BANK NATIONALIZATION

Social Control
a) After independence – socialist pattern of society – equitable distribution of
wealth.
b) Achieved by democratic process.
c) Mixed planning evolved – public & private.
d) Pvt. Sector regulated – regulations, licences, controls and legislations.
e) Public sector growth by nationalization.
Banks prior to nationalization
a) Custodians of private savings + provide credit.
b) Complaints – Indian commercial banks giving advances to large & medium
scale industries.
c) Agriculture, small scale & export neglected.
d) Director of banks – industrialist – influenced banks for loans.
e) Social control imposed – B.R. Act amended.
f) Allowed banks to remain private.
g) Brought controls & restrictions.
h) Determine lending priorities.
i) Evolve guidelines for management.
j) Promote re-orientation of decision-making machinery of banks.
Social control measures
• 1967 – social control proposed in Lok Sabha
• Setting up of National Credit Council
• Legislative control (amend BR Act)
NCC (1967) – 25 members –
• Assess demand for credit from diff. Sectors
• Determine loan priorities
• Coordinate lending & investment policies between Commercial & Co-
operative Banks.
Amendment to BR Act
a) Constitute BOD – Directors special knowledge & practical experience in
banking.
b) Management by whole time Chairman having special knowledge.
c) Restriction on loan to its Directors or Co./firm in which Director
substantially interested or investor of whom Director is guarantor.
d) Powers of RBI to enforce & supervise social control.
e) Punishment for:
• Obstructing anyone to enter or leave banks.
• Holding demonstration within bank.
• Act to undermine faith of depositors.
• Special powers to CG to acquire undertakings of Banking Cos. when RBI
reports default.
Nationalization – causes & effect
• Achieve socialist pattern.
• Decentralize credit.
• Liberal banking facilities – agri., SSI, exports, self-employed.
• Banking to rural areas.
• Credit guarantee insurance payable by stronger section to ensure risk
involved in lending to weaker section.
• Public ownership to mobilize & develop national resources.
• Restrictions imposed – capable to being flouted in spirit although observed
in form.
• Financial stake of SHs negligible – deposit Rs. 2750 cr. – PUC Rs. 28.5 cr.
Arguments against nationalization
1) 1.2.1967-19.7.69 – social control to Nat. – period short to judge social
control failed.
2) June 1968 – March 1969 – 20 com. Banks –
• Agri – (30 cr. to 97 cr.)
• SSI – (167 cr. to 222 cr.)
3) Internal control by CG may be harmful.
4) Lack of dynamism may arise.
5) Socialist countries – Norway, Sweden, Finland, Denmark – No Nat. Of
Banks.
6) Quality of services may drop.
Nationalization phases
• 14 banks – 19th July, 1969 – each deposit more than 50 cr. & aggregate
deposit of 2632 cr. with 4130 branches.
• Central Bank, BOI,PNB, BOB, United Com. Bank, Canara, United, Dena,
Syndicate, Union, Allahabad, Indian, Bank of Maharashtra & IOB.
• 6 banks – 15th April, 1980 – demand & time liabilities of not less than
Rs. 200 cr. Each.
• Andhra, Corporation, Oriental Bank of Commerce, New Bank of India,
Punjab & Sind Bank & Vijaya Bank.
• New Bank of India merged with PNB – 1993.

Legal mode of Nationalization & R.C. Cooper case (1970 SC)

1) 19th July, 1969 – VP of India ( acting as President) promulgated B.C.
(Acquisition & Transfer of Undertaking) Ordinance, 1969.
2) 14 banks acquired & transferred – “new corresponding banks”.
3) Ordinance had machinery of management of new banks & compensation
to the SHs of old banks.
4) 21st July, 1969 – petition filed in SC.
5) 9th Aug., 1969 – Act passed – ord. Repealed.
6) Act challenged in SC.
7) 10th Feb. 1970 – 10:1 void in entirety:
a) Prohibition of 14 banking Co. From banking business
discrimination.
b) Carry on other business impossible as stripped off assets. Premises,
staffs & names – restriction unreasonable.
c) Principle of determining compensation illusory & irrelevant.