{"id":49904,"date":"2019-07-15T15:34:21","date_gmt":"2019-07-15T10:04:21","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=49904"},"modified":"2019-07-16T15:34:51","modified_gmt":"2019-07-16T10:04:51","slug":"7-pm-celebrating-50-yrs-of-bank-nationalisation-15th-july-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-celebrating-50-yrs-of-bank-nationalisation-15th-july-2019\/","title":{"rendered":"7 PM | Celebrating 50 yrs of bank nationalisation | 15th July, 2019"},"content":{"rendered":"\n<p><strong>Context:<\/strong> &nbsp;commercial banks and their significance in\nIndian economy<\/p>\n\n\n\n<p>Banks are one of the most important\nparts of any country. In this modern time money and its necessity is very\nimportant. A developed financial system of the country ensures to attain\ndevelopment. A modern bank provides valuable services to a country. To attain\ndevelopment there should be a good developed financial system to support not\nonly the economic but also the society. So, a modern bank plays a vital role in\nthe socio economic matters of the country.<\/p>\n\n\n\n<p><strong>Nationalization\nof banks in India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Government\nof India took major steps in this Indian Banking Sector Reforms after\nindependence. In 1955, it nationalized Imperial Bank of India with extensive\nbanking facilities on a large scale especially in rural and semi-urban areas.\nIt formed State Bank of India to act as the principal agent of RBI and to\nhandle banking transactions of the Union and State government all over the\ncountry.<\/li><li>Seven\nbanks forming subsidiary of State Bank of India was nationalized in 1960. On\n19th July 1969, major process of nationalization was carried out. It was the\neffort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major\ncommercial banks in India were nationalized. All commercial banks with a\ndeposit base over Rs.50crores were nationalized.<\/li><li>Second\nphase of nationalization Indian Banking Sector Reform was carried out in 1980\nwith more banks. This step brought 80% of the banking segment in India under\nGovernment ownership.<\/li><\/ul>\n\n\n\n<p><strong>Prominent\nreasons behind the nationalization:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Social Welfare:<\/strong> It was the need\nof the hour to direct the funds for the needy and required sectors of the\nIndian economy. Sector such as agriculture, and small village industries were\nin need of funds for their expansion and further economic development. To\nensure that the operations of the banking system are guided by large social\npurpose and are subject to close public regulation.<\/li><li><strong>Expansion of\nbanking:<\/strong>\nIn a large country like India, the number of banks existing those days was\ncritically inadequate. It was necessary to spread banking across the country.\nIt could be done through expanding banking network in the unbanked areas.<\/li><li><strong>Priority Sector\nLending:<\/strong>\nIn India, the agriculture sector and its allied activities were the largest\ncontributors to the national income. Thus these were labeled as the priority\nsectors. But unfortunately, they were deprived of their due share in the\ncredit. Nationalization was urgently needed for catering funds to them.<\/li><\/ul>\n\n\n\n<p><strong>Present\nscenario of banking industry in India:<\/strong> The Indian banking system consists of 27 public sector banks, 21 private\nsector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban\ncooperative banks and 94,384 rural cooperative banks, in addition to cooperative\ncredit institutions. In FY07-18, total lending increased at a CAGR of 10.94 per\ncent and total deposits increased at a CAGR of 11.66 per cent. India\u2019s retail\ncredit market is the fourth largest in the emerging countries. It increased to\nUS$ 281 billion on December 2017 from US$ 181 billion on December 2014.<\/p>\n\n\n\n<p><strong>Issues related to banking sector in India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Non-performing assets:<\/strong> As of March 31, 2018,&nbsp;provisional\nestimates&nbsp;suggest that the total volume of gross\nNPAs in the economy stands at Rs 10.35lakhcrore. About 85% of these NPAs are\nfrom loans and advances of public sector banks. For instance, NPAs in the State\nBank of India are worth Rs 2.23lakhcrore. This indicates that an increasing\nproportion of a bank\u2019s assets have ceased to generate income for the bank,\nlowering the bank\u2019s profitability and its ability to grant further credit.<\/li><li><strong>Capital to Risk-weighted Assets Ratio (CRAR)\nrequirement:&nbsp;<\/strong>The standing Committee on\nfinance noted that RBI\u2019s requirement of a minimum CRAR of 9%, to prevent banks\nfrom becoming highly leveraged, is 1% higher than the Basel III norms for\ninternationally active banks.&nbsp; This is applicable to all PSBs, even though\nnine of them do not operate internationally.&nbsp; The Committee observed that\nsuch a high CRAR requirement is impractical for these banks.<\/li><li><strong>Banks under Prompt Corrective Action (PCA):&nbsp;<\/strong>The Committee observed that 11 PSBs have been placed under\nthe PCA framework by the RBI based on factors such as capital inadequacy and\nhigh NPAs.&nbsp; These banks have restricted lending and deposit-taking\ncapabilities as a result.&nbsp; Despite the imposition of PCA, recoveries in\nthese banks have either been stagnant or grown marginally.<\/li><li><strong>Powers of the RBI in case of PSBs:&nbsp;<\/strong>The Committee noted that the RBI had stated that some powers\navailable to the RBI under the Banking Regulation Act, 1949 are not available\nin the case of PSBs.&nbsp; These include: (i) removing and appointing Chairman\nand Managing Directors of banks, (ii) superseding the Board of Directors, and\n(iii) granting licenses.<\/li><li><strong>Employee and technology:<\/strong> Public-sector banks are seeing more employees\nretire these days. So, younger employees are replacing the elder,\nmore-experienced employees. This, however, happens at junior levels. As a\nresult, there would be a virtual vacuum at the middle and senior level. The\nabsence of middle management could lead to adverse impact on banks&#8217; decision\nmaking process as this segment of officers played a critical role in\ntranslating the top management&#8217;s strategy into workable action plans.<\/li><li><strong>Capital infusion:<\/strong> Fitch Ratings has estimated that Indian PSU\nbanks will need as much as Rs4 trillion of capital by end of March 2019 to meet\nthe capital requirements under Basel III. Other estimates put the need even\nhigher. But till now only 1.3 trillion rupees flown into banks through\nrecapitalization.<\/li><\/ul>\n\n\n\n<p><strong>Measures to improve the\nperformance of banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Insolvency and bankruptcy code (IBC), 2016: <\/strong>The enactment of the Insolvency and Bankruptcy Code (IBC),\n2016 and promulgation of the Banking Regulation (Amendment) Act, 2017 has\nsignificantly altered the financial landscape with optimism to resolve the\nconcerted efforts that are underway for resolution of stress in balance sheets\nof banks and corporations in a time-bound and effective manner. Government\nshould promote efficiently IBC code and slowly create the proper arbitrage\nmechanism to unlock the capital in unproductive assets.<\/li><li><strong>Prompt corrective action:<\/strong> The Reserve Bank&#8217;s pre-emptive approach to\nrecognition and resolution of emerging financial distress and the revised\nsystem of prompt corrective action triggered in April 2017 are intended to\ninstill confidence in the system that accumulation of excessive financial\nimbalances in the future will be prevented.<\/li><li><strong>Consolidation and recapitalization:<\/strong> The Government&#8217;s in-principle approval in August 2017 for\nconsolidation of PSBs through an &#8216;Alternative Mechanism&#8217; and the massive\nrecapitalization plan for PSBs announced in October 2017 as part of a\ncomprehensive strategy to address banking sector challenges should make them\nstrong and competitive as they gear up to meet the credit needs of a growing\neconomy. Under recapitalization, government should infuse capital as early as\npossible to revive credit cycle.<\/li><li><strong>Additional measures: <\/strong>In\naddition to the IBC and the Banking Regulation (Amendment) Act, 2017, the\nGovernment notified the Fugitive Economic Offenders Bill, which is aimed at\npunishing those who are accused of committing financial crimes in India and\nthen fleeing the country. Setting up of the independent regulator National\nFinancial Reporting Authority (NFRA) that will have sweeping powers to act\nagainst erring auditors and auditing firms.<\/li><li><strong>Incentives for PSB employees:<\/strong> remuneration to higher senior management should be increased\non par with private commercial banks. &nbsp;Further, an\noverlap should be provided between tenures of successive CEOs to facilitate\nsmoother transition.&nbsp; The retirement age of CEOs of PSBs should be\nincreased to 70 years (similar to private banks) to utilize the expertise of\nsenior bankers.&nbsp; Further, criminality of bankers should not be presumed\nfor decisions taken in the normal course of business, and&nbsp;bankers should\nbe afforded a chance of explaining their decision before any actions are taken.<\/li><\/ul>\n\n\n\n<p><strong>Way forward:<\/strong> Banks have always played an\nimportant position in the country\u2019s economy. They play a decisive role in the\ndevelopment of the industry and trade. They are acting not only as the\ncustodian of the wealth of the country but also as resources of the country,\nwhich are necessary for the economic development of a nation. The general role\nof commercial banks is to provide financial services to general public and\nbusiness, ensuring economic and social stability and sustainable growth of the\neconomy. So government should empower the banks to fulfill the growing demands\nof the country.<\/p>\n\n\n\n<p>Source: <a href=\"https:\/\/www.business-standard.com\/article\/opinion\/celebrating-50-yrs-of-bank-nationalisation-119071400749_1.html\">https:\/\/www.business-standard.com\/article\/opinion\/celebrating-50-yrs-of-bank-nationalisation-119071400749_1.html<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: &nbsp;commercial banks and their significance in Indian economy Banks are one of the most important parts of any country. In this modern time money and its necessity is very important. A developed financial system of the country ensures to attain development. A modern bank provides valuable services to a country. To attain development there&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-celebrating-50-yrs-of-bank-nationalisation-15th-july-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Celebrating 50 yrs of bank nationalisation | 15th July, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-49904","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":"","cached_date":1704885681},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/49904","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=49904"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/49904\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=49904"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=49904"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=49904"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}