BANK NATIONALIZATION AND SOCIAL CONTROL OVER BANKING

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This article is written by Mrinalini Menon of 1^st Year of DES Navalmal Firodia Law College, Pune, an intern under Legal Vidhiya

ABSTRACT

A bank is a financial institution or an organisation that keeps the money that accepts deposits and money from public and in turn creates a demand deposit while simultaneously creating loan demands. These are basically financial service providers that provide the citizens with a safe and a profitable platform to store their valuables. Money or cash are not the only things that are accepted by banks but also other valuables like gold. The etymological derivation of this term differs from time to time and it even varies according to the country because each of them has its own unique way of understanding and carrying out the banking procedures.

Though some of the features of bank like acceptance of deposits in current accounts for customers and collecting and paying cheques for them have been universally accepted as the basic functions of a bank without any arguments.

Keywords: Bank, deposits, profitable platform, etymological, financial institution, loans,

HISTORY OF BANKS

The term ‘bank’ is something that is not a novice concept. This term is supposed to have its origin from a Latin word ‘Bunches’ or an Italian word ‘Banco’ both of which translates to ‘bench’. It is also said that this word has been derived from a German word ‘Back’ which means ‘Joint Stock Fund’.[1]

In the case of the Greeks and the Babylonians the temples were used as a form of banks wherein the money was lent to people and this was majorly done by the priests who were appointed specifically for this task. Temples were the major centres of money lending transactions in the earlier times. This was a successful method until there started to occur religious clashes and disbeliefs. In each religion it was clearly stated in their own unique way that taking interest rates or extra charges for their own money was not an acceptable condition.

With this temple being used as banks came to an end. Rather it was modernised and turned into a new concept which was practical in all aspects. This form of money lending was first introduced in the city of Venice in the mid of 12^th century, in the year 1157.

In India the concept of banking has existed since the Vedic period which extends from around 2000 BC to 1400 BC. During those times lending of money was considered as an art rather than a business or trade. There was a very slow and steady transition from money lending to banking in that period. After that both money lending and banking existed separately in the Mahabharata and Ramayana era which are considered to be the events of life that took place between 1000 and 700 B.C. During and even after independence India there was a huge need for nationalization in the country. This was majorly because a lot of were there of requirements of big businesses and also of large markets. Following which exports, agriculture and small industries were hanging back. Nationalization of banks solved the major chunk of all these problems and it also gave a financial boost to the country. The other sectors that were lagging like the small markets, agriculture or farming obtained a boost. That itself was a huge success for the nation as India as a whole was majorly dependent on its agricultural sector. This in turn lead to a sudden rise in funds following which the economic condition of the country started aiming and reaching towards its zenith.

NATIONALIZATION OF BANKS

Nationalization is a process wherein the government of a country brings the working entities or the organisations under the control or the power of the government. During this process the government takes control over the privately owned organisations, converting them into state owned entities and in this case, it includes or consists of privately owned banks. This is typically done to gain social, political or economic gains.

The major or crucial reason or evolution for the current banking systems in India is the Nationalization of Banks in the year 1969. In that year Government of India nationalised 14 major banks whose national deposits were above 50 crores. This was done under the Indira Gandhi government. The list of banks that were nationalized or brought under the control of the government and as a public sector entity are as follows:

• Allahabad Bank

• Bank of Baroda

• Bank of India

• Canara Bank

• Central Bank of India

• Dena Bank

• Indian Bank

• Indian Overseas Bank

• Punjab National Bank

• Syndicate Bank

• Union Bank of India

• United Bank of India

• UCO Bank

• Vijaya BankTop of Form

Eventually in 1980 six more private banks were nationalised to the earlier 14 major banks. The names of these six banks are as follows:

Andhra Bank
Corporation Bank
New Bank of India
Oriental Bank of Commerce
Punjab and Sind Bank
Vijaya Bank

An overview of the benefits of this step is that the banks were spreading their branch networks throughout the country, nation-wide deployment of credit and increased mobilization of resources. The reason behind the immense development of the Indian banking system was this process of nationalization that was implemented in our country. This happened soon after independence wherein people were in dire need of access to various facilities but at the same time had no idea or knowledge about the same. Thus, nationalization solved this issue as it brought the procedure or access of banks easy and equal to all citizens.

Banks had been taken under the government control in many nations. When we specifically talk about the case of India the nationalization process took place in majorly two phases, the first one on July 19, 1969 and the second one on April 15, 1980. During the first phase such a step was taken in order to promote social welfare, increase credit availability in rural areas, and reduce concentration of economic power. The nationalized banks had to mandatorily shift a certain amount or percentage of their lending towards sectors like agriculture, small scale industries and exports.

When banks were nationalized, it came directly under the control of the Banking Regulation Act, 1949. RBI later became the regulatory authority for banking in India.

Situation of Banks Before Nationalization[2]

Before nationalisation took place in 1969, only State Bank of India was a public sector undertaking. It was also the first nationalized bank of India which was earlier known as the Imperial Bank of India. In the year 1951, there were more than 400 commercial banks who worked under the private sector. More than 360 banks had failed or collapsed between 1947 and 1955. The rate at which the banks were collapsing was around 40 banks within a duration of one year. This in turn resulted to a huge loss for the people who had invested their money in those particular banks and also affected the economy of our country on a large scale. This trend of collapsing of banks continued throughout the 1950s till the first half of 1960s.

This situation had forced the then finance minister Mr. Morarji Desai, under the leadership of Jawaharlal Nehru as the Prime Minister,to launch a massive bank consolidation drive. It brought down the number of banks from 328 in 1960 to 68 in 1965.

WHAT IS NATIONALIZATION

The concept of nationalization is not just limited to banks but also various other sectors or working organisations that exist in the country. Mainly those which are privately owned by individuals or other entities. It also brings these entities under the public ownership of a national government or state. This would widen the parameters of control that the government has over the state as well as the citizens of the nation. As per the International Monetary Fund (IMF) Nationalisation is a process by which the government takes over private assets and brings them under public ownership.

There is a fine line of difference between nationalization and privatisation and with demutualization. Privatization is a concept in contrast wherein the ownership and management are transferred from public to private sector. On the other hand, demutualization is basically a process in which a customer owned mutual organization or co-operative changes legal form to a joint stock company.

BENEFITS OF NATIONALIZATION

Economic Rationale Behind Nationalization[3]

The banks were only available to a certain geographical and social sector. There were a lot of issues related to the reach and flow of important sectors[4]. Farmers for instance play a vital role in boosting up the economy of our country and banks provide them with loans and other facilities to carry out farming in a profitable way.
Banks did not give enough credit to the industrial and agricultural sector. Nationalisation played an important role in solving this issue. It was very necessary because around 75% of our country at the time of independence constituted of the agriculture sector.
The collapse of the banks before nationalisation was causing distress among the people who had invested their money and was also a reason for the regional imbalance in the banking sector.
Nationalisation developed the financial inclusion of people in the banking arena. During the earlier times people preferred to keep their money either with themselves or usually gave it to the money lenders who charged exorbitant interest rates. This was all the more a reason for the nationalisation of banks.

SOCIAL CONTROL ON BANKS

The major positive side of this process is the broad social control over banks which aims at ensuring that the banks operate in a manner that aligns or goes in par with the social and economic objectives of the society. In India during the British control, people suffered a great number of losses as the landlords and the moneylenders, who performed or functioned as a bank used to lend money at exorbitant interest rates which was clearly not functioning for the welfare of the society.

The various countries that opted for nationalization of banks are as follows:

United Kingdom (1946 & 2007): Soon after the world war the Labour Government lead by Clement Atlee nationalized the Bank of England.
India (1969 &1080): As mentioned earlier the nationalization of banks in India happened in two different phases. During the first one 14 banks were nationalised followed by the second phase wherein 6 more banks were added to the list.
Argentina (1946 &2008): The Central bank and the other financial institutions of Argentina were nationalized by the then President of Argentina, President Juan Perón. This was done as a part of the broader economic policies of the nation.
Egypt (1961 and 1963): In order to increase state control and lessen foreign influence, President Gamal Abdel Nasser of Egypt nationalized banks and insurance businesses.
Iran (1979): To create Islamic economic principles and lessen foreign influence, the new government, led by Ayatollah Khomeini, nationalized banks and other significant industries after the Iranian Revolution.
Chile (1971): During his brief presidency, President Salvador Allende’s administration nationalized the country’s banking industry to expand state control over the economy.
Bolivia (2007): In order to strengthen state control over vital industries and natural resources, President Evo Morales nationalized some banks and the country’s mining and hydrocarbon industries.

R.C. COOPER v UNION OF INDIA [5]

Popularly known as the Bank Nationalisation case of 1970 was a major landmark judgement as it guided the parliament and dealt with the constitutional jurisprudence of the nation. Another reason why this case is so important is the fact that it overruled or rejected the mutual exclusivity theory provided or given in the case of A.K. Gopalan v State of Madras[6]. This case was filed as a result of the nationalisation of the 14 banks within the duration of the Congress party under the leadership of Indira Gandhi in the year 1969. These banks were nationalised due to the reason that Rustom Cavasjee had filed this suit because he was a major shareholder of the Bank of Baroda and Central Bank of India, both of which were nationalised. Through this petition, he claimed that his fundamental rights under Article 13, Article 14, Article 19 and Article 31 were violated. It was held that the government had violated the Article 31 and Article 14. It was also held that any shareholder or director cannot file a petition on the grounds that the company’s fundamental rights have been violated. However, they can file a petition if that particular individual’s fundamental rights have been violated. This landmark judgement was given by the Supreme Court of India on the 2nd of February, 1970 by a majority of 10:1.

CONCLUSION

The nationalisation of banks has indeed been a major step towards the progress of our nation as it helped not only the citizens but also the government in increasing their social control over the banking sector along with various other sectors. But there have been a few downsides to it too. This resulted in the NPA crises[7] which had recently spiked up in the year 2017. NPA stands for the non-performing assets which determine the profitability of the banks which had been seriously affected as a result of nationalisation. Apart from this it also reduced the competition between the private sector and public sector banks. The nationalisation of banks has led to a very complex interest rate structure. Liberal credit policy is necessary for providing financial support to the weaker section of the society but it might prove harmful for the stability of the banking sector of our nation as mentioned earlier.

[1] History Of Banking, Wikipedia, https://en.wikipedia.org/wiki/History_of_banking, last seen on 14/08/2023

[2] Nationalization of Banks in India, Zee Business, https://www.zeebiz.com/india/news-nationalisation-of-banks-in-india-history-effect-19-july-1969-bank-list-how-many-banks-are-nationalised-upsc-trending-indian-economy-190160, last seen 04/09/2023.

[3] The economic rationale of bank nationalisation, The Hindustan Times, https://www.hindustantimes.com/opinion/the-economic-rationale-of-bank-nationalisation-101618049387827.html, last seen 04/09/2023.

[4] Importance of Banking Sector in a Country, unacademy, https://unacademy.com/content/railway-exam/study-material/economics/importance-of-banking-sector-in-the-country/, last seen 04/09/2023.

[5] AIR 1970 SC 564; 1970 SCR (3) 530

[6] 1950 AIR 27, 1950 SCR 88

[7] All you need to know about India’s NPA crisis and the FRDI Bill, The Hindu, https://www.thehindu.com/business/Economy/all-you-need-to-know-about-indias-npa-crisis-and-the-frdi-bill/article61847520.ece, last seen 04/09/2023.