Bank nationalization, also known as the nationalization of banks or state ownership of banks,

refers to the process by which a government takes control and ownership of private banks or
financial institutions. It is typically carried out through legislation or executive orders, and it
grants the government the authority to regulate and manage the operations of the
nationalized banks. When a bank is nationalized, the government assumes responsibility for
managing and regulating its operations. This includes making key decisions such as setting
lending policies, determining interest rates, and overseeing the bank's overall financial
health. Nationalized banks are typically subject to government supervision, and their
activities are guided by the objectives and priorities set by the government.
The rationale behind bank nationalization varies depending on the specific circumstances and
objectives of the government. Some common reasons for nationalization include:

1. Financial stability: In times of economic crisis or instability, governments may nationalize

banks to prevent their collapse, safeguard the financial system, and protect depositors'
funds. By taking control of troubled banks, the government can provide liquidity, recapitalize
the institutions, and ensure their continued functioning.
2. Public interest: Nationalization can be motivated by the desire to promote public welfare
and economic development. Governments may view banks as essential institutions that
should serve the interests of the broader population. By nationalizing banks, the
government aims to ensure that credit is made available to key sectors of the economy, such
as agriculture, small businesses, or strategic industries.
3. Regulation and control: Nationalizing banks gives the government greater oversight and
control over the financial sector. It allows the government to enforce regulations, implement
monetary policies, and direct lending practices in alignment with its economic objectives.
Nationalization can also help prevent excessive risk-taking, unethical practices, and
monopolistic behavior by banks.
The process of bank nationalization typically involves the transfer of ownership from private
shareholders to the government. The process of nationalization typically involves the
government acquiring a majority or full ownership stake in the banks The government may
compensate the previous shareholders by providing fair market value for their shares, or it
may use other mechanisms such as issuing government bonds, or employing other means of
compensation. Nationalized banks are usually operated by government-appointed officials
or boards who are responsible for managing the day-to-day operations, making lending
decisions, and ensuring compliance with relevant laws and regulations. The extent of
government control can vary, with some nationalized banks operating more independently
and others subject to closer government oversight.
It is worth noting that bank nationalization can vary in scope and extent. In some cases, only
troubled or systemically important banks are nationalized, while in others, the entire
banking sector may be brought under state control. The specific details of bank
nationalization, including the legal framework, procedures, and objectives, are determined
by the laws and regulations of each country.
It is important to note that the specific steps and procedures involved in bank nationalization
can differ significantly based on the legal and regulatory frameworks of individual countries.
The government may also seek expert advice from financial institutions, legal professionals,
and economists to ensure a smooth transition and minimize any adverse impact on the
economy and the financial system.
The process for bank nationalization in India has evolved over time, as there have been
multiple instances of bank nationalization in the country. Here is a general outline of the
process based on previous nationalization episodes:
1. Legislative Authorization: The government introduces and passes legislation that
provides the legal authority for bank nationalization. The legislation specifies the
conditions and procedures for nationalization and may outline the objectives and
scope of the nationalization exercise.
2. Decision and justification: The government makes a decision to nationalize specific
banks or the entire banking sector. It provides a clear justification for the
nationalization, citing reasons such as financial stability, public interest, or regulatory
control.
3. Selection of Banks: The government identifies the banks that will be nationalized.
Typically, the selection is based on factors such as the size of the bank, its role in the
economy, its financial health, and the alignment of its operations with the
government's objectives.
4. Valuation and Compensation: An independent valuation is conducted to determine
the compensation to be paid to the shareholders of the banks. The valuation process
assesses the banks' assets, liabilities, market value, and future prospects. The
compensation may be in the form of government bonds or other financial
instruments.
5. Acquisition of Ownership: The government acquires the ownership rights of the
selected banks by purchasing a majority or full stake from the existing shareholders.
This transfer of ownership is usually done through a formal agreement and requires
compliance with regulatory procedures.
6. Transfer of Control: After acquiring ownership, the government appoints a board of
directors or administrators to assume control of the nationalized banks. These
officials are responsible for managing the banks' operations, making key decisions,
and ensuring compliance with regulatory requirements.
7. Operational Restructuring: The nationalized banks may undergo operational
restructuring to align their activities with the government's objectives. This can
involve changes in management, corporate governance practices, lending priorities,
and expansion plans. The aim is to ensure that the nationalized banks fulfill the
government's developmental goals, such as promoting financial inclusion and
supporting priority sectors.
8. Regulatory Oversight: The nationalized banks come under the regulatory oversight of
the Reserve Bank of India (RBI), which is the central bank. The RBI sets and enforces
 prudential norms, monitors their financial health, and ensures compliance with
banking regulations. The government may also establish additional oversight
mechanisms to monitor the performance of the nationalized banks.
9. Communication and Transparency: The government communicates its nationalization
decisions, objectives, and plans to the public, shareholders, and other stakeholders.
Transparent communication helps maintain confidence in the banking system and
provides clarity on the future direction of the nationalized banks.
 RBI ACT
INTRODUCTION

The Reserve Bank of India was set up in the year 1935 as per the Reserve Bank of India Act,
1934. It is the national bank of India dependent on the multidimensional job. It performs
significant money-related capacities from the issue of cash notes to the upkeep of financial
stability in the nation. At first, the Reserve Bank of India was a private investor’s organization
which was nationalized in 1949. Its issues are administered by the Central Board of Directors
designated by the Government of India. Since its beginning, the Reserve Bank of India had
assumed a significant job in the financial turn of events and money related solidness in the
nation.

HISTORICAL BACKGROUND

It all started in 1926 when the Royal Commission on Indian Currency and Finance suggested
the production of a national bank for India. Later in 1927, a bill to offer impact to the above
suggestion was presented in the Legislative Assembly. However, it was later removed
because of the absence of arrangement among different areas of individuals.

The White Paper on Indian Constitutional Reforms suggested the making of a Reserve Bank
and a new bill was presented in the Legislative Assembly in the year 1933. After one year the
Bill was passed and gotten the Governor General’s consent. The Reserve Bank started tasks
as India’s national bank on April 1, 1935 as a private investors’ manage an account with a
settled up capital of rupees five crores (rupees fifty million).

In the year 1942, the Reserve Bank stopped to be the money giving authority of Burma
(presently Myanmar). Due to which the Bank quit going about as broker to the Government
of Burma. In 1948, the Reserve Bank quit delivering focal financial administrations to
Pakistan.

Finally in 1949, the Government of India nationalized the Reserve Bank under the Reserve
Bank (Transfer of Public Ownership) Act, 1948, and all shares were transferred to the Central
Government. This was the period of post-independence and the RBI was comprised for the
administration of cash and for conveying the matter of banking as per arrangements of the
Act.
STRUCTURE OF RESERVE BANK OF INDIA

MAJOR PROVISIONS OF THE RESERVE BANK OF INDIA ACT, 1934

SECTION 2(e)- Scheduled Bank means a bank whose name is included in the Schedule II of
the RBI Act, 1934.

SECTION 3 of the Act demonstrates the foundation of the Reserve Bank of India for taking
over the administration of the money from the Central Government and of carrying on the
matter of banking as per the provisions of this Act.
SECTION 7 engages the Central Government to issue directions in public interest occasionally
to the bank in meeting with the RBI Governor. This part likewise gives intensity of
administration and direction of the affairs and business of RBI to Central Board of Directors.
SECTION 17- The section manages the functioning of RBI. The RBI can accept deposits from
the Center and the State governments without interest. It can buy and limit bills of the trade
from commercial banks. It can buy foreign exchange from banks and offer it to them. It can
give credits to banks and state monetary enterprises. It can give advances to the Central
government and state governments. It can purchase or sell government securities. It can
bargain in subordinate, repo, and invert repo.
ROLES/ FUNCTIONS OF THE RBI

SECTION 20-21B– The Reserve Bank of India goes about as a banker to the Central
government as well as the state governments. All things considered, it transacts all financial
business of the government, which includes the receipt and payment of cash for the public
authority and doing of its trade, settlement, and other financial tasks. Consequently, the
government keeps its money balance on the current account deposits with the RBI. As the
banker of the government, the RBI gives short-term credit to the government to meet any
setbacks in its receipts over its payment. As the banker of government, the RBI is likewise
charged with the responsibility of dealing with the general public (i.e., the government)
obligation/ debt. In the release of this duty, the RBI deals with all new issues of government
advances, benefits the public debt outstanding, and attendants the market for securities of
government.

SECTION 22- 29– RBI in India controls the progression of cash in the market. The primary
target is to keep an eye on the credit system and dependent on it keep up the cash in the
system. This is done with the goal that the deposits are maintained. Additionally, RBI is the
sole position with regards to the printing of cash. This capacity of giving notes by RBI has
numerous points of interest. They are:

 It is anything but difficult to administer.

 This aids in the consistency of the notes that are given.
 It turns out to be anything but difficult to control and manage the credit that is
within the framework.

SECTION 42– The RBI attempts the duty of controlling credit made by commercial banks. RBI
utilizes two techniques to control the additional flow of cash in the economy. These
strategies are quantitative and subjective procedures to control and direct the credit stream
in the nation. At the point when RBI sees that the economy has adequate cash supply and it
might cause an inflationary circumstance in the nation then it crushes the cash supply
through its tight money related approach and the other way around.

SECTION 40- To keep the foreign exchange rates stable, the Reserve Bank purchases and
sells foreign monetary standards and furthermore secures the nation’s foreign exchange
reserves. RBI sells the foreign cash in the foreign exchange market when its stock reductions
in the economy and the other way around. Presently, India has a Foreign Exchange Reserve
of around US$ 487 bn.
INSTRUMENTS AND MODES OF MONETARY POLICY
It is referred as Federal Reserve. The Central bank maintains it to influence the amount of
cash and credit. The monetary policy comprises of the administration of cash supply and
interest rates, pointed toward meeting macroeconomic goals, for example, inflation control,
utilization, development, and liquidity.
SECTION 49– BANK RATE- It is the standard rate at which RBI is ready to buy or rediscount
certain documents including bills of exchange or commercial papers. Bank rates impact the
loaning rates of commercial banks. Higher bank rate will mean higher loaning rates by the
banks. To control liquidity, the national bank can depend on raising the bank rate and the
other way around. The current bank rate is 4.65%.
SECTION 17- OPEN MARKET OPERATIONS– It can accept money on deposit without interest
from the Central government or the state government. It can sale, purchase and discount
bills of exchange. Under section 17, RBI has much wider authority as compared to section
49. It can buy and sell foreign exchange and can also deal with transactions abroad. Under
this provision, RBI acts independently. If the commercial banks reduce rates as compared to
RBI then it can go for an open market like other ordinary banks as a participant.
But if the RBI fixes a bank rate and the commercial banks are not ready to sell their
promissory notes to the RBI due to the high rate then RBI can participate in the open market
and can use the demand and supply rule to fix the price.
SECTION 42- CASH RESERVE RATIO– RBI can tell a bank to keep maximum 20% of all its
demand and time liabilities as reserve. CRR is basically the minimum amount of deposit that
the commercial banks have to hold as reserves with the RBI. The reason is to ensure that
banks do not run out of cash to meet the payment demands of their customers. The present
CRR is 3%.
SECTION 24- STATUTORY LIQUIDITY RATIO– Commercial banks have to maintain a stipulated
proportion of their demand and time liabilities in the form of cash, gold and unencumbered
securities. The proportion is minimum of 40% and the present SLR is 18.50%.
REPO RATE is the rate at which Central bank lends money to the commercial banks when
they need it. If there is an increase in repo rate, the liquidity will fall and banks will not take
loans in this scenario.
REVERSE REPO RATE is the rate at which RBI borrows money from commercial banks. Both
reverse repo rate and liquidity are inversely proportional to each other.
MARGINAL STATUTORY FACILITY- If bank needs an overnight loan, instead of going to
another financial institution, it comes to the RBI. Here instead of loans, securities are to be
issued.
SELECTIVE CREDIT CONTROL- To select the rate of interest, to whom to give, maximum
amount to be given to a single borrower.
ISSUE OF BANK NOTES- As per Section 22 of the Reserve Bank of India Act, RBI has the
exclusive right to issue cash notes of different divisions aside from one rupee note. The One
Rupee note is given by the Ministry of Finance and it bears the marks of Finance Secretary,
while different notes bear the mark of Governor RBI.
Section 24 mentions that the maximum denomination of a note is rupees ten thousand.
Whereas section 26 describes the legal tender character of Indian bank notes.
RBI & CREDIT INFORMATION
SECTION 45A TO 45G-
It includes any information related to-
 The amount or nature of loan or advances and other credit facilities that are given by
the banking companies to their borrowers,
 The nature of security given by the borrowers for such credit facilities,
 The guarantee granted by the banking company to its customers,
 The antecedents, means, credit worthiness and history of financial transaction to the
borrowers,
 Any such information that the RBI may consider to be relevant.[5]
Power of RBI to collect credit information-
 It can be collected in such a manner as the RBI thinks fit.
 It may direct any bank to submit to it the statements related to such credit
information.
Any banking company is bound to comply with the regulations of the Reserve Bank of India.
Procedure for granting credit information to banking companies-
On request of a banking company, the RBI shall furnish the applicant with that credit
information related to the matters stated in the application. But the information so
furnished will not disclose the names of banking companies who have submitted such
application to the RBI. It is on the discretion of the RBI to put fees for furnishing credit
information and that amount would not exceed to rupees twenty-five.
Disclosure of information prohibited-
Any credit information contained in any statement should be kept confidential and should
not be published or disclosed except for the purpose of this chapter.
Those exceptions are-
 Disclosure made by any banking company with the prior permission of the RBI.
 If the bank thinks fit, it may publish the credit information in favor of public interest.
 The disclosure or publication can be done as per the practice and usage customary
among bankers or permitted by any other law.
 It can be done under the Credit Information Companies (Regulation) Act, 2005.