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Class 11 Finance Chapter 3 Commercial Banking in India
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Commercial Banking in India
Chapter : 3
| QUESTIONS |
A. Very Short answer Questions:
1. In which year the Imperial Bank was established?
Ans: Imperial Bank of India was established on 27 January 1921.
2. In which year 14 Indian Commercial Banks were nationalised?
Ans: The Government of India on Nationalised the 14 largest commercial banks on 19 July 1969.
3. In which year 6 Indian Commercial banks were nationalised?
Ans: 6 Banks were nationalised during the Second Round of Nationalisation in 1980.
4. In 1980 how many commercial banks were nationalised?
Ans: Six commercial banks were nationalised in India in 1980.
5. In which year the Lead Bank Scheme was introduced?
Ans: The Lead Bank Scheme was introduced in December 1969.
6. In which year the State Bank of India was established?
Ans: The State Bank of India was established on 1 July 1955.
7. Name the three Presidency Banks.
Ans: The three presidency banks are, Bank of Bengal, Bank of Bombay and Bank of Madras.
8. What was the previous name of the State Bank of India?
Ans: Imperial Bank of India.
9. In which year Imperial Bank of India was nationalised and renamed as State Bank of India?
Ans: The Imperial Bank of India was nationalised and renamed as State Bank of India 1 July 1955.
B. Short Answer Questions:
1. What is a private sector bank?
Ans: The banks which are owned, managed and controlled by the private concerns, i.e., by individuals and companies are known as Private sector banks or Private banks. These banks may be Scheduled or Non-scheduled banks. In India, HDFC Bank, AXIS Bank, ICICI Bank, IDBI Bank, etc. are the examples of Private sector banks.
2. What is a public sector bank?
Ans: The banks which are owned, managed and controlled by the Government are known as Public sector banks or Public banks. In India, all public sector banks are Scheduled banks.
3. What is branch banking?
Ans: Branch banking system is a system of banking where a big bank as a single institution and under single ownership operates through a network of branches spread all over the world. In other words, when a bank carries on banking business in different places with a number of branches, the system is called branch banking system or delocalized banking system.
4. What is unit banking?
Ans: Unit banking system is a system of banking where a bank operates with a single office or place of business. It has its own branch of directors and stockholders. The area of operation of a unit bank is localised and is for more limited as compared to branch banking. The size of a unit bank is much smaller as compared to those of a bank under a branch banking system.
5. What is chain banking?
Ans: Chain banking is a system of banking under which a number of separately incorporated banks are brought under the common control by a device other than holding company.
6. What is group banking?
Ans: Group banking is the system in which two or more independently incorporated banks are brought under the control of a holding company. The holding company may or may not be a banking company.
7. What is a scheduled commercial bank?
Ans: A Scheduled Commercial Bank (SCB) is a commercial bank which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 (RBI Act). All scheduled commercial banks are entitled to refinance facilities from the RBI.
8. Name two Private Sector banks in India.
Ans: The private sector banks in india are:
(i) HDFC Bank.
(ii) ICICI Bank.
9. Give two examples of public sector banks.
Ans: The examples of public sector banks are: State Bank of India and Punjab National Bank.
10. Name any two central banking functions performed by the State Bank of India.
Ans: The two central banking functions performed by the State Bank of India are:
(a) Receiving the Government dues and making disbursement on behalf of the Government.
(b) Issuing the Government loans and receiving funds for the Government.
11. Name any two general banking functions performed by State Bank of India.
Ans: Here are the two general banking functions performed by State Bank of India:
(i) Receiving different kinds of deposits and making advances against securities.
(ii) Keeping the balances of commercial banks.
12. Give two functions of Lead Bank.
Ans: The following are the main functions of a lead bank:
(a) To survey the resources and potential for banking development by identifying unbanked centres in the allotted districts.
(b) To survey the number of industrial and commercial units and other establishments which do not have bank accounts.
13. State two differences of scheduled and non-scheduled banks.
Ans:
| Basic | Scheduled Banks | Non-scheduled banks |
| Public confidence | It earns greater public confidence. | It earns less public confidence in comparison to Scheduled Banks. |
| Refinancing facilities | All Scheduled banks are entitled to refinance facilities from the RBI. | Non-scheduled banks are not entitled to refinance facilities from the RBI. |
14. Explain the meaning of the lead bank scheme.
Ans: Lead bank scheme refers to the scheme which was introduced by the Reserve Bank of India in December, 1969 with the objective of enabling the commercial banks to assume the role of leadership district wise. The scheme was introduced to formalise the concept of ‘area approach’ for the development of banking and credit facilities throughout the country. Under this scheme all the districts in the country have been allotted to the State Bank Group, nationalised banks and private Indian banks.
15. State two major achievements of the nationalised banks in India.
Ans: Achievements/Performances/Progress of Nationalised Banks/Public Sector Banks:
(i) Branch expansion: Before nationalisation, the banks were conservative and opened branches mainly in metropolitan cities and other major cities. Branch expansion gained momentum after the nationalisation of banks. The present network of commercial banks is the result of deliberate policy of massive branch expansion pursued by the public sector banks during the post-nationalization period.
(ii) Deposit mobilisation: The post-nationalization period has shown a substantial rise in the rate of deposit mobilisation. Public sector banks have contributed greatly to the development of banking habits among people through sustained publicity, extensive branch banking and relatively prompt service to the customers.
16. Write two advantages of the branch banking system.
Ans: Advantages of Branch Banking System:
(i) Benefits of large-scale operations: A branch bank has all the advantages of large scale operations. It has large resources when compared to a unit bank. It can appoint experts paying high scale and it can use modern mechanical devices in its offices for efficient working.
(ii) Wider spreading of risks: A branch bank operates over a wide area with different types of economic development. The losses of branches of one region, if any, can be set off against the profit of branches in other regions. In this way the risks are distributed geographically.
17. State two differences between group banking and chain banking.
Ans: Here are the Differences between Group Banking and Chain Banking:
| Basis | Group Banking | Chain Banking |
| Meaning | It is a system where two or more banks are controlled by a holding company. | It is a system where an individual or group of individuals or members of a family control the operations of two or more banks. |
| Agreement | Group banking is necessarily the result of agreement. | Chain banking is not necessarily the result of agreement. |
18. State two differences between public sector and private sector banks.
Ans:
| Basis | Private Sector Banks | Public Sector Banks |
| Meaning | The banks which are owned, managed and controlled by the private concerns, i.e., by individuals and companies are known as private sector banks. | The banks which are owned, managed and controlled by the government are known as public sector banks. |
| Status | Private sector banks may be scheduled or non-scheduled banks. | All public sector banks are scheduled banks. |
19. State two objectives of lead bank.
Ans: Objectives of Lead Bank:
(a) To specify suitable areas to open branches of the lead district.
(b) To extend maximum credit facilities for development in the district.
C. Long answer questions (Type-1):
1. Discuss the objectives of nationalisation of commercial banks.
Ans: Nationalisation of commercial banks is an important development in the field of banking in India.
Objectives of Bank nationalisation in India:
(i) Preventing concentration of economic power: Initially, a few leading industrial and business houses had close association with the commercial banks. The directors of these banks happened to be the same industrialists who established monopoly control on the bank finance.
(ii) Social control was not adequate: The ‘social control’ measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, nationalisation was necessitated by the failure of social control.
(iii) Channel the bank finance to plan priority sectors: Banks collect savings from the general public. If it is in the hands of the private sector, the national interest may be neglected. Besides, in Five Year Plans, the Government gives priority to some specified sectors like agriculture, small industries etc. Thus, nationalisation of banks ensures the availability of resources to the plan priority sectors.
(iv) Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private banks have failed. Because of such rapid branch expansion there is a possibility to mobilise rural savings.
(v) Balanced Regional Development: In India, certain areas remain backward for lack of financial resources and credit facilities. Private banks have neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.
2. Mention clearly five differences between branch banking and unit banking.
Ans: Here are the differences between Branch Banking and Unit Banking:
| Basis | Branch Banking | Unit Banking |
| Meaning | It is that system under which a large bank carries on banking business through a large number of branches spread all over the world. | It is that system where an individual bank undertakes banking business either through a single office or through a few branches operating within a limited area. |
| Large-scale Operations | A big bank possessing huge financial resources and having a number of branches, can enjoy many advantages of large-scale operations. | A unit bank with only one office or a few branches located in a particular area and having limited financial resources cannot enjoy the advantages of large scale operations. |
| Economy of Cash Reserves | Branch banking results in an economy of cash reserves. | A unit bank has to use sufficient cash reserves to meet the requirement of its depositions. |
| Banking facilities | Under branch banking, the banking facilities can be made available to all the cities and even backward areas. | It is difficult to set up unit banks in smaller towns and underdevelopment areas on economic grounds. |
| Public confidence | A bank, with huge financial resources and a number of branches, can command greater public confidence. | A small unit bank, with limited resources and one or a few offices located in a particular area, cannot command greater public confidence. |
3. Explain briefly about the growth of commercial banks in India during the post-independence period.
Ans: The post-independence period has witnessed a massive growth in the Indian banking system. The Indian banking system had gone through a series of crises and thus its growth was quite slow during the first half of the 20th century. When India became independent in 1947, the banking structure was very weak. There were a total of 640 banks of which only 96 were scheduled banks. Since 1947, the Indian banking system has recorded tremendous progress. This is due to planned economic growth, increase in money supply, growth of banking habits, control and guidance by the RBI, etc.
The post-independence period has witnessed a massive growth in the Indian banking system.
(a) Nationalisation of Reserve Bank of India: The Reserve Bank of India was nationalised on 1st January,1949 under the Reserve Bank of India (Transfer to Public ownership) Act,1948.
(b) The Banking Companies Act, 1949: In order to have balanced growth of banking business in India, the Banking Companies Act was passed in 1949. In 1966, the Act was renamed as Banking Regulation Act, 1949.
(c) Formation of State Bank of India: In 1955, Imperial Bank of India, which was established in 1921, was nationalised and renamed as ‘State Bank of India’. In 1959, the State Bank of India (Subsidiary Bank) Act was passed enabling SBI, to take over 8 princely state associated banks, as the subsidiaries.
(d) Social control: The scheme of social control was initiated by the Government in 1968 for more equitable and purposeful distribution of bank credit.
(e) Nationalisation of commercial banks: It has undergone a major structural transformation after the nationalisation of 14 major commercial banks in 1969. In 1980, six more commercial banks were taken over by the Government.
(f) Establishment of Regional Rural Banks: In 1975, a new category of banks known as Regional Rural Banks (RRBs) had been set up to focus more on the development of the rural and agricultural sector.
(g) Licences to Private Sector Banks: Keeping in view, the recommendations of the Narasimham Committee, the RBI has been empowered to issue licences to private sector banks as part of the liberalisation process.
(h) Various Financial Institutions: Besides these developments, various financial institutions for meeting specialised financial needs were also established.
4. State the functions of Lead Bank.
Ans: The following are the main functions of a lead bank:
(a) To survey the resources and potential for banking development by identifying unbanked centres in the allotted districts.
(b) To survey the number of industrial and commercial units and other establishments which do not have bank accounts.
(c) To set up branches in a phased manner.
(d) To identify and study local problems.
(e) To evolve an integrated credit plan by examining the shortage of marketing facilities for agricultural produce and industrial output.
(f) To survey the facilities for storing of fertilisers and other agricultural inputs and other services catering to local needs.
(g) To maintain contacts and liaison with government and semi government agencies.
(h) To provide assistance to other primary lending agencies.
(i) To recruit and train banking staff for counselling the small borrowers and farmers in the priority sectors and follow-up and inspection of the end of bank credit.
(j) To chalk out schemes and implement area planning.
(k) To integrate bank schemes with district plans for an effective distribution of credit along with the expanded banking facilities as per local needs, etc.
D. Long answer questions (Type-2):
1. Discuss the evolution and growth of commercial banking in India.
Ans: Banking industry in India has passed a long journey to secure its present position. The evolution and growth of Indian Banking can be studied over three periods:
(i) Ancient period: The origin of Indian Banking dates back to very ancient times.
(a) Vedic period: The ancient Hindu scriptures refer to the money lending activities in the Vedic period. During the era of Ramayana and Mahabharata, banking had become a full-fledged activity.
(b) Smrity period: During the Smrity period, the business of banking was largely carried on by the members of Vaish community. The authoritative records of taking and giving credits are found as early as between 2000 and 1400 B.C.
(ii) Pre-Independence period: Banking institutions during the pre-independence period primarily consisted of money lenders, indigenous banks, nidhis, loan offices, etc. These institutions are to some extent still popular in rural and semi-urban areas.
(a) The Bank of Hindustan: The origin of banking on modern lines in India can be traced only to the beginning of the East India Company’s trade relation with India. The expanding trade relations of the English merchants compelled many Agency Houses to carry out the business of banking in India in the last quarter of the 18th century.
(b) Presidency Banks: Modern commercial banking made its beginning in India with the setting up of the first Presidency Bank – The Bank of Bengal in Calcutta. Actually, the Bank of Calcutta was established in 1806 as a joint stock bank with limited liability, which was brought under the Royal Charter in 1809 and renamed as Bank of Bengal.
(c) The Joint Stock Companies Act, 1850: In India, the Joint Stock Companies Act, 1850 was the first legislative enactment in the country which permitted the corporate sector to come into the banking business. The passing of this Act greatly helped in the establishment of many commercial banks.
(d) Swadeshi Movement (1905): A large number of banks came into existence since the advent of Swadeshi movement. A few of the banks floated during this period include Bank of India, Central Bank of India, Bank of Baroda, Punjab and Sind Bank, Indian Bank, etc.
(e) Imperial Bank of India: In 1921, the three Presidency Banks i.e., Bank of Bengal, Bank of Bombay and Bank of Madras, were amalgamated and a single bank was formed namely, ‘Imperial Bank of India’ under the Imperial Bank of India Act,1920.
(f) Reserve Bank of India: It must be mentioned that during this period, the Reserve Bank of India (RBI) was established in 1935 as the Central bank of India under the RBI Act, 1934.
(iii) Post-Independence Period: The post-independence period has witnessed a massive growth in the Indian banking system. The Indian banking system had gone through a series of crisis and thus its growth was quite slow during the first half of the 20th century.
(a) Nationalisation of Reserve Bank of India: The Reserve Bank of India was nationalised on 1st January,1949 under the Reserve Bank of India (Transfer to Public ownership) Act,1948. The nationalisation of the Reserve Bank of India was the first and one of the most remarkable developments in the banking industry during the post-independence period.
(b) The Banking Companies Act,1949: In order to have balanced growth of banking business in India, the Banking Companies Act was passed in 1949. The Act was passed to provide safeguard to the interest of depositors and also to ensure the development of commercial banks on sound lines. In 1966, the Act was renamed as Banking Regulation Act, 1949.
(c) Formation of State Bank of India: In 1955, Imperial Bank of India, which was established in 1921, was nationalised and renamed as ‘State Bank of India’. In 1959, the State Bank of India (Subsidiary Bank) Act was passed enabling SBI, to take over 8 princely state associated banks, as the subsidiaries.
(d) Social control: The scheme of social control was initiated by the Government in 1968 for more equitable and purposeful distribution of bank credit.
(e) Nationalisation of commercial banks: It has undergone a major structural transformation after the nationalisation of 14 major commercial banks in 1969. In 1980, six more commercial banks were taken over by the Government.
(f) Establishment of Regional Rural Banks: In 1975, a new category of banks known as Regional Rural Banks (RRBs) had been set up to focus more on the development of the rural and agricultural sector.
(g) Licences to Private Sector Banks: After nationalisation in 1969, it was almost over two decades that no banks have been allowed to set up in the private sector. Keeping in view the recommendations of the Narasimham Committee and to introduce greater competition and improve the profitability and efficiency of the banking system, the RBI has been empowered to issue licences to private sector banks as part of the liberalisation process.
(h) Various Financial Institutions: Besides these developments, various financial institutions for meeting specialised financial needs were also established. They include IDBI, ICICI, SIDCs, SIDBI, IRBI, NABARD, LDBs, EXIM Bank, ECGC, NHB, DFHIL, LIC, GIC, UTI, etc.
2. Discuss the advantages and disadvantages of Branch Banking System.
Ans: Advantages of Branch Banking System:
(i) Benefits of large-scale operations: A branch bank has all the advantages of large scale operations. It has large resources when compared to a unit bank. It can appoint experts paying high scale and it can use modern mechanical devices in its offices for efficient working.
(ii) Wider spreading of risks: A branch bank operates over a wide area with different types of economic development. The losses of branches of one region, if any, can be set off against the profit of branches in other regions. In this way the risks are distributed geographically.
(iii) Efficient Management: The branch banking system makes for greater efficiency in management. The staff members of a branch bank are more efficient and more experienced when compared to those of a unit bank. Each staff member has the opportunity to work in various branches, understanding men and matters of different localities.
(iv) Economy in Remittance: Branch banking has the benefit of economy in remittance of funds. As it has branches in different localities, it need not physically transfer cash from one place to another. It can provide remittance facilities to its customers by more transfer entries in the books of its branches. It makes the operation easy, quick and cheap.
(v) Economy of Cash Reserves: Branch banking has the merit of economy of cash reserves. Cash can be transferred from one branch to another whenever necessary. Therefore, branch can operate with lower cash balances and they avoid large amount of idle reserves/balances.
(vi) Diversification of Deposits and Assets: Under branch banking system, there is greater diversification of deposits and assets because of wider geographical coverage. Diversification means that a bank need not specialise in any particular area or particular industry.
Disadvantages of Branch Banking System:
(i) Difficulty in Management and Control: Since the bank has many branches, spread over different places, supervision, management and control becomes more difficult.
(ii) Less Initiative: The branches of the bank are not allowed to make their independent decision. They have to follow the directives of the head office. Besides they have to refer to the matters to the head office for approval. Therefore, the branch managers cannot take initiatives.
(iii) Adjustment of Losses: In branch banking the losses of one branch may be adjusted against the profit earned by another branch. This will affect the profitability of the organisation as a whole, as loss-making branch will continue to eat into the profits of efficient branches.
(iv) Concentration of economic power: Under branch banking system, the financial resources may accumulate in the hands of a few who control big banks with large number of branches. This will cause concentration of economic powers in few big banks. It leads to monopoly.
(v) Continuance of inefficient branches: Under unit banking system, the inefficient branches cannot survive. But in the case of branch banking, the inefficient branches may continue to operate because the losses of those branches are compensated by the profits of some other strong branches. In this way, under this system, inefficiency is protected.
(vi) Unhealthy Competition: Under branch banking many banks may operate their branches in a particular locality where business prospects are very bright. It may create unhealthy competition among various branches of banks.
3. Discuss the advantages and disadvantages of Unit Banking System.
Ans: Advantages of Unit Banking System:
(i) Easy Establishment: The unit bank operates on small scale basis. Hence, it requires less capital to promote a unit bank. Besides, the formalities, rules and regulations are comparatively easy with that of branch banking.
(ii) Easy Management and Control: The size and operations of the bank under unit banking system will be small. Therefore, management, supervision and control will be easier.
(iii) Quick Decisions: Under unit banking system, the manager can take quick decisions regarding loan sanctioning, etc., and he need not wait for the instructions and approval from the head office.
(iv) Satisfaction of Local Needs: Unit banking is the localised banking. The entire operations of the unit bank are confined to a particular area. Therefore, banks have the specialised knowledge of the local problems, their requirements, etc., and can serve to fulfil those needs. In this way, local needs are better satisfied than branch banking.
(v) Personalised Services: The unit banking gives an opportunity for the bankers to intimately know his customers. The manager has personal knowledge of each of his customers and establishes greater personal contact. This ensures personalised service which is not possible in the case of branch banking where the staffs are frequently transferred.
(vi) No Chance for Monopoly: Under unit banking, the size of the bank will be small and limited to a small area. Each bank is independent by itself. Therefore, monopolistic trend in banking cannot arise.
Disadvantages of Unit Banking System:
(i) No ability to face crisis: Limited area of operation and non-diversification of investments reduce the ability of unit banks to withstand losses. They cannot face any financial crisis.
(ii) No Geographical Distribution of Risk: Under unit banking system the area of operations of a bank is limited to a particular place only. If there is any business depression in that place, the bank also suffers losses. Because of its localised operations, the unit bank cannot distribute the risk over a wider area.
(iii) Variation of Interest Rate: There may not be uniformity of interest rates under unit banking. Different banks may charge different rates of interest, since there is no possibility for the transfer of funds to other areas, the availability of funds influence the rates of interest.
(iv) Not able to provide Adequate Banking Facilities: Because of its restricted areas of operations and limited financial resources, unit banks are not able to provide the entire range of banking facilities as provided by branch banking.
(v) Inconvenience in Remittance of Funds: The unit banks have no branches in other places. Therefore, transfer of funds from one place to another becomes costly and inconvenient.
(vi) Weaker Sections may be Neglected: Even in the towns and cities where the unit banks are operating, the weaker sections of the society i.e., poor people may be neglected because of limited resources of the banks.
4. What is a Lead Bank Scheme? State the effects of this scheme.
Ans: Lead bank scheme refers to the scheme which was introduced by the Reserve Bank of India in December, 1969 with the objective of enabling the commercial banks to assume the role of leadership district wise. The scheme was introduced to formalise the concept of ‘area approach’ for the development of banking and credit facilities throughout the country. Under this scheme all the districts in the country have been allotted to the State Bank Group, nationalised banks and private Indian banks.
The Lead Bank Scheme was introduced by the RBI in 1969. From the very beginning there was inadequate understandings, and even serious misunderstandings. The confusion as to the real meaning and content of the lead bank scheme naturally hampered the progress of the scheme in the initial years. Yet by 1973-74, surveys had been completed in 380 districts to be covered under lead bank scheme. The surveys covered 90 percent of the districts in the under developed states of Assam, Bihar, West Bengal, Orissa, Madhya Pradesh and Uttar Pradesh. The Lead Banks had also constituted district level cumulative committees comprising representatives of scheduled commercial banks and the financial institutions operating in the district, state Government officials, etc. The committees were set up to help in identifying remarkable schemes, in evolving methods for exchanging information about borrowers, lending to priority sectors, etc.
The lead bank scheme has brought together financial institutions and development agencies on a common platform to work for the economic upliftment of the rural poor. The scheme has brought home the importance of district credit plan and the necessity of its formation and implementation. It has also emphasised the necessity of corporation and concerted action on the part of various banking, financial and development agencies in the district. The Lead Bank Scheme improves the tempo of economic growth of the country by providing gainful employment to the people, particularly the small borrowers and by uplifting the weaker sections of the society. This scheme helps in reducing regional, economic and also, special and functional disparities in the country and thereby correcting the sectoral imbalance in the country.
5. Write a brief note on the State Bank of India.
Ans: The Imperial Bank was mainly in the hands of the non-Indians who discriminated against Indians in appointments, emoluments, loan facilities, etc. Proposals for nationalisation of the Imperial Bank were under consideration ever since the attainment of independence of India in 1947. According to the recommendations of All India Rural Credit Survey Committee, Imperial Bank was nationalised in 1955 and renamed as State Bank of India.
The State Bank of India is a statutory institution like the Reserve Bank of India (RBI) and is governed by the State Bank of India Act, 1955. SBI was formed on July 1, 1955, with the passing of the SBI Act, 1955, by taking over the assets and liabilities of the Imperial Bank of India, with the main objective of facilitating the extension of banking in the rural and semi-urban areas.
In 1959, the State Bank of India (Subsidiary Bank) Act was passed enabling SBI, to take over 8 princely state associated banks, as the subsidiaries.
The associate or subsidiary banks of State Bank of India were:
(i) State Bank of Bikaner.
(ii) State Bank of Hyderabad.
(iii) State Bank of Indore.
(iv) State Bank of Jaipur.
(v) State Bank of Mysore.
(vi) State Bank of Patiala.
(vii) State Bank of Saurashtra. and
(viii) State Bank of Travancore At Present.
State Bank of India has no Associate or Subsidiary Banks because all the above associate or subsidiary banks were merged with the State Bank of India.
6. Discuss the functions of the State Bank of India.
Ans: The functions of State Bank of India can be grouped under two categories, viz. Central banking functions and General banking functions:
A. Central banking functions: The SBI acts as an agent of the RBI at the places where the RBI has no branch. Accordingly, it renders the following functions:
(i) Banker to the government: The SBI functions as the banker to the central and state governments. It receives and pays money on behalf of the governments. It renders the following functions as directed by the RBI in this regard:
(a) Collection of charges on behalf of the government, e.g., collection of the tax and other payments.
(b) Grants loans and advances to the governments.
(c) Advises the government regarding economic conditions, etc.
(ii) Bankers’ Bank: Generally, all commercial banks have accounts with the SBI. When other commercial banks face financial shortage, the SBI provides assistance to them as it is considered a big brother in the banking industry. It discounts the bills of the other commercial banks. Due to the functions on this line the SBI is considered in a limited sense as the bankers’ bank.
(iii) Currency chest: The RBI maintains currency chests at its own offices. But RBI offices are situated only in big cities. SBI, by its wide network of branches, operates in urban as well as rural areas. RBI, therefore, in such places keeps money at currency chests with SBI. Whenever the need arises, the currency is withdrawn from these chests under proper accounting and reporting to the RBI.
(iv) Acts as a clearing house: In all the places, where RBI has no branch, the SBI renders the functions of clearing house. Thus, it facilitates the inter-bank settlements. Since, all the banks in such places have accounts with SBI, it is easy for the SBI to act as a clearing house.
(v) Renders promotional functions: SBI also renders various promotional functions. It provides various facilities to the following priority sectors:
(i) Agriculture.
(ii) Small-scale Industries.
(iii) Weaker sections of the society.
(iv) Co-operative sector.
(v) Small traders.
(vi) Unemployed youth, etc.
B. General banking functions: The SBI renders the following general banking functions under section 33 of the SBI Act:
(i) Accepting deposits from the public under current, saving, fixed and other deposit accounts.
(ii) Advancing and lending money upon the security of stocks, securities, etc.
(iii) Drawing, accepting, discounting, buying and selling of bills of exchange and other negotiable instruments.
(iv) Investing funds in specified kinds of securities.
(v) Issuing and circulating letters of credit.
(vi) Acting as administrator, executor, trustee or otherwise.
(vii) Selling and realising the movable or immovable properties that come into the banks in satisfaction of claims.
(viii) Buying and selling of gold and silver.
(ix) Provides merchant banking facilities.
(x) Provides Leasing finance and Project finance facilities, etc.
7. Discuss the performances of Commercial Banks after nationalisation.
Ans: The nationalisation of 14 major commercial banks with deposits of Rs. 50 crores or more in July, 1969 was a historic and momentous event in the history of India. Since nationalisation of 14 banks in 1969 and 6 banks in 1980, their policies and working practices have undergone a drastic change. The Indian banking system has recorded rapid progress due to planned economic growth, increase in money supply, growth of banking habit, control and guidance by the RBI and above all, nationalisation of banks.
Branch expansion gained momentum after the nationalisation of banks. The present network of commercial banks is the result of deliberate policy of massive branch expansion pursued by the public sector banks during the post-nationalization period. Public sector banks have contributed greatly to the development of banking habit among people through sustained publicity, extensive branch banking and relatively prompt service to the customers. Bank nationalisation gives a great fillip to deposit nationalisation, due partly to the expansion of a network of bank branches and partly to the incentives given to the savers. Nationalised banks are making the credit requirements of industry, trade and agriculture on a much larger scale than before. In recent years, bank credit has placed up smartly by around 20 percent per year. In course of time, retail trade, professional and self employed persons, education, housing loans for weaker sections and consumption loans were also added to priority sectors. The public sector banks took priority lending enthusiastically and the rate of progress was quite rapid soon after nationalisation but later progress was more modest. In accordance with the national plans, politics and priorities, banks have now taken up major responsibilities for development and diversifying the Indian economy, entering new fields of activity such as merchant banking and underwriting, mutual fund, portfolio management, leasing and housing finance, etc. The nationalised banks were also expected to provide finance for economic plans of the country through the purchase of government securities. The proportion of time deposits has increased continuously from 50% in 1969. This has a clear indication of a shift in favour of fixed deposits of the commercial banks. With a view to provide bank credit to the weaker sections of the society at a concessional rate, the government introduced this 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 who do not have any tangible security to offer, but who can improve their economic condition with the financial support from the bank.
8. Discuss the main objectives and achievements of bank nationalisation in India.
Ans: Objectives of Bank nationalisation in India:
(i) Preventing concentration of economic power: Initially, a few leading industrial and business houses had close association with the commercial banks. The directors of these banks happened to be the same industrialists who established monopoly control on the bank finance. They exploited the bank resources in such a way that new business units could not enter in any line of business in competition with their business houses. Nationalisation of banks, thus, prevented the spread of the monopoly enterprises.
(ii) Social control was not adequate: The ‘social control’ measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, nationalisation was necessitated by the failure of social control.
(iii) Channel the bank finance to plan priority sectors: Banks collect savings from the general public. If it is in the hands of the private sector, the national interest may be neglected. Besides, in Five Year Plans, the Government gives priority to some specified sectors like agriculture, small industries etc. Thus, nationalisation of banks ensures the availability of resources to the plan priority sectors.
(iv) Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private banks have failed. Because of such rapid branch expansion there is a possibility to mobilise rural savings.
(v) Balanced Regional Development: In India, certain areas remain backward for lack of financial resources and credit facilities. Private banks have neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.
Achievements/Performances/Progress of Nationalised Banks/Public Sector Banks:
(i) Branch expansion: Before nationalisation, the banks were conservative and opened branches mainly in metropolitan cities and other major cities. Branch expansion gained momentum after the nationalisation of banks. The present network of commercial banks is the result of deliberate policy of massive branch expansion pursued by the public sector banks during the post-nationalization period.
(ii) Deposit mobilisation: The post-nationalization period has shown a substantial rise in the rate of deposit mobilisation. Public sector banks have contributed greatly to the development of banking habits among people through sustained publicity, extensive branch banking and relatively prompt service to the customers. Bank nationalisation gives a great fillip to deposit nationalisation, due partly to the expansion of a network of bank branches and partly to the incentives given to the savers.
(iii) Expansion of bank credit: There has been a tremendous expansion of bank credit reflecting the rapid expansion of industrial and agricultural output.
Nationalised banks are making the credit requirements of industry, trade and agriculture on a much larger scale than before. In recent years, bank credit has placed up smartly by around 20 percent per year.
(iv) Advances to priority sectors: Soon after nationalisation, the commercial banks were asked to be specially concerned with the financing of priority sectors of agriculture, small industry and business and small transport operators. In course of time, retail trade, professional and self employed persons, education, housing loans for weaker sections and consumption loans were also added to priority sectors. The public sector banks took priority lending enthusiastically and the rate of progress was quite rapid soon after nationalisation but later progress was more modest.
(v) 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. In accordance with the national plans, politics and priorities, banks have now taken up major responsibilities for development and diversifying the Indian economy, entering new fields of activity such as merchant banking and underwriting, mutual fund, portfolio management, leasing and housing finance, etc.
(vi) Investment in Government Securities: The nationalised banks were also expected to provide finance for economic plans of the country through the purchase of government securities.
(vii) Change in composition of Deposits: The relative proportions of demand and time deposits have also changed after the nationalisation of banks. The proportion of time deposits has increased continuously from 50% in 1969. This has a clear indication of a shift in favour of fixed deposits of the commercial banks.
(viii) Differential Rate of Interest Scheme: With a view to provide bank credit to the weaker sections of the society at a concessional rate, the government introduced this 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 who do not have any tangible security to offer, but who can improve their economic condition with the financial support from the bank.
9. What were the causes of nationalisation of some Indian Banks? How does it help the country?
Ans: The various criticisms against nationalisation of banks can be summarised as follows:
(i) Political purpose rather than for Productive purpose: The government has acquired the strength of a giant and there is the danger of using the financial resources for political purposes rather than for productive purpose.
(ii) Beginning of state capitalism: Such a drastic step of nationalisation of about 90% of the Banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling bank’s resources. It is considered as the beginning of state capitalism and not socialism in India.
(iii) Low level of functioning: Some are of the opinion that after nationalisation banks will degenerate to the level of agricultural co-operatives, which are known for their inefficiency and corrupt practices. Some fear that the officers who manage these big banks also have to bow down to the politicians in course of time.
(iv) Less attractive customer’s services: The nationalised banks are sure to join the ranks of other public undertakings which are known for their working to losses. Indecision, corruption, and of responsibility are the evils with which the government undertakings are suffering. A government bank may not care to give due importance to the customer services.
(v) Promises may not materialise: Nationalisation cannot convert the commercial banks overnight into agricultural banks. Similarly, the hopes raised among the poor and middle-class people about the bank loans may ultimately prove to be false.
