Bank nationalization in India

1. BANKING AND INSURANCE LAW
ASSIGNMENT
ON
Nationalisation of Banks and its Impact
SUBMITTED TO: SUBMITTED BY:
Dr Sunil Kumar Singh Jyotishmay Das
Assistant Professor UID:19MLL1013
Chandigarh University (UILS) Chandigarh University (UILS)

2. CONTENTS
1.1 Introduction.
1.2 Meaning of Nationalisation.
1.3 Objectives of Nationalisation.
1.4 Nationalisation of Banks.
1.5 Impact of Nationalisation.
1.6 Achievements of Nationalisation.
1.7 Failures of Nationalisation.
1.8 Conclusion.

3. 1.1 INTRODUCTION:
India after Independence started economic planning with social objectives.
There were 430 commercial banks at that times, but they failed to help the
objectives. Banks were controlled by Business houses, failed to cater need of
cottage industry, poor people etc1
.
Currently,theIndianbankingsystemisdividedintocommercialbanks,cooperative
banks, regional banks, etc. In commercial banks, there are two types of banks,
publicbanks,andprivatebanks2
.TheimportanteventinthehistoryofIndianbanks
is the nationalization of banks.
1.2 Meaning of nationalisation:
Nationalisation is a process by which the governmenttakes over private assets
and brings them under public ownership.3
Nationalisation refers to an act of taking an industry or assets into the public
ownership4
. It is the opposite of privatisation5
.
In the context of banks, it means that banks which wereearlier in private sector
were transferred to the public sector by the act of nationalisation6
.
1 Kritika Garg,“Nationalisation of banks in India” Availableat:
https://www.slideshare.net/kritikagarg161/nationalisation-of-banks-in-india-48741017 (Lastvisited on
31/10/2019)
2 “Nationalisation of banks” Availableat:
https://www.toppr.com/guides/general-awareness/banking/nationalization-of-banks/ (Lastvisited on
31/10/2019)
3 Shreyas Kamath, “Why were banks nationalised in India?” Availableat:
https://www.quora.com/Why-were-banks-nationalized-in-India-What-does-nationalization-of-banks-really-
mean-What-has-been-the-impact-of-nationalization-of-banks-on-the-Indian-economy(Lastvisited on
31/10/2019)
4 “Nationalisation of banks in India”Availableat:
https://www.gktoday.com/gk/nationalization-of-banks-1969-and-1980/ (Lastvisited on 31/10/2019)
5 Ibid.
6Ibid.

4. 1.3 Objectives of Nationalisation of Banks:
The major objectives of nationalisation were as follows:
According to the Banking Companies (Acquisition and Transfer of undertaking)
Act 1970, the aim of Nationalisation of banks in India is “to control the heights
of the economy and to met progressively and serve better the needs of
development of the economy in conformity with national policy and
objectives.”7
The Banking Regulation Act also providedthat nonew bank or branchof an
existing bank couldbe openedwithout a license fromthe RBI, and no two
banks could have common directors.8
The Banking Regulations Act was enacted, which empowered the RBI "...to
regulate, control, and inspect the banks in India."9
The specific objectives which the nationalised banks were expected to pursue
were outlined by the then Prime Minister Mrs. Indira Gandhi in her statement
to the Parliament on 21 July, 1969.
1. Social Welfare: It was the need of the hour to direct the funds for the
needy and required sectors of the Indian economy. Sector such as
agriculture, small and village industries were in need of funds for their
expansion and further economic development.
2. Controlling Private Monopolies: Prior to nationalisation many banks
were controlled by private business houses and corporate families. It
was necessary to check these monopolies in order to ensure a smooth
supply of credit to socially desirable sections.
3. Expansionof Banking:Ina largecountrylike Indiathenumbersof banks
existing those days were certainly inadequate. It was necessary to
spread banking facilities to unbanked village areas across the country.
4. Reducing Regional Imbalance: In a country like India where we have
urban-ruraldivide; it was necessary for banks to go in the rural areas
where the banking facilities were not available. In order to reduce this
regional imbalance nationalisation was justified.
7 Available at:
Prof. Ram Naresh Chaudhary and Dr. (Smt.) Suman Lata Chaudhary,BankingLaws 49(Central Law Publications,
Allahabad,2018).
8Ibid.
9 Ibid.

5. 5. Priority Sector Lending: In India, the agriculture sector and its allied
activities were the largestcontributor to the national income. So, these
were treated as the priority sectors. But unfortunately they were
deprived of their due sharein the credit. Thus, Nationalisation of bank
was urgently needed for catering funds to them.
6. Developing Banking Habits: InIndia morethan 70% population used to
stayin ruralareas.Itwasnecessary to develop the bankinghabit among
such a large population.
0bjects of nationalisation of banks observed by the Supreme Court of
India in All India Bank Officers Confederationv. Union of India (A.I.R.
1989 S.C. 2045), as:
“The objects of the Banking Companies (Acquisition and Transfer of
undertaking) Act was to nationalise the banks to render the largest
good to the largest number of people.”10
1.4 NATIONALISATION OF BANKS:
The Reserve Bank of India was the first nationalised bank which happened in
January194911
.TheReserveBank of Indiawas nationalised under theprovisions
of the ReserveBank of India (Transfer to Public Ownership) Act, 1948. After few
years back, the government through the Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance, 1969 had nationalised the 14 largest
commercial banks on 19 July 1969. These lenders held over 80 per cent bank
deposits in the country. Soon, the parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received presidential
approval on 9 August 1969.12
10 Supra note 7 at 49
11 “Nationalisation of Banks in India” Availableat:
https://www.toppr.com/guides/general-awareness/banking/nationalization-of-banks/ (Lastvisited on
31/10/2019).
12 “50 years of bank nationalisation: What it means, why banks were nationalised”
Available at: https://www.financialexpress.com/industry/banking-finance/50-years-of-bank-nationalisation-
what-it-means-why-banks-were-nationalised/1647292/ (Lastvisited on 31/10/2019)

6. 13
These fourteen nationalised major private commercial banks are as follows:
 Central Bank of India
 Bank of Maharashtra
 Dena Bank
 Punjab National Bank
 Syndicate Bank
 Canara Bank
 Indian Bank
 Indian Overseas Bank
 Bank of Baroda
 Union Bank
 Allahabad Bank
13
“Indira Gandhi's bank nationalisation was an economic failure,buta smashing political success” Availableat:
https://economictimes.indiatimes.com/news/politics-and-nation/indira-gandhis-bank-
nationalisation-was-an-economic-failure-but-a-smashing-political-
success/articleshow/70456185.cms (Last visitedon31/10/2019)

7.  United Bank of India
 UCO Bank
 Bank of India
The second major phaseof nationalisation occurred in 1980, when govtof India
acquired the ownership of 6 more banks, thus bringing the total number of
nationalised banks to 2014
. These 6 banks were:
 Punjab and Sind Bank.
 Vijaya Bank.
 Oriental Bank of Commerce.
 Corporation Bank.
 Andhra Bank.
 New Bank of India.
Later, the New Bank of India was merged in Punjab National Bank which had
already nationalised on 19th July, 1969.15
1.5 IMPACTS OF NATIONALISATION:
The one positiveimpactof bank nationalization wasthatfinancialsavings roseas
lenders opened new branches in areas that were unbanked. Gross domestic
savings almostdoubled as a percentageof nationalincomein the1970s16
.Dueto
the nationalization of banks, the efficiency of the banking system in India
improved. This also boosted the confidenceof the public in banks17
. The sectors
that were lagging behind like small-scale industries and agriculture got a boost.
This led to an increasein fundsand thusincreasein theeconomic growthof India.
14 Supra note 7 at 46 - 47.
15Ibid.
16 Niranjan Rajadhayaksha,“Opinion :The 1969 bank nationalisation did Indiamoreharm than good”
https://www.livemint.com/opinion/columns/opinion-the-1969-bank-nationalization-did-india-more-harm-
than-good-1563295097940.html
17 Supra note 11.

8. 1.6 ACHIEVEMENT:
Some of the achievements of nationalisation of bank are as follows:
1. Branch Expansion: The Privatebanking companies mainly concentrated their
branches in urban areas with the effect that rural areas remained outside the
purview of commercial banks. Opening of branches in rural areas had not been
a profitable proposition in the initial years.18
Dueto nationalisation of bank this
proposition was totally change
in the banking system, both geographically and functionally. From 6,596
branches and offices in June 1969, their number increased to 32,643 in June
2003.
2. Deposit Growth:
Besides, there has been functional diversification in the form of growth in bank
deposits. The deposits of these banks in June 1969 wereRs.3,897 crores which
increased to Rs.6,88,361 crores in March 2003 and grew by 11.47 per cent
during 2002-03 over 2001-02.
3. Credit Expansion:
There has been an impressiverecord of the nationalised banks in the realm of
credit expansion.
4. Priority Sector Lending:
These banks have undergonea major transformation from ‘wholesale’ banking
to ‘retail’ banking. In other words, there has been greater emphasis on
disbursing credit to the priority sector comprising’ agriculture, small scale
industry, transport operators, retail trade, professional and self-employed
persons, and education.
18 Available at:
Prof. Ram Naresh Chaudhary and Dr. (Smt.) Suman Lata Chaudhary,BankingLaws 48(Central Law Publications,
Allahabad,2018)

9. 5. Spread of Banking in Rural Areas:
Since nationalisation, the spread of banking has increased considerably in rural
areas.
6. Reduction in Regional Disparities:
Regional imbalances in the availability of banking facilities have been
considerably reduced.
7. Some New Schemes:
Public sector banks have been departing from their traditional role and
introducing somenew schemes. A number of other steps havebeen taken up to
improve customer service. Courier services have been introduced to expedite
collection of outstation creditinstruments. Customerservicecentres havebeen
set up in all major cities. Customer relations programmes are organised
periodically.
The system of personal hearing of the grievances of customers has been
introduced at appropriate levels to serve the customer better.
Also, for a rural people, the regional rural banks (RRBs)were formed. Further, the
specific requirements of sectors like foreign trade, housing, and agriculture were
met. This was met by establishing NABARD, NHB, SIDBI, and EXIM.
In Rustam Cawasjee Cooper v. Union of India –(Bank Nationalisation Case)
A.I.R. 1970 S.C. 564.
The constitutional validity of the Banking Companies ( Acquisition and Transfer
of Undertakings) Act, 1969, waschallenged in the SupremeCourt. The Supreme
Court, by a majority of 10 : 1, declared the Act invalid and unconstitutional
because its provisions relating to the statutory transfer of undertakings were
void as they impaired the fundamental guarantee under Article 31(2) of the
Constitution. 19
1.7 Failures of nationalisation of banks:
 Extending loans to agriculture and small scale Industries was risky
and less profitable.
 No additional securities were provided to depositors through
nationalisation of bank.
19 Infra note 20 at 50.

10.  Political interference was disturbing the smooth working of
nationalise banks20
.
 It also promotes inter-state rivalries and policies would raise their
ugly heads, damaging the sound banking system.21
 Nationalisation involves huge amount of money to be paid as
compensation to the shareholders. 22
1.8 Conclusion:
From the above discussion we can say that the nationalisation of banks helped
expansion of branches in small towns and village areas. Itwas necessary for the
time being to nationalise the banks which were performing ineffectively. Ithad
achieved many objectives such as credit expansion, priority sector lending,
which werebeneficial for agricultureand smallscaleindustriesbut dueto global
requirement of economic conditions which eventually led the govt to adopt the
policy of LPG model of economy, nationalisation had to be eased privatisation
of banks was demand of the situation.
Since then private sector banks have dominated the banking sector.
Bank nationalization succeeded in specific areas such as financial deepening
because of the rapid spread of branches, but it eventually did more harm than
good. 23
20 Available at:
Prof. Ram Naresh Chaudhary and Dr. (Smt.) Suman Lata Chaudhary,BankingLaws 53(Central Law Publications,
Allahabad,2018)
21 Supra note 24 at 54.
22 Supra note 22.
23Supra note 16.