The banking system constitutes the most vital elements in the economic life of the nation. It should serve to combine the money market with planning mechanism to maintain the perfect growth rate, avert the monopolistic trends, attentiveness of economic power and delinquency of resources. It is asserted that the banks had neglected the agriculture, small industries and weaker section. The cause of social control as it is forecast in India to achieve the social ends without complete takeover on the banks by the government. Earlier all the banks in India were private banks, which were founded in the pre-independence era for the banking needs of the people. The three significant banks, i.e. Bank of Bengal, Bank of Bombay, and Bank of Madras, were merged to form Imperial Bank of India in 1921. Profitability has become a more significant challenge to Indian banks due to increasing competition in the banking sector. For improvement and increase, the profitability bank should explore every possibility.
The Indian banks, faced as it was with constructional and operational shortage and had immediate need of some revolutionary reforms and social control over the banks. This was the first sorting measure adopted by the government currently in India. The banking system is divided into two parts commercial and other is cooperative. Further, the commercial banks are categorized into two parts private banks and public banks. The vital movement which had happened in our Indian history was the nationalization of banks. After this nationalization, India becomes the leading economies of the world. Reserve bank of India was the first bank which was nationalized in 1949.
Further, in 1969, 14 other banks were nationalized. The next phase of nationalization of banks was in 1980. In 1980, 6 other commercial banks were also nationalized. After the nationalization process, the efficiency of the banks in India was enhanced. The small-scale agriculture industries and a weaker section got a boost, and due to this, the funds were increased, by which the economic growth of India was also increased.
Nationalization of banks in India
Nationalization of banks in India is a unique experiment of integrating the activities of the banks with the planned mechanism of economic development. In 1969 there was an amendment of the Banking Regulation Act. The purpose of this amendment was imposing the “social control” intending to remedy the primary weakness of the Indian banking system. In 1969, 14 major scheduled banks were nationalized, each bank having deposits of more than Rs .50 crore. It was taken as a revolution in the Indian banking system. This nationalization does not change the ownership of the bank; it was just to use an essential part of the financial mechanism for the economic development of the country. It is compulsory on the nationalized banks they have to give priority to the neglected sectors and exports.
The fourteen nationalized banks are:-
- The Central Banks of India
- The Banks of India
- The Punjab National Bank
- The Bank of Baroda
- The United Commercial Bank
- The Canara Bank
- The United Bank of India
- The Dena Bank
- The Syndicate Bank
- The Union Bank of India
- The Allahabad bank
- The Indian bank
- The Bank of Maharashtra
- The Indian Overseas Bank
Need of Nationalization
During the 1950s and 1960s, it was observed that specific sectors of the economy such as:-
- Small scale industries
- Weaker section of the society
These sectors were relatively ignored by the banking system of the country
Example: The agriculture sector only received 2.1% of the total credit as it rises in March 1967 contrast to a humongous 64% for the industry. Hence nationalization kicked in the primary goal of social control was to achieve the social end without taking over the banks into public ownership.
Objective of Nationalization
It aims to mobilize the savings of people to the maximum extent possible and to use them for productive purposes. It ensures that banking operation is guided by a larger social purpose rather than just commercial reasons and are subject to close public regulations. It ensures that the proper credit needs of private sector industry and trade, whether big or small, are met. It ensures that the needs of all sectors, including agriculture, small scale industry self-employed professionals are met. The growth of the new and escalating class of entrepreneurs can take place, and fresh opportunities can be created for them to consider neglected and backward areas in different parts of the country. It can help to curb the use of bank credit for speculative and for other unproductive purposes.
Acquisition and Transfer of Undertakings Act, 1969
On 19th July 1969, the Vice President of India promulgated an ordinance no.8 of 1969 which is called the Banking Companies (acquisition and transfer of undertaking) Ordinance 1969. In this ordinance undertakings of 14 banks with a deposit of Rs. 50 crore or more by each bank were transferred to 14 new body corporate, namely “corresponding new banks”. On 9th August 1969, the parliament passed an act “The Banking Companies (acquisition and transfer of undertakings) Act, 1969”. After passing that act, the ordinance was replaced by it. In the case of Rustom Cowasji Cooper v. Union of India the Supreme Court bench of 11 judges decided that the Banking Companies Act, 1969 was void for the following reasons:-
- According to the act, 14 banks are prohibited from carrying the banking business. Still, on the other hand, the Indian and foreign other banks were permitted to carry on banking business; this was the discrimination.
- The 14 banks couldn’t carry on any other business since they were stripped of their assets premises, staff and even names; this was an unreasonable restriction.
- It was an illusion and irrelevant to adopted the principle for determining the compensation to the 14 banks.
After the decision of Supreme Court, the President of India promulgated another ordinance (no.3 of 1970) which was followed by another act. Namely the Banking Companies (acquisition and transfer of undertaking) 1970. Under section 1(2) of most of the provisions have 196 on the ordinance no.8 of 1969. The new act attempted to add the constitutional loopholes which are pointed out by the Supreme Court.
Nationalization of Six more Banks
In 1980, six more private banks having the demand and liabilities not less than Rs. 200 crore each were nationalized. Under the Banking Companies Act, 1980, the undertaking of these six banks were transferred to the new six corresponding banks.
The six nationalized banks are:-
- The Andhra Bank
- The Corporation Bank
- The New Bank India
- The Oriental Bank of Commerce
- The Punjab and Sind bank
- Vijaya bank
According to Article 39 of Indian constitution state shall direct its policy towards securing:-
- The ownership and authority of the assets of the community who are distributed best to serve the common good
- That the effect of the economic system does not result in the concentration of wealth and means of production to the collective detriment.
Assessment of Nationalization
- Most of the social objectives set out as priority were achieved
- Bank deposits increased significantly
- Branches of banks in rural areas increased substantially
- Loans to priority sectors also increased
- The efficiency of the banking sector declined drastically due to monopolization
- As result, profitability of banks reduced drastically and started incurring losses
Causes of losses:-
- Lending to the priority sector
- Non-performing assets
- Concessional rate of interest
- Cost of servicing of loans
- High CRR and SCR
- Over staffing
- Trade union
The banking system is vital in today’s society. It plays an essential role in the economic development of the country. The Government of India nationalized fourteen banks in 1969 and the second phase of nationalization of banks was in 1980. The old concepts and procedures of the banking system in India have changed by the result of this ‘banking revolution’. Now the banks should go out to help the people of weaker section and neglected sections of the society for the stability of socio-economic status. To control the quantitative and qualitative aspects of bank, credit can be managed by the Reserve Bank of India. The overall impact of nationalization is positive; the outstanding debt of rural households increased from just 16.9% in 1962 to 64% in 1992.
- In the year 1969, how many banks in India were nationalized?
- What are the significant reasons behind this banking revolution?
- Why the ordinance (No.3 of 1970) was promulgated by the President of India?
- S.C. Nandwani, “Bank Nationalization: A case study of India”, (1970), p..30, Cosmopolitian Publishing House New Delhi
- ML, Tanna “Banking Law & Practice in India”, (2005), p. 125, 21st Edn. Vol.I, Wadhwa & co. Nagpur
- S.R Myneni, “Law Of Banking”, (2006) p.43, Ist Edn., Asia Law House Hyderabad
 AIR 1970 SC 564:(1970) 1 SCC 248