During the period of 1938–46, the number of bank branch offices in India tripled to 3,469, and deposits quadrupled to ₹962 crore. However, the partition of India in 1947 had a significant adverse impact on the economies of Punjab and West Bengal, leading to a paralysis of banking activities for months. This pivotal moment in India’s history marked the end of a laissez-faire regime for the Indian banking industry.
Following independence, the Government of India took proactive measures to play a more active role in the economic life of the nation. The Industrial Policy Resolution adopted in 1948 envisioned a mixed economy, leading to increased state involvement in various segments, including banking and finance. This shift towards greater regulation and control was manifested in several key measures:
Nationalization of the Reserve Bank of India (RBI)
- The RBI, India’s central banking authority, which was established in April 1935, was nationalized on January 1, 1949, under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
Enactment of the Banking Regulation Act
- The Banking Regulation Act of 1949 empowered the RBI to regulate, control, and inspect banks in India, and stipulated that no new bank or branch of an existing bank could be opened without a license from the RBI. Additionally, no two banks could have common directors.
- The Indian banking industry had become a crucial instrument for the development of the Indian economy by the 1960s. It had also emerged as a significant employer, prompting a debate about the potential nationalization of the banking sector.
Nationalisation in 1969
- In 1969, the Government of India, led by Prime Minister Indira Gandhi, took a decisive step by nationalizing the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks held 85 percent of bank deposits in the country.
The banks that were nationalized were:
- Allahabad Bank (now Indian Bank)
- Bank of Baroda
- Bank of India
- Bank of Maharashtra
- Central Bank of India
- Canara Bank
- Dena Bank (now part of Bank of Baroda)
- Indian Bank
- Indian Overseas Bank
- Punjab National Bank
- Syndicate Bank (now part of Canara Bank)
- UCO Bank
- Union Bank of India
- United Bank of India (now part of Punjab National Bank)
Nationalisation in 1980
In 1980, a second round of nationalizations targeted six additional commercial banks, primarily to enhance government control over credit delivery. This move increased the Government of India’s stake to approximately 91% of the banking sector. The banks nationalized in 1980 were:
- Punjab and Sind Bank
- Vijaya Bank (now part of Bank of Baroda)
- Oriental Bank of Commerce (now part of Punjab National Bank)
- Corporation Bank (now part of Union Bank of India)
- Andhra Bank (now part of Union Bank of India)
- New Bank of India (now part of Punjab National Bank)
Subsequently, in 1993, New Bank of India was merged with Punjab National Bank, reducing the number of nationalized banks from 20 to 19. Until the 1990s, these nationalized banks grew at a pace of approximately 4%, mirroring the average growth rate of the Indian economy.