Tuesday, April 12, 2016

Nationalisation of Banks - Objectives, Pros and Cons

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


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