Description
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry.
Project Report on Development of Banking
Sector – SBI
Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The
paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.
Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9th August, 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated
reason for the nationalisation was to give the government more control of credit delivery. With
the second dose of nationalisation, the GOI controlled around 91% of the banking business of
India.
After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.
Liberalisation
In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be known as
New Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as
Axis Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank.
This move, along with the rapid growth in the economy of India, kickstarted the banking sector
in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting
rights which could exceed the present cap of 10%,at present it has gone up to 49% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The
new wave ushered in a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded more from their banks
but also received more.
? Current situation
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales.In March 2006, the Reserve Bank of India allowed Warburg Pincus to
increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time
an investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005
that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to
a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.
doc_960947110.docx
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry.
Project Report on Development of Banking
Sector – SBI
Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the GOI in the annual conference of the
All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The
paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.
Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9th August, 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated
reason for the nationalisation was to give the government more control of credit delivery. With
the second dose of nationalisation, the GOI controlled around 91% of the banking business of
India.
After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.
Liberalisation
In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be known as
New Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as
Axis Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank.
This move, along with the rapid growth in the economy of India, kickstarted the banking sector
in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting
rights which could exceed the present cap of 10%,at present it has gone up to 49% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The
new wave ushered in a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded more from their banks
but also received more.
? Current situation
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales.In March 2006, the Reserve Bank of India allowed Warburg Pincus to
increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time
an investor has been allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005
that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to
a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%
respectively.
doc_960947110.docx