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
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) 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) 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) 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) 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) 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) 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) 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.
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