Open Access Research Article
BANK NATIONAZATION AND SOCIAL CONTROL OVER BANKING
Published Paper
Article Details
BANK NATIONAZATION AND SOCIAL
CONTROL OVER BANKING
AUTHORED BY
- NISHA MARUTI BHALEKAR
DEPARTMENT OF
LLM
P.E.SOCIETE’S
MODERN LAW COLLEGE
GANESHKHIND UNIVERSITY CERCLE, PUNE
ABSTRACT
A bank is a financial institution or
an organisation that keeps the money that accepts deposits and money from public and in turn creates
a demand deposit while simultaneously creating
loan demands. These are basically financial service providers that
provide the citizens with a safe and
a profitable platform to store their valuables. Money or cash are not the only
things that are accepted by banks but
also other valuables like gold. The etymological derivation of this term differs from time to time and it
even varies according to the country because each of them has its own
unique way of understanding and
carrying out the banking procedures.
Though
some of the features of bank like acceptance of deposits in current accounts
for customers and collecting and
paying cheques for them have been universally accepted as the basic functions of a bank without any
arguments. The positive and Negative impact of
nationalization or examines
the pre and post Nationalization Era. Moreover, it also emphasis
on the Need of Nationalization. Furthermore, this paper talks about the
social control over banking.
Thereafter, suggests the final thought pertaining to the concept of
Nationalization and social
control over Bankin
INTRODUCTION
Bank nationalization in India started
with the government nationalising the 14 largest commercial banks on 19 July 1969 through the Banking Companies
(Acquisition and Transfer
of Undertakings) Ordinance, 1969. These banks held about 80% of the
entire bank deposits in the country.
In 1980 another six private
banks were nationalised. Until 1969, the State Bank of India was the only bank not privately
owned. Before its nationalisation in 1955 It was called the Imperial Bank. Currently, India has 19 nationalised banks.
There are various reasons
for the occurrence of such nationalization. One of the major reasons
is to energise priority sectors. The agricultural sector was ignored for
a very long time by commercial banks.
These banks were seen as catering to only large industries and businesses. Approx.
2.3% of the bank loans were channelled to farmers, in 1950, with the figure declining to 2.2% in the next 17 years. The government also wanted to
open new branches in the rural and
backward areas. The government also wanted to mobilize savings through
nationalisation and utilize them
for better and more productive purposes leading to efficiency. There were various economic and political reasons as
well Bank nationalization was one of her responses to the economic and political challenges of the time. E.g.,
the wars with China in 1962 and Pakistan in 1965—put pressure on public
finances.
The
private sector banks being predominantly urban oriented and controlled by few
large industrialists were not
properly equipped to help the achievement of the basic socio-economic objectives. The credit needs of
agriculture, small scale industries and weaker sections were totally
neglected.
HISTORY OF BANK AND CONCEPT OF NATIONALIZATION
The
term ‘bank’ is something that is not a novice concept. This term is supposed to
have its origin from a Latin word
‘Bunches’ or an Italian word ‘Banco’ both of which translates to ‘bench’. It is also said that this word
has been derived from a German word ‘Back’ which means ‘Joint Stock
Fund’.1
In the case of the Greeks and the Babylonians the temples were used as a form of banks wherein the money was lent to people and this was
majorly done by the priests who were appointed
specifically for this task. Temples
were the major centres
of money lending
transactions in the earlier
times. This was a successful method until there started to occur religious
clashes and disbeliefs. In each
religion it was clearly stated in their own unique way that taking interest rates or
extra charges for their own money was not
an acceptable condition.
With this temple being used as banks came to an end. Rather
it was modernised and turned
into a new concept which was
practical in all aspects. This form of money lending was first introduced in the city of Venice in the mid of 12th
century, in the year 1157.
In
India the concept of banking has existed since the Vedic period which extends
from around 2000 BC to 1400 BC.
During those times lending of money was considered as an art rather than a business or trade. There was a very
slow and steady transition from money lending to banking in that period. After that both money lending and
banking existed separately in the Mahabharata
and Ramayana era which are considered to be the events of life that took place between 1000 and 700 B.C. During and even
after independence India there was a huge need
for nationalization in the country. This was majorly
because a lot of were there of requirements of big businesses and also of large
markets. Following which exports, agriculture and small industries were hanging back. Nationalization of banks solved
the major chunk of all these problems
and it also gave a financial boost to the country. The other sectors that were
lagging like the small markets,
agriculture or farming obtained a boost. That itself was a huge success for the nation as India as a whole was majorly dependent on its agricultural sector. This in turn lead to a sudden rise in funds following
which the economic condition of the country started aiming and reaching towards
its zenith.
Before
nationalisation took place in 1969, only State Bank of India was a public
sector undertaking. It was also the
first nationalized bank of India which was earlier known as the Imperial Bank of India. In the year 1951,
there were more than 400 commercial banks who
worked under the private sector. More than 360 banks had failed or
collapsed between 1947 and 1955. The
rate at which the banks were collapsing was around 40 banks within a duration of one
year. This in turn resulted
to a huge loss for the people who had invested their money in those particular banks and also affected the economy of our country
on a large scale. This trend of collapsing of banks continued throughout the 1950s till the first half of 1960s.
This
situation had forced the then finance minister Mr. Morarji Desai, under the
leadership of Jawaharlal Nehru as
the Prime Minister,to launch a massive bank consolidation drive. It brought
down the number of banks from 328 in 1960 to 68 in 1965.2
1 History Of Banking, Wikipedia, https://en.wikipedia.org/wiki/History_of_banking,
2 Nationalization of Banks in India, Zee Business, https://www.zeebiz.com/india/news-nationalisation-of-banks-in-india-history-effect-19- july-1969-bank-list-how-many-banks-are-nationalised-upsc-trending-indian-economy-190160,
WHAT IS NATIONALIZATION
The
concept of nationalization is not just limited to banks but also various other
sectors or working organisations that
exist in the country. Mainly those which are privately owned by individuals or other entities. It also
brings these entities under the public ownership of a national government or state. This would widen
the parameters of control that the government has over the state as well as the citizens of the nation. As
per the International Monetary Fund (IMF)
Nationalisation is a process by which the government takes over private assets
and brings them under public ownership.
There is a fine line of difference between
nationalization and privatisation and with demutualization. Privatization is a concept in contrast wherein the ownership
and management are transferred from public to private
sector. On the other hand, demutualization is basically a process
in which a customer owned mutual organization or co-operative changes
legal form to a
joint stock company.
The
term “Nationalization” refers to the transformation of the Private industry or
commerce into a state owned
or public owned commerce. Subsequently, Nationalization of Banks refer to the
acquisition of majority of the stake of private banks and transforming it into
a public ownership of a national
government. The First Bank to get nationalized was Reserve Bank of India (RBI) on 1st Jan, 1949. Through
Transfer of Public Ownership Act. Thereafter, in 1969 and 1980, 14 and 6 Commercial bank of India underwent the
process of Nationalization respectively.3
Moreover, Banking companies (Transfer of Undertakings and Acquisition) Act, 19702
was passed keeping in view
to take over certain Banking institutions.
NATIONALIZATION OF BANKS
The
history of Nationalization can be traced back in the 1947 also known as the
independence period. Its the time
when the banking system in India was established. It started with the foundation of Bank of Hindustan in the year 1770. There are many banks that started operating during those days and are well known in operation now as well.
Like Allahabad bank, Punjab National
Bank, etc. this period is also known as the merging period where most of the
banks were merged with one another. The Imperial bank is one of the biggest epitomes
in that regard which is a merger
of Bank of Madras, Bank of Bombay
and Bank of Bengal which later turned
into what we know as the ‘Reserve Bank of India’. Thereafter, second
phase initiated from 1947 to 1991
which was majorly known as the Nationalizing period for the banks in India. Indira Gandhi, the Prime Minister that
time put up a proposal for the same on behalf of the Central government and thereafter the Government of India
started issuing ordinance of Banking Companies
(Acquisition and Transfer of
Undertakings) 1969.
The following 14 Banks were nationalized in 1969:
1. Central Bank of India
2. Bank
of Maharashtra
3 https://rbi.org.in/history/Brief Chro1935to1949.htm
3. Dena
Bank
4. Punjab National Bank
5. Syndicate Bank
6. Canara Bank
7. Indian Bank
8. Indian Overseas Bank
9. Bank
of Baroda
10. Union Bank
11. Allahabad Bank
12. United Bank of India
13. United commercial Bank
14. Bank
of India
Eventually in 1980 six more private
banks were nationalised to the earlier
14 major banks. The names
of these six banks are as follows:
·
Andhra
Bank
·
Corporation Bank
·
New Bank of India
·
Oriental Bank of Commerce
·
Punjab and Sind Bank
·
Vijaya Bank
An overview of the benefits
of this step is that the banks were spreading
their branch networks
throughout the country,
nation-wide deployment of credit
and increased mobilization of resources. The reason behind
the immense development of the Indian banking system
was this process of nationalization that was
implemented in our country. This happened soon after independence wherein people were in dire need of access to
various facilities but at the same time
had no idea or knowledge about the same. Thus, nationalization solved this
issue as it brought the procedure or access of banks
easy and equal to all citizens.
Banks
had been taken under the government control in many nations. When we
specifically talk about the case of
India the nationalization process took place in majorly two phases, the first one on July 19, 1969 and the second
one on April 15, 1980. During the first phase such a step was taken in order to promote
social welfare, increase
credit availability in rural areas,
and reduce concentration of
economic power.4 The nationalized banks had to mandatorily shift a certain amount or percentage of their
lending towards sectors like agriculture, small scale industries and
exports.
4 https://legalvidhiya.com
When
banks were nationalized, it came directly under the control of the Banking
Regulation Act, 1949. RBI later became the regulatory authority for banking in India.
NEED OF NATIONALIZATION
Nationalization, per se strives
for a well-managed banking system.
An effectively Administered financial institutions aid
country’s huge businesses and industries. Some of the main reasons for the need of nationalization are discussed
below:
1. Focus on backward areas: The foremost
essence of nationalization is to create development and reach the mass. Private banks were neglecting the backward
areas of the society and were solely
focusing on the urban areas. Nationalization was indispensable as it helped
backward areas by providing loans and other banking facilities in order to create development and bridge the gaps between urban and rural areas.
2.
Prioritizing Crucial
sectors: Sectors like: small scale industries, cottage
industries, agricultural
industries and more were being neglected by the private banks. Nationalization
of banking institutions strive
to effectively develop these crucial sectors of our society
3. Creation of Banking Habitat:
Like Hospitals, Schools,
Collages. Banks have also become
an Integral part of our
society which indeed is one of the chief principles of Nationalization, is to create banking habitat.
4. Increase in Profit: Authority of
government over Banking sector generates higher revenue which ultimately provides
higher capital formation
which further can be invested
in large scale
projects or industries.
5. Rapid transfer of funds: When more
people imbibe banking habits, transactions in the country will be done with usage of banks. The need for currency
or hard cash will slowly decline.
Which ultimately refrains Unaccounted transactions and the generation of black money. Funds can be transferred with the
use of electronic media. Hence, Economic activity will speed up. Ultimately increase in the revenue
of the government.
6. Creation of Institutions: Creation of
new institutes like NABARD, SIDBI, etc., suffice the necessity of Agricultural sector, Trade or Foreign Trade of the society.
SOCIAL CONTROL
OVER BANKING
India
had adopted the socialism pattern of society as its prime objective after
Independence owing to which the
concept of social control has emerged in India. Which denotes that the wealth ought to be distributed equitably
without making the country a totalitarian state and achieve it via democratic process. Banks being the custodian of
Savings and an institution of granting credits.
The term “social
control” came into consideration as the banks advances were only directed
towards the medium and large-scale industries. Basically, the small-scale industries like Agriculture, cottage
industries, export industries, etc., were being neglected. Owing to this mismanagement in the banking sector,
the need of Nationalization was proposed.
The
social control empowered via Banking laws (Amendment) Act,1968 which Amended
the Banking regulation Act,1949.
The prime objective of social control focused on providing accessibility in backward areas. Around
196 Regional rural banks (RRBs) were established.5 The then Prime Minister, Morarji Desai
further stated that the foremost objective of Social Control was “To regulate our social and economic life so as to
attain the optimum growth rate for our economy”6
CASE: R.C. Cooper v. Union
of India (Bank Nationalization Case)7
On 19th July, 1969. The vice president
of India passed
an ordinance whilst exercising the power under Article 123(1) of the constitution
of India. A petition was filed against the same. ii. Nevertheless, On 9th August,1969. The banking companies
(Acquisition and transfer of undertaking
Act,1969 was passed which repealed the Banking companies (Acquisition and Transfer of undertakings) ordinance,1969.
In the above case the petitioner rose the following issues: 1. Firstly, the act of passing the ordinance was void as
it was beyond the legislative competence
of the central government. 2. Act is creating discrimination between the banks. Held: A bench of 11 judges of the supreme
court heard the petition and held that the act was within the legislative competence of the
central government.
ARGUMENTS
IN FAVOR OF NATIONALIZATION OF COMMERCIAL BANKS IN INDIA:8
Various factors
were responsible for the nationalization of commercial banks in India. discussion on these factors that helped in this,
are as follows:
1)
Too much concentration in the banking
sector:
In 1959 there were 570 banks in India. But in 1963 the number came down
to 276.However, during this period
the amount of bank deposit had increased by more than two times. This shows too much concentration in the
banking sector. Again, out of 276 banks just 5 banks contributed to more than 50% of the deposits. The big
industrialists used the bank funds to build up their industrial empires.
This implies concentration of economic power.It
was thought that the
nationalization of commercial banks would solve it.
2)
Mobilized savings
were not used for social development:
According to an estimate
there were 188 directors in 20 commercial banks. These directors used to control 1,640 companies.
As a result, the savings of the commercial banks were
used for the promotion of the interests of a few groups of people. This was not
utilized for general economic development.
3)
Hoarding of essential commodities of speculation:
The speculators could get higher
profits as the general price level increased. These speculators
used to take loans from commercial banks. Thus,
in order to check these speculative activities the nationalization of commercial banks was thought to be essential.
4)
To
check illegal activities: According to Indian Companies Act, each company has
to submit the estimates of profitand
loss to the Registrar of Companies. However,
the provision was not applicable to
the banking companies. The bank could holdsecret reserve funds and declared
lower profits. These funds were used to purchase shares of different
companies. The
6 https://theintactone.com/2019/09/14/ibs-u3-topic-1-banking-regulation-act-19
8 https://www.researchgate.net/
banks were involved
in under invoicing of exports and over invoicing
of imports. It was thought
that these illegal activities could be checked as a result of bank nationalization.
5)
Urban bias: The banks were mostly confined to urbanareas. They did not pay any attention to opening of new branches of rural
areas. But in order to have all round development of the country there is need for opening up of new branches in rural areas. As a result of nationalization
of commercial banks it was thought that branch expansion of banks in rural areas will
be possible.
6)
Discrimination against
small business:
The banks lent money only to the big business units. They
neglected the needs of the agricultural sector. But the development of agricultural sector
is necessary for the economic development
of the country. Agriculture is the priority sector. In order to ensure
flow of credit to the
priority sectors, bank nationalization
was thought to be essential.
7)
Stopping
of failure of banks: Up to early 1960s there were a large number of bank failures in our country.
This hampered the interest of the depositors. It was thought that through
bank nationalization the confidence of the public
in commercial banks would rise.
This would also check the growth of black money in
our country.
8)
Improvement of service conditions of bank employees:
Nationalized banks would be able to provide better service conditions to their
employees. The efficiency of the banking business would rise
through better training.
PERFORMANCE OF NATIONALIZED COMMERCIAL BANKS SINCE NATIONALIZATION: 9
One of the major criticisms of commercial banks prior to nationalization
was that they never extended their
hands to the priority sectors like agriculture, small scale industries, exports
etc. Before nationalization such banks operated with the profit motive only. But after nationalization
the scene changed to a huge extent. Commercial banks started to consider objectives like social development and economic development of the nation.
Thus, they started
supporting sectors on which the growth of the then Indian economy was
dependent heavily. The total credit provided
by the public sector banks in 1969 was Rs. 440 crores.
In1988 it went up
to a level of Rs,29,333 crores. Another massive change in the Indian banking
scenario was observed
as a result of
nationalization of commercial banks.
Previously, the private banks were operating with only the profit motive.
So they were eager to operate
and open their
branches only in urban areas, where scope of business was bigger and
brighter than the rural areas. After nationalization of these
banks, there was a gigantic
change in the motives of these commercial banks. They were operating no more with just the profit motive.
As a result of this,
the commercial banks started to extend their services in the rural areas
also. This had a manifold effect on the Indian economy.
Firstly, due to this approach of the nationalized commercial banks there were more branches being opened in rural
areas. Thus, the untapped rural
market were also coming under the ambits of the Indian banking industry.
Secondly, this wa helping
in generation of employment opportunities in the Indian
job markets. Thirdly,
from the point of view of consumer
behavior it can be said that the vast population in the rural areas were being exposed to the banking
services. In this context, it is mention worthy that since 1969 to 1989 there was 600% growth rate
observed in the opening of new branches of commercial banks. Moreover,
in June, 1969 on an average a branch of a bank was serving
more than 65,000 customers in
India. This number came down to
12,000 customers per branch in June,
1989. Another significant impact was felt in case of deposit mobilization. The
deposits of commercial banks which
stood at Rs. 4,650 cores
in June, 1969 grew to Rs. 1,47,000
crores
in
January, 1989. However, in spite of these successes, there were also certain
limitations of nationalization of
commercial banks. Profitability of the commercial banks declined to a huge extent. Nationalization also made these commercial banks heavily dependent on the politicians. Thus large part of the bank credit was still being diverted
towards the big industries and corporate houses. Lastly, it can be said
that nationalization brought in security in the lives of the banking employees. This established a complacent attitude
thereby resulting into a sharp decline
in the standard of the banking services provided to the
customers.
Conclusion
It can be said that due to nationalization of commercial banks the Indian
banking industry faced
a steep challenge. It was the challenge
of blending the profit motive
with the objective of social and economic development of the nation.
The game of balancing these
two diagonally opposite
sets of goals is still on. These banks, there was a gigantic change in
the motives of these commercial banks. They were operating no more with just the profit motive.
As a result of this,
the commercial banks started to extend their services in the rural areas also. This had a manifold
effect on the Indian economy. In 1969, fourteen major commercial banks
were nationalized in India. Foreign
banks and other banks
with deposits of less than Rs.50 crores were not nationalized. Six more commercial banks were nationalized in 1980. The nationalized commercial banks were at that time controlling 91% of total deposits and total credit.
Nationalization of commercial banks in India is looked as a significant effort of the Government of India
to strengthen the economy.
REFERENCES
1.
History Of Banking, Wikipedia, https://en.wikipedia.org/wiki/History_of_banking,
2.
Nationalization
of Banks in India, Zee Business, https://www.zeebiz.com/india/news- nationalisation-of-banks-in-india-history-effect-19-july-1969-bank-list-how-many- banks-are-nationalised-upsc-trending-indian-economy-190160
4.
https://legalvidhiya.com
6.
https://theintactone.com/2019/09/14/ibs-u3-topic-1-banking-regulation-act-19
9.
Banking and negotioable
instrument act 1966 by R.K.Bangi
10.
Nationalization of banks by Ambeer white
Article Information
BANK NATIONAZATION AND SOCIAL CONTROL OVER BANKING
Authors: NISHA MARUTI BHALEKAR
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/12
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.