CHANAKYA NATIONAL LAW UNIVERSITY

PROJECT REPORT OF VIIIth SEMESTER, APRIL 2018

LAW OF BANKING

NATIONALISATION OF BANKS

Submitted By:

MANISHA SINGH
Roll no. 1136
4TH Year, 8 Semester, B.A. LL.B. (Hons.)
th

Submitted to:
DR. AJAY KUMAR
Faculty of LAW OF BANKING
 ACKNOWLEDGEMENT

I am very thankful to everyone who has supported me, for I have completed my project
effectively and moreover on time. I am equally grateful to Dr. Ajay Kumar. He gave me moral
support and guided me in different matters regarding this topic. He has been very kind and
patient while suggesting me the outlines of this project and correcting my doubts I thank him
for his overall support.

Last but not the least, I would like to thank everyone who helped me in gathering different
information, collecting data and guiding me. I also thank my friends who were there with their
suggestions and comments for my project.

MANISHA SINGH

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 RESEARCH METHODOLOGY

Method of Research

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the library at the Chanakya National Law University and also the internet
sources.

Objective:

To know about nationalisation of banks and its impact

Hypothesis:

For attending the objective of economic development for the country, government decided to
nationalise banks in which the commercial banks failed in helping government to attain such
objective.

Sources of Data

The following secondary sources of data have been used in the project-

1. Books
2. Websites

Method of Writing

The method of writing followed in the course of this research paper is primarily analytical and
doctrinal.

Mode of Citation:

The researcher has followed a uniform mode of citation throughout the course of this research
paper.

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT.…………………………………………………………..2

INTRODUCTION.……………………………………………………...………..….5

SCHEME OF PRESENTATION

1. NATIONALISATION OF BANKS: AN INTRODUCTION.................................6

2. REASONS BEHIND NATIONALISATION………………………...………..…12

3. IMPACT OF NATIONALISATION......................................................................15

4. CASE STUDY…………………………………………………………….……...19

5. CONCLUSION ………………………………………...……………………..….21

BIBLIOGRAPHY………………………………………………………………..….23

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 INTRODUCTION

Indian Banking history can be traced to 19th century. During the colonial era many Indian
banks were founded either by the Presley States or by wealthy individuals. The primary aim of
most of the banks was to cater financial needs of trade and industry in that locality. During this
period the banking services became the privilege of big business firms and wealthy individuals.
Masses were denied easy credit and banking services. Agriculture and rural small scale
industries did not have access to credit facilities and banking services. They depended on
village money lenders and other private financiers to fund their activities. These local financial
prodders exploited the rural population by charging enormous interest rates and harsh
repayment conditions.

Nationalization of banks in India by then Indian Prime Minister Indira Gandhi wrote a new
chapter in Indian Banking history. The nationalized banks in India were compelled to focus on
rural and agricultural sectors as a part of their social responsibility. Their resources were
utilized to empower farmers and agricultural labourers in order to free them from the clutches
of money lenders.

Nationalization of banks in India was done in two phases. The first phase of nationalization
started in 1955 when the erstwhile Imperial Bank of India became State Bank of India with an
Act of parliament. During 1959, seven subsidiaries were nationalized and associated with State
Bank of India one by one. This heralded a new beginning in Indian banking system. The State
Bank group became the largest bank in India serving 90 million customers with a network of
over 9000 branches in nook and corners of the country.

The second phase of nationalization started in 1969 with the nationalization of 14 major
commercial banks in India. In 1980, 6 more commercial banks were nationalized and became
public sector banks. After this period the Public Sector Undertaking banks expanded their reach
and grew in leaps and bounds.

The nationalized banks in India expanded their branches and spread their activities across the
country. The PSU banks introduced new schemes and programs to cater all sections of the
society. Thus the nationalization of Banks in India helped the masses to avail banking services
at affordable cost.

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 CHAPTER- 1

NATIONALISATION OF BANKS: AN INTRODUCTION

Introduction:

Nationalization is a process whereby a national government or State takes over the private
industry, organisation or assets into public ownership by an Act or ordinance or some other
kind of orders. This strategy has been frequently adopted by socialist governments for
transition from capitalism to socialism.

The banking sector in India has been facing extreme changes with the economic growth of the
country. In 1948, RBI (Transfer of public ownership) Act was passed to nationalise the Reserve
Bank.1

Nationalisation: Historical Context

The banks are the custodians of savings and powerful institutions to provide credit. They
mobilize the resources from all the sections of community by way of deposits and provide them
to industries and others by way of granting loans.

Soon after Independence, the demand for nationalization of banks in India was raised by some
leading members of the Congress party, the socialist and communist parties. The
nationalization of the Reserve Bank in 1949 was the first step in this movement. Another
important event was the passing of the Banking Regulation Act in 1949. This Act gave
extensive controlling powers to the Reserve Bank and the Government over the joint stock
banks.

After some time, the question of nationalization of the Imperial Bank of India was raised.
British officers were changed in the management of this bank. Initially, due to its lack of
preparedness, the Government denied the need for nationalization of this bank. However, in
July 1, 1955 on the recommendation of the Rural Credit Survey Committee, the Imperial Bank
of India was renamed as the State Bank of India as per SBI Act 1954 and the State Bank Group
was established in 1960 as per State Bank of India (Associate Banks) Act 1959.2

1 P.N. Varshney, Banking Law and Practice, (Sultan Chand and Sons, 23rd Edition, 2009)
2 N V Srinivasan, M L Tannan Banking Law and Practice in India, (Lexis Nexis, 25th Edition, 2015)

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It was observed that the growth of Indian commercial banking was too slow and deficient in
many respects. Commercial banks were mainly managed by big business houses. So
concentration of wealth and economic powers was in the hands of a few industrialists and
monopoly business in banking system was created. Bank directors were related to big business
houses. They utilized banks' resources by granting of loans to the companies in which they had
interests. Thus, the resources of banks were misused.

The lending policy of the commercial banks was highly discriminatory. They did not grant
credit for the interest of the nation or for the development of the priority sectors. Their major
advances were distributed among large and medium-scale industries and big and established
business firms. They did not give attention to the requirements of priority sectors like
agriculture, small-scale industries, exports etc. Bank finance was also supplied to some
antisocial or undesirable activities like hoarding, black-marketing, speculation etc.

To overcome these deficiencies radical changes were needed in the structure and functioning
of commercial banks. In this respect, a new banking policy was initiated by the Congress
Government in 1967, described as the 'social control of banks'. The concept of 'social control'
was in fact, introduced by the AICC Resolution on the eve of the Fourth General Elections.
'Social Control' of banks was deemed to be a midway between complete social ownership, i.e.
nationalization and maintenance of the status quo. According to the AICC Resolution, social
control means greater participation of banks under the effective guidance of the State in the
mobilization of deposits and allocation of credits to the socially desirable sectors of the
economy, which would ensure enlarged material benefits to the nation at large.

The scheme of social control of banks, was introduced by the Government on December 14,
1967, when the then Finance Minister Morarji Desai made a statement in the Lok Sabha while
explaining its objectives, main features and the mode of functioning. In this statement, Mr.
Desai categorically stated that there was no need for nationalizing banks at that time and social
control measures alone would effectively serve the purpose.3

He explained that the aim of social control was "to regulate our social and economic life so as
to attain the optimum growth rate for our economy and to prevent at the same time monopolistic
trend, concentration of economic power and misdirection of resources".

3 An Analysis of the Impact of Nationalisation on the functioning of the Commercial Banks (accessed April 11th, 2018);
available from http://www.iracst.org

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Government took several steps to exercise social control over banks to make banking more
purposeful, more dynamic and more helpful to the common man. These steps are discussed as
follows:

A) A National Credit Council (N.C.C) at an all-India level was established in December 1967.
It was basically designed as an instrument of credit planning. The National Credit Council
consisted of representatives from large, medium and small-scale industries, agriculture,
cooperative sector, trade and bankers and professional accountants. The Finance Minister was
its Chairman and the Governor of the Reserve Bank was vice-chairman. It started its function
from February 1968. The main functions of the N.C.C were:

(i) to assess the demand for bank credit from different sectors of the economy;

(ii) to determine priorities for granting loans and advances for investment, considering the
availability of resources and the requirements of the priority sectors, particularly, agriculture,
small-scale industry and exports;

(iii) to co-ordinate lending and investment policies as between commercial banks and the
specialized agencies with a view to ensuring an optimum and efficient utilization of resources
and

(iv) to tackle other related issues as may be referred to it by the chairman or the vice-chairman
of the Council.

B) The Banking Laws (Amendment) Act was passed in December 1968 as legislative measure
for social control over banks and came into effect from 1.2.1969. Main provisions of this new
Act are discussed below:

(i) The majority of directors of a Bank had to consist of persons having special knowledge or
practical experience in any of the areas such as accountancy, agriculture and rural economy,
banking, co-operative, economics, finance, law, small-scale industries etc.

(ii) Bigger banks had to be managed by whole time chairman possessing special knowledge
and practical experience of working in a banking company or in finance, economics or business
administration.4

4 Nationalisation of Bank: A Historical Blooper or Commitment of the Hour (accessed April 11th, 2018); available from
http://ijahms.com

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(iii) At least two directors had to possess special knowledge and practical experience in respect
of agriculture, rural economy and co-operation.

(iv) The banks were also prohibited from making any loans or advances, secured or unsecured
to their directors or to any companies in which they had substantial interest.

(v) The Reserve Bank was, however, empowered to appoint, remove or terminate the services
of the chairman, any director, the chief executive officer or any other officer or employee of a
bank, under specific circumstances.

(vi) All foreign banks were to set up an advisory board consisting of Indians and conduct their
lending policies and activities under the guidance of such an advisory board.

(vii) The Government had power to take over any bank in the country, without resorting to
legislation, in the interest of depositors and better provision of credit.

C) In order to enlarge the commercial banks' role in agricultural finance, the Agricultural
Finance Corporation Ltd. was set up in 1968.

D) The RBI also introduced changes in its branch expansion policy, as guided by the N.C.C
for extending banking facilities to wider areas.5

However, the social control measures were not able to achieve the desired social and economic
objectives. Therefore, the Government of India nationalized fourteen major Indian banks each
having deposits of Rs. 50 crore and above on 19th July 1969. No foreign bank was taken over.
The names of 14 banks taken over by the Government under the Banking Companies
(Acquisition & Transfer of Undertakings) Act of 1969 are:

(1) Central Bank of India Ltd. (2) Bank of India Ltd. (3) Punjab National Bank Ltd. (4) The
Bank of Baroda Ltd. (5) The United Commercial Bank Ltd. (6) Canara Bank Ltd. (7) United
Bank of India Ltd. (8) Dena Bank Ltd. (9) Syndicate Bank Ltd. (1 0) The Union Bank oflndia
Ltd. (11) Allahabad Bank Ltd. (12) The Indian Bank Ltd. (13) The Bank of Maharashtra Ltd.
and (14) The Indian Overseas Bank Ltd.6

On April 15, 1980, Government took over another six private sector banks whose reserves were
more than Rs. 200 crore each. Till this year approximately 80% of the banking segment in India
were under government ownership but after this there was a rise of approximately 80% in

5 P.N. Varshney, Banking Law and Practice, (Sultan Chand and Sons, 23rd Edition, 2009)
6 (Accessed April 11th, 2018); available from https://www.rbi.org.in

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deposits and advances took a jump by 11,000%. The six banks taken over by the Government
under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 are:

(1) The Andhra Bank Ltd. (2) The Punjab and Sind Bank Ltd. (3) The New Bank oflndia Ltd.
(4) The Vijaya Bank Ltd. (5) The Corporation Bank Ltd. and (6) The Oriental Bank of
Commerce Ltd.

In 1993, New Bank of India merged with Punjab National Bank. As a result, the total number
of public sector banks including SBI and its associates are 27.

Economic Milestone:

In the end, it was politics that trumped economics in 1969 when Prime Minister Indira Gandhi
nationalised 14 banks. She had been under pressure from older, more experienced hands within
the party (known as the Syndicate) who wanted banks to be nationalised to neutralise them.
Their argument was that the banking sector was not working rapidly enough in spreading credit
availability across the country.

Nationalising banks had become the rallying point for a lot of agitations and giving in to the
demand allowed Indira Gandhi to strengthen support. Yet, the speed with which the
nationalisation of banks took place surprised many.7

Morarji Desai, who was finance minister then, remained adamant and refused to go ahead with
the proposal. “Recent experience does not suggest that large banks need to be taken over so as
to do something they have not been doing,” he wrote. However, on July 19, 1969, the Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance resulted in the ownership of
14 banks being transferred to the state. This made Desai’s position in the cabinet untenable.
Indira Gandhi, however, offered that he could stay on as deputy prime minister, but Desai
declined (it was later called a political masterstroke).

The 14 banks controlled 70 percent of the country’s deposits. In 1980, six more banks were
nationalised. (Imperial Bank had been nationalised in 1955, making it the State Bank of India.)

While there is no doubt that the nationalisation of banks led to credit being channelized to
agriculture and small and medium industries, the Act also resulted in a lot of delegated
legislation. Banks had to reserve as much as 40 percent of credit to the priority sectors
(agriculture and small and medium industries). The expansion of branches in rural areas was

7 P.N. Varshney, Banking Law and Practice, (Sultan Chand and Sons, 23rd Edition, 2009)

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particularly noteworthy. The figure rose from 8,261 in 1969 to a whopping 65,521 in 2000.
The pace has slowed since then and, as the principal shareholder, the government made a
negative return on its investment.

Perhaps, that is the reason why PJ Nayak, chairperson of the Reserve Bank of India-appointed
Nayak Committee, says: “It would be better if government banks are brought under the
Companies Act.” That would allow them to improve their functioning while still meeting the
objectives for which they were nationalised in the first place.

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 CHAPTER- 2

REASONS BEHIND NATIONALISATION

The nationalization of banks was a significant move undertaken by the government for the
development of the country. Firstly, it instilled public confidence in the banking system
encouraging the masses to save and invest. It allowed for the elimination of regional bias and
promoted opening up of branches in the remote areas of the country as well, thus strengthening
the banking network. By elimination of monopoly or credit competition, nationalization
streamlined banking practices in the country, thereby directing funds where it was most
necessary – towards industrial and sectorial development as planned by the RBI and the Indian
government.8

Various authorities have given many reasons for the nationalization of major commercial
banks. Opinions given by them are discussed below:

A) The then Prime Minister, Smt. Indira Gandhi: According to the opinion of then P.M, Smt.
Indira Gandhi, private sector banks were nationalized (i) to remove control of few; (ii) to
provide adequate credit facilities to agriculture, small industry and exports; (iii) to give
professional bent to bank management; (iv) to encourage new classes of entrepreneurs and (v)
to provide adequate training as well as reasonable terms of service to bank staff

B) Other opinions of protagonists of nationalization:

(i) The Revenue Issue: Nationalization of banks would enable the Government to obtain all the
large profits of the banks as its revenue.

(ii) The Safety Issue: Nationalization of banks would safeguard and promote the interests of
depositors. As a result public would deposit very rapidly a large amount of money.

(iii) The Monopoly Issue: All major private banks in India were controlled by one big business
house or the other or jointly by a few of them. Consequently, concentration of wealth and
economic power was in the hands of a few industrialists. The directors of banks had close
connections with numerous companies of big business houses and they used to finance the
companies in which they had interests. Nationalization of banks was desirable to prevent the

8 P.N. Varshney, Banking Law and Practice, (Sultan Chand and Sons, 23rd Edition, 2009)

12 | P a g e
spread of the monopoly enterprise. It would secure a great and strategic control over the
national economy.

(iv) The Use Issue: The benefit of commercial banks' massive financial resources had gone
largely to the big business which controlled these. The directors of banks related to companies
of big business houses financed the companies in which they had interests and sometimes they
financed each other's companies on a reciprocal basis in order to prevent healthy competition.
The manipulation of bank advances helped in increasing some anti-social and illegal activities
such as hoarding, black-marketing etc. and creating artificial 34 scarcity which resulted m
continued pnce spirals in our economy. Nationalization of banks would help in stabilizing the
pnce levels by eliminating artificial scarcity of essential goods and encouragmg m development
of bank resources for productive purposes.

(v) The Credit Issue: Private commercial banks adopted traditional approach in their credit
policy which was not conducive to a rapid, balanced development of all the sectors of our
economy. They gave preference to the organized sectors like wholesale trade and medium and
large industry rather than smaller traders, industrialists and agriculturists for financing their
resources. Main object of these banks was to earn profits. Most of the bank credit granted to
industry was utilized by them for financing inventory holdings rather than for its expansion.
Therefore bank loans were not purpose-oriented but were person-oriented or collateral-
oriented. Nationalization of banks was considered as important matter to allocate bank finance
for the needs of Indian economic development

(vi) The Priority Issue: Private Banks did not grant bank credit for the purpose of national
interest and development of priority sector. Bank credit was not granted to needy farmers or
small-scale industrialists or to new entrepreneurs. Thus, nationalization of banks was desirable
so that banking sector could utilize its resources for the benefit of the priority sector under the
schemes of planned economic development of the country.

(vii) Rural Issue: Private sector banks were not interested in openmg their branches in semi-
urban and rural areas. Their activities were largely confined to urban areas and mostly in
metropolitan cities. After nationalization, disparity in the spread of banking facilities would be
removed and rural banking would receive a big push through public sector banking.9

9 M L Tannan, Tannan’s Banking Law, (Lexis Nexis, 1st Edition, 2015)

13 | P a g e
(viii) The Service Motive Issue: By nationalization commercial banks would change their
function from profit motive to service motive in order to achieving the goal of socialism. 35
(ix) The Equality Issue: After nationalization, wide disparities in the salaries in different
commercial banks would be removed. Before nationalization top executives of some private
banks received unduly high salaries than their counterparts in the public sector.

(x) The Tax Issue: The All India Bank Employees Association contended that nationalized
banks would check the incidence of tax evasion and black money.10

As France, Italy, the UAR, Indonesia, Burma, Libya, the USSR, the GDR etc., have benefited
by Nationalisation of their banks, India should also get profit by nationalising her banking
industry.

10 Nationalisation of Bank: A Historical Blooper or Commitment of the Hour (accessed April 11th, 2018); available from
http://ijahms.com

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 CHAPTER- 3

IMPACT OF NATIONALISATION

Achievements of Nationalized Banks:

A banking revolution occurred in the country during the post-nationalization era. There has
been a great change in the thinking and outlook of commercial banks after nationalization.
There has been a fundamental change in the lending policies of the nationalized banks. Indian
banking has become development-oriented. It has changed from class banking to mass-banking
or social banking. This system has improved and progressed appreciably.

Various achievements of banks in the post-nationalization period are explained below:

1. Branch Expansion: Initially, the banks were conservative and opened branches mainly in
cities and big towns. Branch expansion gained momentum after nationalization of top
commercial banks. This expansion was not only in urban areas but also in rural and village
areas.

2. Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial
growth in the deposits of commercial banks. Thus bank deposits had increased by 200 times.
Development of banking habit among people through publicity led to increase in bank deposits.

3. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-
bank nationalization period. At present, banks are also meeting the credit requirements of
industry, trade and agriculture on a much larger scale than before.

4. Investment in Government Securities: The nationalized banks are expected to provide

finance for economic plans of the country through the purchase of government securities. There
has been a significant increase in the investment of the banks in government and other approved
securities in recent years.11

5. Advances to Priority Sectors: An important change after the nationalization of banks is the
expansion of advances to the priority sectors. One of the main objectives of nationalization of
banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy.
To achieve this, the banks formulated various schemes to provide credit to the small borrowers

11 M L Tannan, Tannan’s Banking Law, (Lexis Nexis, 1st Edition, 2015)

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in the priority sectors, like agriculture, small-scale industry, road and water transport, retail
trade and small business. The bank lending to priority sector was, however, not uniform in all
states.

6. Social Banking- Poverty Alleviation Program: Commercial banks, especially the

nationalized banks have been participating in the poverty alleviation Program launched by the
government.

7. Differential Interest Scheme: With a view to provide bank credit to the weaker sections of
the society at a concessional rate the government introduced the “Differential interest rates
scheme” from April 1972. Under this scheme, the public sector banks have been providing
loans at 4% rate of interest to the weaker sections of the society.

8. Growing Importance of Small Customers: The importance of small customers to banks has
been growing. Most of the deposits in recent years have come from people with small income.
Similarly, commercial banks’ lending to small customers has assumed greater importance.

9. Diversification in Banking: The changes which have been taking place in India since 1969
have necessitated banking companies to give up their conservative and traditional system of
banking and take to new and progressive functions.

10. Globalization: The liberalization of the economy, inflow of considerable foreign

investments, frequency in exports etc., have introduced an element of globalization in the
Indian banking system.

11. Profit making: After nationalization, banks are making profits in addition to achieving
economic and social objectives.

12. Safety: The government has given importance to safety of the banks. The RBI exercises
tight control over banks and safeguards depositors’ interest.

13. Advances under self-employment scheme: Public sector banks play a significant role in
promoting self-employment through advances to unemployed through various schemes of the
government like IRDP, JGSY, etc.12

Arguments against nationalisation (Criticism):

12 An Analysis of the Impact of Nationalisation on the functioning of the Commercial Banks (accessed April 11th, 2018);
available from http://www.iracst.org

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1. Political purpose rather than for Productive purpose: The government has acquired the
strength of a giant and there is the danger of using the financial resources for political purposes
rather than for productive purpose.

2. Beginning of state capitalism: Such a drastic step of nationalisation of about 90% of the
banking resources is wholly unnecessary, especially if we take into consideration the enormous
powers vested in the Reserve Bank of India for controlling banks' resources. It is considered as
the beginning of state capitalism and not socialism in India.

3. Scope for inefficiency: Some are of the opinion that after nationalisation banks will
degenerate to the level of agricultural co-operatives, which are known for their inefficiency
and corrupt practices.

4. Less attractive customer's service: Inefficiency, indecision, corruption, and lack of

responsibility are the evils with which the government undertakings are suffering. A
government bank may not care to attach importance to the customer service.

5. Secrecy of customer's accounts: In spite of the assurances given and provisions made in the
Act, businessmen still fear about the maintenance of the secrecy of the customer's accounts. As
such, they may be forced to withdraw their deposits and go to some bank in the private sector
and foreign banks. Thus nationalisation of big Indian banks .will diverts some of the deposits
of Indian banks to the foreign banks which is not at all desirable.

6. Branch expansion: To argue that nationalisation will help to facilitate branch expansion to
rural areas much more rapidly than the private banks cannot be supported by facts. Weather it
is private bank or nationalised bank; it has to go by business principles and satisfy itself that
the new branch is economically viable. In other words, branch expansion can be achieved by
private banks as well, without nationalisation.13

7. Burden of compensation: Nationalisation leads to the payment of heavy compensation to the

shareholders. This gives additional financial burden on the government. Moreover, it is also
argued that nationalisation will not bring much income to the government.

13 Nationalisation of Bank: A Historical Blooper or Commitment of the Hour (accessed April 11th, 2018); available from
http://ijahms.com

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In spite of these criticisms, we cannot ignore the fact that at present, nationalisation of banks
is an accomplished fact. By and large this measure received support from almost all section. It
was welcomed by the middle class people and small industrialists and small traders.

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 CHAPTER- 4

CASE STUDY

R C Cooper V. Union of India14

[The Bank Nationalization Case]

The petitioner in this case, Rustom Cavasjee Cooper was the Director of Central Bank of India,
and held shares in many of the banks that were nationalised. He approached the Hon’ble
Supreme Court of India in 1969, his case was argued by Senior Counsel Nani Phalkhivala and
the Union was represented by the then Attorney General, Niren De and Solicitor General,
Jagdish Swarup. Considering the gravity of the case the petition was referred to the constitution
bench comprising of 11 judges.

The petitioner utilised the Original Jurisdiction of the Court under Art. 32, and argued his rights
under Art. 14, 19 and 31 were violated with the ordinance (Acquisition and Transfer of
Undertaking) which subsequently became an act on 22nd July 1969. The arguments stretched
for seven months and court delivered it judgement on 10thFebruary 1970.

The arguments for the petitioner included constitutional overreach as he alleged violation of
legislative powers and encroachment of the parliament in the state list. The petitioner also
contented that promulgation of ordinance under Art. 123 was invalid as there existed no
condition precedent. He also argued of violation of fundamental and constitutional right. The
respondent believed the petitioner had no locus in this case as he was not the owner of property
defined under Art. 31(c).

The court in its judgement held the ordinance-act to be within legislative competence, it
however declared the ordinance void on merit. It did not denationalise the banks but instead
increased the compensation of such banks.15

To overcome this limitation imposed by judgement, the government brought out an amendment
“The 25th Amendment” which sought to overcome those restrictions as imposed by the
judgement.

14 AIR 1970 SC 564 : (1970) 1SCC 248

15 (Accessed April 11th, 2018); available from https://indiankanoon.org

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“The Twenty-fifth Amendment, officially known as The Constitution (Twenty-fifth
Amendment) Act, 1971, curtailed the right to property, and permitted the acquisition of private
property by the government for public use, on the payment of compensation which would be
determined by the Parliament and not the courts. The amendment also exempted any law giving
effect to the article 39(b) and (c) of Directive Principles of State Policy from judicial review,
even if it violated the Fundamental Rights.”

Interestingly this amendment became a subject matter of another case which led to a landmark
judgement till date “Keshavananda Bharti vs. State of Kerala” in which the Hon’ble SC laid
down the Basic Structure Doctrine of the Constitution.16

All India Officers Confederation vs. Union of India and Indian Overseas Bank17

In this case employers of Nationalised Banks raised question of their status. Anamoly in this
case was that private bodies have appointed their relatives as officers of banks without any
qualification hold by them for the post they were going to hold. Court held that it is upto
employees whether they are doing their jobs properly and company will itself decide
qualifications of employees.18

16 An Analysis of the Impact of Nationalisation on the functioning of the Commercial Banks (accessed April 11th, 2018);
available from http://www.iracst.org
17 AIR 1989SC 2046
18 (Accessed April 11th, 2018); available from https://indiankanoon.org

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 CONCLUSION

Nationalisation has helped country mitigate the ill- effects of the global financial crisis. This,
however, could at finest be an unplanned outcome as nationalisation was primarily aimed at
reconfiguring the financial sector to meet an industrialising India’s plan concerned, and to
correct dragging unfairness in credit distribution. Nationalisation of banks was a dynamism for
socialization higher than economic growth of the country. It has gained the nonpartisan of its
creation. The primeval of Nationalisation mechanism did have loopholes from where
corruption and malpractices entered but the Economic Reforms of 1991 brimming the
loopholes for the fitter.

Nationalisation diffused public confidence in the banking system embolding the mobs to save
and invest. It eliminated the regional biasness and promoted opening up branches in the
lonesome areas of the country as well, hence enhancing the banking network. Aside elimination
of monopoly, competition, and nationalisation rationalised banking practices in the country.

Nationalised banks are also called the government banks in India and work to provide social
welfare to Indian public. They are responsible for direction funds to the needy and various
sectors like agricultures and small industries for expansion as well as economic development.
Banks were nationalized to cater to the funds requirements by priority sectors. These sectors
are largely the agriculture sector which contributes largely to national income of the country.
Nationalised banks in India plays a great role in controlling private monopolies to guarantee
and even contribution of credit to such sections of society that are most desirable. Nationalized
banks in India also help in dropping the regional disparity. India is divided into urban and rural
sectors and it is the nationalized banks that work to provide all firms banking facilities to the
most rural areas of the country. Nationalisation is in accordance with our national policy of
adopting socialistic pattern of society. Some may say that industries which provide proper place
for exploitation should have been nationalized first. They forget that the control of the capital
is necessary because it gives power to exploit. One legitimate criticism levied against
nationalisation is that some banks were not nationalized so that the businessmen may not have
to suffer. The government argued that the nationalised banks had the maximum deposits with
them and other banks were not in position to influence the economy of the country. But there
should be a complete control over the banks if we want them to boost our economy.
Nationalisation of banks is the proper step in the proper direction. After independence, it is the

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nationalized banks that worked to spread banking facilities across the underdeveloped region
of the country in those days as there were insufficient number of banks and people were
deprived of banking facilities. The nationalisation of banks helped in developing banking
practice among the large population of the country since its independence.

The Pradhan Mantri Jan-Dhan-yojana would not have been viable with private banking sector.

Forthwith, we can insolently say that the objective behind nationalisation of banks was a
commitment of the hour. Indian Banking Industry is way beforehand, all set with a cutthroat
spirit, having a staff with decisive functioning and aimed towards more yielding. Banking has
become more professional and ethical and nationalisation hints to have unfolded to a stage
from where we can look forward.

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 BIBLIOGRAPHY

Books:

 M L Tannan, Tannan’s Banking Law, Lexis Nexis, 1st Edition, 2015

 P.N. Varshney, Banking Law and Practice, Sultan Chand and Sons, 23rd Edition, 2009
 N V Srinivasan, M L Tannan Banking Law and Practice in India, Lexis Nexis, 25th
Edition, 2015

Websites:

 An Analysis of the Impact of Nationalisation on the functioning of the Commercial

Banks. Accessed April 11th, 2018. Available from http://www.iracst.org
 Accessed April 11th, 2018. Available from https://indiankanoon.org
 Nationalisation of Bank: A Historical Blooper or Commitment of the Hour. Accessed
April 11th, 2018. Available from http://ijahms.com
 Accessed April 11th, 2018. Available from https://www.rbi.org.in

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