Nationalisation of Banks
in India
Nationalization is a process whereby a
national government or State takes over the private industry, organisation or
assets into public ownership by an Act or ordinance or some other kind of
orders. This strategy has been frequently adopted by socialist
governments for transition from capitalism to socialism.
The banking sector in India has been facing
extreme changes with the economic growth of the country. In 1948, RBI (Transfer
of public ownership) Act was passed to nationalised the Reserve Bank. On Jan 1,
1949, RBI was nationalised. In 1955, the Imperial Bank of India was
nationalized and was given the name “State Bank of India”, to act as the
principal agent of RBI and to handle banking transactions all over the country.
It was established under State Bank of India Act, 1955.
On 19th July, 1969, 14 major Indian commercial
banks of the country were nationalized. In 1980, another six banks were
nationalized, and thus raising the number of nationalized banks to20. Seven
more banks were nationalized with deposits over 200 Crores. Later on, in the
year 1993, the government merged New Bank of India with Punjab National Bank.
It was the only merger between nationalized banks and resulted in the reduction
of the number of nationalized banks from 20 to 19. Till the year1980
approximately 80% of the banking segment in India was under government’s
ownership. On the suggestions of Narsimhan Committee, the Banking Regulation
Act was amended in 1993 and hence, the gateways for the new private sector
banks were opened.
Objectives (Reasons) Behind Nationalisation of
Banks in India
1. To reduce monopoly practices: Initially, a few leading industrial
and "business houses had close association with commercial banks. They
exploited the bank resources in such a way that the new business units cannot
enter in any line of business in competition with these business houses.
Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.
2. Social control was not adequate: The
'social control' measures of the government did not work well. Some banks did
not follow the regulations given under social control. Thus, the
nationalisation was necessitated by the failure of social control.
3. To reduce misuse of savings of general public: Banks
collect savings from the general public. If it is in the hand of private
sector, the national interests may be neglected, besides, in Five-Year Plans,
the government gives priority to some specified sectors like agriculture,
small-industries etc. Thus, nationalisation of banks ensures the availability
of resources to the plan-priority sectors.
4. Greater mobilisation of deposits: The
public sector banks open branches in rural areas where the private sector has
failed. Because of such rapid branch expansion there is possibility to
mobilise rural savings.
5. Advance loan to agriculture sector: If banks
fail to assist the agriculture in many ways, agriculture cannot prosper, that
too, a country like India where more than 70% of the population depends upon
agriculture. Thus, for providing increased finance to agriculture banks have to
be nationalised.
6. Balanced Regional development: In a
country, certain areas remained backward for lack of financial resource and
credit facilities. Private Banks neglected the backward areas because of poor
business potential and profit opportunities. Nationalisation helps to provide
bank finance in such a way as to achieve balanced inter-regional development
and remove regional disparities.
7. Greater control by the Reserve Bank: In a
developing country like India there is need for exercising strict control over
credit created by banks. If banks are under the control of the Govt., it
becomes easy for the Central Bank to bring about co-ordinated credit control. This
necessitated the nationalisation of banks.
8. Greater Stability of banking structure:
Nationalised banks are sure to command more confidence with the customers about
the safety of their deposits. Besides this, the planned development of
nationalised banks will impart greater stability for the banking structure.
Arguments
in favour and against nationalisation of banks
Arguments in
favour of nationalisation
1) It would enable the government to obtain all
the large profits of the banks as its revenue
2) Nationalization would safeguard interests of
public and increase their confidence thereby bringing about a rapid increase in
deposits. Thus preventing bank failures
3) It would remove the concentration of economic
power in the hands of a few industrialists
4) It would help in stabilizing the price levels
by eliminating artificial scarcity of essential goods
5) It would enable the baking sector to diversify
its resources for the benefit of the priority sector.
6) Eliminates wasteful competition and raises the
efficiency of the working of banks
7) enables rapid increase in the number of
banking offices in rural & semi-urban areas & helped considerably in
deposit mobilization to a great extent
8) necessary for the furtherance of socialism and
in the interest of community
9) Enables the Reserve Bank to implement its
monetary policy more effectively
10) It would replace the profit motive with
service motive
11) It would secure standardization of banking
services in the country
12) Would check the incidence of tax evasion and
black money
13) Through pubic ownership and control, banks
function like other public utility services by catering to the financial need
of the common man.
14) Like other countries, India should also get
profit by nationalizing her banking industry.
15) Essential for successful planning and all-round
progress of the national economy, community development and for the welfare of
the people.
Arguments
against nationalisation (Criticism)
1)
Political purpose rather than for Productive purpose: The
government has acquired the strength of a giant and there is the danger of
using the financial resources for political purposes rather than for
productive purpose.
2)
Beginning of state capitalism: Such a
drastic step of nationalisation of about 90% of the banking resources is wholly
unnecessary, especially if we take into consideration the enormous powers
vested in the Reserve Bank of India for controlling banks' resources. It is
considered as the beginning of state capitalism and not socialism in India.
3)
Scope for inefficiency: Some are of the opinion that after
nationalisation banks will degenerate to the level of agricultural
co-operatives, which are known for their inefficiency and corrupt practices.
4)
Less attractive customer's service:
Inefficiency, indecision, corruption, and lack of responsibility are the evils
with which the government undertakings are suffering. A government bank may
not care to attach importance to the customer service.
5)
Secrecy of customer's accounts: In spite
of the assurances given and provisions made in the Act, businessmen still fear
about the maintenance of the secrecy of the customer's accounts. As such, they
may be forced to withdraw their deposits and go to some bank in the private
sector and foreign banks. Thus nationalisation of big Indian banks .will
diverts some of the deposits of Indian banks to the foreign banks which is not
at all desirable.
6)
Branch expansion: To argue that nationalisation will
help to facilitate branch expansion to rural areas much more rapidly than the
private banks cannot be supported by facts. Weather it is private bank or
nationalised bank; it has to go by business principles and satisfy itself that
the new branch is economically viable. In other words, branch expansion can be
achieved by private banks as well, without nationalisation.
7)
Burden of compensation: Nationalisation leads to the payment
of heavy compensation to the shareholders. This gives additional financial
burden on the government. Moreover, it is also argued that nationalisation
will not bring much income to the government.
In spite of
these criticisms, we cannot ignore the fact that at present, nationalisation of
banks is an accomplished fact. By and large this measure received support from
almost all sections of the public. It was welcomed by the middle class people
and small industrialists and small traders.
Achievements of Nationalized Banks
A banking revolution occurred in the country
during the post-nationalization era. There has been a great change in the
thinking and outlook of commercial banks after nationalization. There has been
a fundamental change in the lending policies of the nationalized banks. Indian
banking has become development-oriented. It has changed from class banking to
mass-banking or social banking. This system has improved and progressed
appreciably.
Various achievements of banks in the
post-nationalization period are explained below:
1) Branch Expansion: Initially, the banks were
conservative and opened branches mainly in cities and big towns. Branch
expansion gained momentum after nationalization of top commercial banks. This
expansion was not only in urban areas but also in rural and village areas.
2) Expansion of Bank Deposits: Since nationalization of banks,
there has been a substantial growth in the deposits of commercial banks. Thus
bank deposits had increased by 200 times. Development of banking habit among
people through publicity led to increase in bank deposits.
3) Credit Expansion: The expansion of bank credit
has also been more spectacular in the post-bank nationalization period. At
present, banks are also meeting the credit requirements of industry, trade and
agriculture on a much larger scale than before.
4) Investment in Government
Securities: The
nationalized banks are expected to provide finance for economic plans of the
country through the purchase of government securities. There has been a
significant increase in the investment of the banks in government and other
approved securities in recent years.
5) Advances to Priority Sectors: An important change after the
nationalization of banks is the expansion of advances to the priority sectors.
One of the main objectives of nationalization of banks to extend credit
facilities to the borrowers in the so far neglected sectors of the economy. To
achieve this, the banks formulated various schemes to provide credit to the
small borrowers in the priority sectors, like agriculture, small-scale
industry, road and water transport, retail trade and small business. The bank
lending to priority sector was, however, not uniform in all states.
6) Social Banking - Poverty
Alleviation Program: Commercial
banks, especially the nationalized banks have been participating in the poverty
alleviation Program launched by the government.
7) Differential
Interest Scheme: With a view to
provide bank credit to the weaker sections of the society at a concessional
rate the government introduced the “Differential interest rates scheme” from
April 1972. Under this scheme, the public sector banks have been providing
loans at 4% rate of interest to the weaker sections of the society.
8) Growing Importance of Small
Customers: The
importance of small customers to banks has been growing. Most of the deposits
in recent years have come from people with small income. Similarly, commercial
banks lending to small customers has assumed greater importance.
9) Diversification in Banking: The changes which have been
taking place in India since 1969 have necessitated banking companies to give up
their conservative and traditional system of banking and take to new and
progressive functions.
10) Globalization: The liberalization of the
economy, inflow of considerable foreign investments, frequency in exports etc.,
have introduced an element of globalization in the Indian banking system.
11) Profit making: After nationalization, banks are making profits
in addition to achieving economic and social objectives.
12) Safety: The government has given importance to
safety of the banks. The RBI exercises tight control over banks and safeguards
depositors interest
13) Advances under
self-employment scheme: Public sector
banks play a significant role in promoting self employment through advances to
unemployed through various schemes of the government like IRDP,JGSY, etc