This article is written by Anshul Parashar of 7th Semester of Banasthali Vidyapith University
Abstract
The term “nationalization” refers to the conversion of a private business or trade into a state-owned or public-owned enterprise. Following that, nationalization of banks refers to the acquisition of a majority stake in a private bank and converting it to public control of the government of the nation. On January 1, 1949, the Reserve Bank of India (RBI) became one of the first banks to be nationalized. By virtue of the Transfer of Public Ownership Act. Following that, 14 and 6 commercial banks in India were nationalized in 1969 and 1980, respectively. Furthermore, the Banking Companies (Transfer of Undertakings and Acquisition) Act of 1972 was enacted in order to take over some banking organisations.
Keywords: nationalization, Public Ownership Act, commercial banks, Acquisition, Reserve Bank of India.
Objectives
- The study’s primary objectives are to investigate the motivations behind bank nationalization.
- To investigate the effects of nationalization on commercial bank operations.
- To investigate the era prior to and following nationalization.
- To weigh the benefits and drawbacks of nationalization.
- To investigate the benefits and drawbacks of nationalization.
Introduction
In 1969, fourteen major commercial banks in India were nationalized. Foreign banks and other financial institutions with deposits of less than Rs. 50 crores were not nationalized and 6 more in 1980. The nationalized commercial banks controlled 91% of all deposits and credit at the time. The nationalization of commercial banks in India is seen as a key move by the Indian government to bolster the economy.
Banking Companies under Social Control, two important events occurred in the year 1969 in the history of banking legislation. They are-
(1) Social control over financial corporations and
(2) Nationalization of 14 major Indian banks, followed by six more in 1980.
Why was bank nationalization required?
Bank nationalisation was carried out by the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970. The ordinance went into effect on July 19, 1969, “to better serve the needs of economic development in accordance with national policy aims.”
According to the RBI’s background of Indian the financial sector; banks were viewed as serving a unique role in an environment of development, particularly in agriculture. When India began its plan initiatives, the economic growth function of banks rose to prominence, particularly in the 1960s, as the Reserve Bank pioneered the notion and approach of utilizing finance to stimulate development in numerous ways.
History of Nationalization
Nationalization can be dated back to 1947, often known as the pre-independence period. It is the era when India’s banking system was formed. It all began in 1770 with the establishment of the Bank of Hindustan. Many banks began operations during that time period and are still in business now. This period is also referred to as the merging period, as most banks were combined with one another, such as Allahabad Bank and Punjab National Bank.
The Imperial Bank, a merger of the Bank of Madras, the Bank of Bombay, and the Bank of Bengal that subsequently became the ‘Reserve Bank of India,’ is one of the most prominent examples of this. Following that, a second phase began from 1947 to 1991, which was mostly known as the Nationalization period for Indian banks. Indira Gandhi, the Prime Minister at the time, put forward a proposal on behalf of the Central Government, and the Government of India began issuing the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969
In 1969, the 14 banks were nationalized. Furthermore, six more banks were nationalized in 1980. Following that, in 1991, “the LPG policy went into effect, and Liberalization was duly implemented during this period,” as a result of which a small number of banks were licensed and later amalgamated with the Oriental Bank of Commerce, IndusInd Bank, UTI Bank, ICICI Bank, and HDFC Bank. Government, private, and foreign banks all contributed significantly to the general expansion of the economy. Many private banks were established as a result of banking policy liberalization.”
After gaining independence, India’s banking industry underwent a significant structural upheaval. Large-scale operations with abundant resources and a wide range of activities have substituted the activities of moneylenders with their constrained resources in the banking sector. In Mumbai and Kolkata, the English agencies established their own banking operations. This marked the start of India’s modern banking system. As a result, India’s introduction to modern banking began in the last decade of the 18th century. The first European bank was established in 1710 under the name Bank of Hindustan by English agency companies in conjunction with their trading activity. The establishment of the Bengal Bank, the General Bank of India, etc. came after this.
But sooner or later, all of these banks failed for various reasons. A variety of quasi-banking institutions were set up to serve the interests of the foreign rulers. Presidency Bank of Bengal (1806), Presidency Bank of Madras (1840), and Presidency Bank of Calcutta were among them. By 1921, these three banks had merged to form Imperial Bank of India. The Indian financial system expanded significantly after independence. The Reserve Bank of India was nationalized in 1948 as the first step in this direction. By granting the Reserve Bank a position of monitoring power to oversee and manage the socioeconomic operations prescribed by the government, it altered the Reserve Bank’s perspective.
The Reserve Bank of India Act, 1949 was created to provide the Reserve Bank oversight over the banking sector in order to have a sound and balanced growth of the banking industry in the nation. The Imperial Bank of India became the State Bank of India after being nationalized in 1955. The government began implementing the social control plan in 1967. The government then nationalized 6 other banks with deposits totaling around 200 crores on April 15, 1980, and 14 large banks with deposits totaling approximately 50 crores on July 19, 1969. This procedure was carried out to make sure that the credit was distributed more fairly and with intention.
Along with the aforementioned changes, financial institutions were created to address specific needs. For addressing the long-term financing requirements of large-scale activities, they encompass Industrial Development Bank of India (IDBI), Industrial Credit, and Investment Bank of India. Similar to this, State Financial Corporation (SFC), Small Industries Development (SIDC), and Small Industries Development Bank of India (SIDBI) have been formed to suit the needs of Small-Scale Industries (SSIs). For the purpose of handling the credit requirements in the agricultural sector, organisations such as the National Bank for Agriculture and Rural Development (NABARD), Land Development Bank (LDB), Regional Rural Bank (RRB), etc. have been founded.
Since 1991, as a result of changes in economic policy, a new institutional mechanism for economic liberalization, and banking sector reforms, the business environment in India has undergone a significant transformation. Demands for improved work flow, full consumer access to banking activities through electronic mode, etc. have been created on Indian banks as a result of the transition from an old to a modern business environment. The level of rivalry in the Indian commercial sector has risen to previously unheard-of heights as a result of the new environment of severe competition supported by the opposing forces of deregulation and technology. Because of this, banks’ operational effectiveness has come to be of utmost importance to their continued existence in the current environment. Additionally, branches have been established in rural regions with the offer of financial support as well as advice and guidance on a number of crucial issues, completely changing the lives of rural residents.
Social Regulation of Banking After gaining its independence, India made socialism the main goal of its government, which led to the development of the idea of social control in that country. This implies that the distribution of wealth should be equitable without turning the nation into a totalitarian regime and be accomplished through democratic means. Banks serving as a credit-granting institution and the custodian of savings. Due to the fact that the bank advances were solely intended for medium- and large-scale companies, the term “social control” was taken into consideration. Small-scale sectors like the agricultural sector, cottage industries, export-oriented businesses, etc. we’re being virtually disregarded. Because of this poor management within the banking industry, nationalization was suggested as a solution.
The Banking Laws (Amendment) Act of 1968, that modified the Banking Regulation Act of 1949, empowered societal control. The main goal of social control was to make disadvantaged neighborhoods’ accessible. There were founded about 196 Regional Rural Banks (RRBs) 7. Morarji Desai, the then-prime minister, added that the main goal of social control was “to regulate our social and economic life so that we can achieve the ideal growth rate for our economy.”
Advantages & Disadvantages of Nationalization of Commercial Banks
Reasons for Nationalization
Was nationalization harmful or beneficial?
The 1970s, a decade in which economic development barely surpassed population expansion, saw the pivotal implementation of a more comprehensive political economy policy with bank nationalization. Average earnings remained constant. For India, it was an overlooked decade. Undoubtedly, exogenous shocks like escalating energy costs or poor monsoons contributed to the decline, but economic policies were also affected. Because of the quick expansion of branches, bank nationalization was successful in some areas, such as financial deepening, but ultimately did more harm than good.
Was the decision to nationalize banks the right one?
The credit bubble that formed under political patronage and that emerged outside of government control over Banks is at least partially responsible for the NPA problem that has been going on since 2012. An exceedingly complicated interest rate structure resulted from the nationalization of banks. For various loan categories, there were various interest rates. Eventually, the central bank of India was in charge of numerous interest rates. As a result of the convoluted structure, loans never get to the people in need, defeating the aim of nationalization. Banking is a fiercely competitive industry that relies on profits; as a result of nationalization, there is less competition between banks in the public and private sectors. As a result, the banking sector now functions with a bureaucratic approach. Red tape, excessive delays, and a lack of initiative are all prevalent traits of nationalized banks. Although a liberal policy on credit is required to provide financial assistance to the rural community’s most vulnerable members, it may be detrimental to the viability of the banking sector.
The track record of the nationalized banks has demonstrated that these financial institutions are currently struggling with a large amount of past-due debts and branches that are not viable commercially. It is difficult and less lucrative to lend money to small businesses and farms. Such loans go against good banking practices and may reduce these institutions’ capacity to make a profit. Policy-making missed to make sure that the funding from public institutions is actually flowing to constructive purposes in the vast public interest because banks’ performance audits were not conducted. A proposal for the privatization of banks has been made in light of the importance of a healthy banking sector in the development of the country. Privatizing banks isn’t a cure-all, though. India shouldn’t rush into privatizing its banks; instead, it should concentrate on broad governance changes, dealing with NPAs, and fostering a free market to stimulate investment and put the economy back on track.
CASE: R.C. Cooper V. Union of India, 1970[1]
One of the most significant landmark decisions in Indian Banking Law is the case widely known as “The Bank Nationalization Case”. It also draws heavily from the Indian Constitution’s guiding ideas. The petitioner, R.C. Cooper, whom was the director of Central Bank of India (which is one of the 14 institutions on the list) and owned shares in Bank of Baroda, brought a petition before the Union of India in 1969, at a time when many banks were being nationalized. The petition is the reason why the case has that name. One of the main points he disputed was the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, which specified in Schedule II that when the government acquires a bank, the compensation shall be set by an agreement. Also, if the agreement is not upheld; a tribunal will hear the case.
The Main Points of the Verdict Were[2]: –
- In its ruling, the Supreme Court outlined two key principles. These rules said that neither a shareholder nor a director could assert their fundamental rights on their own behalf the firm unless and until those same rights also affected their own.
- The idea of THE EFFECT TEST was considered. K. Gopalan[3] was the first to propose this idea. This would be regarded to mean that the ordinance that has been approved can only be evaluated in light of its effect and not its purpose or goal.
Conclusion
In the long term, the nationalization process benefited India’s economy and brought about economic stability. It received harsh criticism, though, because it did so at an instance when Pakistan and China were at war with India, which stoked political anger. Many claimed that the nationalizing banks merely a political ploy to discredit the corporate forces that supported her adversaries.
As was already said, the state banks’ relative dominance has changed as a result of the policies’ liberalization, which has allowed for the entry of additional private banks. Their proportion was as high as 8% earlier, but it is currently just 66%. However, the monopoly has ended with the advent of nationalization. By establishing banks in rural regions, the regional imbalance has also been lessened. Additionally, the additional earnings can be put to use, and the public interest has been safeguarded. The overall effect of nationalization has been extremely favorable for India and its financial system because employment facilities have also upgraded.
A proposal for the privatization of banks has been made in light of the importance of a healthy banking sector in the development of the country. Privatizing banks isn’t a cure-all, though. India should focus on fundamental governance changes and the resolution of NPAs rather than rushing to privatize banks. Non-performing assets (NPAs) are a problem that has been addressed by both the government of India and the banking regulator, RBI. To address the public sector lenders’ liquidity issue, the finance minister proposed a cash injection of Rs 70,000 crore in the 2019 budget.
The Indian financial system was strengthened by the nationalization of banks. it also increased the public sector banks’ confidence. Small marketplaces and farming, which were struggling industries, got a boost. As a result, money levels increased, which in turn increased India’s economic growth. Additionally, banks’ power was diminished. They lost some of their monopoly. Bank penetration was generally higher in India’s rural areas as a result of the nationalization of banks.
References
- Rustom Cavasjee Cooper Vs. Union of India [1970] AIR 564, [1970] SCR (3) 530
- Hemant Varshney, R.C. Cooper vs. Union of India- Bank Nationalization Case- Case Summary, Law Times Journal (June 10, 2023, 09:40 A. M), http://lawtimesjournal.in/r-c-cooper-v-union-of-india-bank-nationalization-case-case-summary/
- Kesavananda Bharati Sripadagalvaru & Ors. Vs. State of Kerala & Anr., [1973] 4 SCC 225; AIR [1973] SC 1461
- Advantages of Nationalization of Commercial Banks (June 10, 2023, 09:40 A. M), https://images.app.goo.gl/MzSrrDB9JP255RSt8
- Disadvantages of Nationalization of Commercial Banks (June 10, 2023, 09:40 A. M), https://images.app.goo.gl/4ydkYqvmLXbhiUZu8
- Reasons of Nationalization (June 10, 2023, 9:40 A.M), https://images.app.goo.gl/y1U97wtPtLnX5bNk8
1 Rustom Cavasjee Cooper Vs. Union of India [1970] AIR 564, [1970] SCR (3) 530
[2] Hemant Varshney, R.C. Cooper Vs. Union of India- Bank Nationalization Case- Case Summary, Law Times Journal (June 10, 2023, 09:40 A. M), http://lawtimesjournal.in/r-c-cooper-v-union-of-india-bank-nationalization-case-case-summary/
[3] Kesavananda Bharati Sripadagalvaru & Ors. vs. State of Kerala & Anr., [1973] 4 SCC 225; AIR [1973] SC 1461
