Causes of nationalisation of commercial bank?

Answer 1

The nationalisation of commercial banks increased the role of public sector banks. Vari­ous authorities have advocated many reasons for the nationalisation of major commercial bank. Let us see their views one by one.

A. The then Prime Minister, Smt. Indira Gandhi

In her broadcast to the nation on the eve of nationalisation of the fourteen leading Indian banks, she summed up the objectives of the nationalisation as, "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. It also includes,

(i) The removal of control by a few

(ii) Provision of adequate credit facilities to agriculture, small industry and exports

(iii) The giving of professional bent to bank management

(iv) The encouragement of new classes of entrepreneurs, and

(v) The provision of adequate training as well as reasonable terms of service for bank staff ".

B. Prof. Sayers

Prof. Sayers supports the nationalisation and gives his views under the following four issues.

1. Efficiency issue:

According to Sayers, nationalisation will increase the efficiency of commercial banks as given below.

(i) Deposits will increase because of increasing confidence in public sector bank. In­crease in bank resources will lead to economics of scale.

(ii) The government can appoint experienced personnel to run and manage the banks.

(iii) Govt, has the countrywide administrative network. Hence, it can make suitable changes in the banking policies according to the prevailing trends in the economy.

(iv) Nationalised banks can have the main motive of public service.

(v) Public sector banks can give preference to priority sectors in advancing loans. Thus, nationalisation promotes efficiency.

2. Monetisation issue:

Commercial banks accumulate deposits from the public. There­fore, they are in a position to bring changes in the supply of money. Such an important power should not be in the private sector. It is the public sector that should have the control over money supply.

3. Integration issue:

Central Banks are established by the Govt, for overall monetary control in the economy and is not aiming at profit. But commercial banks are started mainly to earn profit. Thus, there are contradicting objectives between Central Bank and commer­cial banks.

In this situation, the Central Bank may find it difficult to implement its policies when the commercial banks oppose them. Therefore, in the interest of co-ordination and co­operation between them, commercial banks should be nationalised.

4. Socialisation issue:

When a country aims at socialistic pattern of society, then the rol^ of public sector undertaking should be extended in all spheres of the economy. To start and run the public sector undertaking Govt, requires enormous financial requirements.

Private commercial banks may obstruct such policies and may not finance public sector undertak­ings and above all they may discriminate against them. Therefore, the nationalisation of commercial banks will be necessary if the government wants to establish socialism.

C. Views given by others

1. Preventing concentration of economic power:

Initially, a few leading industrial and "business houses had close association with commercial banks. The directors of these banks happened to be the same industrialists who established monopoly control on the bank fi­nance.

They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.

2. Social control was not adequate:

The 'social control' measures of the government did not work well. Some banks did not follow the regulations given under social control. Thus, the nationalisation was necessitated by the failure of social control.

3. Channel the bank finance to plan - priority sectors:

Banks collect savings from the gen­eral public. If it is in the hand of private sector, the national interests may be neglected, besides, in Five-Year Plans, the government gives priority to some specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks ensures the availability of resources to the plan-priority sectors.

4. Greater mobilisation of deposits:

The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion there is possi­bility to mobilise rural savings.

5. Help to agriculture:

If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population de­pends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalised.

6. Balanced Regional development:

In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to pro­vide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.

7. Greater control by the Reserve Bank:

In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about co-ordinated credit control. This necessitated the nationalisation of banks.

8. Small stake of shareholders:

The nationalised banks had deposits totalling Rs. 2742 crore at the end of December 1968. But the capital contributed by their shareholders was only Rs. 28.5 crore, which was just 1% of deposits. Even if we include the reserves, the amount comes to only 2.4% of the banks deposits with such a small and insignificant stake, it is unjustifiable to allow the private shareholders to exercise control over such vital credit machinery with large resources.

9. Greater Stability of banking structure:

Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalised banks will impart greater stability for the banking structure.

10. March Forward towards Socialism:

India aims at socialism. This requires the financial institutions to run under the government's control and only through nationalisation, this objective can be effectively achieved.

11. Better service conditions to staff:

Nationalisation ensures the staff of banks to enjoy greater job security and higher emoluments. It can provide other benefits as well. In this way the banks can motivate their staff and thereby the operational efficiency of banks will be increased.

12. New schemes:

Through nationalised banks, new schemes like village adoption scheme, Lead Bank Scheme can be formulated and implemented. Besides, different types of financial facilities can be extended to persons like Doctors, Engineers, Self-employed persons like artisans etc.

Nationalisation of banks creates great interest among various sections of the public. Many hopes were raised in the middle class and poor people with regard to the financial assistance. The nationalised banks drew up a number of schemes to assist new types of customers and are plans to make each of these banks to adopt a few select districts and concentrate on their intensive development.