Assignment – 1 Retail banking

The Cycle Of Indian Banking : Private- Nationalization- Private

- Vikash Malik
- Roll No. 21B157

The Indian banking history can be broken down into pre- and post-independence segments. The first
ever bank, i.e., the Bank of Hindustan was founded in 1770 in Calcutta. After which many banks like
the Oudh Commercial bank, Allahabad bank, Punjab National bank, Bank of Bengal, Bank of Madras,
and Bank of Bombay came into existence. Some of these banks were merged later and known as the
Imperial Bank which later became the State Bank of India. During this era banks were mostly running
independently and limited to serve only a few sectors and classes of the economy.

Post-Independence was a turning point for development Banking system in the history of banking, as
the government of India decided to nationalize the banks. This although seemed to gather lots of
backlash from the employees and promoters but they couldn’t stop it from coming into existence.

Few highlights of Nationalisation of banks: -

1. The RBI act (Transfer of ownership) was passed in and on 1 st Jan 1949, RBI was nationalized
2. The Imperial Bank was nationalised in 1955 and latter named as the State bank of India and
establishment of SBI Act 1955, which served as principle agent for RBI and was responsible
for handling of bank transactions across the country.
3. Establishment of Banking companies Act (Acquisition and Transfer of undertakings) and
nationalization of 14 commercial banks 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 1969.
4. 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 in 1980. And the Government controlled approx. 91%
of the Banking business.
5. “By September 2020, the number of bank branches reached 1,60,827 from a mere 8,187
before the bank nationalisation in 1969. In rural areas, the bank branches increased from
1,443 in 1969 to 52,632 by September 2020. (Src
-https://www.thehindubusinessline.com/opinion/privatising-public-sector-banks-isnt-a-
good-idea/article34247032.ece)”
Assignment – 1 Retail banking

Reasons for Nationalization of Banks :-

 To Emphasize Priority Sectors: Like Infrastructure and manufacturing and agricultural sector
 Expansion of Branches : It facilitated the opening of new branches to ensure maximum
coverage of banks throughout the country.
 Mobilisation of Savings: To provide people more access to banks and encourage them to
save, injecting additional revenue into a cash-strapped economy.
 Economic and Political Factors: The two wars in 1962 and 1965 had put a tremendous
burden on the economy. The nationalisation of Indian banks would give the economy a
boost through increased deposits. And also a act as a source for revenue for Government to
fund its activities.

The LPG (Liberalisation, Privatisation and Globalisation model.), 1991 - present 

The government Invited private investors to invest in India. Ten private Banks were given license by
RBI. The main objective for this was to promote inflow of foreign funds into Indian economy and
finance the capital incentive sectors which were essential to growth, with controlling the inflation.

Key highlights of LPG in Banking :-

 Prominent names which exist even today from this liberalisation are HDFC, Axis Bank, ICICI,
DCB and IndusInd Bank.
 In the early to mid-2000s, two other banks, Kotak Mahindra Bank (2001) and Yes Bank
(2004), received their licenses. IDFC and Bandhan banks were also given licenses in 2013-14.
 Foreign banks like Citibank, HSBC and Bank of America set up branches in India.
 The nationalisation of banks came to a standstill.
 RBI and the government treated public and private sector banks equally.
 Payments banks came into existence.
 Small finance banks were permitted to set up their branches throughout India.
 Banks began to digitalise transactions and various other related banking operations.

Present Scenario – Privatisation of PSU Banks

Even though the objective of nationalization of Banks was mostly driven with balancing Social and
economic growth with some commercial profits. But over the years with change in norms and
tightening of regulations by RBI which requires banks to set aside more capital to offset potential
bad loans or NPAs which has impacted negatively on the financial statements of Public sector banks.

Also Factors like lagging in services and technology, where private banks able to offer better
adaptability and access and ease of customer being able to bank without actually ever visiting to
branch , has increased the woes of public sector banks, causing many accounts to being shifted to
private banks. Other factors like faster processing of loan and variety of loans and personalized
banking makes the shares of private banks more attractive.

“ Successive governments have struggled to stop the PSBs from bleeding money. In the past 12
years, more than 3.8 trillion rupees ($52 billion) of taxpayers money have gone into keeping them
afloat, writes Tamal Bandyopadhyay in Pandemonium: The Great Indian Banking Tragedy . “

There has been major ongoing debates between many financial experts and among the general
population over the privatisation of public banks by government, each driven by the speculated
Assignment – 1 Retail banking

impact which would result from the privatisation. There is no middle ground as to whether
privatising of banks will help government to save on expenditure as from time to time, government
had to come and rescue many private banks and merge them with public sector banks. Also most of
the defaults which drag down the Public sector banks financials mostly come from corporates which
taken huge loans from them and then turn into NPAs, which supports the argument that you can’t
turn in PSU banks in control of corporates which are in a way a source of liabilities.