with Punjab National Bank in September 1993).
Evaluation of Commercial Banks after Nationalisation:
After the nationalisation of commercial banks, banking operations attained a remarkable achievement in respect of branch expansion, rural expansion, rural banking, priority lending, mobilisation of deposits and also to remove regional imbalances in the economy.
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In-spite of all these achievements the banking sector is suffering from serious shortfalls in productivity and efficiency. According to Narasimham Committee, most of these problems are the result of directed investment and directed credit programmes.
(i) Directed Investment:
The commercial banks are forced to invest a good proportion of their deposits in Government securities as per the Banking Regulation Act 1949 and the RBI Act 1934. Moreover, at present the Statutory Liquidity Ratio (SLR) and Cash Reserve Requirements are also kept at abnormally high level, i.e., 38.5 per cent and 15 per cent respectively. All these are effecting the profitability outlook of these banks adversely.
(ii) Directed Credit Programmes:
Since nationalisation, directed credit programmes were introduced by the Government in order to channelize the flow of credit to under-banked areas, neglected and other priority sectors, IRDP lending, credit to sick industrial units, organising loan melas by party leaders etc.
This system of directed credit operation has disturbed the sound banking practices followed by these banks and has made a serious erosion on the profitability of these banks.
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Moreover, the government has also forced the banks to subsidies credit in the name of socially oriented credit. Again the operational expenditure of these banks has increased significantly due to phenomenal increase in branch banking, lack of supervision, rapid growth of staff and accelerated promotion, improper role of trade unions and for priority lending.
(iii) Drawbacks:
Major drawback of our nationalized banks is their failure to sustain desired credit pattern and to fill the credit gaps in the different sectors of the country. Thus the banking industry is facing a yawning gap between promise and performance and the factor responsible for such a situation is that banks cannot appreciate this new philosophy and new social objective as entrusted by their nationalisation.
Even after 33 years of nationalisation, the nationalized banks still show a great deal of favouritism in advancing loans to big business and established industrialists. In respect of recovery of loans, the performance is equally sad. Moreover, bureaucratisation; corruption, nepotism, political pressure in granting credit are also affecting the operation of these commercial banks.
Trade unions of bank employees and their strike calls have also created a serious threat towards economic paralysis.
Furthermore, profits of the commercial banks are also showing a declining trend, as the profit in percentage of total earning of these banks has declined from 1.6 per cent in 1973 to 1.0 per cent in 1990-91. It is only in 1991-92, the profits of all public sector banks increased to Rs 804 crore showing an increase of Rs 329 crore (69.2 per cent) over 1990-91.
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