Impact of nationalisation of banks in india
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After Independence India adopted a socialist pattern of economy as its goal. The aim was to achieve a society with wealth distributed as equitably as possibly but ensuring that the government does not acquire a totalitarian role.
The Government of India wished to play an active role in the economic life of the nation and with this the government adopted a mixed economy. The two sectors, private and public were allowed to function independently of each other. The private sector was regulated through a system of checks and balances such as regulations, licenses controls and legislations. The public sector was allowed to grow through setting up of institutions and industries and nationalization of some belonging to private sector who failed to achieve the desired result of growth of the economy. [1]
Nationalization of Banks
Considering this basic objective in mind the government decided to nationalize the banks in an attempt to monitor and exercise some control over the banking sector. The motives for nationalization are both political and economic. It is the process whereby the means of production, distribution and exchange are owned by the state on behalf of the people or working class to allow rational allocation of output, consolidation of resources, rational planning or control of the economy. This enables the government to exercise full democratic control over the means thereby ensuring effective means of distribution of output to benefit the public at large. [2]
The nationalization of banks in India was primarily done for two reasons. First, the partition of India in 1947 adversely affected the banking activities especially in Punjab and West Bengal. [3] The laissez faire regime was brought to an end and the government started to play an active role in the reconstruction of the economy especially banking and finance. Secondly, the government believed that the ownership of the Bank by the sovereign will give new confidence to the customers and that it would dispel the suspicions existing in the minds of the people with regards to the capabilities of the bankers in the private sector. [4]
In the year 1948, the Reserve Bank of India, Indias central banking authority was nationalized and it became an institution owned by the government of India. In a further attempt to control the banking activities the government enacted the Banking Regulation Act, which authorized the RBI to regulate, control and inspect the banks in India. The act provided that no bank could be opened without the sanction of RBI and that no two banks can have the same directors. [5]
Then in the year 1955, the government took another major step and nationalized the Imperial bank of India and its undertaking was taken over by State Bank of India.
However, the scheduled banks were accused of directing their advances to the large and medium scale industries and big business houses and the sectors such as agriculture, small scale industries and exports were not receiving their due share. Keeping this mind in February 1966, a scheme of Social Control was setup whose main function was to regularly assess the demand for credit from various sectors of the economy, to determine the needs of the economy and prioritize grant of loans and advances to ensure optimal allocation of resources. The main feature of this scheme was the establishment of a National credit council headed by the Finance Minister and representatives of agricultural sector, trade, industry, banks and professional groups as the members. [6]
This scheme was challenged by the banking industry representatives who argued that social control was not necessary since the RBI had already been vested with effective and extensive powers over almost every aspect of banking. [7]
The Government of India wished to play an active role in the economic life of the nation and with this the government adopted a mixed economy. The two sectors, private and public were allowed to function independently of each other. The private sector was regulated through a system of checks and balances such as regulations, licenses controls and legislations. The public sector was allowed to grow through setting up of institutions and industries and nationalization of some belonging to private sector who failed to achieve the desired result of growth of the economy. [1]
Nationalization of Banks
Considering this basic objective in mind the government decided to nationalize the banks in an attempt to monitor and exercise some control over the banking sector. The motives for nationalization are both political and economic. It is the process whereby the means of production, distribution and exchange are owned by the state on behalf of the people or working class to allow rational allocation of output, consolidation of resources, rational planning or control of the economy. This enables the government to exercise full democratic control over the means thereby ensuring effective means of distribution of output to benefit the public at large. [2]
The nationalization of banks in India was primarily done for two reasons. First, the partition of India in 1947 adversely affected the banking activities especially in Punjab and West Bengal. [3] The laissez faire regime was brought to an end and the government started to play an active role in the reconstruction of the economy especially banking and finance. Secondly, the government believed that the ownership of the Bank by the sovereign will give new confidence to the customers and that it would dispel the suspicions existing in the minds of the people with regards to the capabilities of the bankers in the private sector. [4]
In the year 1948, the Reserve Bank of India, Indias central banking authority was nationalized and it became an institution owned by the government of India. In a further attempt to control the banking activities the government enacted the Banking Regulation Act, which authorized the RBI to regulate, control and inspect the banks in India. The act provided that no bank could be opened without the sanction of RBI and that no two banks can have the same directors. [5]
Then in the year 1955, the government took another major step and nationalized the Imperial bank of India and its undertaking was taken over by State Bank of India.
However, the scheduled banks were accused of directing their advances to the large and medium scale industries and big business houses and the sectors such as agriculture, small scale industries and exports were not receiving their due share. Keeping this mind in February 1966, a scheme of Social Control was setup whose main function was to regularly assess the demand for credit from various sectors of the economy, to determine the needs of the economy and prioritize grant of loans and advances to ensure optimal allocation of resources. The main feature of this scheme was the establishment of a National credit council headed by the Finance Minister and representatives of agricultural sector, trade, industry, banks and professional groups as the members. [6]
This scheme was challenged by the banking industry representatives who argued that social control was not necessary since the RBI had already been vested with effective and extensive powers over almost every aspect of banking. [7]
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