SOCIAL CONTROL
ON BANKING
SYSTEM
NATIONALIZATION OF BANKS IN INDIA
ANU SOLANKI KAMBLE
BACKGROUND
At the time of independence, the private sector banks were
predominantly urban–oriented and under the control of a few
industrialists which had not helped in achieving the basic socio–
economic objectives. The credit needs of agriculture, small–scale
industries and also weaker sections such as small traders and artisans
continued to be ignored.
After independence the government of India(GOI) adopted planned
economic development for the Country. Accordingly Five Year plans
came into existence since 1951. The GOI had some social objectives of
planning.
In 1950-51 there were 430 Commercial Banks. These commercial Banks
failed helping the Government in attaining these objectives. These
Banks were controlled by business houses, failed to cater need of
cottage industry, poor people etc.
Thus, the Government decided to Nationalize 14 major BANKS with a
deposit base over Rs.50 crores were Nationalized.
MEANING
Nationalization is a process by which the government takes over
private assets and brings them under public ownership.
It is the opposite of privatization.
In the context of banks, it means that banks which were earlier in
private sector were transferred to the public sector by the act of
nationalization.
The Reserve Bank was also not completely State owned until it was
nationalized in terms of the Reserve Bank of India (transfer to Public
Ownership) Act, 1948.
OBJECTIVES
The specific objectives which the nationalized 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.
A. Social Welfare: Sector such as agriculture, small and village industries were in
need of funds for their expansion and further economic development.
B. Controlling Private Monopolies: Prior to nationalization 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.
C. Expansion of Banking: In a large country like India the numbers of banks existing
those days were certainly inadequate. It was necessary to spread banking facilities
to unbanked village areas across the country.
OBJECTIVES
D. Reducing Regional Imbalance: In a country like India where we
have urban-rural divide; it was necessary for banks to go in the rural
areas where the banking facilities were not available.
E. Priority Sector Lending: In India, the agriculture sector and its allied
activities were the largest contributor to the national income. So, these
were treated as the priority sectors. But unfortunately they were
deprived of their due share in the credit.
F. Developing Banking Habits: In India more than 70% population used
to stay in rural areas. It was necessary to develop the banking habit
among such a large population.
Objective u/Act
According to the Banking Companies (Acquisition and Transfer of
undertaking) Act 1970, the aim of Nationalization 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.”
In All India Bank Officers Confederation v. Union of India (A.I.R. 1989
S.C. 2045, SC observed –
“The objects of the Banking Companies (Acquisition and Transfer
of undertaking) Act was to nationalize the banks to render the
largest good to the largest number of people.”
INDIRA GANDHI’S OBJECTIVES
Removal of control on banking business by a few industrialists.
Elimination of the use of bank credit for speculative and
unproductive purposes.
Expansion of credit to priority areas which were grossly neglected
like agriculture and small scale industries.
Giving a professional bent to the bank management
Encouragement of new entrepreneurs
Provision of adequate training to bank staff
BEGINNING OF THE PROCESS
The Reserve Bank of India was the first nationalized bank which happened in
January 1949 under the provisions of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948.
Nationalization of Imperial Bank of India and its conversion into State Bank of
India in July,1955.
Conversion of 8 major states associates banks into subsidiary banks in 1959.
After few years, the President through the Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance, 1969 had nationalized 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.
Nationalization of 6 more banks in April,1980.
BANK NATIONALISATION PHASE I
14 banks were nationalized thereunder-
1. Central Bank of India
2. Bank of Maharashtra
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. UCO Bank
14. Bank of India
BANK NATIONALISATION PHASE II
The second major phase of nationalization occurred in 1980, when govt
of India acquired the ownership of 6 more banks, thus bringing the total
number of nationalized banks to 2014.
These 6 banks were:
1. Punjab and Sind Bank
2. Vijaya Bank
3. Oriental Bank of Commerce
4. Corporation Bank
5. Andhra Bank
6. New Bank of India.
Later, the New Bank of India was merged in Punjab National Bank
which had already nationalized on 19th July, 1969.
CONSEQUENCES
Branch expansion- Financial savings rose as lenders opened new
branches in areas that were unbanked like rural areas. This also
reduced regional disparities.
Deposit growth - Gross domestic savings almost doubled as a
percentage of national income in the 1970s.
Improving efficiency - Due to the nationalization of banks, the
efficiency of the banking system in India improved. This also boosted
the confidence of the public in banks.
Priority sector lending - The sectors that were lagging behind like
small-scale industries and Agriculture got a boost.
Credit expansion - led to an increase in funds and thus increase in
the economic growth of India.
CONSEQUENCES
Specialized banks - for rural people, 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.
Grievance redressal mechanism - The system of personal hearing of the
grievances of customers has been introduced at appropriate levels to
serve the customer better.
Introduction of beneficial schemes – like Courier services have been
introduced to expedite collection of outstation credit instruments.
Customer service centers have been set up in all major cities. Customer
relations programs are organized periodically.
REASONS FOR FAILURE
Extending loans to agriculture and small scale Industries was risky and
less profitable.
No additional securities were provided to depositors through
nationalization of bank.
Political interference was disturbing the smooth working of nationalize
banks.
It also promotes inter-state rivalries and policies would raise their ugly
heads, damaging the sound banking system.
Nationalization involved huge amount of money to be paid as
compensation to the shareholders.
Many public sector banks badly suffered due to the political
interference. It was seen in arranging loan meals. It ultimately resulted in
huge nonperforming assets of these banks and inefficiency.
BANK NATIONALISATION CASE
R.C. COOPER VS. UNION OF INDIA AIR 1970 SC 564
BACKGROUND
The first Prime Minister of India, that is, Pandit Jawaharlal Nehru,
believed in socialism to be the best model of development suited
for the country to progress. In fact, the type of socialism in which he
believed was termed as Fabian Socialism. This meant that for the
better progress of the nation, its citizens’ good and development, it
was necessary to exercise State control over certain industries,
which were considered to be important.
Post-Independence, many sectors which were instrumental in the
development of the State were nationalized. For example, the
transport undertakings, insurance sector and the electricity was
completely provided a monopoly of the State! The oil and refineries
sector was nationalized a bit later in the 1960s, though.
BACKGROUND
In the year 1955, the Imperial Bank of India, was nationalized under
the State Bank of India Act and 7 of its subsidiaries too were taken
over the by the Government. So, we may see from this point that
partial nationalization of the banking sector had already started.
The role of the Reserve Bank of India too, is very noteworthy in this
process of nationalization. The Reserve Bank gradually decreased
the number of commercial banking institutions in India from 566, as
in 1951, to merely 89 by the end of 1969.
FACTS
Acting President of India, Justice M. Hidyatullah, issued an
Ordinance just two days before the monsoon session of the
Parliament was going to start, called the “Banking Companies
(Acquisition and Transfer of Property) Ordinance of 1969”.
After the news of the promulgation of the Ordinance reached Mr.
Cooper, who was not only the then Director of the Central Bank of
India Ltd., but also held shares in Central Bank of India, Bank of
Baroda Ltd. and Bank of India Ltd., he filed a Writ petition under
Article 32 of the Constitution of India, stating that his Fundamental
Rights had been violated by the promulgation of the said
Ordinance.
ISSUES
1. Whether a shareholder could file a Writ petition for the violation of
his Fundamental Rights, when the company in which he is a
shareholder is acquired by the Government?
2. Whether the Ordinance in question had been properly made or
not?
3. Whether the Act was within the jurisdiction of the Parliament to get
formulated or not?
4. Whether the impugned Act was violative of Article 19(1)(g) and
Article 31(2) of the Constitution of India or not?
5. Whether the method of ascertaining the compensation was valid or
not?
ARGUMENTS BY PETITIONER
1. Petition was filed by Mr. Cooper in his individual capacity as a citizen of India and
not as a representative of his company. Since a company is not a citizen within the
ambit of the Indian Citizenship Act, 1955, so, it can’t claim any Fundamental Right
under the Constitution, of which Mr. Cooper was eligible by virtue of being a citizen.
2. the Ordinance was promulgated just two days before the monsoon session of the
Parliament, so there was no necessity to promulgate the same.
3. Central Government was entitled to make laws on ‘banking’ only as defined under
Section 5 (b) of the Banking Regulation Act of 1949, as Entry 45 of the Union List
empowered it to do so. Moreover, it was argued that by virtue of Entry 42 of the
Concurrent List, the Legislature was empowered only to make laws in order to
effectuate Entry 45 in the Union List.
4. Ordinance violated freedom of business, trade and profession along with right to
Property that was a Fundamental Right then.
5. Compensation provision was ‘draconian’ and extremely irrational and illogical. The
compensation, which would not be paid in cash, but, in Government securities,
which in turn were payable after 10 years, was completely biased in its approach,
with an aim to harass the public and also, to give an undue benefit to the
Government.
ARGUMENTS BY RESPONDENT
1. petition was not maintainable, as the same was being filed to claim the Rights
in the name of a company, which, as we have seen, does not fall under the
definition of a citizen as per the Indian Citizenship Act, 1955.
2. The power of the President to promulgate the Ordinance was
completely subjective in nature, as the words ‘if he felt’ were used and also,
he was not answerable to anyone for the reason of his actions done during his
term of office.
3. there was an obligation upon the Government to achieve a socialistic society,
with principles of egalitarianism and where no inequality existed. Considering
this definition, the argument was that the Court should interpret the term
‘banking’ in the widest possible way, so as to include all the activities that
could be included by the respondent.
4. mutual exclusivity of the Fundamental Rights from one another, as held in the
case of A. K. Gopalan Vs. State of Madras and stated that the Act was not
violative of Article 19 (1) (g), as it fell within the ambit of Article 31 of the
Constitution.
DECISION
By 10:1, Court held the said Act to be constitutional as Parliament
had the power to make this law and it did not violate Art. 19(1)(g).
The compensation provision
RATIO DECIDENDI
Just because a Legislative action was also violating the Rights of the
company didn’t mean that the Court was not having the jurisdiction to
protect the Rights of the shareholder of the company as well.
The Court also struck down the ‘Object’ test and laid down the ‘Effect’
test. The Effect test would now look into the Effect of any particular
legislative Act, rather than looking at the objective with which it had
been formulated.
since the Ordinance had already been converted into an Act, so it was
unnecessary for the Court to discuss the same.
the term property included all the Rights, liabilities, assets, etc., which
were associated with the property. The power of the Parliament to
acquire any banking company was an independent power of the
Parliament and it required no separate Legislation to be enacted first
under List II and List III.
RATIO DECIDENDI
Act to be clearly violative of the Article 31, as Article 31 talked about
compensation for the acquired property. Now, the term
‘compensation’ meant complete indemnification to the person, whose
property was being acquired. Since it was frankly clear from the
objectives of the Act that equal indemnification was not going to be
provided and also, after applying the test of severability, as the Act was
not independent enough to stand alone without the part in question, so
it was liable to be struck down.
The Act was not violative of Article 19(1)(g), as the State had the
complete Right to partially or completely monopolize any business that
it felt to.
However, the Act was in clear violation of Article 14 as it barred the 14
banks carrying out banking activities within the country, however, other
banks, including the foreign banks, had not been stopped from doing
so.
AFTER-EFFECTS OF THE JUDGMENT
Parliament, in order to strengthen its position, made the
25th Constitutional (Amendment) Act, 1971 in which the following points
were noted-
1. The word ‘compensation’ in Article 31(2) was replaced by the word
‘amount’. This meant that the Government was now not liable to pay
an ‘adequate’ amount to the person whose property was being
acquisitioned as earlier.
2. Article 19(1)(g) was clearly detached from Article 31(2).
3. Article 31C, a new provision was added to the Constitution to remove
all difficulties that-
4. Articles 14, 19 and 31 are not to be applied to any law enacted under
the fulfilment of objectives laid down under Articles 39(b) and 39(c).
5. Any law to give effect to Articles 39(b) & 39(c) will be immunized from
Court’s intervention.
