Nationalization of Banks: History of Indian Banks

15 Dec 2020  Read 184110 Views

The Indian banking system has a history of bank nationalization, particularly during the 1960s and 1980s. The first major wave of bank nationalization was seen in 1969 under the leadership of PM Indira Gandhi & the second wave of bank nationalization took place in 1980. 

Fourteen major private banks were nationalized, with an additional six banks at a later stage. These were mostly large banks with extensive branch networks across India. The process of bank nationalization simply refers to the transfer of ownership and control of banks from private entities to the government under RBI.

Suppose Bank nationalization has contributed anything to the economy. In that case, it has to be gaining self-sufficiency in food grains products and a massive rise in financial inclusion, which has helped India to emerge as one of the greatest economies. On this note, let's get deep into the concept of Nationalization.

Process of Bank Nationalization

It could be expressed as a process whereby the National government or the state becomes empowered to take over the private industry, organization or even the assets into their ownership, i.e. public ownership through any legislation, an ordinance or any kind of order. A lot of socialist governments have undertaken this process just to convert from capitalism to socialism.

  • The government, usually through the Ministry of Finance, makes a decision to nationalize some of the banks. This decision is made on the basis of a few factors, such as directing credit towards priority sectors or ensuring stability in the banking sector.

  • The government then introduces and passes legislation or ordinances to give legal backing to the nationalization process. This legislation specifies the banks to be nationalized, the modalities of the transfer, and the T&Cs of the nationalization.

  • In India, the RBI (Transfer of Public Ownership) Act was passed in order to nationalize the Reserve Bank of India, and as a result, on 1 January 1949, RBI was nationalized. 

  • The government analyzes the valuation of the banks to be nationalized. A fair compensation package is offered to the existing shareholders of the banks whose ownership is being transferred to the government based on certain factors such as the bank's net worth, market value, etc.

  • Once the valuation and compensation process is over, the ownership of the banks is transferred to the government. The shares held by the existing shareholders are acquired by the government, such as a public sector undertaking (PSU).

Nationalization of Banks

  • With the transfer of ownership, the government assumes control and governance of the nationalized banks, meaning that the banks come under the purview of the Reserve Bank of India (RBI).

  • Similarly, in the year 1955, the Imperial Bank of India underwent nationalization, and later, it was named the State Bank of India, which, in the present time, is the largest bank of the Public sector. 

  • It was established by the State Bank of India Act 1955 and also serves as the principal agent of RBI and is responsible for handling bank transactions across the country. 

  • Due to this sudden nationalization, banks all over the country had to face extreme changes, ultimately leading to economic growth.

It was in the year 1969, 19 July, when 14 of the most major commercial banks functioning in India underwent nationalization. In the year 1980, another 6 banks were nationalized, which enhanced the total number to 20.

History of Nationalization

The history of Nationalization can be traced back to 1947, which is also known as the pre-independence period. It was during this time that the banking system in India was established. It began with the foundation of the Bank of Hindustan in the year 1770. Many banks started operating during those days and are still operating, like Allahabad Bank, Punjab National Bank, etc. This period was marked as the merging period, where most of the banks merged. The Imperial Bank is one of the biggest examples in that regard, which is a merger of the Bank of Madras, Bank of Bombay and Bank of Bengal, which later turned into what we know as the 'State Bank of India'.

After that, the second phase started from 1947 to 1991, which was majorly known as the Nationalizing period for the banks in India. Indira Gandhi, the Prime Minister then, proposed the same on behalf of the Central government. Afterwards, the Government of India started issuing ordinances for Banking Companies (Acquisition and Transfer of Undertakings) in 1969. After 14 days or so of the issue of the ordinance, Parliament enacted the Banking Companies (Acquisition and Transfer of Undertakings) Act. As a result of that, a few banks were nationalized, like- Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Punjab National Bank, UCO Bank, Union Bank of India, etc.

In the year 1980, the second round of Nationalization started when 6 more commercial banks, Punjab and Sind Bank, Oriental Bank of Commerce, Corporation Bank, Andhra Bank, New Bank of India and Vijaya Bank, got nationalized. The credit delivery to the government was the major reason for the same. With the second round of nationalization, government-controlled approx. 91% of the banking business of the country.

The third phase started in the year 1991 till date. The policy of Liberalization was duly followed in this period, and as a result of that, a small number of these banks got licensed. They were known as the New generation tech-savvy banks, which later merged with the Oriental Bank of Commerce, IndusInd Bank, UTI Bank, ICICI Bank and HDFC Bank. The three sectors of banks, i.e. Government, Private and foreign, contributed their best to the economy's overall growth. As a result of the liberalization of banking policies, a lot of private banks also came into effect.

Indira Gandhi's Role in Bank Nationalization

  • Indira Gandhi, the former Prime Minister of India, played a crucial role in the process of bank nationalization in India. In 1969, under her leadership, the Indian government decided to nationalize 14 major private banks in the country through an ordinance, looking after the need for economic reforms, the goal of promoting social welfare, and the goal of reducing the concentration of economic power.
  • The government believed that nationalizing banks would help mobilize resources for development, increase credit flow to sectors that were neglected by private banks, and bring banking services to underserved areas.
  • The banks that were nationalized included prominent names such as Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank, and others. The government acquired a majority stake in these banks, effectively bringing them under public ownership and control.
  • Following the nationalization, the banks became public sector banks (PSBs). Through the Reserve Bank of India (RBI), the government exercised control over the PSBs and played a significant role in their governance, policies, and operations.
  • The nationalized banks played a crucial role in expanding banking services and providing credit to priority sectors, including agriculture, small-scale industries, and exports.
  • Indira Gandhi's decision to nationalize banks was met with both support and criticism. Supporters stated that it would help reduce economic disparities and promote inclusive growth.
  • At the same time, critics expressed concerns about government interference, inefficiencies in the banking sector, and potential politicization of lending decisions.

Overall, the nationalization of banks under Indira Gandhi's leadership had a long-lasting impact on the Indian banking sector.

What was the Need to Nationalize?

The need to nationalize banks was felt for many reasons, as they were a huge help to the country's big businesses and massive industries. Then in addition to that, the agriculture sector, which is the most important contributor to the economy, the exports sector, and the small-scale industries also needed financial guidance to pace up. All these factors were considered before nationalizing. Regional rural banks also came into effect, mainly focusing on the betterment of rural areas. Their aim was to serve the large masses.

Also, institutions like NABARD, SIDBI, EXIM, etc., were set up with a view to fulfilling the requirements of foreign trades, housing and agricultural needs of the country.

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As discussed earlier, liberalization in the policies has led to more private banks coming into effect, and the public banks and their dominance have shifted. Earlier, their share was up to 8%, which now has come down to 66%. But with the emergence of Nationalization, the monopoly has come to an end. There has also been a reduction in the regional imbalance by setting up banks in the rural areas or so. The surplus profit can also be utilized, and public interest protection has been protected. The working conditions have also improved; hence, the overall experience of the Nationalization has benefited India and its economy.

About the Author: Shalu Singh | 18 Post(s)

Shalu Shravan Singh, currently a final year law student, and quite enamoured of writing. A music aficionado that’s also a wanderer and desires to visit more of these places.

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