Banking sector goes beyond nationalisation spirit

The move to nationalise 14 large banks by Indian government on July 19, 1969 changed landscape of banking system in the country Dr K Srinivasa Rao The initiative to nationalise all the 14 large banks on July 19, 1969 was a historic move aimed at bringing about socio economic transformation in India. The second phase of nationalisation of six more banks took place in 1980 thus bringing around 90 per cent of banking network that existed at that time under the fold of the government ownership. Out of these 20 banks, New Bank of India was merged with Punjab National Bank reducing the number to 19. Again with the onset of private sector banks and foreign banks, the share of public sector banks has now come down to 70 per cent. The financial intermediation of mobilizing surplus resources from the savers has been successfully channelized to the productive sectors of the economy by way of priority sector loans extended by nationalised banks. Thus, during the phase of nationalisation, though laudable efforts were made to connect the masses with the formal banking network, the enormity of banking needs witnessed an exponential growth. Within the given resources and operating limitations, it was difficult to match the growth of banking infrastructure with the surging needs of the economy. The entire architecture of banking dissemination was done through a well-designed Lead Bank Scheme (LBS). It was launched by Reserve Bank in 1969 with a view to facilitate banks to mobilize deposits on a massive scale to disseminate credit to every sector of the economy. All the districts, except Metropolitan districts were allotted to different banks based on the existing regional orientation. Each bank was also allotted districts in more than one state. Similarly each state is assigned to a bank identified as convener of State Level Bankers Committee (SLBC).The allotment of districts had a major role in the spread of banking to unbanked centers. This was the beginning of rapid growth of banking reach. Though banks have actively participated in priority sector lending, attention has increasingly been drawn to the fact that large sections of population remained outside formal banking structure. In 1969, out of the 8262 bank branches in the country, 1833 were in rural area. However, the number now increased to 36,130 in FY-12. The semi-urban centres, which had 3362 bank branches then, are home to 25,931 branches now. It provides an insight into the pace of expansion of banking in hinterland, but in a country with over 6,00,000 villages, the reach is not enough. Despite continued thrust on expanding bank network under nationalisation for over four decades, it was found that the banks still had to go a long way to penetrate to the desired extent. The statistics on people-bank connect evidently pointed out the large excluded segment posing tough challenge for banks to bridge the gaps. The global experience of advantages of more inclusive growth in some of Asian and African countries made the government to relook at the structure and spread of banking in India. It was found that in a country with 1.2 billion people, the banking system has 660 million deposit accounts and about 110 million borrower accounts in March 2009. The banking inclusion of around 47 per cent is not at all considered sufficient to harness the potentiality of millions of entrepreneurs pan India. With intent to accelerate banking outreach, renewed thrust on bank's branch expansion, use of Information Communication and Technology (ICT) model to create more touch points in the hinterland has been envisaged. The government agencies, Reserve Bank and even some large corporate sectors began to realize the urgency of inclusive growth and strongly joined hands with banks to proliferate across the nation. In India, banks can reliably connect people with the mainstream economy, but the coordination and cooperation of all agencies are needed to accomplish the task of connecting people with the formal banking system. The recent CRISIL Inclusive Index (CII) provided a deeper understanding of the progress of financial inclusion. The CII improved from 35.4 per cent in 2009 to 40.1 per cent in 2011. Credit penetration improved from 37.3 per cent to 41 per cent and deposit reach increased from 39.7 per cent to 48.3 per cent during the same period. Thus so far, one in two Indians has a savings bank account and one in seven has a loan account. Though it is long way to go, the progress in last few years has been more impressive. Hence, while the nationalisation of banks has been the spring board to connect more people with the formal banking system, the recent emphasis on financial inclusion with the active support of RBI and government agencies has helped banks realize the goals of nationalisation going much beyond its underlying spirit. (The writer is General Manager, Bank of Baroda, Mumbai. The views are his own)