Tuesday Trivia

History of bank nationalisation in india

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 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 etc.

The government then introduces and passes legislation or ordinance 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 Jan 1st, 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).

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, 19th 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.  There are many banks that 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 ‘Reserve 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. And 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, 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.