Commercial Banks: Social Control and Nationalization of Bank

Background and Issues at Independence:

• At the time of India’s independence, private sector banks were predominantly urban-oriented and controlled by a few industrialists.
• The credit needs of key sectors like agriculture, small-scale industries, and weaker sections (such as small traders and artisans) were largely ignored.
• Despite agriculture being the main occupation for about three-fourths of the population and contributing 50% to the gross domestic product (GDP), only 1% of the total bank credit went to the agricultural sector as of June 1967.
• Private money lenders, who charged very high interest rates, dominated agricultural credit.

Social Control over Banks:

• To address these issues, the government imposed social control over banks in 1968. The objective was to ensure that bank credit reached priority sectors, such as agriculture and weaker sections of society.
• Social control led to the opening of 785 new bank branches by mid-1969, but did not significantly improve the flow of credit to agriculture or weaker sections.
• Many banks continued to ignore government directives, prompting the government to consider nationalization of banks as a more effective solution.

Nationalization of Banks (1969):

• On July 19, 1969, the Government of India promulgated the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969, which resulted in the nationalization of 14 commercial banks that had deposits of more than ₹50 crore each. These banks were:
  1. Central Bank of India
  2. Bank of India
  3. Punjab National Bank
  4. Bank of Baroda
  5. United Commercial Bank
  6. Canara Bank
  7. United Bank of India
  8. Dena Bank
  9. Union Bank of India
  10. Allahabad Bank
  11. Syndicate Bank
  12. Indian Bank
  13. Bank of Maharashtra
  14. Indian Overseas Bank

Objectives of Nationalization:

The nationalization of banks under the leadership of Prime Minister Indira Gandhi aimed to:

1. Remove control over the banking business from a few industrialists.
2. Eliminate speculative and unproductive uses of bank credit.
3. Expand credit to priority areas like agriculture and small-scale industries, which were largely neglected.
4. Professionalize bank management and provide training to staff.
5. Encourage new entrepreneurs by providing financial support.

Second Phase of Nationalization (1980):

• Encouraged by the success of the first phase, six more private sector banks with deposits over ₹200 crore were nationalized on April 15, 1980:
  1. Punjab and Sind Bank
  2. Andhra Bank
  3. New Bank of India
  4. Vijaya Bank
  5. Oriental Bank of Commerce
  6. Corporation Bank
• As a result, by June 1992, bank advances to the agriculture sector had increased to 16.2% of total credit, compared to just 1% in 1967.

Bank Mergers:

In recent years, several significant bank mergers have taken place, particularly in the public sector:

1. State Bank of India (SBI) merged with five of its associate banks (SBBJ, SBH, SBM, SBP, SBT) and Bharatiya Mahila Bank (BMB) in 2017.
2. Bank of Baroda, Vijaya Bank, and Dena Bank merged in 2019, forming a consolidated entity.
3. Punjab National Bank (PNB) merged with Oriental Bank of Commerce (OBC) and United Bank of India (UBI) in 2020, becoming the second-largest public sector bank in India.
4. Canara Bank and Syndicate Bank merged in 2020.
5. Union Bank of India, Andhra Bank, and Corporation Bank merged in 2020.
6. Indian Bank and Allahabad Bank merged in 2020.