Growth of banks in India - class-IX

An increase in cash reserve ratio reduces the excess reserves of commercial banks and limits their credit creating power

India nationalized 14 banks in 1969, bringing the total to 19 nationalized banks (including the earlier nationalized State Bank of India).

The Industrial Development Bank of India (IDBI) was established on July 1, 1964, as a subsidiary of the Reserve Bank of India.

Before the nationalization of banks in 1969, private banks were heavily concentrated in urban and metropolitan areas, neglecting rural and semi-urban regions.

A major driver for bank nationalization was that private banks were often controlled by large industrial business houses, which led to the concentration of credit in those specific sectors.

Prior to 1969, private banks prioritized lending to large industries and urban businesses, often ignoring the credit needs of agriculture and small-scale sectors.

Before the nationalization of banks in 1969, the agricultural sector received a very small share of total bank credit, specifically around 2.2 percent. This neglect was a primary driver for the government's decision to nationalize major commercial banks.

Prior to nationalization, commercial banks in India were largely urban-centric and focused on large-scale industries, neglecting agriculture, small-scale industries, and exports. This imbalance was a key justification for the state taking control of the banking sector.

NABARD (National Bank for Agriculture and Rural Development) was established in 1982 as the apex regulatory body for overall regulation of regional rural banks and apex cooperative banks in India.

NABARD is a development financial institution, which functions as a bank. It provides refinance support to other banks and institutions for agricultural and rural development.

The primary objectives of bank nationalization were social welfare, financial inclusion, and directing credit to priority sectors like agriculture and small-scale industries. Generating revenue was not a primary objective of the government policy.

ICICI stands for Industrial Credit and Investment Corporation of India. It was originally established as a development finance institution to provide medium and long-term project financing to Indian businesses.

The Bank Rate is the rate at which the central bank (RBI) is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the RBI Act. It serves as a tool for monetary policy.

Small Industrial Development Bank of India (SIDBI) is a development fiscal establishment in India, headquartered at Lucknow and having its offices all over the country. 

Its purpose is to provide refinance facilities and short term lends to industries and serves as the major financial institution in the Micro, Small and Medium Enterprises (MSME) sector. 

SIDBI also, coordinate the functions of institution occupied in similar activities. It was established on April 2, 1990, through an Act of Parliament. It is headquartered in Lucknow. SIDBI operates under the Department of Financial Services, Government of India.

Thus, the correct option is B.

Core Banking Solutions (CBS) refers to the networking of bank branches, allowing customers to access their accounts from any branch. Statements 2 and 3 are incorrect descriptions of this technology.

The government through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalized the 14 largest commercial banks on 19 July 1969. 

Punjab National Bank acquired New Bank of India in 1993. Thereafter, no other nationalized bank in India has been merged into another bank.

In a major process of nationalization, seven subsidiaries of the State Bank of India were nationalized via the State Bank of India (Subsidiary Banks) Act, 1959. In 1969, fourteen major private commercial banks were nationalized.

B.  14

With Mrs. Indira Gandhi’s taking over as the Prime Minister of India, the Indian National Congress rallied for a state takeover of some of the major banks in the country. In what can be deemed a rather hasty move, the government promulgated an ordinance - the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 - thereby nationalizing all the 14 banks that were under consideration with effect from the midnight of 19 July 1969. As a follow-up to passing the ordinance, the Banking Companies (Acquisition and Transfer of Undertaking) Bill was taken up by the Parliament for discussion. It received a clear majority as well as the assent of the President within a month of issuing the ordinance.

The first bank purely managed bu Indian was Punjab National Bank, established in Lahore in 1895. The Punjab National Bank has not only survived till date but also one of the largest banks in India.

A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank. A draft ensures the payee  a secure form of payment. During a payer’s reconciliation  of his bank account, he notices a decrease in the account balance because of the money withdrawn from the account.
To obtain a bank draft, a person must first deposit funds equal to the cheque amount with the issuing bank. The bank then generates a cheque to the payee
drawn on the bank's own account. The name of the remitter (the person
purchasing the cheque) is noted on the check, but the bank itself is the
entity making the payment. The cheque is signed by a bank cashier or
officer.

The Government of India set up the Industrial Reconstruction Corporation of India (IRCI) in April 1971, under the Indian Companies Act, mainly to look after special problems of sick units’ and provide assistance for their speedy reconstruction and rehabilitation, if necessary, by undertaking the management of the units and developing infrastructure facilities like those of transport, marketing etc.

Small Industries Development Bank of India (SIDBI) is a development financial institution in India, headquartered at Lucknow and having its offices all over the country.

Regional Rural Banks were
formed under the R.R.B. Act, 1976, with an objective to provide credit and other
facilities to small farmers, agricultural labourers and artisans in rural areas.

First of all Imperial Bank of India was taken over by the Government of India on July $1$, $1955$ and was named as State Bank of India. Along with it eight other (at present seven) were converted as it associate banks and they formed State Bank Group.
$1$. The State Bank of Bikaner and Jaipur. (Earlier Bikaner and Jaipur were separate banks)
$2$. The State Bank of Hyderabad
$3$. The State Bank of Indore
$4$. The State Bank of Mysore
$5$. The State Bank of Saurastra
$6$. The State Bank of Patiala
$7$. The State Bank of Travancore.

The prime or major objective behind the Nationalization of Banks in 1969 was to ensure release of huge amounts held by the Private Banks by way of deposits from the general public for the equitable and inclusive growth of the country's economy and facilitate easy access to credit for all the sectors of the economy.

Indira Gandhi nationalised 14 major banks through an Ordinance on July 19, 1969. These banks held 70-85 per cent of total deposits in banks at the time.

The lead bank of a district is that bank which forms the basic day to day policies of that district and which is identified to coordinate implementation of the district credit plan which refers to the credit creation plans of the banks. 

According to the RBI guidelines issued in 2013 for licensing new banks in the private sector, the minimum paid-up equity capital requirement was set at Rs. 500 crores.

The profitability of public sector banks is often constrained by high overhead costs, the requirement for social-sector lending (priority sector), and an over-cautious approach to lending due to risk aversion or bureaucratic processes.

The Government of India nationalized New Bank of India in 1980. Punjab National Bank acquired New Bank of India in 1993.

In order to control credit, CRR and bank rate should be increased and both will assist in control of credit.

The functions of the RRB are as follows:

(1) Granting of loans and advances to small and marginal farmers and agricultural labourers, whether individually or in groups, and to co-operative societies, agricultural processing societies, co-operative farming societies, primarily for agricultural purposes or for agricultural operations and other related purposes;

(2) Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce and industry or other productive activities within its area of co-operation; and

(3) Accepting deposits.

but providing inputs to farmers is not its function 

Nationalised banks are authorized by the RBI to accept Foreign Currency Non-Resident (FCNR) deposits from NRIs and Persons of Indian Origin, as they have the necessary infrastructure and regulatory clearance.

RBI adjusts rates like CRR, SLR, and Bank Rate to manage liquidity and control inflation. By changing these, the RBI influences the lending capacity of commercial banks, thereby impacting the money supply and demand in the economy.

The initiative to provide banking services to all villages is a core component of the Financial Inclusion strategy, which aims to bring unbanked populations into the formal banking system.

The Reserve Bank of India was nationalised with effect from 1st January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation.

The Committee on Financial Sector Assessment (CFSA) reviewed the entire financial system and recommended reforms across various legal frameworks, including banking, commercial, and taxation laws, to ensure stability and efficiency.

The Negotiable Instruments Act, 1881, is fundamental to banking as it governs instruments like cheques, bills of exchange, and promissory notes, which are essential for day-to-day banking transactions.

Nationalisation of banks aimed at all of the provision of adequate credit, for agriculture and small industry and export only, but not big industries.

The Narasimham Committee (I and II) was specifically appointed to suggest comprehensive reforms in the Indian banking sector, including structural changes, capital adequacy, and asset classification.

Asia Bank (often referring to entities like City Union Bank or similar regional private entities) is categorized as a private sector bank in the Indian banking landscape.

Regional Rural Banks (RRBs) are designed to operate in specific rural areas and are supported by sponsor banks and NABARD for refinance facilities to serve rural credit needs.

The State Bank of India (SBI) was formed by the nationalization of the Imperial Bank of India in 1955. The other options are incorrect as they do not represent the predecessor institution.

The State Bank of India Act was passed in 1955, leading to the establishment of SBI as a public sector bank. It replaced the Imperial Bank of India.

The first major wave of bank nationalization in India occurred in July 1969, when 14 major commercial banks were brought under government control.

The Industrial Investment Bank of India was originally established in 1971 as the Industrial Reconstruction Corporation of India (IRCI) to assist sick industrial units.

The Industrial Reconstruction Corporation of India was renamed the Industrial Reconstruction Bank of India (IRBI) on March 20, 1985, following the enactment of the IRBI Act.

NABARD (National Bank for Agriculture and Rural Development) is the apex regulatory body and development bank for agriculture and rural development in India.

The Industrial Development Bank of India (IDBI) was established in 1964 by an Act of Parliament to provide credit and other financial facilities for the development of industry.

IDBI was initially set up as a Development Financial Institution (DFI) to provide long-term finance to industrial projects.

SIDBI was established on April 2, 1990, through an Act of Parliament to serve as the principal financial institution for the promotion and development of the MSME sector.

On July 1969, fourteen major private commercial bank of India were nationalized which included Indian bank, Indian Overseas bank, Canara bank etc in order to increase the efficiency of public sector. 

Prior to the 1969 nationalization, the share of agriculture in total bank credit was very low, estimated at approximately 2.2 percent.

In 1969, fourteen major private commercial banks of
India were nationalized which included Indian bank, Indian Overseas bank,
Canara bank etc in order to increase the efficiency and effectively of public sector by bringing domestic competition in the sector so that it can compete with the international banking system. 

Statistical data regarding the distribution of bank branches in India indicates that rural branches accounted for approximately 44 percent of the total branch network in 2006.

Loans and advances are assets for a bank because they represent money lent to customers that will be repaid with interest. Since they are loans given to customers, both the description of them as assets and the nature of the transaction are relevant.

Land development banks are specialized institutions designed to provide long-term credit to farmers for land improvement and agricultural development, typically ranging from 15 to 20 years.

Nationalization aimed to shift credit away from large industrial houses toward priority sectors like agriculture and small-scale industries. Therefore, providing credit to big industrial organizations was not an aim, but rather a practice the government sought to curb.

In 1969, the Indian government nationalized 14 major commercial banks to bring them under state control and align them with national development goals.

The second phase of bank nationalization in India occurred in 1980, when the government nationalized 6 additional commercial banks.

Major bank nationalization in India occurred in two distinct phases: the first in 1969 (14 banks) and the second in 1980 (6 banks).

In 1969, the Government of India nationalized 14 major commercial banks through an ordinance. This was the first major wave of bank nationalization, bringing banks with deposits over Rs. 50 crores under public ownership. This question duplicates the factual information from question 497255.

Before nationalization, commercial banks were primarily owned by private industrial houses and focused their lending on large-scale industry and commerce, often neglecting agriculture and rural areas.

Nationalization was driven by multiple factors, including the neglect of the agricultural sector, the concentration of economic power, and the general failure of private banks to follow social welfare norms.

The decision to nationalize banks was based on several issues, including the concentration of wealth in a few hands, the urban bias of banking services, and the neglect of priority sectors like agriculture.

Prior to nationalization, private commercial banks were heavily concentrated in urban areas where industrial and commercial activity was highest, leading to a lack of banking services in rural regions.

Nationalization aimed to align banking operations with national economic development goals and to ensure that credit was directed toward productive sectors of the economy, rather than just serving private interests.

Nationalization was intended to democratize credit and support small-scale sectors. Providing credit exclusively to big industries was the opposite of the intended goal, which was to diversify credit access.

Following nationalization, the government mandated that banks expand their branch networks into rural and unbanked areas to promote financial inclusion, leading to a massive increase in the number of branches.

Bank
rate is the official minimum rate at which the Central Bank of a
country (RBI in India) is prepared to rediscount approved bills held by commercial banks in the country.

Government policy was the driver of nationalization, not a factor responsible for the problems that necessitated it. The problems were private ownership, urban bias, and the violation of social banking norms.

In 1980, the second phase of bank nationalization in India involved 6 major commercial banks.

The first phase of bank nationalization in 1969 involved 14 major commercial banks.

Maharashtra, being a major financial and industrial hub, saw significant deposit mobilization following the expansion of banking services after nationalization.

Nationalization was a response to the failures of private banks, including their focus on profit over social needs, their urban-centric branch models, and their neglect of priority sectors like agriculture.

The total number of banks nationalized in India is 20, consisting of 14 banks in 1969 and 6 banks in 1980.

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks. It includes 

Banks were nationalized because of the following reasons:

Private banking saw its introduction in India around mid 19th century and was predominant till Independence.

Commercial banks were under private sectors and were more businessmen friendly.

They lacked the tenacity to serve the poorer section of the spectrum majorly from agro and allied-agro contingent. 

Agriculture was the back bone of Indian economy and lack of financial empathy towards them was deemed reckless and thus a reform was required.

Hence bank nationalisation was sought:

·         To reduce concentration of wealth and economic power

·         To empower the village industries

·         To make more useful use of funds of banks

Indian Banks have strong balance sheets, are well capitalised and well regulated. The capital adequacy ratio of every Indian bank is well above the basel norms and those stipulated by the RBI. Not a single Indian bank has had to be rescued in the aftermath of the crisis. India has a long history of working with Public Sector Banks.

(a) In 1949, Reserve Bank of India(RBI) which is an apex bank that
controls the entire banking system of India was nationalized to be the central bank of India. It is the sole agency of note
issuing and controls the supply of money in the economy. 

The effect of increased CRR will be reduced or nullified if bank rate is
reduced because both are inverse functions. If CRR will increase it
contracts credit and if bank rate reduced it expands credit.