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Essay on “Privatization of Banks” Complete Essay for Class 10, Class 12 and Graduation and other classes.

Privatization of Banks


 Time has come to review the working of the banking sector in the country after about three decades of the nationalization of major banks which came in 1969. This is essential in view of the economic reforms process initiated by the Union Government in July 1991. On July 19, 1969 when the 14 commercial banks were nationalized (the other six were nationalized in 1980), the late Prime Minister Indira Gandhi had said, “Our sole concern has been to accelerate development and thus a significant impact on the problems of poverty and unemployment and to bring about a progressive reduction of disparities between the rich and the poor sections of people and between relatively advanced and backward areas.”The question that arises today is that, have these objectives been achieved?

One must concede that the banking sector in India has recorded a phenomenal growth since 1969. There has been a rapid expansion of branches of unbanked and underbanked rural areas during the last three decades. Before nationalization only 22% of the branches of various commercial banks were in rural areas, as compared to 58% today. The total number of branches increased from 8,322 to 60,528 between July 1969 and March 1992 with the total number of branches taking a quantum leap from 2,000 to 38,000 during the same period. This implies that a bank branch today serves a population of less than 11,000 persons on an average, as compared to about 65,000 prior to nationalization and about 85,000 in 1961. The mobilization of savings is reflected the fact that deposits, as a percentage of the Gross Domestic Product, have increased from nearly 13% in 1969 to about 38% today. But this increase in the opening of bank branches has had no relation to their potential viability. Rapid increase in staff, accompanied by rapid promotions, has led to a gradual and dismal reduction in the quality of service rendered by the commercial bank! in the public sector. A glaring example of this deterioration is sec in the merger of the New Bank of India with the Punjab National bank as the former had incurred huge losses on account of non-replication of bank debts, loans, etc., over a number of years.

Some headway has. Indeed, been made in the disbursement of rural credit over the past 15 years or so. But, in terms of coverage, only about 23% or operational holdings are covered by institutional credit. In other words, the institutional system has not succeeded in providing credit support to a majority of small peasants. In addition to inadequate coverage, various studies undertaken by banks to assess the impact of rural lending show that loans have been haphazard. The banks have, in this sense, failed to meet the needs of the masses in conformity with the national policy objectives. The rich, whether in urban or rural areas, have got away with a larger share of the bank credit while small amounts have been doled out to the poorer sections of the populace from time to time.

Over the years, a major controversy regarding the operation part of the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) emerged. As per the RBI Act, 1934 and the Banking Regulation Act, 1949, the commercial banks are required to keep CRR and SLR. There had been no operational change during the first two decades of bank nationalization. While these two instruments of monetary policy have been used intensively during the early seventies and onwards, CRR fluctuated from 4.5% to 10% and more while SLR rose from 25% to 31.5% of the total deposits (i.e., Demand Deposits). All these trends have affected the profitability of banks.

In the early nineties, the Narasimham Committee on the financial system strongly recommended the phasing out of existing directed banking system and recommended the adoption of the free-play of market forces. The committee observed that over the last two decades, the banking system had been increasingly squeezed. On the one side, the CRR and SLR restrictions had channelized an increasing share of bank funds into Government spending, squeezing, the funds available for productive investment, while on the other an increasing share had gone to agriculture leaving a small share for trade and industry. The committee proposed that the priority sector be redefined to comprise the small and marginal farmers, the tiny sector of industry, small business and transport operators, village and cottage industries, rural artisans and other weaker sections of society. Foreign banks should be allowed to open offices in India. Also, foreign and Indian banks should be allowed to set up joint ventures. Regarding the SLR and CRR, the committee recommended that SLR should be reduced to 25% for further five years and CRR reduced to a greater extent.

Following the recommendations of the Narasimham Committee, the Government introduced the Banking Companies (Acquisition and Transfer of Undertakings) Amendment Bill, 1993, which was passed on May 9, 1994. The Bill seeks to disinvest the equity of public sector banks to the extent of 49% of share capital of the public, granting of licenses for setting up new private sector banks and granting licenses to foreign banks to open more branches in India. No stipulation has been imposed by the Government and the RBI on private sector banks with regard to their role in the social sector, particularly for the weaker sections of society where the public sector banks are currently playing some role (though not upto the mark) for their development. As such, the private sector banks will confine themselves to metropolitan and urban areas and serve the so-called creamy layer of society and the elitist customers. This is one area where some attention must be paid by the private sector banks.

 Additionally, the Goiporia Committee, headed by the former State Bank of India Chairman, looked into the banking operations and recommended the streamlining of the system, efficient and punctual working, opening of specialized branches, computerization, etc. This overall approach may tone up the entire banking operations and help the hapless customers, who are invariably at the mercy(of the bank staff, whenever they visit any branch of nationalized bank. Privatization will go a long way in solving this problem also. It is thus a step in the right direction in the wake of the recommendations of the Malhotra Committee on the privatization of the insurance industry, which the Government has accepted. Privatization of banks will, in a way, complete the economic liberalization process launched by the Government in July 1991.


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