Bank nationalisation

Topic: Challenges to and Restoration of the Congress System · NCERT: Class 11, Ch 2 "Rights in the Indian Constitution"; Class 12, Ch 5 "Challenges to and Restoration of the Congress System"

Meaning

Bank nationalisation was the takeover by the Union government of 14 major private commercial banks on 19 July 1969. Each of these banks held deposits of at least Rs 50 crore [4][2]. Six more private banks were taken over on 15 April 1980 [2].

It matters for two reasons:

• It put Directive Principles (Art. 39(b) and (c)) into practice.
• It led to R.C. Cooper v. Union of India (1970) and the 25th Amendment. These sharpened the fight between Parliament and the judiciary over the right to property.

Explanation

Background: from "social control" to ownership

• Social control of banks came first. The government guided private banks but did not own them. It was introduced in December 1967 [2].
• The National Credit Council was set up on 22 December 1967 to decide credit priorities for the whole country [2].

• Social control formally came into force in February 1969 [3].

• Priority sector means the parts of the economy that must get a fixed share of bank loans. The idea first appeared in the RBI's credit policy for 1967-68. That policy named agriculture, exports and small-scale industries [3].

• At its second meeting (24 July 1968), the National Credit Council asked banks to lend more to agriculture and small industry "as a matter of urgency" [3].

• Why social control was judged not enough:

• Big business houses owned or controlled the large banks.
• These banks lent mostly to big industry and trade.
• Farmers, small industry and weaker sections got very little credit. So the government chose direct ownership.

How the takeover was done (in order)

1. Ordinance: an ordinance is a temporary law the President makes when Parliament is not sitting (Art. 123). The Acting President issued Ordinance 8 of 1969 on 19 July 1969 under Art. 123(1) [4]. - It moved the business of 14 named banks to new state-owned banks [4]. - Time limit: an ordinance lapses unless Parliament approves it within six weeks after it meets again.

2. Act of Parliament: the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 (Act 22 of 1969) replaced the ordinance. It took effect from 19 July 1969, the same day as the ordinance [4]. - Its stated aim was to "serve better the needs of development of the economy in conformity with the national policy and objectives" [4].

The stated reasons

• Credit was concentrated. Banks linked to industrial houses lent mainly to big business.
• Credit had to be redirected to agriculture, small industry, exports and weaker sections.
• Rural reach. Banks were to open village branches and collect the savings of ordinary people.
• Constitutional basis: DPSP. Directive Principles of State Policy are guidelines in Part IV that the state should follow when making laws. Courts cannot enforce them.
• Art. 39(b): ownership and control of material resources should be shared out to serve the common good.

• Art. 39(c): the economy should not concentrate wealth and the means of production in a few hands.

• Result for small borrowers: small farmers, small manufacturers, retail traders, transport operators, self-employed people and students got institutional credit at reasonable interest [3].

The politics: Indira Gandhi's "Left turn"

• Timing: it happened during the Congress split of 1969, in the same weeks as the fight over the 1969 Presidential election.
• The Left turn: it marked Indira Gandhi's shift to a socialist, pro-poor agenda. This set her apart from the Syndicate (the group of senior Congress party bosses).
• Morarji Desai's exit: Desai was Deputy Prime Minister and Finance Minister, and he opposed sudden nationalisation.
• He lost the Finance portfolio.

• This left him isolated.

• Popular support: the move was popular. It helped Indira Gandhi present herself as the champion of the poor before the "Garibi Hatao" campaign of 1971.

In the Constitution and practice

• Constitutional and legal base: ordinance under Art. 123; Act 22 of 1969; justified by Art. 39(b) and (c) [4].
• R.C. Cooper v. Union of India (10 February 1970):
• The petitioner: Rustom Cavasjee Cooper held shares in, and had accounts with, several nationalised banks, and was a director of one of them [4].
• How he came to court: he filed under Art. 32, the right to go directly to the Supreme Court when a fundamental right is violated [4].
• Bench and vote: an 11-judge bench, vote 10:1. Justice J.C. Shah wrote for the majority. Justice A.N. Ray dissented [4].
• Art. 14 (equality before law): the named banks were in practice barred from banking business while other banks carried on. The Court called this "hostile discrimination" (unfair treatment with no good reason) [4].
• Choosing 14 banks: the Court gave no opinion on whether picking these 14 was itself discrimination, because reliable data was missing [4].
• Art. 31(2) (compensation for property taken by the state): the valuation left out goodwill and unexpired long-term leases and used irrelevant principles. Payment was also to be made in securities that matured only after 10 years [4].
• Linked rights: Art. 19(1)(f) (property) and Art. 31(2) are not mutually exclusive, so one law can be tested under both [4].
• Effect test: a court judges a law by what it actually does to a person's rights, not by its object or form. This rejected the A.K. Gopalan (1950) approach [4].

• Result: the whole 1969 Act was declared void, because its compensation sections (ss. 4, 5, 6 and Schedule II) could not be separated from the rest [4].

• Parliament's response:

• New Act: the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, enacted in February 1970, removed the defects the Court found [2].
• 25th Amendment Act, 1971: it came into force on 20 April 1972 [5]. It made two changes.
  • In Art. 31(2), "compensation" was replaced by "amount". This amount could be fixed by law and could not be challenged in court for being too low [5].
  • It inserted Art. 31C: a law giving effect to Art. 39(b) or (c) could not be challenged for violating fundamental rights [5].

• 44th Amendment: it later removed the right to property from Part III. Property is now a legal right under Art. 300A [5].

• What followed:

• Lead Bank Scheme, December 1969: one bank in each district coordinates credit there [2].
• Differential Rate of Interest scheme, 25 March 1972: very cheap loans for low-income groups [2].
• Priority-sector target, set November 1974: public-sector banks were to give at least one-third of their credit to the priority sector by March 1979 [3].
• Regional Rural Banks, 26 September 1975 [2].
• Six more banks nationalised, 15 April 1980 [2].
• Higher target, March 1980: raised to 40% of advances, to be reached by 1985 [3].

• NABARD, 12 July 1982 [2].

• Lasting effect:

• Gains: many more bank branches, especially in villages, and more lending to farmers and small borrowers.
• Criticisms: politically directed lending (such as "loan melas"), NPAs (loans that stop earning interest or repaying principal, usually after 90 days of non-payment), repeated recapitalisation (putting in fresh taxpayer money), and weak governance.
• Mergers: public-sector banks were merged in 2019-20. This cut their number to 12 (position from 1 April 2020).

Don't confuse with

• Social control of banks (1967-69): the state guided private banks without owning them. Nationalisation meant the state took ownership.
• Golaknath (1967) and the Privy Purses case (1970): these are separate cases from the same years of conflict. Only R.C. Cooper struck down the bank nationalisation Act.
• "Compensation" vs "amount": before the 25th Amendment, courts could check whether payment was fair "compensation". The "amount" fixed by law could not be challenged for being too low [5].
• Effect test vs object/form test: Cooper looked at what a law actually does to rights. A.K. Gopalan (1950) had looked at the law's purpose and wording [4].

Prelims Hooks

• 14 banks, each with deposits of at least Rs 50 crore, were taken over on 19 July 1969 by an ordinance under Art. 123. Six more followed on 15 April 1980 [4][2].
• R.C. Cooper (10 February 1970): 11 judges, 10:1, A.N. Ray dissenting. It struck down the 1969 Act under Arts. 14 and 31(2) [4].
• Trap: Cooper did not hold that choosing only 14 banks was discriminatory. The Art. 14 violation was barring the named banks from banking business [4].
• 25th Amendment: "compensation" became "amount" in Art. 31(2). It inserted Art. 31C, which protects laws made for Art. 39(b) and (c) [5].
• The original priority sectors (credit policy 1967-68) were agriculture, exports and small-scale industries [3].
• Match the dates: Lead Bank Scheme, December 1969; RRBs, 26 September 1975; NABARD, 12 July 1982. Priority-sector target: one-third by 1979, then 40% by 1985 [2][3].

Mains Points

• DPSP vs fundamental rights (GS-II):
• Nationalisation pitted Art. 39(b)-(c) against the rights to property and equality (Arts. 31, 14).

• Cooper, the 25th Amendment and Kesavananda Bharati (1973) show how this clash was settled. Parliament may pursue the Directive Principles, but only within the basic structure (core features, such as judicial review, that Parliament cannot destroy).

• Policy and politics (GS-I):

• Nationalisation was an economic reform and also a political weapon.
• It marked the Left turn and isolated Morarji Desai and the Syndicate during the 1969 split.

• It built popular support for the 1971 "Garibi Hatao" election.

• Did it work, and who has the last word?

• Gains: rural credit grew, and RRBs and the Lead Bank Scheme followed.
• Costs: NPAs and repeated recapitalisation raise the question of ownership versus good governance. This links to today's debates on bank mergers and privatisation.
• Separation of powers: Parliament re-enacted the law and amended the Constitution soon after losing in court. This raises the question of how far Parliament should go in overriding the courts on economic policy.

Read more

• Bank nationalisation (1969)