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Banking Reform in India∗ - page 5 / 57





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banking authority, adding up, in the final analysis, to social control and nationaliza- tion.8

After nationalization, the breadth and scope of the Indian banking sector expanded at a rate perhaps unmatched by any other country. Indian banking has been remarkably successful at achieving mass participation. Between the time of the 1969 nationalizations and the present, over 58,000 bank branches were opened in India; these new branches, as of March 2003, had mobilized over 9 trillion Rupees in deposits, which represent the overwhelming majority of deposits in Indian banks.9. This rapid expansion is attributable to a policy which required banks to open four branches in unbanked locations for every branch opened in banked locations.

Between 1969 and 1980, the number of private branches grew more quickly than public banks, and on April 1, 1980, they accounted for approximately 17.5 percent of bank branches in India. In April of 1980, the government undertook a second round of nationalization, placing under government control the six private banks whose nationwide deposits were above Rs. 2 billion, or a further 8 percent of bank branches, leaving approximately 10 percent of bank branches in private hands. The share of private bank branches stayed fairly constant between 1980 to 2000.

Nationalized banks remained corporate entities, retaining most of their staff, with the ex- ception of the board of directors, who were replaced by appointees of the central government. The political appointments included representatives from the government, industry, agriculture, as well as the public. (Equity holders in the national bank were reimbursed at approximately par).

Since 1980, has been no further nationalization, and indeed the trend appears to be reversing itself, as nationalized banks are issuing shares to the public, in what amounts to a step towards privatization. The considerable accomplishments of the Indian banking sector notwithstanding, advocates for privatization argue that privatization will lead to several substantial improvements.

Recently, the Indian banking sector has witnessed the introduction of several “new private banks,” either newly founded, or created by previously extant financial institutions. The new private banks have grown quickly in the past few years, and one has grown to be the second largest bank in India. India has also seen the entry of over two dozen foreign banks since the

8 Tandon (1989, p. 198). 9 Statistical Tables Relating to Banks in India, 2003


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