BANARAS HINDU UNIVERSITY

FACULTY OF LAW

TOPIC: NaTIONalIsaTION Of BaNks IN INdIa

summITed By :-

Name: Manish Kumar Mani

Roll no: 15225BLT060

Enroll no: 391270

Semester: X (5th year)

uNder,

DR. ANURAG AGRAWAL

remarks :-
PREFACE
This assignment is prepared by me as a part of my B.A.LL.B
Xth semester course. This topic is an important part of the
subject. It deals with the important points in simple,
coherent and critical manner.
This Assignment is divided into few parts as introduction,
features and conclusion with proper indication. This project is
prepared under the guidance of my professor. This topic was
provided by him and I am happy and satisfied with the
assignment as it helped me to gain more knowledge.
I am thankful to my teachers and friends who helped me by
their suggestions for the improvement of the assignment.

Manish Kumar Mani

 ACKNOWLEDGEMENTS
The attitude of the people close to me is what made this
assignment successful. I therefore acknowledge their faith,
trust, loyalty and honesty.

Secondly I thank a person who made the assignment into a

success. Your earlier experience and strong scientific
approach and personality contributed greatly to the outcome
of this assignment. My gratitude goes to the professors and
friends for their support, guidance, conversations and
theoretical discussions. Thank to subject professor for their
sincere interest in the topic of research and for allowing me
to drop into your office anytime and allowed me to approach
this research my way and provided me with the necessary
guidance and support. Thank you for your comments and for
your support throughout this assignment. Several friends
have assisted me. I thank those who welcomed me for their
help. Friends and family at home have furthermore
contributed to this assignment.

Manish Kumar Mani

SYNOPSIS
During the colonial era numerous Indian banks were instituted either by
wealthy individuals or by the Presley States. The major aim of most of the
banks was to accommodate financial needs of industry and trade in that
locality. During this time, the banking services became the opportunity of
big business firms & wealthy individuals. Masses were denied banking
services and easy credit.

In India, Nationalization of banks by then Indian Prime Minister, Indira

Gandhi wrote a new chapter in the history of Indian Banking. In India, the
nationalized banks were obligated to focus on agricultural and rural
sectors as a part of their social responsibility. Their resources were used
to authorize farmers & agricultural labour so as to free them from the
clutches of money lenders.

In India, Nationalization of banks was done in 2 phases. The initial phase

of nationalization commenced in the year 1955 when the former Imperial
Bank of India became the State Bank of India with the Act of parliament.
During the year 1959, 7 subsidiaries were nationalized & connected with
SBI one by one. This heralded a new beginning in the banking system of
India.

The second phase of nationalization started in the year 1969 with the
nationalization of 14 main commercial banks in India. In the year 1980,
six more commercial banks were nationalized & became public sector
banks. Subsequently, the Public Sector Undertaking banks prolonged their
reach & grew in leaps & bounds. In India, the nationalized banks
expanded their branches & stretched their activities across the nation.
The Public Sector banks launched new programs and schemes to cater all
sections of the society. Therefore, nationalization of Banks in India helped
the masses to avail banking services at reasonable cost.

Chronology of Nationalization of Banks

• 1955 – SBI nationalized.

• 1959 – Seven subsidiaries nationalized & associated with State Bank of

India

1. State Bank of Bikaner and Jaipur

2. State Bank of Hyderabad
3. State Bank of Indore
4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Saurashtra
7. State Bank of Travancore

• 1969 – Fourteen major commercial Banks nationalized on July 19th,

1969.

1. Allahabad Bank
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Canara Bank
6. Central Bank of India
7. Dena Bank
8. Indian Bank
9. Indian Overseas Bank
10. Punjab National Bank
11. Syndicate Bank
12. UCO Bank
13. Union Bank of India
14. United Bank of India

• 1980 – Six more commercial Banks nationalized.

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce
5. Punjab & Sindh Bank
6. Vijaya Bank

Later on, in the year 1993, the government merged New Bank of India
with Punjab National Bank.
LIST OF CASES
1. All India Bank Officers’ Confederation v. Union of India

2. Life Insurance Corporation v. Escorts Limited

3. Sajjan Bank (P) Ltd. v. Reserve Bank

ABBREVIATIONS

IMF- International Monetary Fund

SLR- Statutory liquidity ratio

CRR- Cash Reserve Ratio

RBI- Reserve Bank of India

MPC- Monetary Policy Committee

RP- Repo rate

RPR- Reverse repo rate

SLR- Statutory Liquidity Ratio

OMOs- Open Market Operations

N.C.C- National Credit Council

AB- Allahabad Bank

BOB- Bank of Baroda
BOI- Bank of India
BOH- Bank of Maharashtra
CBI- Central Bank of India
CB- Canara Bank
DB- Dena Bank
IB- Indian Bank
IOB- Indian Overseas Bank
PNB- Punjab National Bank
SB- Syndicate Bank
UB- UCO Bank
UB- Union Bank
UBI- United Bank of India
WHAT IS NATIONALISATION?

o According to the IMF (International Monetary Fund),

o Nationalisation is a process by which the government takes over
private assets and brings them under public ownership.

NATIONALISATION OF BANKS
o When banks were nationalized, it came directly under Banking
regulation Act 1949.
o RBI later become the regulatory authority for banking in India.
o One of the most crucial evolutions which led to the foundation of
current Banking system in India was the Nationalization of Banks in
1969. Subsequently, in 1980 six more private banks were
nationalized. The Supreme Court in the case of 1All India Bank
Officers’ Confederation v. Union of India[1], remarked that the
object of Banking Companies (Acquisition and Transfer of
Undertakings) Act was to nationalize the banks to render the largest
good to the largest number of people. The object of Section 9 of the
Act which is regarding Central Government’s power to make a
scheme for constitution of Board of Directors, is to give the Board a
truly representative character so as to reflect the genuine interests
of the various persons manning or dealing with the bank as an
industry and a commercial enterprise.
Some of the benefits of nationalization of banks were spreading of branch
network of banks throughout the nation including the rural areas, wide
deployment of credit across the country, increased mobilization of
resources.

SITUATION BEFORE NATIONALISATION

o Before nationalization took place in 1969, only State Bank of
India was a public sector undertaking, having been nationalised in
1955.
o In 1951 there were more than 400 commercial banks who worked
under the private sector.
o More than 360 banks had failed between 1947 and 1955 — the rate
of collapse was 40 banks a year.

1
All India Bank Officers’ Confederation v. Union of India
 o The trend continued through the 1950s and the first half of 1960s.
o This had forced Morarji Desai, the then finance minister, to launch a
massive bank consolidation drive.
o It brought down the number of banks from 328 in 1960 to 68 in
1965.

ECONOMIC RATIONALE BEHIND NATIONALISATION

o Issues related to the reach and flow of credit to important sectors.
o Banks were not giving enough credit to agriculture and industry.
o The banks were more interested in extending credit for trade.
o The collapse of banks was causing distress among people.
o Regional imbalance in banking sector.
o Developing banking habits of the people.

POLITICAL BACKDROP
o Indira Gandhi became the prime minister in 1967 and Morarji Desai
as her finance minister.
o Her political authority was invariably questioned by those who were
colleagues of her father, Jawaharlal Nehru.
o A group of leaders led by K Kamraj and Morarji Desai, known as
the Syndicate, controlled the party and Indira Gandhi was being
forced to toe their line.

o The collapse of banks were causing distress among people, who

were losing their hard-earned money in the absence of a strong
government support and legislative protection to their money.
o Indira Gandhi saw a rare chance to become people’s hero at a time
when she was being challenged within the Congress party .

EVENTS THAT LED TO NATIONALIZATION

o Death of President Zakir Hussain on 3rd May 1969.
o The Syndicate put up Neelam Sanjeeva Reddy as its presidential
candidate.
o Indira Gandhi favoured VV Giri.
o On July 12, Indira Gandhi announced her intention at the
Congress’s Bangalore session to nationalise private banks.
 o As stand-in President VV Giri was to step down on July 20, Indira
Gandhi needed to get bank nationalisation done in next seven days.
o A draft Ordinance was prepared on July 18 and the next day it was
passed by the cabinet at 5 pm.
o President Giri promulgated it and Indira Gandhi addressed
the nation at 8.30 pm.
o Shocker to the business community, but the people were happy.

14 banks were nationalised:

1. Allahabad Bank
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Bank
9. Indian Overseas Bank
10.Punjab National Bank
11.Syndicate Bank
12.UCO Bank
13.Union Bank
14.United Bank of India

o In 1980, the government took control of another 6 banks.

TYPES OF BANKS

Central Banking Services- The Central Bank issues currency and bank
notes, discharges treasury functions of the Government and acts as the
banker’s bank. Reserve Bank of India is the Central Banking Institution in
India.

Commercial Banking Services- It includes services like receiving and

giving of various types of loans and advances. It also performs some non-
banking services like locker facilities, online payments of bills. Such banks
also advise on investment and re-investment, transfer and allotment of
funds.

Specialized Banking Services- Special Banking institutions are

established with the objective to address any specific banking services
like industrial banks to supply industrial long term credit and working
capital, development banks to render financial support to any
developmental activities. This also includes co-operative banks,
established with the object to serve small industries and self-employed
workers.

Non-Banking Financial Services- Many institutions in India have been

establish which disburse non-banking financial services in the country. For
instance, Mutual Funds which accept finances from members and
investing money in both primary as well as capital market. Other Non-
banking financial institutions include insurance companies like LIC, GIC
Bank etc. This also includes Merchant Bankers who are governed by the
Securities Exchange Board of India (Merchant Bankers) Rules 1992.

NARASIMHAM COMMITTEE REPORT

The Narasimham Committee was set up in the 1980’s to recommend changes

in the financial system of the country. The Committee suggested some
elementary changes in the system for de-regulation and liberalization of
banks. Some of the recommendations included raising capital from the
public, allowing entry of new private sector banks, allow foreign banks to
open branches in India, centralized banking system, reducing SLR (statutory
liquidity ratio) and CRR (cash reserve ratio) to prudent levels, making
provision for bad debts and establishing Tribunals for recovery of bad debts.
Several recommendations of the Narasimham Committee have been
incorporated in the present financial and banking system of India.
RESERVE BANK OF INDIA

The Reserve Bank of India was established under the Reserve Bank of
India Act, 1934. One of the essential functions of the RBI was currency
issue, which was earlier performed by the Government of India. Other
functions of the RBI include:

1. Safeguarding financial and economic stability of the country

2. Lender of last resort- RBI is the reservoir of credit and hence
other banking institutions rely on it for aid in situations of crisis.

 Acts as banker to the State and banker’s bank

1. Ensures economic stability and promotes economic development

2. Printing of currency notes and managing mints

 Maintain internal as well as external value of currency

 Monetary Policy- One of the primary functions of RBI includes use
of monetary instruments by the RBI in a manner that it aids in
achievement of the inflation target. To achieve this goal the
Centre has constituted the Monetary Policy Committee (MPC)
which determines the policy interest rates. The various
instruments used by the RBI to regulate monetary policy
includes:
 Repo rate- It is the interest rate at which the RBI provides
overnight liquidity to banks.
 Reverse repo rate- The interest rate at which the RBI absorbs
liquidity on an overnight basis from the banks.
 Bank rate- This is the rate at which the RBI buys or rediscounts bills
of exchange or other commercial papers.
 Cash Reserve Ratio (CRR)- This is the average daily balance that a
bank is required to maintain with the RBI as a share of such percent
of its Net demand and time liabilities.
 Statutory Liquidity Ratio- The share of Net Demand and Time
Liabilities that a bank is required to maintain in safe and liquid
assets.
Open Market Operations (OMOs): These include both, outright purchase
and sale of government securities, for injection and absorption of durable
liquidity, respectively.

 Selective Credit Control– The RBI has been empowered under

Section 21 of the Act to control advances given by the
commercial banks. Under this selective credit control policy, the
RBI can determine the norms relating to advances to be followed
by commercial banks in India.

1. Grant licenses to Banking companies subject to fulfillment of

remove conditions by prospective bank as prescribed in the Act.
2. Remove managerial and other persons from office– The RBI is
also entrusted with the power the remove an office if it is
satisfied that the said banking company is not acting in a desired
manner or conducting activities detrimental to the interests of
depositors. However, while taking such a step the RBI has to also
give reasons for the same.

Foreign exchange management– The statutory power for exchange

control has been provided in the Foreign Exchange Regulation Act, 1973.
This Act empowers the RBI to control and regulate dealings in foreign
exchange payments outside India, export and import of currency notes
and bullion, transfer of securities between residents and non-residents,
acquisition of foreign securities, and acquisition of immovable property in
and outside India, among other transactions. It was observed by the
Supreme Court in the case of Life Insurance Corporation v. Escorts
Limited[2], that RBI is the ‘custodian general’ of foreign exchange.2

Management of RBI:

The functions and operations of the RBI is managed by the Central Board
of Directors. The Board comprises of:

2
Life Insurance Corporation v. Escorts Limited
 1. Governor and not more than four Deputy Governors
2. Four Directors nominated by the Central Government
3. One Government official nominated by the Central Government

The Bank has local boards in Mumbai, Madras, Kolkata and New Delhi.

BANKING REGULATION ACT

The Banking Companies Act, 1949 was changed the Banking Regulation
Act. The Act was passed with the object to consolidate and amend the
Law relating to Banking to provide for extension of social control over
Banks. The Banking Regulation Act was substantially amended in 1968 for
extension of social control of Banks and the steps taken in this direction
were:

 Setting up of National Credit Council (N.C.C.)

 Introducing legislative control on the banks by suitable
amendments to the Banking Regulation Act

Some of the amended provisions which led to extension of social control

over Banks were:

Section 10A- This provision envisages that the Board of Directors shall
include persons with professional and other experience. It provides that
not less than 51% of total number of members of the Board of Directors
of the Banking company shall comprise of persons having special
knowledge or practical experience in respect of agriculture, banking, co-
operation, economics etc.

Additionally section 10B of the Act provides for management of affairs of

a banking company by a whole-time Chairman who has special knowledge
and practical experience in the working of banking companies.

Licensing of Banking Companies- Section 22 of Banking Regulation Act

Section 22 of the Banking Regulation Act entails provisions relating to
licensing of banking companies. It mandates possession of license for
carrying on banking business in India. For grant of license, a banking
company has to lodge a request for the same with the RBI in writing.

Prior to grant of license, the RBI under Section 22(3) of the Banking
Regulation Act is required to be satisfied about the following conditions:

1. The company is or will be in a position to pay its depositors in full

as their claim accrue;
2. The affairs of the company are not being or will not be conducted
in a manner detrimental to its depositors;

 The management of company will not be prejudicial to public

interest of interest of depositors;

1. The company has adequate capital structure and earning

prospects;
2. The grant of license would not be prejudicial to the operation and
consolidation of banking system consistent with monetary
stability and economic growth;

 The carrying on of banking business would not be contrary to

public interests.

License to banking company situated outside India (Section 22(3A))- In

such cases, the RBI apart from the aforesaid requisites as enumerated
under sub-section (3) is also required to determine that the laws of the
country in which the Bank will be incorporated does not discriminate
against Banking companies registered in India.

Cancellation of license- Under Section 22(4) of the Act, the RBI is also
entrusted with the power to cancel the license of company under the
following circumstances:

1. Company ceases to carrying on banking business in India

 2. Company fails to adhere to any of the conditions of license

Prior to cancellation of license, the RBI is required to provide an

opportunity to the banking company to fulfill the requisite conditions.
Cancellation of license does not mean a stoppage also of other business
than banking. The company may carry on money lending business[3].

Appeal against cancellation- The Act provides that a banking company

whose license has been cancelled can appeal against the same with the
Central Government within 30 days from the date on which cancellation
has been ordered by RBI. In such cases, the order of Central Government
is deemed to be final.

In the case of Sajjan Bank (P) Ltd. v. Reserve Bank[3], it has been
held that the provisions of Section 22 of Banking Regulation Act, 1949
prescribes only a system of licensing, having for its object the regulation
of business of banking and does not violate fundamental right of any
person to carry on the business of banking.3

3
Sajjan Bank (P) Ltd. v. Reserve Bank
CONCLUSION
o The political control of bank lending continued even after the 1991
reforms.
o Bad loan mess has weighed down on the Indian economy since
2012.
o 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.
o The 50th anniversary of banks nationalisation is a good opportunity
to objectively review the performance of PSBs and take corrective
measures.
o The government may revisit the Narasimham Committee
recommendation on banking sector reforms.
o Bringing down government equity to 33% will give banks the
muchneeded functional autonomy.
BIBLIOGRAPHY

I. STATUTORY AND REGULATORY REFERENCES

i. Bare Act
1. Banking Regulation Act, 1949

ii. Regulatory Reference

2. Reserve Bank of India, ‘Income recognition, asset classification,
provisioning and other related matters’. DBOD No.BP.BC129/21.04.043-
92, April 27, 1992

3. Reserve Bank ofIndia Guidance Note on Credit Risk Management,

Circular No.DBOD.BP.520/21.04.103/2002-03, dated 12.10.2002

II. BOOKS
1. R.N.CHAUDHARY.: BANKING LAWS, CENTRAL LAW
PUBLICATIONS,2017.

2. DR.R.S.SOLANKI.: BANKING LAWS, SATYAM LAW

INTERNATIONAL,2018.