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A Brief History of Nationalization of Banks

IndianMoney.com Research Team | Updated On Friday, September 13,2019, 05:25 PM

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A Brief History of Nationalization of Banks

 

 

In one of her broadcasts to the nation, the then Prime Minister Mrs Indira Gandhi announced the objective of her government to nationalize banks. The paper named “stray thoughts on bank nationalization” was presented in the annual conference of All India Congress Meeting that catalysed the nationalization of commercial banks. This was a brave decision by the former prime minister to end the monopoly of the private banks and establish a strong and efficient banking system in the country.

She said “The present decision to nationalise major banks is to accelerate the achievements of our objectives.The purpose is to expand bank credit to priority areas which have hitherto been somewhat neglected.”

According to many economists, the nationalization of banks is an important economic resolution carried outby the government after 1947.

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Why Were the Private Banks Nationalized?

Prior to the nationalization, private banks were controlled and managed by private owners. The government decided to end the private monopoly through the nationalization of banks and bring these financial institutions under government control.

The decision of nationalisation was purely taken in national interest. It was a step necessary to benefit the Indian economy and its people. Private banks were class-based and were benefitting only a small group of people. This leads to the concentration of power in hands of few people and if the necessary steps were not taken the economic disparity would become more prominent.

 With the nationalization of the banks, the credit scenario in the country changed. Now the government can extend affordable credit to all types of borrowers. The banking business would contribute to economic development. The disparity between the rural and urban areas can be reduced by exposing people to better banking facilities. The nationalized banks would help the government to finance the growing financial requirements of the country.

See Also: Major Problems Faced by India’s Nationalized Banks

What Factors Led to the Nationalization of Banks?

To bring the banks under the sovereign authority the government passed a comprehensive act called the Banking Companies Act in 1970. Thisactsealed the fate of the banks and the takeover became absolute. But why were the banks nationalized? Take a look at the reasons for the nationalization of the banks.

  • To Propel Economic Development by Controlling Resources: nationalization of commercial banks would enable the government to have authority over huge resources. It can loan money to large scale industries and business houses. It can also divert funds across priority sectors to change the existing conditions of the economy.
  • To Meet the Credit of the Priority Sector: the private sector banks were more focussed on making profits and thus were loaning money to big industries and the upper strata of the society. Banking before nationalization was out-of-reach of the people engaged in agriculture or small businesses. With the nationalization of commercial banks, the priority sector like agriculture and the allied industries like cottage industries, export-oriented industries, small scale businesses and employment-intensive industries can borrow money from the banks.
  • To Encourage Balanced Regional Development:a large part of the country remained backward due to the lack of credit facilities. The disparity between the rich and the poor was on the rise and the nationalization of the banks was important to explore the business potential and profit opportunities across the nation. Nationalization would allow the government to achieve inter-regional development and remove class disparity.
  • Greater Control of the Reserve Bank: Indian government needed strong policies and a central body to supervise and control the functioning of the banking system in India. Thus the RBI was appointed as the central body that would exercise strict control over bank credit, bank policies and it’s functioning.
  • To Bring About Greater Stability in the Banking Structure: the government wanted to implement stability in the banking system by implementing uniform lending policies for all. This step was important to safeguard the interest of the borrowers. The planned development of the nationalized banks will bring about greater stability in the banking structure and thus lead to economic growth.
  • Prevention of Money Lenders and Exploitation of the Poor:poor banking facilities lead a large section of people being exploited by the private moneylenders. This could be controlled if banks extended credit at an affordable interest rate. The banks can convert the deposits into loans and help people avail cash as well as tax exemption on loans. The role of private lenders can thus be reduced.
  • Creation of Employment: with the extension of branches to smaller cities and towns the government can create more employment opportunities. With government jobs, the employees can enjoy greater job security and employment benefits.

See Also: Banking System in India: What You Need to Know?

Other Reasons for the Nationalization of Banks:

  • India’s unstable financial situation due to wars with China and Pakistan put pressure on the public finances
  • Two successive droughts resulted in food shortage in the country. India was also facing a compromise in national security due to food imports from America.
  • The green revolution was initiated in the country and the agricultural sector needed affordable credit.
  • Due to financial troubles, the economic growth of the country stagnated between the years 1960 to 1970.

What Were the Benefits of Nationalization of Banks?

Nationalization of banks has helped the government end the private monopoly over the banking sector. Some of the main benefits of nationalization of commercial banks are as follows:

  • It is argued that the nationalization of the banks has lead to the abolition of power from the hands of a few monopolists. This has enabled the government to work towards the welfare of people and economic prosperity.
  • With the nationalisation, the government has control over a large amount of funds. Now it can work towards modernisations of industry, transport, public services and the welfare of the nation.
  • The nationalization of the banks implemented public faith in the banking system. With a stable banking system, the banks can earn large revenue and make maximum utilization of resources as well as fund all types of industries and sector.
  • The bank branches were no longer confined to urban centres. It expended to un-banked areas like villages and remote areas thus reducing the regional imbalance. This encouraged a large population to nurture banking habits. Consequently, it helped bring about rapid change financial services offered by the banks and strengthen the economy.
  • India’s adoption of socialist measures allowed the government to promote green revolution and assist in the growth of the agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas.

See Also: All You Need To Know About The Public Sector Banks In India

Was the Nationalization of Banks a Right Move?

On July 1969, India nationalized 14 private banks. This was a defining economic event that bought about social, political and financial reformation in the country. The banks were regulated by the central body RBI thus enabling the banks to make profits as well as extend easy credit at affordable interest rates. It leads to the establishment of a unique loan structure meant to benefit different section of people and different industries. Banking has become more viable than before. The increase of bank branches enabled better banking facilities throughout the country.

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