Banking Article, Banking Finance 2020, Banking Finance April 2020


“The resources of the financial system are held by financial institutions in trust and have to be deployed for the maximum benefit of their owners’ viz., depositors and investors. The safety of their funds should be the primary concern of banks and regulatory authorities and ensuring solvency, health and efficiency of the institutions should, therefore, be central to effective financial reform.” –Report of the committee on Financial Reform, 1991 (Narsimham Committee)

Introduction: Public Sector Banks (PSB) are banks where the majority share, i.e., 51% or more, is held by the Government. As of now, after merger, there are 12 Public Sector Banks in India. The History of modern banking in India started in 1955 when the Imperial Bank of India was transformed into the State Bank of India. This was the first time that the Central Government entered into the banking business. Seven other state banks became the subsidiaries to State Bank of India, with the passing of State Bank of India Subsidiaries Banks Act in 1959. In 1969, 14 major Banks with deposits of more than Rs.50 crores were nationalised and in 1980 the Government took over six other commercial banks.

The indigenous banks, prior to nationalisation, were unable to meet the demands of the general public. They were mainly confined to big cities like Mumbai, Chennai, Kolkata, Kanpur, Delhi etc. They were not able to cater to the demands of small farmers and small businessmen. They were only financing large corporate houses. In the 1930s, the Reserve Bank of India (RBI) suggested a few banking reforms and asked banks to follow accounting standards and submit periodical statements of their affairs. RBI also offered them privileges enjoyed by the scheduled banks. The indigenous banks declined the offer. Some other reasons for nationalisation of banks were the 1962 war with China, 1965 war with Pakistan and two successive years of drought that had put pressure on public finances. This was the backdrop for nationalisation of Banks. In the words of the Late Prime Minister Smt. Indira Gandhi during her Lok Sabha speech on 29th july 1969 “Purpose of nationalization is to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas”.

Branch, Deposit and Credit Expansion: Earlier, branches were concentrated in urban and metropolitan areas but after nationalisation, banks expanded their branch network at a very rapid pace. There were only 8260 branches in 1969 out of which only 1860, i.e., 22% were rural branches. At the end of June 2018, there were 90821 public sector bank branches, out of which 54598, i.e., 60.11% branches are in rural and semi urban areas. This has helped in integrating the rural and urban areas. Branch expansion helped in organising the money market in India, which was unorganised prior to nationalisation. Branch Expansion of Public Sector Banks also helped in deposit mobilisation.

As per the RBI report dated   30.06.2011, deposit growth of all schedule commercial banks increased 7 times during 1951-1971, 33 times during 1971-1991 and 23 times during 1991-2010. The growth of deposits between 1971-1991, is mainly attributed to the PSBs and their branch expansion.

Not only did the Bank deposit expand in this time, bank credit also expanded at almost the same rate. The banks were now providing credit to the agriculture sector, small industries and trade along with credit to large corporate and export houses.

Priority Sector lending: A working group on priority sector lending was formed under the chairmanship of Dr. K.S. Krishnaswami. On his recommendations, in 1980, RBI issued directives to Banks regarding priority sector lending. The directives included

  • Priority sector lending should be 40 percent of total bank advances.
  • Out of priority sector lending 40 percent should go to agriculture.
  • 50 percent of direct lending to agriculture should go to weaker section in agriculture and allied activities.
  • 12 percent of bank credit should go to exporters.

Public Sector Banks took an active part in Priority Sector lending and were instrumental in achieving majority of the targets set by RBI.  The loan portfolio of these sectors has grown exponentially as illustrated in table 1.                                                                                                                                                            (In crores)

S.No Priority sector June 1969 June 1971 March 2005 March 2009 March


1 Agriculture 160 340 109917 298211 932100
2 Small scale Industries 260 440 68000 191307 331700
3 Other priority sector 20 130 125114 230565 594600
4 Total priority sector advance 440 910 307046 720083 1858400

Social Banking: At the time of nationalization, the then prime minister pointed out ‘An institution such as banking has necessarily to be inspired by a large social purpose and has to sub serve national priorities and objectives’.  PSBs were not only doing Priority sector lending, they were also used by the Government for social and poverty alleviation programme. Banks were involved in two types of social banking (i) Non lending social activities and (ii) lending social activities. Non lending banking social activities included mobilization of rural deposit, expansion of branches in rural areas etc. and lending activities included activities financed by Commercial banks. The Government launched many schemes and some of the schemes envisaged by the Government and put in place through PSBs are the following:

  • Differential Interest Rate (DRI):- Banks were asked to give loans to below poverty line customers at concessional interest rate of 4 percent.
  • Integrated Rural Development Programme (IRDP): This programme was introduced in 1978-79 and aimed at alleviating rural poverty by providing income generating assets to the poorest of poor.
  • Pradhan Mantri Gram AwasYojana: This scheme was started in 1985 with the idea of housing for all. Under the scheme loans were given to rural people at subsidized rates.
  • Swarnajayanti Gram Swarozgar Yojana(SGSY), now National Rural Livelihood Mission (NRLM): It is poverty alleviation programme implemented by Ministry of Rural Development. This focuses on promoting self employment and organization of rural poor.

Apart from these  schemes, Prime Ministers Rozgar Yojana(PMRY),  Pradhan mantri Gram Sadak Yojana (PMGSY), Sampoorn Gramin Rozgar Yojana (SGRY) ,National Rural Employment generation scheme(NREGS) etc. were rolled out through PSBs. Public Sector Banks are continuously supporting the Government in achieving their social objectives.

Economic Reforms: Economic reforms of 1991 gave way to new age private sector banks like ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank etc. and foreign banks like CITI Bank, Standard Chartered Bank, HSBC Bank etc. These banks came with:-

  • Sounder technology like ATM, PoS, Internet Banking, Mobile Banking etc.
  • Personalised banking and financial services to high net worth individuals.
  • Dedicated Relationship Manager assigned to the customer.
  • Door step delivery of loans.
  • Customisation of products according to the needs of the customer.

On one hand PSBs were directed to achieve Priority sector lending targets, social scheme targets and on the other hand they had to focus on competing with these Private and foreign players who were better equipped, technologically and professionally. Public Sector Banks started losing their market share. Considering this the Public sector banks started evolving rapidly by improving their technology. Most of the Banks have migrated to core banking platform within a short span of time. They started opening ATMs, delivering PoS machines, started offering Net banking and introduced advanced digital products.

Public Sector Banks and subprime crisis: After the collapse of Lehman brothers due to subprime crisis, it was forecasted that it will hamper Indian economy and Indian banks. But, Indian banks especially Public Sector Banks successfully weathered the crisis. During 2007-08 and 2008-09 PSBs in India were having Return on Asset (ROA) at 1%, which is considered good as ROA had been negative all over the world. When capital was eroding all over the world and Banks required fresh capital infusion, Capital adequacy improved in FY’2008-09 in India. It was also forecasted that Non Performing Assets (NPA) will increase in India after the crisis, which actually did not happen. Public sector Banks with their time-tested approach for lending saved the country from crisis.

 Finacial Inclusion: Thrust of financial inclusion came when Reserve Bank of India in its annual policy statement of 2005 asked banks to reach towards the masses and provide the banking facilities at a place of their convenience. Biggest change came in, when from the ramparts of Redfort , on 15th August 2014, Prime Minister, Mr. Narendra Modi, announced one of the biggest financial inclusion drives (Jan Dhan Yojana) in the world. The main purpose of the scheme was to transfer subsidies directly into the accounts. Public Sector Banks were instrumental in opening Jan Dhan Accounts. They organized camps from village to village and worked relentlessly to achieve the desired results. It was a Herculean Task as every bank was given only 6 months time to achieve a specified target. Public Sector Banks lived upto the Governments expectations.

As per data available from Department of Financial services, Ministry of Finance, as on 18.09.2019, total number of Jan Dhan Accounts opened are 37.05 crores out of which nearly 29.46 crores were opened by the PSBs This is nearly 79.50 percent of the total jan dhan accounts opened. Regional Rural banks opened only 17 percent and private banks opened only 3.50 percent of total Jandhan accounts. This is despite the fact that Private Sector Banks constitute nearly 25 percent of the total banking business.

                                                                                                           (Amount in crores)

Bank Name / Type Number of Beneficiaries at rural/semiurban centre bank branches Number of Beneficiaries at urban metro centre bank branches No Of Rural-Urban Female Beneficiaries Number of Total Beneficiaries Deposits in Accounts Number of Rupay Debit Cards issued to beneficiaries
Public Sector Banks 15.77 13.69 15.50 29.46 81684.79 24.33
Regional Rural Banks 5.30 1.03 3.53 6.33 18885.59 3.85
Private Sector Banks 0.70 0.56 0.67 1.26 2960.63 1.16
Grand Total 21.77 15.27 19.71 37.05 103531.01 29.34

 Social Security schemes: On 9th May 2015, our Prime Minister launched a few social security schemes to cover the account holders. These include Pradhan mantri Suraksha Bima Yojana(PMSBY) for personal accidental insurance cover, Pradhan Mantri Jeevan Jyoti Bima Yojana(PMJJBY) for Insurance cover and Atal Pension Yojana(APY) for guaranteed minimum pension to subscriber. As per data from Department of financial services, total Gross enrolment upto 31.03.2019 is 15.47 crore under PMSBY, 5.91 crore under PMJJBY and 1.49 crore under APY. Public Sector Banks have vast coverage from metro region to remotest place in India. Again PSBs played a major role in taking these schemes to the nook and corner of the country.

Demonetization: On 8th November 2016, the Government of India decided to demonetize Rs.1000 and Rs 500 notes in order to curb black money and to stop the flow of cash for funding illegal activities and terrorism. The Government also announced issuance of new Rs.500 and Rs.2000 note. There were Rs.15.41 lakh crore worth of bank notes that were to be demonetized in a very short time. It was an insurmountable challenge for the banks. The Government called for the meeting of all Bank chiefs on 8th November 2016 to discuss the task on hand. The Issue of recalibration of the ATMs was also discussed. It is reported that most of the Private Sector Banks expressed their inability to recalibrate their ATMs. It was at this time that the PSBs, especially India’s largest Public Sector Bank State Bank of India (SBI), rose to the occasion and gave assurance for recalibration. The very next day, i.e., 9th of November 2016 all the demonetized notes were to be taken out from the ATMs and the bank counters. There was a huge rush to deposit demonetized notes on 10th November 2016 when Bank opened for public after demonetization. Public Sector banks planned and executed well and as a result they were able to handle the rush well. PSBs were also instrumental in calming the public and handling the resentment. ATMs were opened to public on 11th November 2016 and proving to be the backbone of the Indian Economy, PSBs were able to recalibrate the ATMs in a short span of time. 27000 ATMs were running on the first day of which SBI topped the chart with 17000 machines running. PSBs also had huge Branch network and Banking correspondents that helped in demonetizing the old currency and distribution of new currency. PSBs worked round the clock to make the demonetization successful and even the Prime Minister could not refrain himself from praising the PSBs for doing the job well. PSB’s work was appreciated by the whole country during demonetization as they stood up to the herculean task in spite of criticism in their style of functioning.

Digital Transformation: After the entry of new age and technology driven private sector banks, PSBs started facing stiff competition and started losing their market share. There was no way out for PSBs, but to transform themselves technologically. First PSBs implemented Core Banking Solutions (CBS) that helped in transforming them from branch banking to any where banking. PSBs started putting ATMs all over the country and their numbers grew rapidly as compared to private sector banks. As on 31.03.2019, total ATMs belonging to Public Sector banks is 136098. While number of ATMs for private Sector Banks stood at 63340.PSBs accounts for more than 68% share of ATMs. PSBs also focussed on Inter Net Banking (INB) platform to grow rapidly. Now PSBs are providing all sorts of transactions through INB be it account enquiry, money transfer, RTGS/NEFT, Issuance of demand draft, bill payments, creating fixed deposits, TDS enquiry or e-filing. Customers using these INB platforms are happy with the quality of INB provided by PSBs.

Growth of mobile banking is said to be the biggest revolution of the 21st century. After the introduction of smart phones, everything from music, movies, restaurants, to tickets is on mobile phones. PSBs invested in Mobile Banking successfully. Initially PSBs were providing SMS based enquires but with the growth of technology, all the banking activities became handy. Except cash, today all the banking transactions can be completed through mobile phones. Not only transactions but Public Sector Banks are also offering online loans to select customers which can be availed through mobile apps, without any documentation. National Payments Corporation of India (NPCI) developed Unified Payment Interface (UPI) to facilitate Inter Bank Transactions. Each of the Public Sector banks developed their own UPI. This is helpful for the masses. Those who are illiterate, but have an adhaar card, can also perform digital transfers. UPI has certainly revolutionised the digital banking as PSBs are having access to the remotest part of the country.

PSBs are continuing to leverage digital technology to their back office operations also. Digitalization of the credit appraisal process is helping PSBs in making their process standardized and boosting credit off-take significantly. Strengthening of internal systems like Loan management system and performance management system can lead to greater operational efficiency.


Mergers: – Earlier there were 27 public sector banks but the Government has started merging the Public Sector Banks to improve the operational efficiencies and competitive position. State Bank of India merged its seven associate Banks. Recently the Government announced the merger of Oriental Bank of Commerce and United Bank with Punjab National Bank to form country’s second largest Bank. Dena Bank and Vijaya Bank were merged with Bank of Baroda and created the third largest Bank in India. Merging Syndicate Bank with Canara Bank will create fourth largest Bank. Union Bank will become fifth largest bank after merging with Andhra Bank and Corporation Bank. Seventh largest Bank will be the Indian Bank after merging with Allahabad Bank. Government wants to reduce the number of Public Sector Banks to 12. Consolidation of Public Sector banks is a good move as it will help them in fighting the Non Performing Assets (NPAs) and reaching higher scale of operations. These 12 banks will be the new age Public Sector Banks better equipped technologically, well capitalised and healthier.

                                                                                                           (Amount in Crores)

S.No Anchor Bank Amalgamating Bank Business Size* Rank by size
1. State Bank of India State Bank of saurashtra, State bank of Indore,

State Bank of Bikaner and Jaipur,

State Bank of Hyderabad, State Bank of Travancore, State Bank of Mysore,

State bank of Patiala, Bhartiya Mahila Bank.

Rs.52.05 lakh 1
2 Punjab National bank (PNB) Oriental Bank of commerce

United Bank of India

Rs.17.94 lakh 2
3 Bank of Baroda Dena Bank

Vijaya Bank

Rs. 16.13 lakh 3
4 Canara Bank Syndicate Bank Rs.15.20 lakh 4
5 Union Bank of India Andhra Bank

Corporation Bank

Rs.14.59 lakh 5
6 Bank of India Nil Rs.9.03 lakh 6
7 Indian Bank Allahabad Bank Rs.8.08 lakh 7
8 Central bank of India Nil Rs.4.68 lakh 8
9 Indian Overseas bank Nil Rs.3.75 lakh 9
10 UCO Bank Nil Rs.3.17 lakh 10
11 Bank of Maharashtra Nil Rs. 2.34 lakh 11
12 Punjab & Sind Bank Nil Rs. 1.71 lakh 12

Conclusion: Right from their formation to the present times, Public Sector Banks on the one hand are working according to the needs of Government and on the other; they are continuously evolving themselves to face the competition from private Banks. They are also under pressure from the customers to keep pace with their growing expectations. Non Performing Assets (NPA) are also haunting PSBs along with the pressure of privatisation. Despite all these odds, Public Sector Banks are doing well and people have trust in their ability to fight back. It is also commendable that not a single Nationalised Bank has failed or faced liquidation till date. Overall Nationalised banks have helped India emerge as one of the largest developing economies, gain self sufficiency in food grains production and make significant strides in financial inclusion. Therefore

“PSBs certainly do deserve RESPECT ………”



  1. Narsimhan Committee Report(1991) on the Banking System in India
  2. Indian Economy-Datt and sundharam
  3. The 1969 bank nationalization did India more harm than good- Niranjan Rajadhyaksha
  4. RBI, Trends and progress of banking in India 2007-08, 2009-10, 2017-18.
  5. Crisis proof Banking Sector-T T Ram Mohan
  6. Department of financial services
  7. Jan Dhan Yojana a Burden on Public Sector Banks(PSB):Nikunj Ohri
  8. Demonetization: Data from SBI shows how public sector banks are saving the day for Modi Govt- Shishir Tripathi and Pawan Kumar
  9. Explained: How to read the mergers of Public Sector Banks
  10. Next Generation PSBs

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