Top 10 reason for nationalization of commercial banks

In 1970, a comprehensive Act was passed called Banking Companies (Transfer of Undertakings and Acquisition) Act. By this, the taking over of major Scheduled banks became absolute. Another six more banks were nationalized in 1980. The total number of public sector banks then was 28. But, at present the total number stands at 19. You may find the list of nationalized banks in India from RBI website.

Nationalization of Banks

Image: Nationalization of Banks

But why should commercial banks be nationalized? Lets look at some of the reasons.

Reason for Nationalization of Commercial Banks

  1. Control of huge resources
  2. Attention to priority sector
  3. Development of backward areas
  4. Efficiency argument
  5. Profitability
  6. Uniform banking policy
  7. Mobilization of savings and prevention of money lenders
  8. Encouraging banking habits and creating banking habitat
  9. Speedy transfer of funds
  10. Augmentation of Employment

1. Control of huge resources: The taking over of commercial banks would enable government to have control over huge resources by which it can start large scale industries. It can also divert funds for various essential industries, according to the conditions prevailing in the country.

2. Attention to priority sector: The private sector banks were not giving importance to industries from the economy point of view. They were neglecting agriculture, small scale industries, cottage industries, and rural industries. With the nationalization of commercial banks, priority sector, namely, agriculture and its allied industries, small scale, cottage, export oriented and employment intensive industries could be effectively attended.

3. Development of backward areas: The private sector banks were neglecting rural areas and backward areas by concentrating only in urban areas. This trend could be changed by nationalizing these banks and opening their branches in rural and backward areas. It would also enable the banks to give more loans for starting industries in rural and backward areas. Due to the above factors, the problem of regional disparities could also be reduced.

4. Efficiency argument: With more banks in the public sector, modernization could be introduced and efficiency of the banks could be improved. A better recruitment policy could be adopted by which efficient men/women can be employed. Efficient operations will improve banking services and will earn more profit.

5. Profitability: With the banking sector coming under the control of government, higher revenue could be achieved and the entire profits earned by these banks.will be enjoyed by the government. This helps the government in capital formation and they could be utilized for promoting more large scale industries.

6. Uniform banking policy: Throughout the country, the banking operations could be uniform and the interest rates prevailing in the banks will also be uniform. Banks will grant loans based on productivity of the borrower rather than the security of the borrower. Hence, throughout the country better projects and industries could be financed with uniform lending policy, taken at a higher level.

7. Mobilization of savings and prevention of money lenders: In the absence of proper banking facility, the public are being exploited by private financiers by offering attractive interest rates. This can be prevented if banks can convince people and provide a reasonable rate of interest. Apart from this, the interest earned from these banks are exempted from income-tax to a certain extent. The banks can also promote different kinds of deposits suitable to different sections of people. Against their deposits, loans can also be obtained by the depositors. By such activity, the role of money lenders could also be reduced.

8. Encouraging banking habits and creating banking habitat: With increasing literacy in rural areas, the rural folk will be made to realize the importance of banking habit. Also, the location of banks will form part of their habitat. This means, like schools and hospitals, banks will also form a part and parcel of people’s day-to-day life in rural areas.

9. Speedy transfer of funds: When more people cultivate banking habits, more transactions in the country will be done with bank money. The need for currency or hard cash will slowly decline. Unaccounted transactions and the generation of black money could be eliminated. Funds can be easily transferred from one place to another by the use of electronic media. Thus, in the country, economic activity will speed up. Consequently, revenue of the government will also increase.

10. Augmentation of Employment: There will be more employment opportunities created in these banks with opening of more branches. Apart from this, the bank can also create more employment opportunities by encouraging self employment activities. It can lend to various projects which can directly and indirectly encourage employment opportunities.