NATIONALISATION OF BANKS PROS & CONS

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 cus-
tomer 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.