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NATIONALISATION OF COMMERCIAL BANKS IN INDIA

Author: Aanchal, IV year of B.A.,LL.B. from KIIT School of Law, Bhubaneshwar


ABSTRACT

Banks are the custodian of private savings and they also provide credits for investment. They accept deposits from the public and use them as credits to enhance funding for growth and development. In 1955, the Imperial Bank of India was nationalised and it was taken over by the State Bank of India. Before the Nationalisation period banks were under the control of big business houses which only favoured big industries and businessmen. They failed to fulfil the requirements of small-scale industries and needy sectors and did not provide adequate funds to these sectors. In order to address this kind of disparity and to promote regional harmony steps were taken by the government to Nationalise the Commercial banks in India This paper discusses every aspect of the nationalisation process, its aim and objectives to figure out the effectiveness of banks nationalisation and the changes brought by it.

KEYWORDS: Nationalisation, Commercial Banks, Custodian, Credit flow, private savings


INTRODUCTION

In the era of 1969, 14 commercial banks were nationalised in India. This was a major step towards the nationalisation of banks after independence. There was also a limit fixed for the banks for Nationalisation. Foreign banks along with all other banks that had deposits of less than 50 crores were not nationalised at that period. During that period commercial banks which were nationalised were controlling 91% of total credits and deposits. The nationalisation of Banks in India was seen as a great effort of the Indian Government to initiate growth and strengthen the economy of India. Banks act as a custodian for public money but before nationalisation, they were completely in the hands of private entities. As there was no interference by the government, the officials of the banks used to carry unfair means to earn profits. Public Interest and public welfare were of no concern. They used people’s savings to expand their businesses. So, it was extremely needed for the banks to be nationalised to protect the people from the unfair practices of the bankers and bank officials. It was not an easy task to nationalise the commercial banks for the government as like any other movement or changes it has also two sides which consist of its pros and cons. This movement was supported as well as criticised in India.


Today, Indian banking has reached even the very remote and rural areas of the country. It has not been confined to big cities and towns. This is one of the biggest reasons for economic growth in India. This is because of the government funding to the banks right from the period when those 14 major banks were nationalised. Now, the customers don’t need to wait for so long to deposit or withdraw money from the banks. The private banks were not fulfilling the basic needs of the customer rather they had to suffer the unfair means practised by the bankers, hence it became necessary to nationalise the private banks in India.

This article focuses on the importance of the nationalisation of banks in India, its impact on the Indian economy, various achievements, case laws initiating nationalisation and the pros and cons of the movement. The role of the public sector increased due to the nationalisation of commercial banks as now it was under the control of the government. It was a need for independent India to have a strong, fair and sound Banking system to achieve good and stable economic growth in the country. The banking system in India should not be in a way showing less concern towards its customers rather it should implement various schemes and policies in the public interest and should also function in a way to become capable of facing all the challenges prevailing in the business world. Therefore, the nationalisation of banks was a revolution in the banking sector.


BANKS NATIONALISATION PERIOD

Post-independence the Indian Government decided to adopt the appropriate economic plan for the entire country. For it, 5 years plan came into existence in 1951. Social ownership over the means of production was the main objective of this economic planning. The commercial banks were the private sector banks back then in those days. In the year 1950-51, 430 banks were existing in the country. There were some social objectives of the Indian government behind this planning. So, these commercial banks failed to provide help or assistance to the government for implementing or working towards achieving these objectives.[i]


Therefore, the government eventually decided to nationalise 14 major commercial banks on July 19th 1969. Those banks having deposits base over 50 crores were made eligible for nationalisation. The government believed that the banks controlled by the private entities overlooked the needs of small-scale businessmen, cottage industry, farmers, small credit men and they failed to provide them credit or loans for carrying out the business. Then comes the second phase for the nationalisation of commercial banks which was in the year 1980.


Indira Gandhi who was the Prime Minister during the year 1969, first initiated the process of nationalisation of banks in India. 14 banks were then nationalised. Those banks were mostly managed and owned by big businessmen.


The 14 banks were

(a) Central Bank of India

(b) Bank of Maharashtra

(c) Dena Bank

(d) PNB

(e) Syndicate Bank

(f) Canara Bank

(g) Indian Bank

(h) Indian Overseas Bank

(i) Bank of Baroda

(j) Union Bank

(k) Allahabad Bank

(l) United Bank of India

(m) UCO Bank

(n) Bank of India.


Even before the process of nationalisation started, the State Bank of India was already nationalised. It was done in the year 1955 under the SBI Act of 1955. Seven state banks of India were nationalised on 19th July 1960.[ii]


Then after this, the second phase of nationalisation of Indian Banks took place and it was in the year 1980. This time seven more banks were nationalised with a deposit base of over 200 crores. By that time approx. 80% of the banking sector in India was under the control of government ownership. After the banks were nationalised in India in these two phases the branches of public sector banks saw a significant rise of approx. 800% in case of deposits and there was a huge rise seen in advances with 11,000%.


NECESSITY FOR NATIONALISING THE BANKS

The necessity to nationalise the commercial banks emerged because the private banks were not fulfilling the criteria laid up by the government for social and economic development which are so essentially needed for the development and growth of the country. Even the introduction of the Banking Regulation Act passed in the year 1949 and the nationalisation of the major bank that was State Bank of India in the year 1955 failed to expand in rural areas or the remote areas of the country and it also failed to reach the small-scale businessmen or the borrowers.


These commercial banks favoured the developmental goals of big businessmen, industries and established business houses. Commercial banks credit in Industrial share increased to double between the years 1955 and 1968 is from 34% to 68%.[iii] Agriculture sector still received less than 2% of the total credit. Similarly, the credits to export and small-scale business were also not taken care of. The purpose to nationalise banks is to allocate the credit share proportionately among all the borrowers and sectors to ensure collective growth. The process of Nationalisation took place in two phases first in the year 1969 which covered 14 banks and then another in the year 1980 in which 7 more banks were covered. Today, there are 27 Nationalised banks existing. The nationalisation of banks undoubtedly has improved the situation a lot and it is being very impressive. In June 1969 the number of branches of commercial banks had increased from 8261 to 65521 in the year 2000.[iv] The expansion of these branches in rural areas was commendable and remarkable. There was also an increase in both deposits and cash flow


AIM BEHIND NATIONALISING THE BANKS

The main aim of the Banking Companies Act which was passed in the year1970 is to control the inflation in the economy and better serve the needs of the country consistent with the national policies and objectives. The nationalisation of commercial banks was carried out to achieve the developmental goals laid down by the government. The following objectives are:

  • Welfare for the society: It was extremely required to initiate and insist the small business and needy sectors such as the agriculture sector boost up. They needed funds for their expansion and growth and this could only be achieved if banks were under the control of the government. Hence nationalisation of banks was the need of the hour.

  • To have control on Private Monopoly: Before the period of nationalisation of banks, it was controlled by the private entities that are big business houses. So, nationalisation was done to assure an equal proportion of credit distribution and also for the credit allocation to the needy sectors.

  • Decreasing Regional Disparity: In our country India there is a rural-urban division kind of thing. So, to ensure balanced credit distribution between both this step was required to be taken.

  • Lending to desirable sectors: In our country, the agriculture sector and those activities related to this sector contributes the most to the National Income. So, these are the main growth fetching sectors. Despite this, they were not getting adequate funds to boost up their growth and contribution.

  • Banking Expansions: In our country with a huge area and population there was a great need for expansion of banking branches to even the rural and remote areas of the country.

  • Banking Habits: More than 70% of the population live in rural areas where at that time there were hardly any branches of the bank. So, it was necessary to develop banking activities in the rural areas.

  • Organizing Savings: The main aim of the nationalisation was to collect the savings, mobilize them and use them for some other productive purposes.

  • Productive Sectors: Nationalisation of banks looked into the needs of the farmers, small scale industries and provided them with funds which earlier they were not availing.

  • Rise of new opportunities: It aims to develop and foster the growth of all the sectors without any disparity. It created a fresh opportunity for small industries as well as for neglected areas.

  • To stop unnecessary activities: It aims to stop the flow of bank credit on unproductive activities and speculative sectors.


CASE LAW ON NATIONALISATION OF BANKS

RC Cooper v Union of India,[v] This is considered one of the landmark cases in the field of banking laws. In this case the constitutional validity of the Banking Regulation Act, 1969 was challenged in the Supreme court. Here it was argued that this act is violative of Article 14 and 31 of the Indian Constitution. The court also struck down this act on the basis that the banks were nationalised and for that they were not given reasonable compensation as per the provisions of the bank and also this act did not allow the banks to pursue any other business other than banking after being nationalised. Hence this is also a violation of Article 14 of the Indian Constitution. Hence, the court opted to strike down this act.


CONCLUSION

These nationalised banks are also called the government banks in India and they assist in public and desirable sectors. They are responsible for providing credit and funds to the needy sectors such as agriculture and small industries.[vi] Nationalisation of banks has taken banking services from urban areas to rural areas. It has introduced and aware the rural people of the benefits of banking services. There is a speedy transfer of funds from one place to another. It has also created a lot of job opportunities for the youth. It has also availed credit facilities to small scale industries and the agricultural sector. It also freed rural people from the hands of moneylenders. Banks assured timely credit flow to all the needy sectors. Those under priority sector are given importance in terms of advances and credits and it includes the weaker section of the society also. Even big industries are not neglected; they are also assured sufficient funds or credit for their growth and progress. It has discouraged investment of funds in harmful activities or unnecessary investment in real estate. It has dismantled the concentration of capital in one hand only that is in the hands of big industrialists. It has mainly focused on the use of public money for social and economic welfare. Bank nationalisation has abolished regional disparity existing before. It has also helped the government for the implementation of different policies and schemes in the public interest.


[i]Aggrawal B.P 1981 Commercial Banking in India, New Delhi, p 1

[ii]Ahluwalia. M.S. 1993 “India’s Economic Reform”, New Delhi

[iii]P. Sahey 1997 “ The Impact of Liberalisation on the productive efficiency of Banks

[iv]Government of India, 1991 Report of the Committee on the financial system

[v]AIR 1970 SCR (3) 530

[vi]Subash C. Ray, 2004 “ Comparing the performance of public and private sector banks”