As per VNSGU Syllabus 2017-18

1. Nationalized Banks
Indian Banking and Currency System

2. Phases of Nationalization Process
 The first phase of nationalization began with the nationalization of
Imperial Bank of India, under the State Bank of India Act, 1955.
the State Bank of India Came into existence on 1st July 1955. it
has seven subsidiaries. It holds the dominant market position
among all the commercial banks. It is the largest commercial
banks with 19194 and 63 foreign branches.
 In second phase, the government decided to nationalize 14 major
commercial banks on 19th July, 1969. All commercial banks with
a deposit base over Rs.50 crores were nationalized. It was
considered that banks were controlled by business houses and
thus failed in catering to the credit needs of poor sections such as
cottage industry, village industry, farmers, craft men, etc.

3.  In third phase, 6 commercial banks in the private sector were
nationalized on 15th August 1980. in 1993, Bank of India was
merged with Punjab National Bank, hence the number of
public sector banks other than the State Bank of India and its
seven associate banks declined to 19. the total number of
branches of Nationalized Banks in India as on 31st march 2012
was 48822.

4. Objectives of Banks Nationalization:
1. Social Welfare: in order to achieve the objectives of economic
and social welfare, it was essential that the ownership and
control of country's strategic sectors .should be in the hands of
the state. As the financial institution like banks are the most
important levers of the attainment of social objectives, the
nationalization of banks was considered as significant step.
2. Controlling Private Monopolies: Prior to nationalization
many banks were controlled by private business houses and
corporate families. It was necessary to check these
monopolies in order to ensure a smooth supply of credit to
socially desirable sections.

5. 3. To Curb the Evil of Inter-locking of Directorates: As the directors of the
banks were connected with one or the other industrial groups the banks
under their control used to make unsecured advances to them. Loans were
sometimes given to even extremely weak financial concerns if the directors
had their interest in them; likewise resources of the banks were utilized by
the directors to promote their personal interest. All these meant misuse and
misdirection of the saving of the community.
4. Allocation of resources in Accordance with Plan Priorities: It was
found that many a times bank advances did not confirm to the priorities laid
down in our five year plans. While liberal advances were made to low
priority industries the credit need of high priorities were practically starved.
This resulted in the distortion of the pattern of investment. In other words,
bank had failed to be guided by the positive social objectives of our
planning process. It was argued that the private control of commercial
banks in a planned economy was anachronism which had to be an
obstacle to the achievement of plan objectives.

6. 5. Priority Sector Lending: In Nationalization, the agriculture
sector and its allied activities were the largest contributor to
the national income. Thus these were labeled as the priority
sectors. But unfortunately they were deprived of their due
share in the credit. Nationalization was urgently needed for
catering funds to them.
6. Reducing Regional Imbalance: In a country like
Nationalization where we have an urban-rural divide; it was
necessary for banks to go in the rural areas where the
banking facilities were not available. In order to reduce this
regional imbalance nationalization was justified.

7. 7. To prevent the misuse of the Funds: t was also pointed out
that in many cases, bank credit instead of being used for
genuine productive purpose was diverted to hoarding,
profiteering, speculation and other anti-social activities. This
created artificial scarcity of goods and commodities in the
economy. Bank Nationalization was sought to prevent the
misuse of bank funds.

8. Achievements of the Nationalized Banks:
1. Development-oriented Banking: Historically, Indian banks were mainly
concerned with the growth of commerce and some of the traditional industries such
as, cotton textile and jute. The banks were concentrated in the big commercial
centers. They mostly granted short-term commercial loans. They were unwilling to
venture into new fields of financing. But after nationalization of banks, the concept
of banking has widened from acceptance of deposits and mere lending to
development oriented banking. Banks are increasingly catering to the needs of
industrial and agricultural sectors. From short- term lending, banks have been
gradually shifting to medium and even long-term lending. From well-established
large industries and business houses, banks are positively shifting to assisting
small and weak industrial units, small farmers, artisans and other neglected groups
of people in the country. They have adopted the Lead Bank Scheme. Under this
scheme, all the districts of the country are allotted to some bank or the other. The
lead bank of district is actively engaged in:
 Opening bank branches in all important localities.
 Providing maximum credit facilities for development in the district, and
 Mobilizing the savings of the people in the district.

9. 2. Branch Expansion: Rapid economic development pre-supposes rapid
expansion of commercial banks. Initially, the banks were conservative and
opened branches mainly in cities and big towns. Branch expansion gained
momentum after nationalization of top commercial banks and the introduction of
“Lead Bank Scheme.” The Lead Bank Scheme has played an important role in
the bank expansion Program. The number of branches of all scheduled
commercial banks increased from 8,260 in 1969 to 1,02,343
in march 2013. Thus within 44 years after bank nationalization, there was over
900 per cent increase in the number of branches. There had been a significant
increase in bank branches in the rural, under banked and unbanked areas. The
number of branches in rural areas increased from 1860 in 1969 to 37,953
in 2013. With the progress of branch expansion Program, the national average
of population per bank office has declined from 63,800 to 15,000. M.
Gopalkrishnan says “the single striking feature of the post-nationalization
banking scene is the rapidity with which the branch network has multiplied itself.
The rate of branch expansion has been unparalleled any where else in the
world.” Thus, the overall growth of bank branches in the last 30 years has been
remarkable in its geographical coverage and removal of regional imbalances in
the country.

10. 3. Expansion of Bank Deposits: Since nationalization of banks, there has
been a substantial growth in the deposits of commercial banks. Thus bank
deposits had increased by 150 times. Development of banking habit
among people through publicity, extensive branch banking and prompt
service to the customers led to increase in bank deposits. To attract
deposits, Indian banks have introduced many attractive saving schemes.
To attract deposits from widely scattered areas, mobile bank’s branches
have been introduced by a number of banks.
 A number of banks have started evening branches, Sunday branches for
the benefit of their customers. Apart from the quantitative increases in
deposits, there has been an impressive qualitative shift. The number of
small account holders with the banks has been increasing day-by-day.
Aggregate deposits are composed to time deposits and demand deposits.
Earlier there was predominance of demand deposits. Now there is
predominance of time deposits. The ratio of time deposits to total deposits
has been increasing.

11. 4. Credit Expansion: The expansion of bank credit has also been more
spectacular in the post-bank nationalization period. At present, banks
are also meeting the credit requirements of industry, trade and
agriculture on a much larger scale than before. Credit is the pillar of
development. Bank credit has its crucial importance in the context of
development and growth with social justice.
5. Investment in Government Securities: The nationalized banks are
expected to provide finance for economic plans of the country through
the purchase of government securities. There has been a significant
increase in the investment of the banks in government and other
approved securities in recent years.
6. Growing Importance of Small Customers: The importance of small
customers to banks has been growing. Most of the deposits in recent
years have come from people with small income. Similarly, commercial
banks lending to small customers has assumed greater importance.
Thus banking system in India has turned from class-banking to mass-
banking.

12. 7. Advances to Priority Sectors: An important change after the nationalization
of banks is the expansion of advances to the priority sectors. One of the main
objectives of nationalization of banks to extend credit facilities to the borrowers
in the so far neglected sectors of the economy. To achieve this, the banks
formulated various schemes to provide credit to the small borrowers in the
priority sectors, like agriculture, small-scale industry, road and water transport,
retail trade and small business. The bank lending to priority sector was,
however, not uniform in all states.
 It was quite low in many backward states like U.P., Bihar and Rajasthan. Under
the new banking policy stress is laid on the weaker and under-privileged
groups in the priority sector “weaker sections” refer to all persons who became
suppressed, depressed and oppressed because of socio-political, socio-
economic or socio-religious reasons. The concept of profitability has been
substituted by “social purposes” with regard to lending to weaker sections of
the society. Quantitatively, banks have done well in priority lending. But
overdues and bad debts have been a serious problem faced by banks in
respect of advances made to the weaker sections of the society. There is
always the problem of ensuring the effective end use of the loans given to the
priority sectors.

13. 8. Social Banking – Poverty Alleviation Program: Commercial banks, especially the
nationalized banks have been participating in the poverty alleviation Program
launched by the government.
 Differential Interest Scheme: With a view to provide bank credit to the weaker
sections of the society at a concessional rate the government introduced the
“Differential interest rates scheme” from April 1972. Under this scheme, the public
sector banks have been providing loans at 4% rate of interest to the weaker sections
of the society.
 Integrated Rural Development Program (IRDP): This is a pioneering and ambitious
Program to rectify imbalances in rural economy and also for all- round progress and
prosperity of the rural masses. Under this Program banks has assisted nearly 1.8
million beneficiaries during 1997-98 and disbursed a total amount of Rs. 1990 crores
as loan. Out of the beneficiaries, over 1 million belonged to scheduled castes and
scheduled tribes and 0.7 million were women. Other important scheme introduced by
the government of India and implemented through the banking system includes
 self-employment scheme for educated youth,
 self-employment Program for urban poor, and
 credit to minority communities.

14. 9. Innovative Banking: In recent years, commercial banks in India have been
adopting the strategy of “innovative banking in their business operations.”
Innovative banking implies the application of new techniques, new methods and
novel schemes in the areas of deposit mobilization, deployment or credit and bank
management. Mechanization and computerization processes are being introduced
in the day-to-day working of the banks.
10. Globalization: The liberalization of the economy, inflow of considerable foreign
investments, frequency in exports etc., have introduced an element of globalization
in the Indian banking system.

15. 11. Diversification in Banking: The changes which have been taking place in
India since 1969 have necessitated banking companies to give up their
conservative and traditional system of banking and take to new and
progressive functions. The government had been encouraging commercial
banks to diversify their functions. As a result, commercial banks have set up
merchant banking divisions and are underwriting new issues, especially
preference shares and debentures. There are now eight commercial banks
which have set up mutual funds also. Commercial banks have started lending
directly or indirectly for housing. Venture capital fund is also started by one
public sector bank. State Bank of India and Canara Bank have set-up
subsidiaries exclusively for undertaking “factoring services.” In future all
commercial banks can be expected to diversify their functions and adopt new
technologies.

16. Problems and Constraints of the Public Sector Banks:
1. Problems pertaining to Branch Expansion:
 There has been expansion of bank branches in India, which
accounts almost 7.5 fold increase in the number of bank branches
over last decade.
 The share of public sector banks in total increase in the bank
branches is around 70%.
 In 1969, the number of rural branch of the bank was 22 which has
increased and reached to 36.1% in 2011.
 The average population per bank in India at the end of June, 2011
was 14000 as against 4000 in England and Canada, 7000 in USA
and 5000 in Germany.
 It has been observed that the public sector banks are more
concerned to the fulfilment of the physical targets, which should be
avoided.

17.  The rural bank branches are starving for trained and skilled staff, which
hamper the business potentials of the banks.
 A lack of report has been found between the bank staff and the
villagers. There has been time dispute between the farmers and the
staff for banking hours.
 The observation of the branch expansion process in India reveals that
the expansion process has mainly been seen in the considerably
developed regions of Western and Southern India while the poor and
backward states have derived less benefit.
2. Problem Pertaining to Deposit Mobilization:
 Rise in the money income of the people,
 Increase in the number of bank offices,
 Special efforts for deposit mobilization by the scheduled banks by
introducing innovative schemes for savings and offer of various types
of incentives to the customers; led an increase in the amount of bank
deposits.

18.  Only 25% of the total deposits belongs to rural areas.
 Lack of adequate bankable and creditworthy development projects in
rural area leads to the diversion of rural deposits to the urban areas.
 The nationalized banks are also facing competition from some financial
institutions as they are providing more interest on deposits than that of
nationalized banks.
3. Problems pertaining to Credit:
 Total bank credit in 1969 was 3035 cr. And increased to 29,96,655 cr.
In 2011.
 Prior to bank nationalization, a substantial part of bank credit was
given to trade, commerce and industry which formed about 86%of the
bank credit, while the share of agriculture was hardly 2%, credit to
small industries, self employed and retail traders was neglected.
 Post nationalization there has been fundamental and qualitative
change has taken place in composition of bank credit.

19.  Under social banking credit on a preferential basis to the priority sectors
of the economy and to the weaker section of the society has been
given.
 The priority sectors mainly includes:
a) Agriculture
b) Small scale industries
c) Small business and retail trade
d) Small road and water transport operations
e) Professional and self employed persons
f) Export sector
g) Education and housing loans.
 In the process of expansion of bank credit, following problems have
evolved:

20. a) Small and marginal farmers have derived relatively less benefits from
banks.
b) Lack of coordination between the credit activities of nationalized banks
and other institutions engaged in the similar task.
c) Lack of physical infrastructural facilities and marketing arrangements.
d) Lack of up to date land records, competition from private lending
agencies, small and fragmented holdings leads to difficulties in providing
credit to small farmers.
e) Lack of effective supervision on end use of credit.
f) High proportion of overdue due to poor recovery of loans.
4. Problem of Low Efficiency:
 The quality of customer services has been deteriorated in the post
nationalization period.
 Staff indiscipline, lack of devotion, red tapism, corruption, malpractices,
neglect of duty, lack of initiative and quasi decisions all have impaired
the smooth working of public sector banks.

21. 5. Frauds and Robberies:
 During the calendar year of 2000, commercial banks reported 3072 cases
of frauds involving an amount of 679,52 cr, in addition 8 cases of frauds
involving an amount of 159 cr were reported in the overseas branches.
 The central vigilance commission has to be more alert and security
arrangements in banks have to be upgraded in co-ordination with the home
and police departments of the concerned state governments.
6. Low profitability of the Public Sector Banks:
 27 public sector banks had shown a net profit of Rs. 44901 cr. In 2010-11
(0.85% of total assets)
 23 old private Indian banks was having 3102 cr. of net profit (1% of the
total assets)
 8 new private banks were with 1.34% of total assets as net profit.
 42 foreign banks were with 1.57% of the total assets as net profit.

22.  The causes of low profitability of the public sector banks were;
1. Rapid branch expansion
2. High cost of establishment
3. Inadequate training
4. Concessional finance
5. Lack of cost consciousness
6. Inadequate recovery and overstaffing
7. Increase in Non-performing assets.
7. Politicization of Banking Operations:
 Political interference in the banking operations, particularly in the case of
public sector banks has been held responsible for wide spread defaults.
 The Agriculture Credit Review Committee had observed in 1989 that
commercial banks in India are overcontrolled, overregulated and over
managed by the central government.

23.  The committee had noted that in respect of rural loans, a large number of
beneficiaries are identified not by banks or even by government agencies
but by the functionaries of political parties.
 This has to be checked and the banks should be free from political
interference.
8. Non-Performing Assets (NPAs) of Banks:
 Banks earn profits out of the Loans and Advances. However quite a high
percentage of their advances are not recovered; neither the interest nor
the principle amount. It adversely affects the earning of nationalized and
other banks.
 Banks as well as RBI have taken many steps to recover their NPAs. An
ordinance is passed in order to empower them to recover their dues. It
has become an Act called ‘Securitization Act’ in 2002. The banks have
got wide powers under the Act to enforce recovery of NPAs.
 From the year 2003 it has been decided to extend the benefits of this act
to co-operative banks as well. It is expected that this act will go a long
way in tackling the problem of their NPAs.

24. Non-Performing Assets:
 Meaning: An asset becomes non-performing when it ceases to generate
income for the bank. A non-performing asset is defined as a credit facility in
respect of which the interest and/or instalment of principal has remained
‘past due’ for a specified period of time.
 Interest and/or instalment of principal remained overdue for more than
90 days in respect of a term loan.
 The account remains ‘out of order’ in respect of over draft/ cash credit.
 The bill remains overdue for a period for more than 90 days in the case
of bill purchased and discounted.
 Interest and/or instalment of principal remains overdue for two harvest
season but for a period not exceeding two and a half year in the case of
an advance grated for agricultural purposes.
 Any amount to be received remains overdue for a period of more than
90 days in respect of other accounts.

25.  Classification: Banks are required to classify non performing assets further
in to the following three categories according to the period for which the
assets has remained non-performing and the responsibility of the dues:
 Substandard and assets: Which has remained NPA for a period less than
or equal to 12 months.
 Doubtful assets: If asset remained in the substandard category for 12
months.
 Loss assets: Where the loss has been identified but the amount has not
been written off wholly.
 NPAs of Banks in India:

26.  Total NPAs of scheduled banks in India were Rs. 81813 crs. On 31st march
2010; in which NPAs of public sector banks were Rs. 57301 crs. And NPAs
of private sector banks were Rs. 17384 crs.
 Among the various channels of recovery available to the banks for dealing
with the bad loans, the SARFAESI and the Debt Recovery Tribunals have
been the most effective.
Causes of NPAs:
 It should be noted that in the developed countries, NPA in the banking
sector emerge generally as the result of excess lending to the estate
dealers and speculators during the boom years and subsequent collapse of
property prices.
 On the other hand, NPAs in the banking sector arises in the developing
countries because of poor quality of the loans sanctions, nepotism
(partiality) and political interference in the functioning of the banks.

27. Tools available with the Banks to deal with their NPAs:
a) One time settlement: Banks have been advised to devise one time
settlement scheme for the resolution of NPAs, as a part of their loan
recovery policy. In case of doubtful NPAs, the minimum amount for One
time settlement is 100% of the outstanding balance in the account as on
that date and 100% of the outstanding balance at the existing prime
lending rate till the date of final payment in case of Substandard NPAs.
b) Lok Adalat: for the settlement of the cases when the outstanding balance
for doubtful and loss categories is more than 5 lakh Rs. Banks approaches
Lok Adalat. It helps in resolving the disputes between the parties by
conciliation, mediation, compromise or available settlement and reduces
the burden on courts. It is difficult to bring parties together when the Lok
Adalat meets.

28. c) Debt Recovery Tribunals: The DRTs were set up under the Recovery of
Debts due to Banks and Financial Institutions Act, 1933. There are two types
of tribunals; (i) Debt Recovery Tribunals (DRTs) and (ii) Debt Recovery
Appellate Tribunals (DRATs). The order of DRT is appealable at DRAT. The
central government sets up the tribunals and provides them with the
presiding officer, recovery officer and other employees. Under the jurisdiction
of the local government, bank can file an application for the recovery to
DRTs.at present there are 25 DRTs and DRATs.
d) Corporate Debt Restructuring: To provide timely and transparent system of
restructuring of corporate debts of 20 crs. or above this scheme was
introduced in 2001-02. Banks and financial institutions have restructured
more than 100000 debts through financial restructuring, business
restructuring and operational restructuring. Financial restructuring includes
extension of loan maturity, reduction of interest rates, write-off principal.
Business restructuring includes sale of assets or business unit, business
division or merger or amalgamation. Operational restructuring includes
changes in company management, special audits and liquidation of non-
viable asstes.

29. e) SARFAESI Act: The government enacted the securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act in 2002 for realization of dues without the intervention of
courts or tribunals. It aims to bring down the level of risk in system and
encourage banks lending activities.
 To resolve the problem NPAs effectively, the Act deals with three aspects:
i. Securitization: Conversion of financial or non-financial asset into
securities.
ii. Asset reconstruction: It is a financial tool for corporate debt
restructuring and financial rehabilitation through rebandling, takeovers or
sale.
iii. Security enforcement: It refers to the right of lenders to foreclose a non
performing loan.
 The act does not apply to unsecured loans, loans below 100000 and loans
where the remaining principal due is less than 20% of the amount
advanced. It is an effective weapon to recover dab debts of the banks.

30. f) Asset Reconstruction Companies: The SARFAESI Act, 2002,
surfaced the way for setting up Asset reconstruction companies to
help the banks and financial institutions to clean up their balance
sheets. ARC isolates non performing loans from the balance sheets
of the banks and financial institutions and thereby enable them to
focus on core activities. Also, it facilitates development of markets
for distressed assets.

31. THANK YOU
Any Question?