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Some thoughts on Bank Nationalization 
G.Giridhar Prabhu
Achal Industries, Mangalore

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Introduction | The Case for Denationalization | Service  Matters  | Few suggestions

The Nationalization of Banks in 1969 has been one of the significant economic, political and social events of Post Independent India. Apart from the fact that it had the imprint of the personality of Mrs. Indira Gandhi, it has several significances which merit attention. 

The first one was the intervention of the state in the functioning of the banking sector itself. The ownership of the State gave a new confidence to the savers and being backed by a sovereign the normal suspicions associated with the capabilities of the bankers in the private sector were gone.

2. Banking ceased to be selective. The entry barriers that existed for customers to bank, social economic and political were lowered. This resulted in a massive quantitative expansion of the bank customer base as well as in the nature of services provided.

3. The reach of banking widened. Absence of concern for profitability and targeting made banks to expand rapidly in un-banked areas thereby the entire country was linked to banking activity.

4. The expansion of banks also expanded the economy. The entire infrastructure that required was built by themselves or by the citizens for their use.

5. A large employment base was created. Young men and women mostly from middle and poorer sections of society but qualified with the requisites got into the banking system and we see the results today.

6. Customers got acquainted with banking practices faster than it would otherwise have taken.

7. The well intentioned policies channeled through the banks helped the borrower clientele with a generous disposition.

8. The savings of the community had an efficient channel which otherwise would not have had the benefit of aiding transactions.

9. State intervention to some extent distorted the banking sector. The domination of the State has had a negative effect on the contribution of the banking sector as a whole to the economy. Absence of profitability, non-realization of its potential as a business and also the deterioration in service has all affected citizens.

10. The intervention by the State and excessive domination and intervention by the bureaucracy and polity into the functioning of banks has led to deterioration on economic efficiency, which runs counter to the principles of a good Government.


The Case for Denationalization:

The objective details of the effects of Nationalization are very well before today’s audience with figures at their fingertips. Let me focus on the topic of today’s symposium, that is the Government’s move to move away from state ownership.

The topic should be subjected to most detailed scrutiny and discussed objectively. Here are some thoughts on stimulating a debate and discussion on the subject. 

The term nationalization always denotes taking over an existing business. Whatever be its stage, whether beginning, working, thriving, sick or dead the term nationalization denotes taking over of the entire business by the State.

This is enabled under the proviso of Article to the Indian Constitution.

Article 19. Protection of certain rights regarding freedom of speech, etc. –
(1) All citizens shall have the right -

(a) To (f) x x x x x 

(g) To practice any profession, or to carry on any occupation, trade or business.

(6) Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and, in particular, [nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to, - 

(i) The professional or technical qualifications necessary for practicing any profession or carrying on any occupation, trade or business, or

(ii) The carrying on by the State, or by a Corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise].

The term exclusively or otherwise indicates that the State can choose to have a monopoly or it will do it by choice.

In the case of Bank Nationalization initially 14 major banks were taken over and subsequently 5 were added taking the total to nineteen. Unlike Life Insurance this was not an operation for exclusivity in that other banks were allowed to operate under public ownership.

The takeover was enabled under the Banks Nationalization Act. All action of the Government has to be by legislation and this Act was the enabling legislation not only to takeover but to enable the Government to run the banks as outlined in the Act.

My earlier statements should not be taken as a defense of nationalization per se. I am belonging to a group which firmly believes that it is “not the business of Government to be in business”. Ever since nationalization, the liberals in this country and right-minded right thinking people have spoken against nationalization. While the legal arguments did not hold well, the social argument largely was swayed by emotion rather than logic. The “benefits” outweighed the costs.

Let us not put under the carpet the effects of Nationalization on the banking sector and the service aspect. While we could all be called beneficiaries of the largesse conferred by the state, the state ownership of banks distorted economics, it made banks instruments for purposes other than their truly legitimate purpose. 

Values were sacrificed for expediency, and many evils arose. You are all witnesses of the phenomenon what happened in a few banks. The state has been confronted with the salvage of the losses incurred by these banks. And we all know that it is not the fault of the employees, or the depositors or the borrowers, but how the waywardness of some executives in management in collusion with well-intentioned or unscrupulous borrowers managed to subvert a part of the asset structure.


Nationalized or Denationalized – It is Service that Matters 

From a businessmen and industrialist point of view which I represent today, we in business and industry have been beneficiaries of all the above said advantages but we have borne the brunt of the inefficiencies caused by the system. This is because while the quantity in the system went up the quality of service has been questionable.

A long time ago, our Chamber had the good fortune of hosting about 12 of the country’s chief executives of banks. The talk at that time we had was service, service and service. The Government had to appoint a committee to go into the issue and the Committee issued hundreds of recommendation.

A lot of changes have taken place since then. I commend Corporation Bank as it stands out as an example for excellence, even under the ownership of the State. It is a matter of pride for our district that it stands tall today on the true qualification of standing of a banker that is the integrity of its operations and which shows in its performance the lowest non-performing assets.

But most of all it did something unique. It exercised autonomy on its own to the extent that the system permitted. It led itself into the path of innovation. I hold it a classic example of innovation and entrepreneurship when it launched the cash crop but also made it a successful. It was a unique combination of organization, technology and people that made it so.

The emergence of the new generation banks has changed the quality of the service. Backed by the major institutions these provided the major break in the qualitative aspects of service.

Therefore now there is definitely a need for a new look at the banking sector as a whole and introduce a series of steps – policy, organizational, systemic and technology to restore banking 

To its true and original purpose – that is service of the citizens in banking services primarily the function of handling transaction money. The so called reform and liberalization process after 1992 saw the intention of the State that it no longer considered appropriate to continue its activity by dabbling in business and commercial activities. The ideology was given up long ago. We have not seen a single nationalization since 1992. State ownership and management has continued.

When the Government decided in principle that its involvement in banks should get reduced it did act. In respect of some banks shares were issued to the public and they became partly public owned and partly owned by Government.

This in my opinion is a step opposite to Nationalization. If the Government has decided in respect of even one or a few banks that they be let open for public ownership, then it is not logical for the Government to have full ownership in the rest.

Once it is decided in principle, the Government should take a positive step forward. The concept of nationalization should get divorced from the principle of Government ownership. Government can own any enterprise even without a Nationalization Act. This will be easier when it does so when none of the banks are wholly owned. Since some banks have shares issued to the public it would be better if all the banks, including the so-called “bad” banks also have some shares issued nominally to the public.

Management would then be focused on each bank without lumping them together. 

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Some thoughts on Bank Nationalization
Paper presented at Symposium on Privatization of Nationalized Banks – Corporation Bank Officers’ Organization (R), Mangalore on 21st July, 2001.

Prepared by : G. Giridhar Prabhu
Prepared on : 17.7.2001

ACHAL INDUSTRIES
190, Industrial Area, Baikampady, Mangalore / 575 011, India
Tel : (Off) (91) 824-408387 Fax : (91) 824 – 408487
Email : achalind@hotmail.com / ggpra@vsnl.com
Website : www.achalcashew.com


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