Differences between State Bank and Nationalized Banks

Though all the 27 public sector banks are corporate bodies, but the statutes under which they were established are different. The State Bank of India was established under the State Bank of India Act, 1955, the subsidiary banks under the State Bank of India (Subsidiary Banks) Act, 1959, and the nationalized banks under the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 & 1980. These banks are, therefore, governed by their respective statutes.

Initially cent percent ownership of the 20 nationalized banks vested in the Government of India, whereas the State Bank of India was owned, to a large extent, by the Reserve Bank of India – there was small private ownership in the share capital of the State Bank. The subsidiary banks are owned by the State Bank of India. During recent years State Bank of India and some of the nationalized banks – Oriental bank of Commerce, Dena bank, Bank of India have enlarged their capital by issuing shares to the public.

The State Bank of India acts as an agent of the Reserve Bank of India. According to Section 45 of the Reserve Bank of India Act, 1934 “the Reserve Bank shall appoint the State Bank as its sole agent at all places in India where it does not have an office or branch of its Banking Department and there is a branch of the State Bank or branch of a subsidiary bank”. The nationalized banks have not been conferred with this privilege of acting as agent of the Reserve Bank. Since the enforcement of the Banking Laws (Amendment) Act, 1983, the Reserve Bank has been empowered to appoint any nationalized bank to act as its agent at all places in India where it has a branch for the following purposes:

1. Paying, receiving, collecting and remitting money, bullion and securities on behalf of any government in India; and
2. Undertaking and transacting any other business entrusted by the Reserve Bank from time to time.

The new banks are required to be registered as public limited companies under the Companies Act, 1956, with initial paid up capital of Rs 100 crore. They are to be governed by the provisions of Reserve Bank of India Act and the Banking Regulation Act, 1949 and shall comply with the directions issued by the Reserve Bank of India. Ten new private sector banks have been established mainly by the financial institutions such as UTI, ICICI, IDBI, and HDFC. One such bank Times Bank was subsequently merged with another new bank HDFC Bank.

Local Area Banks:

In 1996, Government decided to allow new local are banks with the twin objectives of (1) providing an institutional mechanism for promoting rural and semi-urban savings and (2) for providing credit for viable economic activities in the local areas. These banks will be established as public limited companies in the private sector and will be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be Rs 5 crore with promoter’s contribution at least Rs 2 crore. They are expected to be set up in district towns and the area of their operation would be a maximum of three geographically contiguous districts, where they can open their branches. A few Local Area Banks have already been allowed to be set up.

The Co-operative Banks:

The co-operative banks also perform the basic functions of banking but differ from the commercial banks in many respects as follows:

1. The co-operative banks have a three tier set-up. The State Co-operative Bank is the apex institution in a State, while Central/District co-operative banks function at the district level and Primary Credit Societies work at the village level. The commercial banks are organized on a unitary basis.
2. Only the State Co-operative Banks have access to the Reserve Bank of India, whereas every commercial bank which is a scheduled bank is entitled to avail of the refinance facilities from the Reserve Bank.
3. Co-operative banks function within a given area. Their operations are restricted to a particular State in case of a State / Apex banks a particular district in case of a district co-operative bank and to a local area in case of a society. The commercial banks, on the other hand, function over a wide area which is not limited by the boundaries of a particular State or district. Most of them have branches over a number of States and many of them all over the country.
4. Co-operative banks proceed on the principle of co-operation, whereas commercial banks function on sound business principles. The former are therefore, granted accommodation at concessional rate by the Reserve Bank.

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