NATIONALIZATION OF BANKS

9/13/2020 1
 Introduction SURANYA.S.KUMAR,BSOLS

• When the ownership and management of the banks

is taken over by the Government (Central or State),
then such process is called Nationalization of Banks
and such banks are called Nationalized Banks.
• In other words; nationalization is the process of
transfer of ownership including management of
banks from private sector to government (public)
Sector.
• In a socialistic form of society like India, wealth must
be distributed as equitably as possible or otherwise
the nation will become a totalitarian State, which is
against the preamble of the constitution.
9/13/2020 2
• To achieve this goal through democratic
process, a mixed pattern of planning was
evolved i.e., two sectors namely private sector
and public sector were allowed to function
independently.
• While the public sector is indirectly or
ultimately controlled by the government, the
private sector is governed through regulations,
licenses, controls and legislative Acts like the
Monopolies and Restrictive Trade Practices
Act, 1969, the Consumer Protection Act, 1986,
etc.
9/13/2020 SURANYA.S.KUMAR,BSOLS 3
• STAGES OF NATIONALIZATION:
• 1. In 1955, the Imperial Bank of India was nationalized and it was taken over
by the State Bank of India.
• 2. On 19th July, 1969 fourteen major banks viz,
• (a) The Central Bank of India Ltd.,
• (b) The Bank of India Ltd.,
• (c) The Punjab National Bank Ltd.,
• (d) The Bank of Baroda Ltd.,
• (e) The United Commercial Bank Ltd.,
• (f) The Canara Bank Ltd.,
• (g) The United Bank of India Ltd.,
• (h) The Dena Bank ' Ltd-.,
• (i) The Syndicate Bank Ltd.,
• (j) The Union Bank of India Ltd.,
• (k) The Allahabad Bank Ltd., (l) The Indian Bank Ltd.,
• (m) The Bank of Maharashtra Ltd.,
• (n) The Indian Overseas Bank Ltd., each having deposits of more than Rs. 50
crores (aggregate deposits of Rs. 2,632 crores with 4,130 branches) were
nationalized.
9/13/2020 SURANYA.S.KUMAR,BSOLS 4
• 3.On 15th April 1980, six more banks were nationalized.
• (i) Andhra Bank
• (ii) Corporation Bank
• (iii) New Bank of India
• (iv) Oriental Bank of Commerce
• (v) Punjab and Sind Bank and
• (vi) Vijaya Bank.
• Immediately after the nationalization of the above 20 banks,
the ownership of banks were transferred to the Central
Government and they were made public sector undertakings.
The word ‘Iimited’ at the end of the bank’s name was
deleted.

9/13/2020 SURANYA.S.KUMAR,BSOLS 5
• PROCESS OF NATIONALIZATION:
• On 19th July 1969, an ordinance was promulgated by the President of
India under Article 123 (1) of the Indian Constitution called ‘the
Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance’ 1969’ by which 14 banks with the deposits exceeding Rs.
50 crores were nationalized.
• The ordinance was followed by Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970.
• Bank Nationalization Case: (RHC Cooper Vs. Union of India) “ The
above ordinance and the subsequent Act were challenged on the
following grounds:
• 1. That the classification was unreasonable in fixing an arbitrary
amount of Rs. 50 corers as deposits, as the basis for nationalization.
• 2. Though the proprietors of the Banks were permitted to-carry on
any other business than banking, since the entire bank staff, premises
and the banks’ names were taken away by the Government, the
proprietors of the banks were practically disabled to carry on any
other business.
9/13/2020 SURANYA.S.KUMAR,BSOLS 6
• Hence this act of the Government amounted to unreasonable restriction
violative of Article 19 (1) (g) i.e., fundamental right to carry on any
profession.
• 3. The principle of payment of compensation to the owners of the banks
were incorrect and illusory and violated the ‘Right to Property’ under
Article 31 (2) of the Constitution.
• The Supreme Court by a majority of 10:1 held that the ‘nationalization
ordinance’ and ‘Act’ were unconstitutional and hence void.
• However, the then Prime Minister Mrs. Indira Gandhi, got absolute
majority in the Loksabha and Rajyasabha through the subsequent
general elections held.
• By such majority, the Parliament 'overruled the above judgment and by
an ordinance followed by an Act, the Parliament nationalized all the 14
banks.
• The Government paid aid Rs. 87 Crores. as compensation to the owners
of the banks. With that payment, the nationalization process of banks
came to an end.

9/13/2020 SURANYA.S.KUMAR,BSOLS 7
• MANAGEMENT OF NATIONALIZED BANKS: (Sec. 7 to 9)
• Sec.7 to 9 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 provides for 'management of nationalized
banks.

• 1. The Head Office of the nationalized bank shall ' continue to be the
same a's of the corresponding bank at the time of nationalization.
• 2.The general superintendence, direction and management of affairs of
the nationalized bank shall vest with its Board of Directors.
• 3. The remuneration of each member of the board of Directors shall
continue to be the same before and after nationalization of banks.
• 4. The Chairman of the pre-nationalized bank shall be the custodian of
the nationalized bank and he shall manage the affairs of the bank until a
New Board of Director is appointed.
• 5. Every nationalized bank, in discharge of their functions, shall be
guided by the policy of public interest as per the directions of the
Central Government in consultation with the Reserve Bank of India.
9/13/2020 SURANYA.S.KUMAR,BSOLS 8
• SPECIALIZED PUBLIC SECTOR FINANCIAL BANKS]
INSTITUTIONS:
• After nationalization of banks, to help the industrial,
agricultural, rural, housing, imports and exports
development, the Central Government has setup the
following leading financial banks and institutions.
• 1. Industrial Development Bank of India (IDBI)
• 2. Industrial Finance Corporation of India[ (IFCI)
• 3. Industrial Reconstruction Bank of India (IRBI) .
• 4.State Financial Corporations (SFCS)
• 5 . Agricultural Refinance and Development Corporation
(ARDC)

9
9/13/2020 SURANYA.S.KUMAR,BSOLS
• 6.National Bank for Agriculture and Rural Development
(NABARD)
• 7. Export Import Bank of India (EXIM)
• 8.Life Insurance Corporation of India (LIC)
• 9.Agricultural Finance Corporation Ltd (AFC)
• 10.GCneral Insurance Corporation of India (GIC)
• 11.Export Credit Guarantee Corporation of India Ltd., (ECGC)
• 12.Unit Trust of India (UTI)
• 13.Housing and Urban Development Corporation Ltd.,
(HUDCO)
• 14.Housing Development Finance Corporation Bank Ltd
(HDFC Bank)

9/13/2020 SURANYA.S.KUMAR,BSOLS 10
• MERITS 0F NATIONALIZATION (REASONS FOR
NATIONALIZATION)
• 1.The major private banks were operating mostly with the public
money.
• The contribution of share holders was very negligible.
• In the above 14 banks, as against a total public deposit of Rs.
2,750 crores as on December 1968, the paid up capital of the
shareholders was only Rs. 28.5 crores.
• 2.Even capitalist countries have nationalized their banks and such
banks were performing well. For a. France has nationalized four
of its six banks and Italy, four of its five banks and this was an
influencing factor for Indian Government to nationalize the above
banks. .
• 3. The public ownership of the banks will help most effectively
the mobilization and development 0f national resources and its
utilization for productive purposes in accordance with the
Government’s plan. and priorities.
9/13/2020 SURANYA.S.KUMAR,BSOLS 11
• 4. Before nationalization, the major banks were owned and
controlled by a handful of share holders. In other words, there
was concentration of wealth/economic power in the hands of
a few individuals and large number of people were financially
suffering without any assistance from the above banks.
• This is against the Directive Principles of State Policy under
the Indian Constitution.
• 5. The banks, before nationalization, were instrumental for
lopsided urban and rural growth. These banks did not open
branches in small towns and villages whereas after
nationalization, the bank branches exist even in small villages.
• 6. The Directors of the Banks, before nationalization, were
utilizing the public funds for the business and industrial
growth of their directors, share holder and a select few
business houses.
9/13/2020 SURANYA.S.KUMAR,BSOLS 12
• 7.Before nationalization, the bank funds were used for
speculative and sometimes illegal transactions like shares,
hoarding activities, etc.
• 8. Prior to nationalization, since the banks were not under the
control of the Government, the five year plans of the Government
could not be achieved as these banks did not cooperate with the
Government in achieving the five year plan objectives.
• 9. The banking institutions are the centres of private savings and
they provide credit and ,loans to public. They accept deposits and
utilize the money for industrial and other‘ developmental
activities by granting advances and loans. Such powerful financial
institutions must be under the control of the government for
better economic prosperity 9f the nation.
• 10.As regards the Private Scheduled Banks, the main complaint
was that these banks were restricting their advances only to the
large and medium scale industries and big business houses. ‘
9/13/2020 SURANYA.S.KUMAR,BSOLS 13
• The priority sectors like agriculture, small-scale industries, rural industries,
exports etc. were neglected which affected the 'uniform national
development and this was the main reason for nationalization.
• 11.Now the banks which are under the control of the Government could help
the neglected and weaker sections Of the community instead of confining
only big business houses and closed business circles.
• 12.Nationalization helps to decentralize credit policies With liberal advances
to agriculture, small-scale industries, exports, rural industries etc.,
• 13.Now the new enterprises setup in backward area‘ are preferred and given
importance, because 0f uniform development of both urban and rural areas
simultaneously. Further for these rural enterprises, lower rate of interest is
charged along with subsidies.
• 14.Now a dynamic new role is played by the banks for the all round
development of the nation.
• (. All India Bank officers confederation and others Vs. Union of India and
others, AIR 1989 SC 2045)
• The Supreme Court held that the object of‘ nationalization of banks is to
render the. largest good to the largest number of people in India.
9/13/2020 SURANYA.S.KUMAR,BSOLS 14
• DEMERITS OF NATIONALIZATION:
• 1. In fact, there was no pressing need for nationalization. It was
more a political decision with an eye to catch the vote bank
rather than with any genuine interest or welfare of the
public/nation.
• 2. The internal control of the banks by Government will result in
red-tapism, rigid rules etc .Nationalization has more harmful
evils than good.
• 3. All public sector institutions are known for their lack of
dynamism and slow work culture. Since the employees have
constitutional protection of their services and assured of their
monthly salaries, their work output is less, lethargic and
Without any enthusiasm. ‘
• 4.Banking sector is not nationalized in all socialist countries. ‘
• For example in Denmark, Finland, Norway and Sweden, the
banks are still in the private
9/13/2020
sector.
SURANYA.S.KUMAR,BSOLS 15
• 5. Public control opens the flood gate of corruption and
favouritism. The history of performance of public sector
institutions are poor and loss making.
• »The employees of 'public sector undertakings do not give
respect to individual dignity and there is delay and lethargy in
their work culture.

• In a personalized service like banking, service is all 'the more

important and it must be rendered ‘ effectively and quickly with
humane consideration, which is feasible only in private sector.
• 6.The executives and other officials of the banks are afraid to
take decisions because of audit and Vigilance and they are more
bothered to protect their terminal benefits and this tendency
has affected the working system of the bank adversely.
• Further it has ‘slowed‘ down the services to the customers. ‘
9/13/2020 SURANYA.S.KUMAR,BSOLS 16
• EFFECT OF NATIONALISED BANKS:
• 1. All the areas neglected prior to nationalization are taken care of after
nationalization. Now, there has been a high growth in, number of
branches of commercial banks in metropolitan areas, urban towns, rural
and semi urban areas.
• 2. There has been a remarkable growth in rural areas especially in
agricultural, small scale industries, etc., due to the opening of branches of
public sector branch in these areas.
• 3. Due to vast network of branches by public sector ' branches, both the
volume of deposits and advances have remarkably increased.
• 4. The nationalized banks are used by the Government for the
implementation of Government's various policies, 'anti-poverty
programmes, etc.,
• 5. Due to opening of many branches in semi urban and rural areas, people
now have developed saving habits by using the services of banks.
• 6. Prior to nationalization, the bank was serving only rich people’s needs,
but now banks are easily approachable even by the people at the lower
strata of the society.
9/13/2020 SURANYA.S.KUMAR,BSOLS 17
• UNIVERSITY QUESTIONS FOR REVIEW:
• 1. Explain nationalization of banks?
• 2. What are the meritqs and demerits of
nationalization of banks?
• 3. What were the causes and circumstances
for nationalization of banks?
• 4 .Do you support Nationalization of banks?
Explain with reasons.
• 5. Write short notes on Nationalization of
banks
9/13/2020 SURANYA.S.KUMAR,BSOLS 18