Commercial banks (both public and private), Regional Rural Banks, Cooperative Banks, etc. our banking system. The nationalization of banks is one of the significant events in the development of the Indian banking system. The event paved the way for India’s economy to climb into the top ten economies in the world.
The progression of the Indian financial sector can be divided into three stages:
- Before 1947, the pre-independence period
- From 1947 until 1991, the country was in the post-independence phase.
- The LPG era (1991) and onwards, i.e. 1991 and onwards
1. Pre-Independence Period
The presence of a large number of banks in India characterizes this phase. In India, there were over 600 banks. The development of the banking system began in 1770, when the Bank of Hindustan was established in the then-capital, Calcutta (now Kolkata). In 1832, the bank discontinued operations. Many additional banks arose after the Bank of Hindustan, including the General Bank of India (1786-1791) and the Oudh Commercial Bank (1881-1958), but they did not last long. The Oudh Commercial Bank was India’s first commercial bank. Some 19th-century banks are still in operation today, establishing themselves as model institutions.
Allahabad Bank, for example, was founded in 1865, and Punjab National Bank was founded in 1894. In addition, several banks, such as the Bank of Bengal (founded in 1806), the Bank of Bombay (founded in 1840), and the Bank of Madras (founded in 1843) were combined into a single institution. The new institution was initially known as the Imperial Bank of India, but it was eventually renamed the State Bank of India. On the proposal of the Hilton Young Commission, the Reserve Bank of India was established in 1935. Due to the failure of the majority of small banks during this period, public confidence was poor, and individuals continued to deal with money lenders and unorganized players.
2. After independence Phase – 1947 to 1991
The nationalization of the bank was one of the period’s most notable elements.
Why was it necessary to nationalize?
- The banks mostly served huge corporations.
- Agriculture, small-scale industry, and exports were among the sectors that were behind.
- Moneylenders preyed on the masses.
As a result, the Reserve Bank of India was nationalized in 1949. During the rule of Smt. Indira Gandhi, fourteen commercial banks were nationalized over the course of two decades. Regional Rural Banks (RRBs) were established in 1975, based on the Narasimham committee’s recommendation, with the goal of servicing the underserved.
The main purpose was to reach out to the general public and promote financial inclusion. Other specialist banks were also established to promote the economic activities that were required. NABARD, for example, was founded in 1982 to assist agricultural-related projects. Similarly, the EXIM bank was established in 1982 to facilitate export and import. In 1988, the National Housing Bank was founded for the housing sector, and in 1990, the SIDBI was established for small-scale companies.
Was the Nationalization Process a Success?
Nationalization was a crucial milestone in the banking industry, and it aided in the restoration of public trust in the system. Small and vital industries began to have access to financing, which aided in the expansion of the economy. Furthermore, the move aided the country’s development in the global banking sector.
3. The LPG Era (1991) and Beyond 1991 saw a significant shift in the Indian economy.
India’s economy was opened up, and international and private investors were invited to invest. The introduction of private players into the banking sector was characterized by this move. The RBI granted banking licenses to eleven private businesses, with ICICI, HDFC, Axis Bank, IndusInd Bank, and DCB among the noteworthy survivors.
In 1998, the Narsimham committee advised that additional private players be allowed to participate. As a result, the RBI granted Kotak Mahindra Bank and Yes Bank licenses in 2001 and 2004, respectively.
The final round of licensing took place over a decade later. IDFC Bank and Bandhan Bank were granted licenses by the RBI in 2013-14. The story didn’t end there; in order to ensure that every Indian has access to finance, the RBI introduced two new types of banks: Payments banks and small banks, marking the start of the banking industry’s fourth phase.
These institutions are permitted to receive a minimal deposit (Rs. 1 lakh per currently). These banks are not permitted to offer credit (including loans and credit cards), although they are permitted to maintain current and savings accounts.
ATM/debit cards, online banking, and mobile banking are some of the other options available. The first payment’s bank was started by Bharti Airtel.
The six most active payments banks are shown below –
- Aditya Birla Payments Bank
- Airtel Payments Bank
- India Post Payments Bank
- Fino Payments Bank
- Jio Payments Bank
- Paytm Payments Bank
2. Small Finance Bank
These are specialty banks that provide basic banking services such as deposit acceptance and lending. The primary goal is to reach out to those who are underserved, such as small businesses, marginal farmers, micro and small businesses, and unorganized sectors.
The following are the small financing banks that are currently active in India:
- Ujjivan Small Finance Bank
- Jana Small Finance Bank
- Equitas Small Finance Bank
- AU Small Finance Bank
- Capital Small Finance Bank
- Fincare Small Finance Bank
- ESAF Small Finance Bank
- North East Small Finance Bank
- Suryoday Small Finance Bank
- Utkarsh Small Finance Bank
There is a significant development in the banking industry and it has undergone a significant transformation throughout the years, and it will continue to do so. This sector will continue to grow as a result of the many actions and new features that there is still development in the banking sector.