Changes that Took Place after the Establishment of RBI

This article throws light upon the four main changes that took place after the establishment of RBI. The changes are: 1. Growth of Banking in India after Independence 2. Establishment of the State Bank of India 3. Reforms in Banking Sector 4. Nationalisation of Banks.

Change # 1. Growth of Banking in India after Independence:

With establishment of Reserve Bank of India in 1935 the Imperial Bank of India ceased to be the banker to the Government. The Imperial Bank was given the right to act as an agent of the Reserve Bank of India and represent the bank where it had no branches for transaction of Government business.

By the time The Reserve Bank of India was established there were hundreds of indigenous and small banks already working in India. Some of important banks which were functioning include Allahabad Bank 1865, Punjab National Bank 1895, Andhra Bank 1923, Bank of Baroda 1908, Bank of India 1906, Bank of Maharashtra 1935, Canara Bank 1906, Central Bank of India 1911, Corporation Bank 1906, Indian Bank 1907, Punjab and Sindh Bank 1908, Syndicate Bank 1925 Union Bank of India 1919, Vijya Bank 1931, Catholic Syrian Bank 1920, City Union Bank, 1904, Dhanlakshmi Bank 1927, Fedral Bank 1931, ING Vysya Bank 1930, Karnatka Bank 1924, Karur Vysya Bank 1926, Laxmi Vilas Bank 1926, Nanital Bank 1922, South Indian Bank 1929 Tamilnadu Merchantile Bank 1921 etc.

Although the banking Industry had developed enough and a fleet of banking companies were operating. But Industry, mining, agricultural and particularly small traders and artisans etc. were facing credit crunch for either too rigid rules of banks or on account of lack of security. In operation of accounts like Saving or current account many restrictions were imposed.

On the other hands banks were engaged in such businesses some of which were of speculative nature. In the swing of competing each other the banks some times flouted the rules of ordinary banking functions. This period saw a number of banks run on. And public had lesser confidence in the banks and as such deposit growth of banks was slow.

In place of banks public preferred the saving bank facilities provided by the post Offices. In case of remitting or transferring the money from one place to another the money orders of (Postal Banks) were taken as more safer than the services of banks.

Although the Company law of 1850 was applicable to all the joint-stock banks but it contained only very same provision with regard to banking companies. The Government of India passed Banking Companies Act 1949. Later by an amendment this Act was changed to Banking Regulation Act 1949. and RBI was vested with extensive powers for supervision of banking in India as the Central Bank of the Country.

In addition to enactment of Banking Regulation Act 1949 the Government of India, in view of the growing economy of the nation and also with a view to bring the banking within reach of maximum citizens particularly the lower strata of public, had been bringing financial and banking reforms by way of enactment of different Acts, Laws, ordinance etc. With the view of developing rural India and keeping in mind to provide banking facilities in far flung areas of the country the Government of India in 1955 passed State Bank of India Act 1955. The Act provided

Change # 2. Establishment of the State Bank of India (Takeover from Imperial Bank of India):

Establishment of the State Bank:

(1) A Bank to be called the State Bank of India shall be constituted to carry on the business of banking and other business in accordance with the provisions of this Act and for the purpose of taking over the undertaking of the Imperial Bank.

The Reserve Bank, together with such other persons as may from time to time become shareholders in the State Bank in accordance with the provisions of this Act, shall, so long as they are shareholders in the State Bank, constitute a body corporate with perpetual succession and a common seal under the name of the State Bank of India, and shall sue and be sued in that name.

The State Bank shall have power to acquire and hold property, whether movable or immovable, for the purposes for which it is constituted and to dispose of the same.

On 30 April Imperial Bank of India became the State Bank of India for proving extensive banking facilities on a large scale specially in rural and semi-urban areas. The SBI was also to act as the principal agent of RBI to handle banking transactions of the Union and State Govts. All over the country.

Change # 3. Reforms in Banking Sector:

The banking reforms efforts of Govt. of India continued to keep a pace with the world economy. After Nationalisation of State State Bank of India with launch of First Five Area Plan having specific stress for the development of rural areas also envisaged the concept of regulating the functions of private banks which were more concentrating the credit to big Industry Houses or influential borrowers.

The Government of India Passed State bank of India (subsidiary) Act 1959 (38 of 1959) and eight banks of Princely states were made as subsidiaries to the State Bank of India.

These banks include:

1) Bank of Bikaner,

2) Bank of Jaipur (This Bank was later on merged with Bank of Bikaner with new name as Bank of Bikaner and Jaipur),

3) Bank of Indore,

4) Bank of Mysore,

5) Bank of Patiala,

6) Travancore Bank,

7) Bank of Hyderabad,

8) Bank of Saurashtra.

With bringing these banks under orbit of State Bank of India the representation of banks expanded in large areas. Seeing the expanding spree in banking sector Government thought of bringing some social controls also.

As such certain amendments were brought out by the Government in Banking Regulation Act per see Social Control Act 1968 the main features inter-alia include:

1. In bigger banks a whole time chairman be appointed. For this post the person should possess special knowledge and practical experience in the field of Banking, Finance, Economics, Business Administration.

2. Most of the Directors to be persons with special knowledge and practical experience in any of the areas such as Accountancy, Agriculture, Rural Economy, Banking, Economics, Finance, Law, Small Scale Industries.

3. At least two Directors with the Special knowledge and practical experience in Agriculture, Rural Economy and Co-operation.

Banks are prohibited from making loans or advances secured or unsecured to their Directors or to Companies in which they have substantial interest.

Change # 4. Nationalisation of Banks:

In pursuance of social control a Historic step in the Banking Industry of India was taken on 19^th July 1969 when 14 major banks with deposits more than Rs.50 crores were nationalized under the Banking Companies (Acquisition and Transfer of Undertaking) Act 1969.

These banks are:

1) Central Bank of India,

2) Bank of Maharashtra,

3) Dena Bank),

4) Punjab National Bank,

5) Syndicate Bank,

6) Canara Bank,

7) Indian Bank,

8) Indian Overseas Bank,

9) Bank of Baroda,

10) Union Bank,

11) Allahabad Bank,

12) United Bank of India,

13) UCO Bank and

14) Bank of India.

2. On 15^th April 1980 6 more commercial banks were nationalized having deposits more than Rs.200 crores.

These banks are:

1) Andhra Bank,

2) Corporation Bank,

3) Oriental bank of Commerce,

4) Punjab and Sind Bank,

5) Vijaya Bank, and

6) New Bank of India.

The New Bank of India was merged with Punjab National Bank in 1993.

All the above banks before nationalisation were private business houses which were owned by businessmen and were also being managed by them. Small businessmen, traders, farmers etc. had hardly any say in these Banks.

Although there was wide spread criticisms of the act of nationalizing the bank and many big Business houses and media also tried to explain that the banks shall become the monopoly of Govt. and shall not free to function. Among such ante nationalization expressions Mr. Prakash Tandon Ex- Chairman of Punjab National Bank had well described the rationale of nationalization of banks.

As per him:

“Many failures and crises over two centuries, and the damage they did under ‘Laissez faire’ conditions, the need of planned growth and equitable distribution of credit, which in privately owned banks was concentrated mainly on the controlling Industrial Houses and influential borrowers, the need of growing Small Scale Industries and Farming regarding finance equipment and inputs, from all these there emerged an inexorable demand for banking legislation, same Govt. Continue and central banking authority, adding up, in the final analysis, to social control and nationali­zation.”

It was therefore a historic Act on the part of Government in achieving the socialistic pattern of society. Indian Government brought out a number of legislations and laws to regulate banking institutions. With result in spite of enacting strict rules and regulation for the ordinary functions of banks a great deal of flexibility was also provided in order to protect the system by any external disorder in economy.

In the list of such Legislation some important legislations are:

1. Banking Regulation Act 1949. This act has been amended many times according to requirements.

2. The Banking Companies(Amendment) Act 1956.

3. The banker books evidence Act 1891. Amended many a times.

4. Banking Companies (Acquisition & transfer of undertaking)Act 1970 amended again in 1980.

5. SBI Act 1955.

6. SBI (Subsidiary)Act 1959.

7. Deposit in Insurance and Credit Guarantee Act 1961.

8. Regional Rural Bank Act 1976.

9. Banking Law( Application to Co-operative Societies) Act 1966.

10. Banking Companies (Legal Practitioners clients Accounts) Act 2001.

11. The Banking Regulation (amendment and miscellaneous Provisions) Act 2004.

12. The Banking Regulation Act 2007.

The list is not exhaustive there are numbers of other legislations, Acts and law which have been executed and implemented in India to ensure a stable banking system in the country.