Bank nationalisation (1969)

Detail

1. The background: from "social control" to takeover

• Social control of banks: this was the first step, taken before nationalisation. The government guided private banks without owning them. It was introduced in December 1967 [2].
• The National Credit Council was set up on 22 December 1967. Its job was to judge credit priorities for the whole country [2].

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

• Priority sector: these are areas of the economy that the state says must get a fixed share of bank loans. The idea first appeared in the RBI's credit policy for 1967-68. That policy listed agriculture, exports and small-scale industries (SSI) [3].

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

• Why the government thought social control was not enough:

• Big business houses owned or controlled the large private 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.

2. The takeover, July 1969

• Ordinance: a temporary law made by the President when Parliament is not sitting (Article 123). It must be approved by Parliament within six weeks after Parliament meets again.
• Ordinance 8 of 1969: the Acting President issued it on 19 July 1969 under Art. 123(1) [4].
• It transferred the business of 14 named commercial banks to new banks owned by the state. Each of these banks held deposits of at least Rs 50 crore [4][2].

• NCERT reproduces a news clipping dated 20 July 1969 reporting the takeover.

• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 (Act 22 of 1969): Parliament passed this Act to replace 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].

3. Why nationalise? (the stated rationale)

• Credit was concentrated: banks linked to industrial houses lent mainly to large industry and trade.
• Credit had to be redirected: loans were to go to agriculture, small industry, exports and weaker sections, the priority sectors.
• Rural branches and savings: banks were to open branches in villages and collect the savings of ordinary people.
• Constitutional basis: nationalisation put Directive Principles of State Policy (DPSP) into practice. DPSP are guidelines in Part IV that the state should follow in making laws, but courts cannot enforce them.
• Art. 39(b): the ownership and control of material resources should be shared out to serve the common good.

• Art. 39(c): the economy should not work in a way that concentrates wealth and the means of production in a few hands, to the harm of everyone else.

• After nationalisation, small borrowers such as small farmers, small manufacturers, retail traders, transport operators, self-employed people and students got institutional credit at reasonable interest rates [3].

4. The politics: the "Left turn"

• Nationalisation came during the Congress split of 1969, in the same weeks as the fight over the 1969 Presidential election.
• It announced Indira Gandhi's Left turn, a shift to a socialist and pro-poor agenda. This set her apart from the Syndicate (the group of senior Congress party bosses).
• Morarji Desai, Deputy Prime Minister and Finance Minister, lost the Finance portfolio. This left him isolated, because he opposed sudden nationalisation.
• The move was popular. It helped Indira Gandhi present herself as the champion of the poor in the run-up to the "Garibi Hatao" campaign of 1971.

5. The legal battle: R.C. Cooper v. Union of India (1970)

• The petitioner: Rustom Cavasjee Cooper. He held shares in, and had accounts with, several of the nationalised banks, including the Central Bank of India, Bank of Baroda, Union Bank and Bank of India. He was also a director of one of them [4].

• He filed the case under Art. 32, the right to go directly to the Supreme Court when a fundamental right is violated [4].

• Date and bench: judgment given on 10 February 1970 by an 11-judge bench. The vote was 10:1. Justice J.C. Shah wrote for the majority and Justice A.N. Ray dissented [4].

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

Ground	What the Court held	Article
Discrimination	The named banks were in practice barred from doing banking business, while other Indian and foreign banks could carry on. The Court called this "hostile discrimination" (unfair treatment with no good reason) [4]	Art. 14 (equality before law)
Choosing 14 banks	The Court gave no opinion on whether picking 14 banks out of many was itself discrimination, because reliable data was missing [4]	Art. 14
Compensation	The method of valuation left out goodwill and the value of unexpired long-term leases, and used irrelevant principles. Compensation was also to be paid in securities that would mature only after 10 years [4]	Art. 31(2) (compensation for property taken by the state)
Linked rights	Arts. 19(1)(f) (property) and 31(2) are not mutually exclusive, so the same law can be tested under both [4]	Arts. 19, 31
Test for rights	The "effect" test replaced the "object/form" test. This rejected the approach of A.K. Gopalan (1950) [4]	Part III generally

• Effect test (also called the "direct operation" test): courts judge a law by what it actually does to a person's fundamental rights, not by what the legislature meant it to do or how the law is worded [4]. (See fundamental-rights for details.)

6. Parliament's response

• Step 1: a new Act. Parliament re-enacted the takeover through the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, enacted in February 1970 [2]. It removed the defects the Court had found.
• Step 2: a constitutional amendment. The Constitution (Twenty-fifth Amendment) Act, 1971 was passed to reverse Cooper and came into force on 20 April 1972 [5].
• In Art. 31(2), the word "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].

• The bigger picture: Golaknath (1967), Cooper and the Privy Purses case (1970), followed by the 24th and 25th Amendments, made the conflict between Parliament and the judiciary sharper. That conflict led to Kesavananda Bharati (1973) and continued into the emergency of 1975. (See amendment-basic-structure and emergency-1975.)

• Later change: the 44th Amendment removed the right to property from the list of fundamental rights. It is now a legal right under Art. 300A [5].

7. Legacy

• Steps that followed:

Date	Measure
December 1969	Lead Bank Scheme: one bank in each district takes charge of coordinating credit and development there [2]
February 1972	Priority-sector categories formally defined by the RBI [3]
25 March 1972	Differential Rate of Interest scheme: loans at very low interest for low-income groups [2]
November 1974	Public-sector banks told to give at least one-third of their credit to the priority sector by March 1979 [3]
26 September 1975	Regional Rural Banks (RRBs) set up to give credit to rural people [2]
15 April 1980	Six more private banks nationalised [2]
March 1980	Priority-sector target raised from 33⅓% to 40% of advances, to be reached by 1985 [3]
12 July 1982	NABARD set up to provide credit for agriculture and rural industry [2]

• Gains: many more bank branches, especially in rural areas. Bank lending to farming and small borrowers grew.
• Criticisms:
• Lending was often directed by politicians, for example through "loan melas".
• Banks built up NPAs. An NPA (non-performing asset) is a loan that has stopped earning interest or repaying principal, usually after 90 days of non-payment.
• The government has repeatedly had to recapitalise these banks, meaning it puts in fresh taxpayer money.

• Weak governance was another problem.

• Mergers: public-sector banks were merged in 2019-20. This cut their number to 12 (position from 1 April 2020; check the current count in the economy subject).

Prelims Hooks

• 14 banks nationalised on 19 July 1969 by ordinance under Art. 123. The threshold was deposits of at least Rs 50 crore. Six more banks followed on 15 April 1980.
• R.C. Cooper v. Union of India (10 February 1970): 11 judges, 10:1, with A.N. Ray dissenting. Struck down the 1969 Act under Arts. 14 and 31(2).
• Cooper brought in the effect test (look at what a law does to rights, not its object or form). It overturned the A.K. Gopalan (1950) approach and held that Arts. 19(1)(f) and 31(2) are not mutually exclusive.
• Trap: Cooper did not hold that choosing only 14 banks was discriminatory. The Art. 14 violation was barring the named banks from banking business.
• 25th Amendment (1971): replaced "compensation" with "amount" in Art. 31(2). Inserted Art. 31C, which protects laws for Art. 39(b) and (c).
• Lead Bank Scheme: December 1969. RRBs: 26 September 1975. NABARD: 12 July 1982. Differential Rate of Interest scheme: March 1972.
• The original priority sectors (credit policy 1967-68) were agriculture, exports and small-scale industries.
• Priority-sector targets: one-third by 1979 (set in 1974); 40% by 1985 (set in 1980).
• The National Credit Council was set up in December 1967 as part of social control of banks.

Mains Points

• DPSP vs fundamental rights: bank nationalisation shows the clash between Art. 39(b)-(c) (spreading wealth fairly) and the right to property and equality (Arts. 31, 14). Cooper, the 25th Amendment and Kesavananda (1973) show how this clash was settled. Parliament may pursue the Directive Principles, but only within the basic structure (the core features of the Constitution, such as judicial review, which Parliament cannot destroy).
• Policy and politics (GS-I, post-1947 history): nationalisation was both an economic reform and a political weapon. It marked the Left turn, isolated Morarji Desai and the Syndicate, and helped Indira Gandhi win popular support during the 1969 split and the 1971 "Garibi Hatao" election.
• Did it work? Branches spread, rural credit grew, and priority-sector lending, RRBs and the lead-bank scheme followed. But politically directed lending, NPAs and repeated recapitalisation raise questions about ownership versus governance. This links to the debates on public-sector bank mergers and privatisation.
• Separation of powers: the government re-enacted the law and then amended the Constitution soon after losing in court. This raises a question about how far Parliament should go in overriding the courts on economic policy.