Essay on the Major Banking Developments/Reforms After Independence

After, independence, the Government of India launched economic planning in the country since 1951. During the last six decades of the planning era, commercial banking has undergone drastic transformation through several important developments/reforms and policy measures introduced by the government. Some of these are discussed in a nutshell in the following sections.

Some of the major changes introduced in the Indian banking system may be enlisted as follows:

(i) Liquidation and amalgamation of banks;

(ii) Nationalisation of the Reserve Bank of India;

(iii) Banking legislation;

(iv) Evolution of public sector banking through bank nationalisation;

(v) Declining significance of foreign banks;

(vi)Structural changes of commercial banking;

(vii) New strategies in banking business;

A brief account of these developments is given below.

Liquidation and Amalgamation of Banks :

Even in the post-Independence period when the history of bank failures continued, the Reserve Bank of India adopted a deliberate policy of systematic elimination of weaker and uneconomic banking units by resorting to relicensing, compulsory mergers/amalgamations and liquidations of such banks, thereby strengthening the banking system in the country.

As history goes, there were 14 bank failures in 1954, which came down to 4 in 1963. During the decade 1954-1963, there were 92 cases of total bank failures which also included two scheduled banks (the Laxmi Bank and the Palai Central Bank in 1960).

This led the government to insert a new section, Section 45 in the Banking Companies Act in September 1960, which empowered the Government of India, on the recommendation of the Reserve Bank, to compulsorily amalgamate weak banks with strong well-managed banks.

In the 1960s, thus, a strong move to consolidate the banking system had taken place. As a result of mergers, amalgamations and liquidations, the number of scheduled banks declined from 92 in 1951 to 73 by end of June 1969 and that of non-scheduled banks from 474 to 16 in the same period.

During the post- bank nationalisation period (i.e., July 1969 onwards) 13 more non-scheduled commercial banks went out of business, so that by 1985 their number had declined to 3.

Nationalisation of the Reserve Bank of India:

In 1935, the British Government in India had started a central bank called the Reserve Bank of India as a private sector bank. After Independence, it was quite logical on the part of the new national government to nationalise it.

Eventually, by passing the Reserve Bank of India Act in 1949, the Reserve Bank of India was taken over by the Government of India as a state- owned central bank. This was a right step on the part of the government.

It not only improved the prestige and authenticity of the Reserve Bank of India as a central bank of the country, but it was also necessary for giving a desired shape to the working of the banking system conducive to the plan objectives and priorities.

Banking Legislation :

Legislative safeguards and control of the banking business are necessary in national interest. Till Independence, however, the banks in India were functioning without any effective legislative controls by a central bank.

In fact, till 1935, there was no central bank in the country. There were no comprehensive banking laws, except the Bank Charter Act, 1876 which regulated three Presidency Banks, and the Indian Companies Act, 1913, which provided some safeguards against bank failures.

Even the Reserve Bank of India Act, 1934 did not contain much, except empowering the Reserve Bank to include or exclude a bank from the list of scheduled banks.

The Indian Companies (Amendment) Act was, however, passed by the Government in 1936, to incorporate major recommendations of the Central Banking Enquiry Committee.

The Act was further amended in 1942. In 1946, however, the Banking Companies Act was passed containing some provisions to regulate banking companies in the country.

Still, there was an urgent need for a comprehensive banking legislation rightly felt by the national government. Consequently, the Banking Companies Act, 1949 was passed by the Government of India.

The act was later on renamed as the Banking Regulation Act, 1949. To regulate the banking business, the Act vested enormous powers of supervision and control in the hands of the Reserve Bank of India.

The Act had gone through several amendments from time to time and the Act, as such, comprehensively codifies all major aspects of banking business, right from the licensing of banks, their functions, capital requirements, liquidity, amalgamation, inspection, developmental problems and so on.

Evolution of Public Sector Banking Through Bank Nationalisation:

India marched towards the establishment/expansion of public sector banking through the progressive nationalisation of commercial banks. There were three phases of bank nationalisation:

1. Nationalisation of Imperial Bank of India in 1955 and its seven associate banks in 1959- 60.

2. Nationalisation of the 14 major commercial banks in 1969.

3. Nationalisation of 6 more commercial banks in 1980.

On July 1, 1955 the Government of India nationalised the Imperial Bank of India and converted it into the State Bank of India. The establishment of the State Bank of India (SBI) was a pioneering attempt in introducing public sector banking in the country. Later on in 1959- 60, seven subsidiary State Banks were also nationalised to form the SBI Group.

The SBI Group had its laudable objective of bringing rural orientation in Indian banking, which it achieved with remarkable success.

For a short period during December 1967 to June 1969, the Government of India pursued the policy of social control of banks aiming at an equitable and purposeful distribution of credit towards developmental needs.

For some reasons, however, the government was not fully satisfied with the implementation of social controls over banks in achieving the social goals.

An idea was thus mooted that the social ownership would serve a better purpose rather than mere social contracts to fulfill the socially-desired objectives.

Eventually, on July 19, 1969, fourteen major Indian scheduled banks (with deposits of over Rs. 50 crores) were nationalised by the government with a view to serve better the needs of development of the economy in conformity with national priorities and objectives. These fourteen nationalised banks are:

(1) The Allahabad Bank; (2) The Bank of Baroda (3) The Bank of India; (4) The Bank of Maharashtra (5) The Canara Bank; (6) The Central Bank of India (7) The Dena Bank; (8) The Indian Bank; (9) The Indian Overseas Bank; (10) The Punjab National Bank; (11) The Syndicate Bank; (12) The Union Bank of India; (13) The United Bank of India; and (14) The United Commercial Bank.

As a result, 85 per cent of the banking business in terms of deposits was brought under public control.

On April 15, 1980, six more Indian scheduled banks (with deposits of over Rs. 200 crores) were nationalised. These banks are:

(1) The Andhra Bank; (2) Corporation Bank; (3) The New Bank of India; (4) The Oriental Bank of Commerce; (5) The Punjab and Sind Bank; and (6) Vijaya Bank.

As such, over 90 per cent of the banking activity in the country is brought into the public sector.

In short, nationalisation of banks implied a bold and major economic step in the process of banking reforms in the country. It has resulted in the evolution of public sector banking.

With the progress of Indian commercial banks, especially in the post-nationalisation period, the importance of foreign banks has started diminishing.

Their degree of monopoly in financing India’s foreign trade has been considerably reduced in recent years, since the public sector banks have also started participating increasingly in the field as well.

As an impact of nationalisation, the structure of Indian commercial banks has radically changed.

Apart from the phenomenal growth of banking institutions in the country, government ownership and control over the banking business also led to dynamic changes in the banking policies and to new strategies of banking development during the almost two decades of post-nationalisation period.