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INTRODUCTION –, Banks are the custodians of the public money but they were in the clutches of the private, brands. The officials of the banks carried out unfair means to earn profits. Public interest, was completely ignored. The savings of the people were used to be employed for their own, business. The nationalization of banks becomes extremely needed in order to protect the, customers from the unfair games played by the bankers. The nationalization of banks was, not an easy step to take. Like any other movement, it too had some pros and cons. It too, was appraised as well as criticized., The paper therefore aims at elucidating the various achievements, merits of nationalization, and its impact on various sectors of economy. The progressive nationalization of banks has, increased the role of public sector banking in the country. Without a sound and effective, banking system in India we cannot have a healthy economy. The banking system in India, should not only be hassle free but it should be able to meet new problems posed by any, business environment factors. Therefore, nationalization of banks has emerged the various, in banking sector., , NATIONALIZATION OF BANKS –, After independence the Government of India (GOI) adopted planned economic, development for the country (India). Accordingly, five year plans came into existence since, 1951. This economic planning basically aimed at social ownership of the means of, production. However, commercial banks were private sectors those days. In 1950-51,, there were 430 commercial banks. The Government of India had some social objectives, of planning. These commercial banks failed helping the government in attaining these, objectives. Thus the government decided to nationalize 14 major commercial banks on, 19th of July, 1969. All commercial banks with a deposit base over Rs.50 crores were, nationalized. It was considered that the banks were controlled by business houses and, failed in catering to the credit needs of poor sections such as cottage industry, village, industry, farmers, crafts men, etc. The second dose of nationalization came in, April1980when banks were nationalized., The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then, prime minister. It nationalized 14 banks then. These banks were mostly owned by, businessmen and even managed by them. They are:,  Central Bank of India, 1|Page

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, , , , , , , , , , , , , , Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Bank, Indian Overseas Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank, Bank of India, , Before the steps nationalization of Indian banks, only State Bank of India (SBI) was, nationalized. It took place in July 1955 under the SBI Act of 1955. Nationalization of seven, state bank of India (formed subsidiary) took place on 19th July, 1960. The State Bank of, India is India’s largest commercial bank and is ranked one of the top five banks worldwide., It serves 90 million customers through a network of 9,000 branches and it offers – either, directly or through subsidiaries- a wide range of banking services., The second phase of nationalization of Indian banks took place in 1980. Seven more banks, were nationalized with deposits over 200 crores. Till this year, approximately, 80% of the, banking segment in India was under government ownership. After the nationalization of, banks in India, the branches of the public sector banks rose to approximately 800% in, deposits and advances took a huge jump by 11,000%. Thus, the years in which, nationalization of banks took place were 1948: Soon after Independence, RBI was nationalized.,  1955: Nationalization of State Bank of India.,  1959: Nationalization of SBI subsidiaries.,  1969: Nationalization of 14 major banks.,  1980: Nationalization of seven banks with deposits over 200 crores., , WHAT FACTORS LED TO THE NATIONALIZATION OF BANKS ?, After independence the Government of India adopted Planned Economic development, for the country. Nationalization was in accordance with the national policy of adopting, 2|Page

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the socialistic pattern of society. Nationalization came at the end of a troubled decade., India has suffered many economic as well as political shocks. There were two wars (with, China in 1962 and Pakistan in 1965) that putimmense pressure on public finances., Two successive years of drought had not only led to food shortages but also, compromised national security because of the dependence on American food, shipments. Subsequently, a three-year plan holiday affected aggregate demand as, public investment was reduced. The decade of 1960-70s was the lost decade for India as, the economic growth barely outpaced population growth and average incomes, stagnated., Industry’s share in credit disbursed by commercial banks almost doubled between 1951, and 1968, from 34% to 68% whereas agriculture received lessthan 2% of total credit., Agriculture needed a capital infusion, with the initiation of the Green Revolution in, India that aimed to make the country self-sufficient in foodsecurity., , NEED FOR NATIONALISATION OF BANKS –, The need for the nationalization was felt mainly because private commercial banks were, not fulfilling the social and development goals of banking which are so essential for any, industrializing country. Despite the enactment of the Banking Regulation Act in 1949 and, the nationalization of the largest bank, the State Bank of India, in 1955, the expansion of, commercial banking had largely excluded rural areas and small-scale borrowers., The developing goals of financial intermediation were not being achieved other than for, some favored large industries and established business house. Whereas industry’s share, in credit disbursed by commercial banks almost doubled between 1951 and 1968, from, 34% to 68%, agriculture received less than 2% of total credit. Other key areas such credits, to exports and small-scale industries were also neglected., The stated purpose of bank nationalization of bank was to ensure that credit allocation, occur in accordance with plan priorities. Nationalization took place in two phases, with a, first round in 1969 covering 14 banks followed by another in 1980 covering 7 banks., Currently, there are 27 nationalized commercial banks., , OBJECTIVES BEHIND NATIONALISATION OF BANKS IN INDIA –, According to the Banking Companies Act 1970, the aim of the nationalization of banks in, 3|Page

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India is “to control the heights of the economy and to meet progressively and serve, better the needs of development of the economy in conformity with national policies and, objectives.” The nationalization of commercial banks took place with an aim to achieve to, following major objectives. More specifically, the important objectives of bank, nationalization as outlined by the prime minister in the parliament on July 21, 1969 are:,  Social Welfare: It was the need of the hour to direct the funds for the needy and, required sectors of the Indian economy. Sector such as agriculture, and small, village industries were in need of funds for their expansion and further economic, development to ensure that the operations of the banking system are guided by, large social purpose and are subject to close public regulation.,  Controlling Private Monopolies: Prior to nationalization, many banks were, controlled by private business houses and corporate families. It was necessary to, check these monopolies in order to ensure a smooth supply of credit to socially, desirable sections.,  Expansion of banking: In a large country like India, the number of banks existing, those days was critically inadequate. It was necessary to spread banking across, the country. It could be done through expanding banking network in the unbanked areas.,  Reducing Regional Imbalance: In a country like India where we have a urban-rural, divide; it was necessary for banks to go in the rural areas where the banking, facilities were not available. In order to reduce this regional imbalance, nationalization was justified.,  Priority Sector Lending: In India, the agriculture sector and its allied activities were, the largest contributors to the national income. Thus these were labeled as the, priority sectors. But unfortunately, they were deprived of their due share in the, credit. Nationalization was urgently needed for catering funds to them.,  Developing Bank Habits: In India, more than 70% population used to stay in rural, areas. It was necessary to develop the banking habit among such a large, population.,  Mobilize savings: Nationalization aimed at mobilizing the savings of the people to, the largest possible extent and to utilize them for productive purposes.,  Productive sector: Nationalization ensures that the needs of productive sectors of, the economy and in particular those of farmers, small skill industries and self, employed professional groups are made.,  Creating fresh opportunity: It aims to actively foster the growth of new and, progressive entrepreneur and create fresh opportunity for hitherto neglected and, 4|Page

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backward areas in different parts of the country.,  To curb speculative activities: It also focuses on curbing the use of bank credit for, speculative and other unproductive purposes., , ARGUMENTS IN FAVOR OF, COMMERCIAL BANKS IN INDIA –, , NATIONALIZATION, , OF, , Various factors were responsible for the nationalization of commercial banks in, India. A discussion on these factors that helped in this, are as follows:,  Speculative activities: Previously, the funds of the banks were mostly used for, hoarding and speculative activities. Anti social elements were able to receive the, bank loans to make large profits by creating artificial shortages of essential goods., Such misuse bank resources would be controlled by the nationalization of banks., Before nationalization, the commercial banks in India used to give loan to, unscrupulous persons who used to indulge in speculation of essential commodities.,  Threat to democracy: Some of the banks had started giving money to politicians for, contesting elections, under one or the other pretext. Consequently money started, playing an important role in the elections and had it continued it would have been a, serious threat to the very existence of the democracy.,  Financing the priority sectors: The banks were ignoring national priorities and the, economic policies which were mooted by the government could not succeed. It was, necessary to provide adequate finance to the Agriculturalists and to the educated, unemployed. After nationalization the banks have started working in accordance with, the policies of the government.,  Ownership and control of a few: Indian banks were owned and controlled by a few, big shareholders. They generally influenced the pattern of allocation of bank credit in, accordance with their own interest. According to an unpublished Reserve Bank, sample survey, at the end of 1965, of the total equity capital of Rs 21.4 crores of 9, large banks, about 40% was held by only 33 accounts and the rest by more than, 88,000 accounts. The nationalization of banks would bring banks under the control of, government for meeting the general interest of the public.,  Concentration of wealth and power: The banks in India were controlled by a few, industrial houses which used the public funds of the banks to build up large, industrial estates. According to an estimate in mid-sixties 70% of total industrial, advances went to only 1% of the number of borrow accounts, each with credit, outstanding of over Rs. 5 lacs, whereas 12 % of the accounts with credit outstanding, 5|Page

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of less than Rs. 10,000 each received only 4% of the total. This led to the growth, of wealth and power in few hands.,  Credit to directors: The resources of the banks were made available to the directors, of these banks at concessional rates. These directors also had connecting with other, business concerns. According to an official survey, 188 persons serving on the boards, of 20 leading banks had 1452 directorships of other companies also. In this way, the, funds of the banks were not utilized for the economic development of the country, but for the promotion of the interest of the directors. Bank nationalization would, check favorable attitude of the banks towards directors.,  Discrimination against small business: Indian banks had adopted a general policy of, providing finance to large industries, small businesses were not able to approach, these banks for meeting their credit needs and were usually discriminated against., Nationalization was favored in order to extend financial help to the small business, units.,  Indifference to agricultural sector: The agricultural sector was almost ignored by the, commercial banks. Most of the banks and their branches existed in the urban areas, and were catering the needs of the industry and trade. Little efforts were made by, the banks to meet the credit requirement of agriculture which is the backbone of, Indian economy. Nationalization of banks was hoped to contribute to the, development of agriculture.,  Financing Economic Plans: It was argued that the nationalized banks would make, their resources available to the government for financing economic plans of the, country .in this way, the banks contribute to the development of the economy.,  Safety of depositors: Nationalization will provide 100% safety to the deposits of the, people. This will inspire public confidence in the banking system and thus increase, the bank deposits.,  To check illegal activities: According to Indian Companies Act, each company has to, submit the estimates of profit and loss to the Registrar of Companies. However, the, provision was not applicable to the banking companies. The bank could hold secret, reserve funds and declared lower profits. These funds were used to purchase shares, of different companies. The banks were involved in under invoicing of exports and, over invoicing of imports. It was thought that these illegal activities could be checked, as a result of bank nationalization.,  Stopping of failure of banks: Up to early 1960s there were a large number of bank, failures in our country. This hampered the interest of the depositors. It was thought, that through bank nationalization the confidence of the public in commercial banks, 6|Page

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would rise. This would also check the growth of black money in our country.,  Improvement of service conditions of bank employees: Nationalized banks would be, able to provide better service conditions to their employees. The efficiency of the, banking business would rise through better training., , ARGUMENTS AGAINST NATIONALIZATION OF COMMERCIAL, BANKS IN INDIA –,  Low deposit level: Banks or any other public dealing institution if nationalized, results in frustration among the people because the institution becomes inefficient, and does not bother about the public. This may result in less deposit and loss of, confidence in public.,  Less Confidence: After nationalization the commercial banks have become an, effective tool in the hands of the ruling party. The party in power forces the bank, to give loans to the supporters of their party and can also get money for contesting, elections on one or the other pretext. Under such circumstances the, nationalization of the banks has gone against the interest of the common man.,  Decreasing in Efficiency: Only 20 banks have been nationalized and the, government has justified its action by saying that nationalization of all the banks, was not necessary because they wanted the public sector and the private sector, banks to compete with each other. In fact there can be no competition between, the public sector and private sectors banks as it is between public sector industries, because the Reserve Bank controls monetary activities of the Commercial Bank in, the country. The experience of other nationalizes institution indicates that the, nationalization of the commercial banks will reduce the efficiency of these banks., Moreover, political interference will also impair the smooth working of these, institutions.,  Uncontrolled Monopolize: The root cause of the growth of the monopolies and, the concentrations of wealth and power lies in the existing economic system., Therefore, the remedy requires the changing and reforming of the economic, system and not the nationalization of banks.,  Risky Lending to Agriculturist: Extending loans to agriculture and small scale, industries is risky and less remunerative. Such loans are against the sound banking, rules and may weaken the economy viability of these institutions.,  No need of security to deposits: It is pointed out that there is no need to provide, 100% security to the depositors in India through nationalization of banks., 7|Page

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Institutions like Indian Deposit Insurance and CREDIT Guarantee Corporation are, functioning quite efficiently and providing enough relief to the deposition.,  Burden of Compensation: Nationalization involves large amounts of money to be, paid as compensation to the shareholders. This puts additional financial burden on, the government. Moreover, it is also argued that nationalization will not bring, much revenue to the state.,  Nationalization is no socialism: It is argued that nationalization may not lead to, socialism. State capitalism is not socialism. Moreover, there is a general tendency, to treat public property not as sacred national property, but as no one’s property., As such, it is misused and destroyed like anything., , PERFORMANCE OF NATIONALIZED COMMERCIAL BANKS SINCE, NATIONALIZATION –, One of the major criticisms of commercial banks prior to nationalization was that they, never extended their hands to the priority sectors like agriculture, small scale industries,, exports etc. Before nationalization such banks operated with the profit motive only. But, after nationalization the scene changed to a huge extent. Commercial banks started to, consider objectives like social development and economic development of the nation., Thus, they started supporting sectors on which the growth of the then Indian economy, was dependent heavily. The total credit provided by the public sector banks in 1969 was, Rs. 440 crores. In 1988 it went up to a level of Rs. 29,330 crores., Another massive change in the Indian banking scenario was observed as a result of, nationalization of commercial banks. Previously, the private banks were operating with, only the profit motive. So they were eager to operate and open their branches only in, urban areas where scope of business was bigger and brighter than the rural areas., After nationalization of these banks, there was a gigantic change in the motives of these, commercial banks. They were operating no more with just the profit motive. As a result of, this, the commercial banks started to extend their services in the rural areas also. This, had a manifold effect on the Indian economy., Firstly, due to this approach of the nationalized commercial banks there were more, branches being opened in rural areas. Thus, the untapped rural markets were also, coming under the ambits of the Indian banking industry., 8|Page

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Secondly, this was helping in generation of employment opportunities in the Indian job, markets., Thirdly, from the point of view of consumer behavior it can be said that the vast, population in the rural areas were being exposed to the banking services. In this context, it, is mention worthy that since 1969 to 1989 there was 600% growth rate observed in the, opening of new branches of commercial banks., Moreover, in June, 1969 on an average a branch of a bank was serving more than 65,000, customers in India. This number came down to 12,000 customers per branch in June,, 1989. Another significant impact was felt in case of deposit mobilization. The deposits of, commercial banks which stood at Rs. 4,650 cores in June, 1969 grew to Rs. 1,47,000, crores in January, 1989., However, in spite of these successes, there were also certain limitations of nationalization, of commercial banks. Profitability of the commercial banks declined to a huge extent., Nationalization also made these commercial banks heavily dependent on the politicians., Thus a large part of the bank credit was still being diverted towards the big industries and, corporate houses. Lastly, it can be said that nationalization brought in security in the lives, of the banking employees. This established a complacent attitude thereby resulting into a, sharp decline in the standard of the banking services provided to the customers., In conclusion, it can be said that due to nationalization of commercial banks the Indian, banking industry faced a steep challenge. It was the challenge of blending the profit, motive with the objective of social and economic development of the nation. The game of, balancing these two diagonally opposite sets of goals is still on., , THE BANK NATIONALISATION CASE, Rustam Cawasjee Cooper v. Union of India - In this landmark case, the constitutional, validity of the Banking Companies Act, 1969 was challenged in the Supreme Court. The, Supreme Court, by a majority of 10:1, declared the Action valid and unconstitutional, because its provisions relating to the statutory transfer of undertaking were void as they, impaired the fundamental guarantee under Article 31(2) of the constitution. The majority, judgment held thata) The Act is within the legislative competence of parliament but it makes hostile, discrimination against the named banks in that it prohibits the named banks from, 9|Page

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carrying on banking business and even new banks may be formed which may be, engaged in banking business., b) In reality, it resists the named banks from carrying on business other than banking, as defined in Section(5)(b) of the Banking Regulations Act, 1949., c) That the violates the guarantee of compensation under Article 31(2) in that it, provides for giving certain amounts determined according to principles which are, not relevant in the determination of compensation of the undertaking of the, named banks and by the methods prescribed the amounts which cannot be, regarded as compensation.”, , 10 | P a g e