This phase witnessed socialisation of banking in 1968. Commercial banks were viewed as agents of change and social control on banks Since inadequacy was felt in this front, 14 banks were nationalised in 1969 and another 6 in 1980. This period also witnessed the birth of RRBs in 1975 and NABARD in 1982 which had priority sector as their focus of activity. Although number of commercial banks declined from 281 in 1968 to 268 in 1984, no. of scheduled banks shot up from 71 to 264. As many as 50,000 bank branches were set up of which 3/4 th were in rural and semi urban areas. In fact so rapid was the growth in these areas that the banking industry had hardly any time to consider other issues and consequently with growth came inefficiency and loss of control. As a result profitability came under strain.
The banking system was localized in a few metropolitan and urban cities, neglecting the vast and potential rural areas as unbanked Not concentration on the Agri and SME sector The banking system remained confined to industry and trade, ignoring the vital interests of the priority and neglected sectors, including agriculture and small scale industries and artisans. Enormous concentration of economic power existed in the banking sector. A few business houses were in effective control of powerful banks. Thus commercial banks contributed to the enormous growth of big business houses, leading to emergence of industrial monopolies. In view of the above weaknesses it was necessary to align bank credit flows into broader areas. Priority Sector Lending became the principle focus. The other focus was to make the banks vibrant and potent instrument of development and making them a mass institution. Thus the scheme of social control was introduced in 1968 with the main objectives of achieving a wider spread of bank credit, rectifying sectoral and regional imbalances, and directing credit flows to priority sector. Objectives of Nationalization of Banks To extend banking facilities to unbanked and underbanked centers, specially in rural areas To ensure an increased flow of assistance to the neglected sectors To foster the growth of new and progressive entrepreneurs To give a professional bent to bank management with a view to removing the control of a few.
Banking Sector in India, has gone through a metamorphosis during the last decade. While banking sector contributed to a great extent in creating a vital infrastructure for national building, generating employment opportunities and expanding business, it also, suffered a lot during the course of expansion from deficiencies with regard to their efficiency and quality of operations, controls, mechanism and profitability.
In the light of the above mentioned shortcomings and deterioration in the financial health of the banking system, quick and comprehensive remedial measures became an immediate necessity. Accordingly the GOI constituted in August 1991 a high powered committee under the chairmanship of Shri.N.Narsimham, the then Governor or RBI to examine all aspects relating to the structure, organisation, function and problems relating to the Banking System. Phased reduction in statutory preemptions Interest rates on CRR balances Phasing out of directed credit programme Interest rate deregulation Capital adequacy norms (should attain a CAR of 8% by 98) Income recognition Asset Classification Transparency Tax treatment of Provisions Loan recovery Tackling doubtful debts There should be no further nationalisation of banks Restructuring the banks Entry of Private Banks Branch Licensing Foreign Banks Supervision of Banks Control of Banking System
Regulatory stance through six key elements: industry structure and sector consolidation; freedom to deploy capital; regulatory coverage; corporate governance; labour reforms and human capital development; support for creating indust`ry utilities and service bureaus
Focus on Class banking and security rather than on purpose.
Emphasis on foundation of sound banking system in the country
Consequently the phase witnessed the development of necessary legislative framework and as a result the ‘BANKING REGULATION ACT’ was passed in 1949 to conduct and control operations of the commercial banks in India.
During the period number of Commercial banks declined remarkably.. From 566 banks in 1951 to 281 in 1961.
Continued financial profligacy (decadence) of the Government coupled with close monitoring and heavy control rendered the banking system on the verge of bankruptcy, and thus drastic reforms were inevitable.
India, for the first time faced the problem in the International Market
Defaulting on its international commitments
External commercial credit markets was completely denied