Thepartition of Indiain 1947 adversely impacted the economies of PunjabandWest Bengal,
paralysing banking activities for months. India'sindependencemarked the end of a regime of theLaissez-fairefor the Indian banking. TheGovernment of Indiainitiated measures to play an active
role in the economic life of the nation, and the Industrial Policy Resolution adopted by thegovernment in 1948 envisaged amixed economy.This resulted into greater involvement of the statein different segments of the economy including banking and finance. The major steps to regulatebanking included:
TheReserve Bank of India,India's central banking authority, was established in April 1935, butwas nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer toPublic Ownership) Act, 1948 (RBI, 2005b).
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India(RBI) "to regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank couldbe opened without a license from the RBI, and no two banks could have common directors.
NATIONALIZATION IN THE 1960S
Despite the provisions, control and regulations of Reserve Bank of India,banks in India excepttheState Bank of Indiaor SBI, continued to be owned and operated by private persons. By the1960s, the Indian banking industry had become an important tool to facilitate the development of theIndian economy.At the same time, it had emerged as a large employer, and a debate hadensued about the nationalization of the banking industry.Indira Gandhi,the thenPrime Minister of
India,expressed the intention of theGovernment of Indiain the annual conference of the All India
Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalization."
The meetingreceived the paper with enthusiasm.Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('BankingCompanies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) andnationalisedthe 14largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85percent of bank deposits in the country.Jayaprakash Narayan,a national leader of India, describedthe step as a
"masterstroke of political sagacity."
Within two weeks of the issue of the ordinance,theParliamentpassed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and itreceived thepresidentialapproval on 9 August 1969.A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reasonfor the nationalisation was to give the government more control of credit delivery. With the seconddose of nationalisation, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government mergedNew Bank of IndiawithPunjab National
Bank.It was the only merger between nationalised banks and resulted in the reduction of thenumber of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grewat a pace of around 4%, closer to the average growth rate of the Indian economy.