Banking Reform in India

Introduction: Measured by share of deposits, 83 percent of the banking business in India is in the hands of state or nationalized banks, which are banks that are owned by the government, in some, increasingly less clear-cut [Link], even the non-nationalized banks are subject to extensiveregulations on who they can lend to, in addition to the more standard prudential [Link] control over banks has always had its fans, ranging from Lenin to [Link] there are those who have emphasized the political importance of public control over banking, most arguments for nationalizing banks are based on the premise that prot maximizing lenders do not necessarily deliver credit where the social returns are the [Link] Indian government, when nationalizing all the larger Indian banks in 1969, argued that banking was inspired by a larger social purpose and must subserve national priorities and objectives such as rapid growth in agriculture, small industry and [Link] is now a body of direct and indirect evidence showing that credit markets in developing countries often fail to deliver credit where its social product might be the highest, and both agriculture and small industry are often mentioned as sectors that do not get their fair share of [Link] nationalization succeeds in pushing credit into these sectors, as the Indian government claimed it would, it could indeed raise both equity and e ciency.

Background: India has a long history of both public and private banking. Modern banking in India began in the 18th century,with the founding of the English Agency House in Calcutta and Bombay. In the rst half of the 19th century, three Presidency banks were founded. After the 1860 introduction of limited liability, private banks began to appear, and foreign banks entered the market. The beginning of the 20th century saw the introduction of joint stock banks. In 1935, the presidency banks were merged together to form the Imperial Bank of India, which was subsequently renamed the State Bank of India. Also that year, Indias central bank, the Reserve Bank of India (RBI), began operation. Following independence, the RBI was given broad regulatory authority over commercial banks in India. In 1959, the State Bank of India acquired the state-owned banks of eight former princely states. Thus, by July 1969, approximately 31 percent of scheduled bank branches throughout India were government controlled, as part of the State Bank of India. The post-war development strategy was in many ways a socialist one, and the Indian government felt that banks in private hands did not lend enough to those who needed it most. In July 1969, the government nationalized all banks whose nationwide deposits were greater than Rs. 500 million, resulting in the nationalization of 54 percent more of the branches in India, and bringing the total number of branches under government control to 84 percent. Prakesh Tandon, a former chairman of the Punjab National Bank (nationalized in 1969) describes the rationale for nationalization as follows: Many bank failures and crises over two centuries, and the damage they did under laissez faire conditions; the needs of planned growth and equitable distribution of credit, which in privately owned banks was concentrated mainly on the controlling industrial houses and inuential borrowers; the needs of growing small scale industry and farming regarding nance, equipment and inputs; from all these there emerged an

inexorable demand for banking legislation, some government control and a central banking authority, adding up, in the nal analysis, to social control and nationalization. After nationalization, the breadth and scope of the Indian banking sector expanded at a rate perhaps unmatched by any other country. Indian banking has been remarkably successful at achieving mass participation. Between the time of the 1969 nationalizations and the present,over 58,000 bank branches were opened in India; these new branches, as of March 2003, had mobilized over 9 trillion Rupees in deposits, which represent the overwhelming majority of deposits in Indian [Link] rapid expansion is attributable to a policy which required banks to open four branches in unbanked locations for every branch opened in banked locations. Between 1969 and 1980, the number of private branches grew more quickly than public banks,and on April 1, 1980, they accounted for approximately 17.5 percent of bank branches in [Link] April of 1980, the government undertook a second round of nationalization, placing under government control the six private banks whose nationwide deposits were above Rs. 2 billion,or a further 8 percent of bank branches, leaving approximately 10 percent of bank branches in private [Link] share of private bank branches stayed fairly constant between 1980 to 2000. Nationalized banks remained corporate entities, retaining most of their sta , with the exception of the board of directors, who were replaced by appointees of the central [Link] political appointments included representatives from the government, industry, agriculture,as well as the public. (Equity holders in the national bank were reimbursed at approximately par).Since 1980, has been no further nationalization, and indeed the trend appears to be reversing itself, as nationalized banks are issuing shares to the public, in what amounts to a step towards privatization. Recently, the Indian banking sector has witnessed the introduction of several new private banks, either newly founded, or created by previously extant nancial institutions. The

new private banks have grown quickly in the past few years, and one has grown to be the second largest bank in India. India has also seen the entry of over two dozen foreign banks since the commencement of nancial reforms. Advocates for privatization also criticize public sector banking as unresponsive to credit needs. CONCLUSION: Bank ownership does seem to have had a limited impact on the governments ability to direct credit to specic sectors. Through the early 1990s, the credit environment in India was very tightly regulated. The government set interest rates, required both public and private banks to issue 40 percent of credit to the priority sector, and to meet specic sub-targets within the priority sector. Nevertheless, banks controlled by the government provided substantially more credit to agriculture, rural areas, and the government, at the expense of credit to trade, transport, and nance. though, Surprisingly, there was no e ect on credit to small scale industry. Lending di erences shrunk over the 1990s, and in 2000 were about half of what they were in the early 1990s. This might reect the increasing dynamism of the private sector banks in the liberalized environment of the 1990s or the loosening grip of the government on the nationalized banks. BIBLOGRAPHY: Google Wikipedia

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