Nationalization of Banks: History of Indian Banks

Indian banking system has passed 51 years of Bank Nationalization successfully and if it has contributed anything to the economy, then it has to be gaining self-sufficiency in food grains products and a massive raise in financial inclusion. It has helped India to emerge as one of the greatest economies and its potential being recognized around the globe. On that note, let’s get deep into the concept of Nationalization.

Process of Bank Nationalization

It could be expressed as a process whereby the National government or the state becomes empowered to take over the private industry, organization or even the assets into their ownership i.e. public ownership through any legislation or an ordinance or any kind of order. A lot of socialist governments have undertaken this process just to convert from capitalism to socialism.

• In India, the RBI (Transfer of public ownership) Act was passed in order to nationalize the Reserve Bank of India and as a result on Jan 1st, 1949, RBI was nationalized. 

• Similarly, in the year 1955 the Imperial Bank of India underwent nationalization and later it was named as the State Bank of India which, in the present time, is the largest bank of the Public sector. 

• It was established by the State Bank of India Act 1955 and also serves as the principal agent of RBI and is responsible for handling bank transactions across the country. 

• Due to this sudden nationalization, banks all over the country had to face extreme changes which led to economic growth ultimately.

It was in the year 1969, 19th July when 14 of most major commercial banks functioning in India underwent nationalization and then in the year 1980 another 6 banks were nationalized which enhanced the total number to 20.

History of Nationalization

The history of Nationalization can be traced back in the 1947 which is also known as the pre-independence period. It was during this time when the banking system in India was established. It began with the foundation of Bank of Hindustan in the year 1770.  There are many banks that started operating during those days and are still operating like Allahabad bank, Punjab National Bank, etc. this period was marked as the merging period where most of the banks were merged with one another. The Imperial bank is one of the biggest example in that regard which is a merger of Bank of Madras, Bank of Bombay and Bank of Bengal which later turned into what we know as the ‘Reserve Bank of India’.

After that the second phase started from 1947 to 1991 which was majorly known as the Nationalizing period for the banks in India. Indira Gandhi, the Prime Minister that time put up a proposal for the same on behalf of the Central government and thereafter the Government of India started issuing ordinance of Banking Companies (Acquisition and Transfer of Undertakings)  1969. And after 14 days or so of the issue of ordinance Parliament enacted Banking Companies (Acquisition and Transfer of Undertakings) act. As a result of that, few banks were nationalized like- Allahabad bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara bank, Punjab National Bank, UCO Bank, Union Bank of India, etc.

In the year 1980 the second round of Nationalization started where 6 more commercial banks like Punjab and Sind bank, Oriental Bank of Commerce, Corporation Bank, Andhra Bank, New Bank of India and Vijaya Bank got nationalized. The credit delivery to government was the major reason for the same. With the second round of nationalization, government controlled approx. 91% of the banking business of the country.

The third phase started from the year 1991 till date. The policy of Liberalization was duly followed in this period and as a result of that a small number of these banks got licensed. They were known as the New generation tech-savvy banks which later merged with the Oriental bank of commerce, IndusInd Bank, UTI bank, ICICI bank and HDFC bank. The three sectors of banks i.e. Government, Private, Foreign contributed their best to the overall growth of the economy. As a result of liberalization of banking policies, a lot of private banks also came into effect.

What was the Need to Nationalize?

The need to nationalize banks was felt due to many reasons as they were a huge help to the big businesses and massive industries functioning in the country. Then in addition to that, the agriculture sector which is the most important contributor to economy, then the exports sector, the small scale industries also needed financial guidance in order to pace up. All these factors were considered before nationalizing. Regional rural banks also came into effect mainly focusing on the betterment of the rural areas. Their aim was to serve the large masses.

Also, institutions like NABARD, SIDBI, EXIM, etc. were set up with a view to fulfill the requirements of foreign trades, housing and agricultural needs of the country.

Conclusion

As discussed earlier that the liberalization in the policies have led to more private banks coming to effect, the public banks and their dominance have shifted. Earlier their share was up to 8% which now has come down to 66%. But with the emergence of Nationalization, the monopoly has come to an end.  There has also been a reduction in the regional imbalance by setting up banks in the rural areas or so. The surplus profit can also be utilized and there has been protection of public interest. The working conditions have also improved and hence, the overall experience of the Nationalization has been quite beneficial for India and its economy.