The importance of public banking C.P.

CHANDRASEKHAR Public ownership of banks, besides preventing the system from plunging into periodic crises, delivers many growth and welfare benefits. THE HINDU PHOTO ARCHIVES

Prime Minister Indira Gandhi addressing members of a taxi drivers' union in Delhi who visited her to express their support for the nationalisation of 14 banks, in 1969. IN a reversal of its recently held position, the Congress party has declared that publicly owned banks are one of Indias strengths and that the nationalisation of banks was one of the partys important achievements. This has, as expected, upset those who have supported the partys two-decade long flirtation with financial liberalisation, which included an as yet unfinished drive to privatise public sector banks. The declaration was first made by Congress president Sonia Gandhi at the Hindustan Times Leadership Summit. She argued that while the ongoing economic upheaval could grievously affect the most vulnerable sections of our society, her party had partially insulated Indias poor from becoming victims of the unchecked greed of bankers and businessmen. Elaborating, she said: Let me take you back to Indira Gandhis bank nationalisation of 40 years ago. Every passing day bears out the wisdom of that decision. Public sector financial institutions have given our economy the stability and resilience we are now witnessing in the face of the economic slowdown. Coming from the Congress party chief at election time, this could be dismissed as mere rhetoric that is unlikely to influence policy. After all, the United Progressive Alliance chairperson had noted in the same speech that, the response to the economic slowdown resulting from the crisis should not be a return to the era of controls. But the cynics were surprised when just days after Sonia Gandhi made her remarks, Finance Minister P. Chidambaram took the cue from his leader and extolled the virtues of a nationalised banking sector. Speaking at a function organised as part of the M. Ct. M. Chidambaram Chettyar centenary celebrations, he emphasised that Indias public sector banks were strong pillars in the worlds banking industry. This was because, unlike the chief executives of private banks in the United States, public sector bank managers did not violate regulations in search of profits. For a Minister who has been pushing for the dilution of banking regulations, the privatisation of public banks, and the relaxation of the cap on voting rights of shareholders in banks, this is indeed a reversal of position. Three factors may have contributed to this change of opinion. First, the evidence that the managers of private banks pursuing profits had dropped all diligence and made decisions that have threatened and are still threatening the viability of leading banks in the developed capitalist countries. These include banks that the advocates of financial liberalisation and privatisation upheld as models of modern banking. Second, the recognition that the only way in which the losses made by these banks could be socialised and their viability ensured was for the government to invest in their shares so as to recapitalise them. Across the world, the response to the financial crisis has shifted out of mere measures to inject liquidity into the system to backdoor nationalisation of these banks so as to save them from bankruptcy and to ensure that they keep lending. Finally, the evidence that on an average, the public sector banks in India have weathered the financial storm much better than the private banks, including some that had been celebrated as the post-liberalisation icons of innovative banking.However, if the argument stops here, the explicit or implicit defence of nationalisation and support for public banking can only be partial and circumstantial. What needs recognition is a conceptual case for regulated, public banking that emerges from the current and previous financial crises. It is now widely recognised

that the current crisis can be traced to forces unleashed by the transformation of U.S. banking in the 1970s, when it moved away from the lend and hold model in which the interest margin or the difference between interest paid on deposits and the interest charged on loans determined the profits of banks. With interest rates being controlled or regulated, this margin was small and implied that the profitability of banking was low and below that of the rest of the financial sector and even that of many non-financial industries. In fact, during the inflationary 1970s, profitability sank even further because savers moved out of bank deposits, returns on which were regulated, to other kinds of financial instruments. There was a good reason why the banking system was thus regulated. As financial intermediaries, banks accept deposits from the public at large, including small savers. These deposits are insured against risk, are liquid and can be withdrawn at will. On the other hand, the banks that pool these deposits provide medium or long-term advances to borrowers who are risky targets, creating loan assets that are relatively illiquid. Given the risk carried by these intermediaries, which are crucial to the real economy, they had to be protected and the savings of small savers and households secured through regulation, including regulation of interest rates. A consequence was that banking was an island of low profits, resulting in a conflict between this profit scenario and private ownership. Transfer of risk KAMAL NARANG

Bank employees stage a demonstration outside the State Bank of India head office in New Delhi on January 25 protesting against privatisation, outsourcing and the "anti-labour policies" of the United Progressive Alliance government. It was this conflict that led to the financial liberalisation of the 1970s and the 1980s in the developed countries, when processes euphemistically referred to as financial innovation were adopted to boost the profits of the banks. As a part of that, banks shifted to the originate and distribute model in which they created credit assets not to hold them but to pool them, securitise them and sell them to other investors, transferring risk in the process. The banks own incomes now depended not on net interest margins (after accounting for intermediation costs) but on the fees and commissions they were paid to serve as factories that produced financial assets for investors with varying tastes for risk. In the process, banks migrated to a world where expected and realised returns were much higher than earlier, resolving the conflict between private ownership and lower relative profitability. Unfortunately, that transformation also generated all the elements that underlie the current and previous crises. The number of bank failures in the U.S. increased after the 1980s. From 1955 to 1981, U.S. banks averaged 5.3 failures a year, excluding banks that were protected by official open-bank assistance. On the other hand from 1982 to 1990, the banks averaged 131.4 failures a year, or 25 times as many as from 1955 to 1981. During the four years ending 1990, banks averaged 187.3 failures a year. The most spectacular set of failures was that associated with the savings and loan crisis, which was precipitated by financial behaviour induced by liberalisation. Thus, there is a fundamental contradiction in private enterprise capitalism. If the banking sector is regulated, it cannot deliver the profits that are considered adequate by private investors, who are given returns elsewhere in the system. On the other hand, if regulations are relaxed to facilitate the pursuit of profits, it will result in bank fragility and the poor become the victims of the unchecked greed of bankers and businessmen, as Sonia Gandhi noted. The only solution, therefore, is the nationalisation of banking, or the core of the financial system.

Such nationalisation, which delivers a resilient banking system, yields many favourable outcomes: It ensures the information flow and access needed to pre-empt fragility by substantially reducing any differences in the objectives and concerns of bank managers, on the one hand, and bank supervisors and regulators, on the other. This is a much better insurance against bank failure than efforts to circumscribe their areas of operation, which can be circumvented. It subordinates the profit motive to social objectives and allows the system to exploit the potential for cross subsidisation. As a result, credit can be directed, despite higher costs, to targeted sectors and disadvantaged sections of society at lower interest rates. This permits the fashioning of a system of inclusive finance. It gives the state influence over the process of financial intermediation and allows the government to use the banking industry as a lever to advance its development efforts. In particular, it allows for the mobilisation of technical and scientific talent to deliver both credit and technical support to agriculture and the small-scale industrial sector. This multifaceted role for state-controlled banking allows the government to combine policies aimed at preventing fragility and avoiding failure with policies aimed at achieving broad-based and inclusive development. Directed credit at differential interest rates can lead to economic activity in chosen sectors and regions and among chosen segments of the population. It amounts to building a financial structure in anticipation of real-sector activities, particularly in underdeveloped and underbanked regions of a country. The importance of public ownership in realising these objectives cannot be overstressed, since it requires subordinating the profit motive to larger social goals, which would not be acceptable to a privately owned and controlled banking system. It hardly bears emphasising that the achievements of Indias banks after nationalisation have been remarkable. There was a substantial increase in the geographical spread and functional reach of banking, with nearly 62,000 bank branches in the country as of March 1991, of which over 35,000 (or over 58 per cent) were in the rural areas. There was a sharp increase in the share of rural areas in aggregate deposits and credit. In fact, a major achievement of the banking industry in the 1970s and the 1980s was a decisive shift in credit provision in favour of the agricultural sector. From an extremely low level at the time of bank nationalisation, agricultures share of credit rose to a peak of about 18 per cent by the end of the 1980s. In sum, public ownership of banks, besides preventing the system from periodic crises caused by the behaviour encouraged by the pursuit of private profit, delivers many growth and welfare benefits. It is, therefore, gratifying that the combination of a financial crisis and the pressures of electioneering have forced the government to retract on its mindless advocacy of financial liberalisation and recognise the benefits of public ownership. Whether this will influence policy is, however, yet to be seen. PHASES Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III. Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Banking in India Central bank Reserve Bank of India Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Nationalised banks Bank IDBI Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank State Bank of India State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank Group State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Travancore Axis Bank Bank of Rajasthan Bharat Overseas Bank Catholic Syrian Bank City Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank Ganesh Bank of Kurundwad HDFC Bank ICICI Bank IndusInd Bank ING Private banks Vysya Bank Jammu & Kashmir Bank Karnataka Bank Limited Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank Ratnakar Bank Rupee Bank Saraswat Bank SBI Commercial and International Bank South Indian Bank Tamil Nadu Mercantile Bank YES Bank

ABN AMRO Abu Dhabi Commercial Bank Antwerp Diamond Bank Arab Bangladesh Bank Bank International Indonesia Bank of America Bank of Foreign banks Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Bank of Tokyo Mitsubishi UFJ Barclays Bank Citibank India HSBC Standard Chartered Deutsche Bank Royal Bank of Scotland Regional Rural banks South Malabar Gramin Bank North Malabar Gramin Bank Pragathi Gramin Bank Shreyas Gramin Bank Real Time Gross Settlement(RTGS) National Electronic Fund Transfer (NEFT) Financial Services Structured Financial Messaging System (SFMS) CashTree Cashnet Automated Teller Machine (ATM) By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Nationalised banks list:

1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8. Corporation Bank 9. Dena Bank 10. Indian Bank 11. Indian Overseas Bank 12. Oriental Bank of Commerce 13. Punjab and Sind Bank 14. Punjab National Bank 15. State Bank of Bikaner & Jaipur 16. State Bank of Hyderabad 17. State Bank of India (SBI) 18. State Bank of Indore 19. State Bank of Mysore 20. State Bank of Patiala 21. State Bank of Saurashtra 22. State Bank of Travancore 23. Syndicate Bank 24. UCO Bank 25. Union Bank of India 26. United Bank of India 27. Vijaya Bank

JAGADISH S FINANCIAL ANALYST AND ADVISOR Nationalisation of banks: acquiring minimum 51% of paid-up capital of a private bank by the state government or central government is called nationalisation of the bank. The difference between nationalised banks and other banks: nationalilsed banks are controlled by concerned government where as other banks are controlled their owners, but all banks in India are regulated by RBI. The advantages of investing in nationalised banks compared to the other banks: you haven't mentioned the investment through FD in a nationalised bank or buying its shares in open market. Best Answers in: Event Marketing and Promotions (1)... see more Nationalized banks are those taken over by government (in this case, Indian government) from their former owners by acquiring majority shareholding (minimum of 51%) in the company to guarantee control. The implication of this is that government will have majority representation on the board. these government representatives are likely to be mostly politicians. How well such banks are manged will depend on the maturity of the elite in government. However, all banks both nationalized and private ones are all regulated by RBI. How well a bank performs will depend on the quality of management. IIt is definitely not safe to assume that nationalized banks are safer than private ones. You need hard facts. Generally speaking your investment decision should be guided by your investment objectives such as current income, capital appreciation, security, regularity of income, certainty of return, diversification needs etc If you are contemplating a major stake it is advisable you get a professional to analyze the financial statements for you.

Best Answers in: Economics (3)... see more I would disagree slightly with Jagadish & Adeola and add a further point. A nationalised bank is where the state (government) owns only (as a minimum) 50.1% (not just 51% and above) of the share capital with full voting rights (as other share / stock classes can have differing voting and control rights) AND importantly have appointed the board of directors to carry out the management and investment decisions as laid out by the government policy of the day. Some banks have been nationalised in ownership alone (the share ownership), but not in control, as the previous board of directors might still be controlling the day to day management of the entity. As far as investment in nationalised banks is concerned, the issue really is the reason for your investment in the first place.

Are you trading, investing for the long term; a fundamental investor or a technical trader? You underlying investment philosophy and the overall performance of the entity should guide you, not just the fact of ownership. Control, management strength, investment objects of the entity, etc. are some of the issues you should consider (there are many more to consider besides). I agree with Brian that from an economic perspective, moral hazard now certainly has something to do with it too. If you know that a safety net always exists, then the risk taking decisions are done in a slightly different environment, than if there is no safety net. The choice as an investor is yours. Be independent and confident, or follow those lemmings...

A nationalised bank is where the state (government) owns only (as a minimum) 50.1% (not just 51% and above) of the share capital with full voting rights (as other share / stock classes can have differing voting and control rights) AND importantly have appointed the board of directors to carry out the management and investment decisions as laid out by the government policy of the day. Some banks have been nationalised in ownership alone (the share ownership), but not in control, as the previous board of directors might still be controlling the day to day management of the entity. As far as investment in nationalised banks is concerned, the issue really is the reason for your investment in the first place.

Bhalchandra P Brand Manager at Cobra Indian Beer Pvt. Ltd. Currently trying to revamp and vitalize the brand portfolio. see all my answers Best Answers in: Using LinkedIn (11)... see more Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% y the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed

the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalised banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009. The only biggest advantage to have an a/c with Nationalised banks is they have branches in almost all the towns and their low cost of maintaining an a/c Recent trends in the Banking Sector The key trends in the banking sector are as follows:

Increased Merger & Acquisition activity in the banking sector with local private banks having made several domestic acquisitions Large expansion of branch network and deposits by private and some foreign banks Rationalisation of branches by nationalised banks Increased focus towards consumer finance Increased focus on attracting local rupee deposits Increased emphasis towards automation and customer service Reduction in the increase in non performing loans as a result of better governance of banks and greater accountability process initiated by the government Significant increase in inward remittance business as a result of governmental clamp down on unofficial remittance channels following September 11.