=> | So Banking & Fremer, See sr Cheupder. STRUCTURE AND ROLE OF _INDIAN BANKING SYSIEM - "Conde 1 Evolution of Banking in India 2 Rois of Banking System in the Econor 1.3. Structure of Indian Banking System 4 Scheduled and Non-scheduled Banks 1.4.1. Difference between Scheduled and Non-sonedbied Banks 1.4 EVOLUTION OF BANKING IN INDIA Banking is believed to have existed in the mos! Vedic period. Money-lending was 2 common practice fa, with the anv The Puranas and Smrnitis mention about money-changing and money-le Manusmriti contains references regarding deposits, pledges, policy on loans and rates of interest. Kautiliya’s Arthashastra also speaks extensively on banking practices in ancient India. in, in fridia, India had trade relations with most of the cauntries of the world To facilitate some banking facilities were obviously essential and were provided by traditional Indian bankers. Within’ the country also, trade and industry were widespread and highly developed though decentralised and on a small scale. Because internal trade and industry were prosperous, credit needs were felt and adequately met by Indian bay ‘These bankers are known as Indigenous Bankers and they were the fore-runners of modern banking institutions because they performed the functions of accepting deposits, giving loans and facilitating trade by dealing in hundis. When the British came to India (during the 17 Century), there were severa! banking firms in the country doing { traditional Indian banking business and even the British merchants took their help The Indigenous Bankers represented proprietorship or joint family firms. They worked with their own funds, though they did accept deposits, For money-lending. } promissory notes were used. Hundis or bills of exchange were also common. They facilitated remittance of funds. They gave loans to farmers, small businessmen craftsmen and traders. Usually, they combined money-lending and some other business like trading, farming ete i 3... Modern organised banking in India, however. can be traced back to the | when the British traders established trade relations with India entury British Agency Houses can be said to have\gtarted modern bs dia, in the ie second half of the 18% century. In 1770, the Hindustan Bank was established at Kolkata. It was associated with the well-known agency house “Alexander and Cor compa ‘The Bengal’ Bank esiablished id 1784 was not related’ to any agency hi oySY.8,Com. Indian Banking System _ 12 ____Stucure and Role of Indian Banking System General Bank of India got establishe ‘All these banks, however, were short-lived an 8 ablished as the first Joint Stock bank with limited lability. gy, their business-coverage also was Iinited jy, and unbalanced. mt Banking in India, in the modern sense, can be said to have mode a sound beginning with the establishment of the Bank of Kolkata in 1806. The East _India Conipany gave a charter of banking business fo this bank in 1809 and it was renamed as Bank of Bengal. With the full patronage and support of the East lfdia Company, the a Bank 6f Bengal started the issue of paper currency in 1823 and was permitted to open ot branches in 1840. In this year, it was given the status of the presidency Bank of Bengal. Im 1840 and 1843, the Presidency Banks of Mumbai and Kolkata respectively were ch established. In 1920, these three banks were amalgamated to form the Imperial Bank of . India, which became the State Bank of India after its nationalization in 1955. fat ‘The Indian Joint Stock banks were to be established at the end of the last century. 1b: In 1881, the Audh Commercial Bank was established, while the Punjab National Bank ¢l was formed in 1894 and People's Bank in 1901. During the period 1906-1911, several ‘commercial banks like the Bank of India, Central Bank of India, Bank of Baroda, Bank 1 of Mysore, etc. were established. Thus the rise and growth of modern joint stock + banking in India can be traced to the beginning of the present century. i ‘Thus, it is clear that the origin of modern banking is to be found in the business of 5 merchants, money-lenders and goldsmiths. They gradually adopted various functions of a bank. With an increase in the volume of business, the business passed on from individuals to public limited companies. Because such institutions were necessary in | the years following the industrial and commercial revolutions, they experienced rapid { grovith during the second half of the nineteenth century. With the turn of the century. j the growth of banking had already become a necessary concomitant of economic | development and in many ways a precondition of economic development ! po! . | ey SUBJECT TESTING \ Q°1 Answer the following questions in 20 words : 1. Who are indigenous bankers ? 2. Which was the First Bank established in Kolkata ? 3. Who have started modern banking in India ? Q.2 Answer the following question in 300 words : 1._Explain the Evolution of Banking in india. 4.2 ROLE OF BANKING SYSTEM IN THE ECONOMIC GROWTH AND DEVELOPMENT In performing the various functions, cpmmercial banks render a variety of services to the economy in general and to the business community in particular. These services are as under : IA] Importance of Banking System in-an Economy |» ~ (i) Functioning as an Intermediary : Banks act aS intermediaries between the | savers and investors. We have already seen that banks prompt the people to save money by offering them a guaranteed return in the form of interest. Thus, they bringD) Q ‘System J 5 v.8.Com. Indian Banking System 13 Structure and Role of Indian Banking System 4S¥.8.Com. Indian Banking System 1.3 ___Stucture and Role of Indian Banking System ‘ility. 4 the savings of people together and they also make loans available to those who are in inited: | need of credit. Thus, banks act as agents to bring the saving public and the investing {public together, and thus act as intermediaries sound i ‘This is a very important function and can be performed by banks because on the done hand, they stand guarantee to the depositors about the return of thei savings and tamed id on the imilarly, undertake the responsibility of recovering the loaned amount ae jother hand, make the money available to the borrowers. engal. ; (2) Channelization of Savings and Investment : Banks perform the function of were 4channelizing the savings into various fields of investment. The individual savers are not ank of aware of the opportunities of investment, Similarly, they are not in a position to decide jas to which fields of investment are safe and which are not. The commercial banks are atury, {better judges of this. Similarly, by advancing credit or denying credit they indirectly Bank #channelize the investment of funds into proper and productive fields of investment. everal | 43) Helping Economic Development : Banks help the economic development of a Bank ‘country. These banks can very well see the profitability or otherwise, of any investment stock ‘in development projects. Depending on the changes of the profitability of the project, — {banks provide or deny credit to them. Thus, indirectly. they help the economic ress of jdevelopment of a country. ons of | _{4) Imparting Liquidity to Non-liquid Assets : Commercial banks advances from jioans to borrowers against different types of securities. For example, they advance loans ary Jn’ jagainst the security of goid ornaments or gold bullion, These are non-liquid assets rapid ney Awhich are transformed into liquid resources by the commercial banks, The same is the nomi¢ {case with other non-liquid assets. {5) Mobilization of Capital : The commercial banks are in a position to transfer {capital from one part of the country to another part of the country or to other countries {Thus, they impart mobility to capital. f ey ty to capi When capital is transferred from one part of the country to another, geographical mobility is provided, But sometimes, banks also help to provide occupational mobility. if yyone wants to withdraw capital from one business and wants to transfer it to another uusiness, banks can help him to do it because they also deal in shares. (6) Creating and Dealing in Bank Money : Most of the commercial banks claim at they do not create money but only deal in money. But this is not true because in process of dealing in money, they create money: and bank money is in circulation n a very large scale in modern economies. An example will make the process of the AND freation of bank money very clear. When a person is given a loan by a bank, normally, e person is allowed to operate a bank account to the extent of the amount of credit ven to him. The person makes his own payments by issuing cheques. The cheques vices {drawn on the bank are accepted in settlement of payments and they continue to srvices form the functions of money. Thus, banks in the process of advancing loans, also ite money. ae : (7) Encouragement to Trade and Industry : By providing loans to traders and an the #Mdustrialists, commercial banks encourage their activities! Industrialists need working > save ffapital. Traders need short-term accommodation for purchase of stocks. All such needs bring dare met by bank credit.'SY.B.Com. Indan Banking Systern cture and Role of Indian Banking System, (g) Equitabie Oistrivation of Funds ; Savings are not equitably distributed throughout the county. Yao? vegions whic are advanced have larger funds: while the backward regi Banks collect funds where they are available and provide them to Thus, they serve to distribute funds equitably. 1 (9) Promotion oi f s promote the habit of thrift among . ; the people, by nia! t facilities for the safe-Keeping and safe; Investment of thei: bard sued Japusitors ge! interest and their money, which would have remained idle raductive purposes. ‘ Ai) Influence on Rates of taterest 5 influence the market rates of interest ag they provide toaris cor various terms. A higher rate for a particular type of lending Induces the barks t- het field and the market rate then comes down, Thus, a uniform interest rate simvorure 5 brought into existence as a result of the activities of | ¢ bank, a ’ ‘ : [B] Role of Banking Syste: in the Economic Growth and Development a : AG After having discussed the charging zole of commercial banks in general and that in developing econemies § particular, we are now in a position to analyse the various | 5 ways in which commercial tanks a developing economy can help the process of? d economic developmen. They are as follows ite n “tal formation. For this purpose, it is necessary that the rate of savings increases. - Commercial banks ca: said do serve a very useful purpose in raising the level of aggregate savings. In th piace, commercial banks can provide objective conditions ¢ irwhich people feel that their savings will be secure im the hands of the banks, This} U sense of security induces people to save and thus, total savings increase. Secondly, for want of proper opportuvisties, peopie in low income groups are not able to save. But by} fi operating savings acc ommercial banks provide an opportunity to small savers to} 5 save and invest in productive tields. This is another factor that leads to an increase in} total savings. Finally. the coimercial banks device a number of schemes offering Ko Capital Formatiun : Economic development requires ani increase in the rate off « attractive benefits 10 the customers. Thus. they ave able 10 mobilize larger amounts of savings pb, (2) Promotion of Eoterprise : Just as capital is one important factor that must : grow if the economy is to levelop, enterprise is another important factor that must grow and help the econonm’ tc develop. This requires the expansion of the entrepreneurial] 5 “ class which is willing t accept risks and challenges. Many times, it so happens that there are people who have te qualities of a promising entrepreneur, but they do not have the money or capitai to put their plans into practice. Hence, banks have any important function to perform. They can scrutinize and select the plans of enthusiast entrepreneurs aud make flzance available to them. Thus, by promoting enterprise banks can help rapid economic development (3) Monetization of Debts : Commercial banks serve to increase investable fun by offering to monetize debts if and when required by creditors. Thus. people who hav savings may hold back a part of them as a precaution against unforeseel Circumstances. But banks offer their services whereby people can hand over thel bonds, securities, shares. etc., to the banks against which they (the people) can borro and meet their needs of cash. This is known as monetization of debts it serves SEA SEE TCR LE~ o stem = 5 v.8.Co Indian Banking System 13 ‘Structure and Role of indian Banking System outed * sncrease the level of investment: since, with a banking system: seady to monetize debts, le the it is no longer necessary for the people to hold bark any mach for unforeseen needs, 2 and / They can invest all their investable funds. ‘ands <4] Development of Trade and Commerce : Development of trade and commerce promotes industrialization by causing the expansion of the market aud widening uf t mong: hinterlands that supply raw materials io industries. Comnuereia! banks provide short ee ies. They help the One} expansion of the bill-market. All these bankiniy services het ne sages “of trade and commerce, which, in tum, aids economic deve’ terest ; , . , . ding, (©) Regional Balance : 1 the vanking sysiew a g aveloping economy has ius, a? network of branches, it can help economic developmiént in’ another way. the banks can ies of; transfer surplus funds from regions where they are abundana to these regions which ' are starved of capital. For example, the branches of a bank: iu well developed urban ~y centers can collect large amounts of savings, because the savings potential of these { centres is very high. The same savings, through branches in underdeveloped areas, can {that 4¢ made available to investors in such areas This distribution of funds opens up new tious fields of investment. Thus, the banking system not only paves the way of economic peshaty development between the advanced and the backward regions in a country, but also helps to correct the imbalance in development between the advanced and backward regions of the country. ate of zases. | vel of (6) Influence on interest Rates : As imp itions’ commercial banks can influence the supply of mon more or less credit, . This} they can exert a significant influence on the market of Interest. They also thereby ly, for] influence the choice of the People between holding more or fess of liquid assets. This tut by] further influences the rates of interest. A chean money policy with low interest rates ers to} stimulates economic development. fenngt AW) Blastic Money Supply : Through their activity of credit creation, commnercial nts off Panks facilitate the expansion and contraction of the total cupply of money. Similarly, j bY transferring funds from one piace to another, they can aajust the supply of credit to must, demand for it in different regions, as well as in the different sectors of the economy. t grow] THUS. they serve to make money supply more elastic. The elasticity of the supply of eurial] "SY $s very important for the smooth functioning of the economy, as well as for economic development. s that! Tastituti¢ he money niarket, 4o not; (8) Regulation of Economic Activity : In a civeloping country, the function of ve anithe regulation of the flow of credit by central bank is of t've siastic| °SPecially true when economic development is planned most importance. This is Che plan lays down priorities, and on the basis of these priorities, the development of various sectors has te take ‘jplace. Regulation of credit then becomes an important instrument, whereby the central ank prevents credit from flowing into those sectors which are riot given priotity in the funds! plan, and at the same time, credit is channelized into the sectors which claim top > have|priority. The effectiveness of the central bank's credit contro! measures, however, oem cepends upon the extent to which commercial hanks have spread thelr networks in the theitivarious sectors of the economy. As well developed commercial banking system: wmoN|therefore, facilitates the regulation of credit by the central bank and thus aids eccnomic ves toldevelopment. os “prise,{ Role of indian Banking System, Modernization of Business : Commercial banks. represent the modem organised sector and they are themselves following modern methods of management, accounting, project-evaluation and so on, When business units from the unorganised sector approach commercial banks for accommodation, they aré exposed to these wrodern business practices. Thus, for example an agriculturist, a minor industrialist or any other small businessman has to submit his project (0 the bank to forecast the ceenand for his product and has to prepare his budget. By doing all these things he gets sx intimation to the modem business practices which he may adopt in the management this business. This, obviously, has a salutory effect in a developing economy 16 Stetue and .¥.8.Com Indian Banking Syste” (10) Consultancy Services : Besides, commercial banks may also provide financial guidance to entrepreneurs, advise them on the feasibility of their projects and furnish necessary information regarding various sources of finance, technical help, marketing services, etc. These services which are incidental to the usual banking function, go a long way in encouraging lthe development of agriculture, small-scale industries and other types of minor business. 1 | ‘SUBJECT TESTING ~ | | Q. 1 Answer the following question in 20 words : | | 1, What is Monetization of Debts ? Q.2 Answer the following question in 50 words | 1, Explain the importance of Banking System in India. (april 2007) | Q.3 Answer the following question in 150 words : | 1. Role of Banking System in Indian Economy (April 2007) | Q. 4 Answer the following question in 300 words : 1. Explain the importance of Banking System In Economic Growth and Development. 4.3 STRUCTURE OF INDIAN BANKING SYSTEM ‘The banking system of a country occupies @ pivotal role in functioning and) development of a country's economy. In fact, it ies at the core of the money market and? also plays a complementary role in supporting the capital market. We must therefore,t take a comprehensive view of the structure of the bariking system In India. It is necessary to remember that the structure of the banking and financial system! of any country is neither created at one stroke, nor is it permanent for all times to, some ‘The fact of the matter is that various institutions get evolved over & period of time, either through the trial and error method adopted by the people or at the snstance| of the Government. A look at the structure of the Indian Banking system, would show! how various institutions have evolved as and when such @ need arose and both at thes instance of the Government, as well as on the intitiative of the people engaged ul financial activities sydern nent, aised chese? st or} 1 gets? Industrial Davelpoment NABARD Exim Bank BE National + Bank of India (IDB1) mk Small Industral Develpoment Ba ‘Bank of India (SIOBI) BANKING INSTITUTIONS ~~] —j-— Commercial Banks Regicnal f Co-operative 1 Banks | Public Sector Private Sector | Co-operatve | Banks Banks es i 4 a] | | fndian Foreign Ie eae | i 1 i i i Old New Local Arca Distinct Centar | : State Bank Nationalised I ; F Group Banks Paar) Credit | on | Subsidiary Comoanies Co-operative i State Bank Subsidiary of india Banks 907) | Subsidiary Companies t — ne H Development Bunks and |} _ - - H Industrial Development Banks 2n0 Development Banks | I ! State Level Land All India State Level Develo oer 1 i and| IFCiUtd. ICI SFCs_— SIDES Primary Land tand, Development Ban : Subsidiary Subsidiary , eae efore, Companies Companies lavestment institutions | ner Pal uc cic ut ‘stem| Credit Guarantee Institutions es to! a —— EC oiecci od of ped Investment institutions bees tancel —_—_—}—--- shi uc Pe ca unl loney Market Institutions tt the Discuunt and Finance House of ls ed in] | Fig. 1.1 : Structure of Indian Banking System |Structure and Role of Indian Banking System S.Y.B.Com. Indian Banking Systemn_ other public sector banks, With the merger of New Bank of India with the Punjab National Bank, the number of other public sector banks now stands at 19!) ‘The difference between the state bank Group and the other public sector banks is aS follows (i) All the 27 public sector banks are corporate bodies, but they were established or nationalised at different times and under different conditions. (ii) The banks nationalised in 1969 and 1980 were wholly: owned by the Government of India, whereas in case of the State Bank of India, the Reserve Bank of India had major ownership and a small private ownership in the share capital was allowed initially. lit) Under Section (45) of the RBI Act 1934, the State Bank of India acts as the agent of the Reserve Bank of India 5, -New Private Banks and Local Area Banks With the predominance of nationalised banks in India, no new private sector bank was set up, may be, because no private company came forward though legally there was no bar. After the Narasimham Committee Report (1991) the RBI issued guidelines for the setting up of new private sector banks in January 1993! These guidelines have the following main features — (i) Any new bank shall be registered as a public Itd. company under the Company's ‘Act 1956. (ii) Preference for giving a licence shall be given to a bank intending to locate its head-quarters at a centre having no head-quarters of any other bank. (ii) Voting rights of individual shareholders will be subjected to the usual ceiling of 10%, though public financial institutions can be made an exception. (iv) The minimum paid-up capital for such banks shall be Rs. 100 crores with the promoter's contribution of 25%. For the NRI participation in primary equity the limit is 40%. {v) It was obligatory to list the shares on the stock exchanges. (vi) The capital adequacy: norm of 8% of risk-weighted assets shall apply to such tanks right from their launching. (vii) For a period of 3 years after establishment, the bank is not permitted to setup a subsidiary or a mutual fund. (viii) The provisions of the RBI Act, Banking Regulation Act and other statutes will off course be applicable to the new banks. : Local Area Banks : With an objective of providing an institutional mechanism in the rural and semi- urban areas for promoting savings and also for making credit facility available in such areas, Local Area Banks received a green signal from the Government of India in 1996. These banks could be established as public Itd. companies in the private sector and could be promoted by individuals, companies, trusts and societies, with a minimum paid up capital of Rs. 5 crores with promoter’s contribution of Rs. 2 crores, The area of | Operation of such banks has a ceiling of three geographically contiguous districts. The head-quarters also must be at a district level with branches in a maximum of three districts noted above. | 4 6. Regional Rural Banks : Regional rural banks are those banks which provide credit to the weaker sections of the rural area, ie. to landless agricultural labourers, rural artisans, small and marginal farmers etc.2M $s ¥.8.Com. Indian Banking System at _ and Role of indian Banking System ab 7, The Apex Banking Institutions 9 «Under the mentorship and overall control of the Reserve Bank of India, various &S F apex banking institutions as shown in Fig, 1.1. have been established during the post independence era, caf (a) Industrial Development Bank of India (IDBI) : ess rrr he § started as a subsidiary of the RBI in 1964. It was expected to provide direct assistance i eS rr LL wre f In 1976, the IDBI was de-linked from the RBI and its share capital was transferred to : the Central Government. This resulted in enlargement of its role in functioning as a he | co-ordinator of all term-lending institutions and public sector banks in the ecvune | (o) Small Industries Development Bank of India [SIDBI] In April 1990, a seperate apex development bank namely The Small Industries nk ¢ Development Bank of India’ came into existence. The SIDB} is a fully owned subsidiary as} of the Industrial Development Bank of India and it has taken over IDBI's financing for} activities relating to the small scale industrial units, It is concerned mainly with he | (@) refinancing after loans granted by other financial institutions, (b) discounting as well ee rrr by small re Manufacturers, (c) equity assistance by way of seed capital, (4) rediscounting of short YS} term trade bills in the small scale sector and resource support to institutions concerned with the development of SSI units, For the refinance purposes, SIDBIs resourece neve “S4 augmented through loans from OCF, Japan and the Aen Development Bank (c) National Bank for Agricultural and Rural Development [NABARD] : of, Established in 1982 by combining the Agricultural Credit Department and Rural Planning and Credit Cell of the RBI and the Agricultural Refinance and Development he} Corporation, this national bank caters to the three types of needs of agriculture and he} rural development by performing (a) credit functions, (b} developmental functions, {c] regulatory functions. The State Co-operative Banks, Regional Rural Banks, State Nam peevslopment Banks and Commercial Banks get refinance facility, hom she | ch} NABARD. It co-ordinates the operations of the rural credit agencies, and’ acre us te agent of the Government and the RBI sal @) Export-Import Bank of India (EXIM Bank) : “1 Established in 1982, EXIM bank acts as the apex banking institution in the field of zi| reign trade. Broadly, its functions include the financing “of exports and imports, OH) financing of joint ventures in foreign countries, financing of export and import of machinery on lease basis, and assisting the Indian party to a joint venture in « foreign sountry. The bank can raise resources through issue of bonds and debentures in the ar} open market and by borrowing from the RBI’s national industrial credit (long term Nationalization of Banks in India: “Nationalization is a process whereby a national government or State takes over the private industry, organization or assets into public ownership by an Act or ordinance or some other kind of orders.” This strategy has been frequently adopted by socialist governments for transition from capitalism to socialism. The banking sector in India has been facing extreme changes with the economic growth of the country. In 1948, RBI (Transfer of public ownership) Act was passed to nationalized the Re: Bank. On Jan 1, 1949, RBI was nationalized. In 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of India”, to act as the principal agent of RBLand to handle banking transactions all over the country. It was established under State Bank of India Act, 1955, cIve On 19th July, 1969, 14 major Indian commercial banks of the country were nationalized whose deposit was minimum 50 Crores under the supervision of Prime Minister Indira Gandhi. On 15" April, 1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20, Seven more banks were nationalized with deposits over 200 Crores. Later on, in, the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. Till the yearl980 approximately 80% of the banking segment in India was under govemment’s ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and hence, the gateways for the new private sector banks were opened ‘The banks that were nationalized in 1969 are listed below. ( 1° Phase) /2 Bank of India ‘7 Syndicate Bank 12 Indian Bank —— | _______ —_______ Prof.S.D, Bansode Page 1‘The banks that were nationalized in 1980 are listed below. ( 2" Phase } 1 Andhra Bank | 2 Punjab & Sindh Bank 3 New Bank of India 4 Vijaya Bank 5 Corporation Bank | I° Oriental Bank of Commerce | _—____ | Note: New bank of India was merged with Punjab National bank in the year of 1993. Key Points : - V.V.Giri Prime Minister- Smt. Indira Gandhi Finance Minister- Morarji Desai RBI Govemnor- L.K. Jha 2" Phase: 1980 President- Neelam Sanjeeva Reddy Prime Minister- Smt. Indira Gandhi Finance Minister- R.Venkataraman RBI Govemnor- I.G. Patel Note: Information Taken from Wikipedia. > Objectives (Reasons) Behind Nationalization of Banks in India 1. To reduce monopoly practices: Initially, a few leading industrial and "business houses had close association with commercial banks. They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalization of banks, thus, prevents the spread of the monopoly enterprise. 2, Social control was not adequate: The ‘social control’ measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, nationalization was necessitated by the failure of social control, Prof. S. D. Bansode3. To reduce misuse of savings of general public: Banks collect savings from the several public. If itis in the hand of private sector, the national interests may be neglected, besisles, in Five-Year Plans, the government gives priority to some specified sectors like agriculture. somzll- industries etc. Thus, nationalization of banks ensures the availability of resources to the plan priority sectors 4. Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion there is possibility tc mobilise rural savings 5. Advance loan to agriculture sector: If banks tail to assist the agriculture in many ways. agriculture cannot prosper, that too, a country like India where more than 70% of the population depends upon agriculture, Thus, for providing increased finance to agriculture banks have t be nationalized. 6. Balanced Regional development: In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas becatise of poor business potential and profit opportunities, Nationalization helps to provide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities 7. Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt. it becomes easy for the Central Bank to bring about co-ordinated credit control. This necessitated the nationalization of banks. 8. Greater Stability of banking structure: Nationalized banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalized banks will impart greater stability for the banking structure > Arguments in favour and against nationalization of banks: Arguments in favour of Nationalization: 1, It would enable the government to obtain all the large profits of the banks as its revenue. 2. Nationalization would safeguard interests of public and increase their confidence Uieicby bringing about a rapid increase in deposits. Thus preventing bank failures. 3. It would remove the concentration of economic power in the hands of a few industrialists. 4. It would help in stabilizing the price levels by eliminating artificial scarcity of essential goox's 5. It would enable the baking sector to diversify its resources for the benefit of the priority se 6. Eliminates wasteful competition and raises the efficiency of the working of banks. 7. Enables rapid increase in the number of banking offices in rural & semi-urban areas & helped considerably in deposit mobilization to a great extent, 8, Necessary for the furtherance of socialism and in the interest of community. 9, Enables the Reserve Bank to implement its monetary policy more effectively. 10. It would replace the profit motive with service motive. | ee SS SLA Prof. S.D. Bansode Page 3iL, It would secure standardization of banking services in the country, 12. Would check the incidence of tax evasion and black money. 13. Through pubic ownership and control, banks function like other public ulility services by catering to the financial need of the common man. 14, Like other countries, India should also get profit by natioaalizing her banking industry 15, Essential for successful planning and all-round progress of the national economy, commenity development and for the welfare of the people Arguments against Nationali ion (Critiei m) / Problems of Nationalization L Political purpose rather than for Productive purpose: The goverment has acyuiired the strength of a giant and there is the danger of using the financial resources for political puxpas, rather than for productive purpose. 2.Beginning of state capitalism: Such a drastic step of nationalization of about 90% of the banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling banks’ resources. It is considered! as the beginning of state capitalism and not socialism in India. 3.Scope for inefficiency: Some are of the opinion that after nationalization banks will degenerate to the level of agricultural co-operatives, which are known for their inelfi and corrupt practices. iene: 4.Less attractive customer's service: Inefficiency, indecision, corruption, and lack of responsibility are the evils with which the government undertakings are suffering. A government bank may not care to attach importance to the customer service. 5, Seerecy of customer's accounts: In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer's accounts. As such, they may be forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus nationalization of big Indian banks .will diverts some of the deposits of Indian banks to the foreign banks which is not at all desirable. 6. Branch expansion: To argue that nationalization will help to facilitate branch expansion to rural areas much more rapidly than the private banks cannot be supported by facts. Weather it is private bank or nationalized bank; it has to go by business principles and satisfy itself that the new branch is economically viable. In other words, branch expansion can be achieved by private banks as well, without nationalization 7. Burden of compensation: Nationalization leads to the payment of heavy compensation to the shareholders. This gives additional financial burden on the government. Moreover, it is also argued that nationalization will not bring much income to the government. In spite of these criticisms, we cannot ignore the fact that at present, nationalization of banks is an accomplished fact. By and large this measure received support from almost all seotions of the public, It was welcomed by the middle class people and small industrialists and smell t: Prof. .D. Bansode Page 4