Nationalisation of Banks in India and Monetary Policy: Banking Awareness Special Series

Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will introduce the candidates to some banking awareness topics Daily that will improve their general awareness and ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is a Nationalisation of Banks in India and Monetary Policy.

Nationalization of Banks in India and Monetary Policy

Nationalization of Banks in India

History of Indian banks: Indian banks can be divided into three phases: 1. Pre-Independence phase (before 1947), 2.Second phase- 1947 to 1991 and 3.Third phase after 1991 to till date.

The first phase: In 1770 it is the beginning of the foundation of the bank of Hindustan which discontinued its operations in 1832. But many banks are operating currently Allahabad bank, Bank of India, Punjab National bank, etc.

Bank of Madras, Bank of Bombay, and the Bank of Bengal merged their businesses and formed an imperial bank of India which was later named the Reserve Bank of India.

The Second phase: This phase is known as the nationalization of banks in India.

The third phase: It considered the major developments of banks during this phase. This is the result of the liberalization of economic policies. Private Banks came into the Indian banking system during this phase. 

Nationalization of Banks: 

• The Reserve Bank of India, the first bank in India was nationalized in January 1949.
• Then after 14 other banks were nationalized in July 1969 (PM-Indira Gandhi).
• Then after 6 other commercial banks were nationalized in 1980.
• In 1969 the Regional Rural Banks (RRBs) were also formed. The objective was to serve large masses of the unreserved rural population.

Impacts of Nationalization:

• The efficiency of the banking system is improved and it boosted the confidence of the public in banks. 
• It is increased the penetration of banks and their operations which was mainly seen in the rural and remote areas of the country. 
• It leads to an increase in the funds and their utilization in economic activities in the country.

Monetary Policy

 Understanding: It is the policy in which the demand side of economic policy, refers to the actions undertaken by a nation’s central bank (Reserve Bank of India) to control and manage the money supply and to achieve the goal of macroeconomic which promotes sustainable economic growth. 

It is the process of drafting, announcing, and implementing the plan of actions taken by the central bank of the country.

Monetary Policy is the management of money supply and interest rates which are aimed to comply with macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity. 

Tools used: Open Market Operations (OMO), bank reserve requirements, unconventional emergency lending programs, direct lending to banks, and managing market expectations. 

There are majorly two types of monetary policy which are as follows:

1.) Expansionary: It increased the supply of money and boost investment and consumer spending. It is taken into consideration when the country is facing high unemployment and or during the period of slowdown (recession). The monetary authority lowers the interest rates as part of expansionary monetary policy. 

2.) Contractionary: It slows the growth of the money supply which aims to bring down inflation. Increased money supply can lead to higher inflation and raised also the cost of living thus contractionary monetary policy increased the interest rates which leads to slow economic growth and inflation ratio.