Nationalization of Bank, Social Control and Legal Perspective

Article authored by Praseedha Pradeep, law student from Government Law College Ernakulam Kerala

Introduction

In the year 2019, our Nation marked its successful completion of 50 years of Nationalization of Banks. In the year 1969, the then Prime Minister and Finance Minister Indira Gandhi decided to nationalize fourteen private banks in the country. The Nationalization of a bank means the undertaking of the private banking sector by the Government of India. The Central Bank of India was the 1st bank to be nationalized after the Independence of India.

Social Control

Where both the ownership and control of commercial banks rest in the Government’s hands in Nationalization, Social Control does not involve the transfer of ownership of the banks to India’s Government. In Social Control, the bankers only face restricted freedom in regulating the banking sector, whereas the Government may more effectively distribute credit for social welfare. Before the Nationalization of banks in 1969, a social scheme to regulate credit was implemented to eradicate the neglect in considering the credit needs of agriculture, weaker sectors and small-scale industries. The major objectives were:-

  • Reducing the control of the managing committee members since they acted as the representatives of the industrialists.
  • Guiding the enormous volume of credit flow to the priority sector
  • The wider spread of credit among the weaker sectors

But despite the efforts taken, the scheme had no remarkable impact; the situation remained the same. The majority of banks neglected the implication of the said scheme, and the policies were regulated by those who had prior control. The Government believes that the social control scheme alone will not be enough, considered Nationalization as an alternative scheme.

Objectives of Nationalization

  • Removal of control on commercial banks by industrialists
  • Exclusion of use of bank credit for unproductive uses
  • Development of credit to the sectors which were neglected before (Weaker sectors, small-scale sectors and agricultural sectors)
  • Moulding it into a better professional stream
  • Better training amongst banking personnel 
  • Better Regional balance
  • Enhancing banking habits

The 1st Fourteen Nationalized Banks

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

Advantages of Nationalization

  • Development of Specialized banks
  • Betterment in Efficiency
  • Utilization of bank profits in the national interest
  • Exclusion of interbank competition
  • Assistance to savings
  • Prevention of Trade Cycles
  • Socialistic patterns of society

Disadvantages of Nationalization

  • Lack of implementation of promised services
  • Lack of experienced employees
  • Lack of financial secrecy
  • Conflicting effects on the development of the private sector

Achievements in Nationalization

  1. Enlargement of branches of banks
  2. Enabled District Survey
  3. The opportunity of loans to sick industrial undertakings
  4. Financial assistance to neglected sectors
  5. Better Job opportunities for the unemployed

Drawbacks

  • Neglections in priority sectors
  • A decline in the services of the banks
  • Failure to gather funds
  • Failure to provide needful staff and services

Despite all the drawbacks it faced, there was an active flow of funds to the agricultural sector.

Legal Perspective

Banking Companies Ordinance, 1969: – The Indira Gandhi Govt. through the BCO(Acquisition and Transfer of Undertakings) nationalized the 14 banks in 1969.

 Some of the essential legal framework regulating the banking companies are:- 

  1. The Banking Regulations Act, 1949
  2. Reserve Bank of India, 1934
  3. Information and Technology Act, 2000
  4. Indian Evidence Act, 1872
  5. Negotiable Instruments Act, 1881
  6. Foreign Exchange Management Act, 1999
  7. Indian Contract Act, 1872
  8. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002

Some of the issues in Indian Banking System

Though the Banks are providing virtual and user-friendly E-Banking Systems in India, yet it is facing and suffering from some major loopholes which are likely causing harm and detriment to the privacy and security of the customers at large, some of such major issues are:

  • Legal Issues
  • Security Risks
  • Privacy Risks

Banking System is an essential part of our Life in the modern age, but with the incline drift and sphere of E-Banking in India, Cyber and Bank frauds are also increasing with the same gravity. There is a rising demand that our present Government must give this issue acute heed and secure more firm enforcement of cyber laws regarding curbing the same.

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