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Nationalization of banks: Objectives, Reasons, Impacts - full notes -commerce -banking

 

  • Nationalization of banks means to take the banks under govt. Undertaking.

  • Banks after nationalization come directly under Banking Regulation act 1949.

  • RBI became the first nationalized bank in India in July 1949.

  • RBI later became the regulatory authority for banking in India.

  • Further 14 other banks were nationalized in July 1949.

  • Bank of India, PNB and many other were part of this nationalisation.

  • While the next phase of nationalisation saw 6 other commercial  banks nationalised in 1980. These include Vijaya bank, Corporation bank etc.


Objectives of Nationalization

  • To eliminate concentration of economic power in few hands

  • To diversify the flow of bank credit towards the priority sector consisting of agriculture and allied activities, small scale industries and small businesses.

  • To foster a new class of entrepreneur so as to create, sustain and accelerate economic growth.

  • To professionalize bank managements.

  • To impart adequate training as also reasonable terms of service to bank staff

  • To extend banking facilities to unbanked rural areas.


Reasons for Nationalisation :

  • To energise priority sectors at a time when the large businesses dominated credit profiles.

  • There were 361 private banks which failed across the country in the period from 1947 to 1955, translating to an average of over 40 banks per year.

  • This has resulted in depositors losing all their money as they were not offered any guarantee by their respective banks.

  • Ignoring the agricultural sector: Commercial banks were seen as catering to the large industries and businesses, ignoring the agricultural sector.

  • In 1950, only 2.3% of the bank loans were channelled to farmers, with the figure declining to 2.2% by 1967.

  • Opening new branches: The focus was also on opening up of bank branches in the rural and backward areas.

  • Mobilization of savings: Nationalisation aimed at mobilizing the savings of the people to the largest possible extent and to utilize them for productive purposes.

  • Economic and Political reasons: Bank nationalization was one of her responses to the economic and political challenges of the time.For example, there were two wars—with China in 1962 and Pakistan in 1965—that put immense pressure on public finances . Two successive years of drought had not only led to food shortages, but also compromised national security.

Impact of nationalization:

Positive impact:

  • Increase in Savings: Financial savings rose as lenders opened new branches in areas that were unbanked. 

  • Gross domestic savings almost doubled as a percentage of national income in the 1970s.

  • Improve in bank efficiency: Due to the nationalization of banks, the efficiency of the banking system in India improved. This also boosted the confidence of the public in banks.

  • Small scale industries boost: The sectors that were lagging behind like small-scale industries and agriculture got a boost. This led to an increase in funds and thus increases in the economic growth of India

  • Penetration of banks: The nationalization of banks also increased the penetration of banks. This was mainly seen in the rural areas of India.

  • Financial inclusion:  It was witnessed because:

  • India’s nationalisation led to an impressive growth of financial intermediation.

  • The share of bank deposits to GDP rose from 13% in 1969 to 38% in 1991.

  • The gross savings rate rose from 12.8% in 1969 to 21.7% in 1990.

  • The share of advances to GDP rose from 10% in 1969 to 25% in 1991.

  • The gross investment rate rose from 13.9% in 1969 to 24.1% in 1990.

  • Nationalisation also demonstrated the utility of monetary policy in furthering redistributionist goals.

  • Outreach increased: Banks were no longer confined to only metropolitan or cosmopolitan in India. In fact, the Indian banking system has reached even to the remote corners of the country.

  • Increase in Public deposits: Purpose of nationalization is to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas.

  • Green Revolution: This is one of the main reasons for India’s growth process, particularly in the Green revolution.

Negative impact:

  • Socio-economic objectives : Failed to eradicate poverty and in scaling down inequalities of income, wealth and entitlements, especially in rural India.

  • Never suppressed private banks: The performance of nationalised banks, on the parameters of branch expansion as well as increasing the number of deposits, never surpassed that of private banks.

  • Not able to achieve financial inclusion: Though bank nationalisation was made for the purpose of extending bank facilities to rural areas, financial inclusion was only increased post the implementation of Jan Dhan Yojana.

 




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