Sunday, February 8, 2015

Nationalized Banks and Public Sector Banks

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Public Sector Banks (PSBs)
If the government holds majority stake, i.e,. more than 50 % stake of an enterprise, then it is known as Public Sector Unit (PSU). Government is the owner of the PSU, and is responsible for the managerial control of the enterprise.
Similarly, if the majority stake (>50 %) of a bank is held by the government (generally, central government), then it is known as Public Sector Bank (PSB).

To know whether a bank (or any enterprise) is a public sector bank, just take a note on the stake of government.

Nationalized Banks
If some private entity or individual holds the majority stake (>50 %) of a bank, then it is a Private Sector Bank. Now if the government buys the majority stake of the private bank, and take the managerial control of it, then it will be known as Nationalized Bank, and the process will be known as Nationalization.

Note that the bank earlier was a private bank, but after the nationalization process, it became a Nationalized Bank. Hence to know whether a bank is a nationalized bank, just take a note on the history of the bank (private -> public) and the stake of government in it.

Nationalized Bank vs. PSB
Now it is evident that a nationalized bank is always a public sector bank (PSB), because the government (in turn the public) owns it (>50 % stake), but a PSB may not be a nationalized bank (if the government itself creates the bank, with majority stake).

History of Nationalization
  • The Reserve Bank of India (RBI) was nationalized with effect from January 1, 1949, on the basis of Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • The Central government entered the banking business with the nationalization of the Imperial Bank of India in 1955 (60% stake bought by RBI), and renamed State Bank of India (SBI) under State Bank of India Act, 1955. In 2008, government acquired RBI's stake in SBI to remove any conflict of interest, because RBI is the banking regulatory authority.
  • The 7 other state banks became the subsidiaries of SBI, after being nationalized on 1959, under State Bank of India (Subsidiary Banks) Act, 1959. Currently 2 SBI subsidiaries are merged, making total 5 SBI associate banks.
  • The major nationalization took place in July 19, 1969 under former PM Smt. Indira Gandhi, under Bank Nationalization Act, 1969. 14 major banks were nationalized at that time, making 84 % of total branches coming under government control. However, on February 10, 1970, the Supreme Court held the Act void on the grounds that it was discriminatory against the 14 banks and that the compensation proposed to be paid was not fair compensation.

    A fresh Ordinance was issued on February 14, which was later replaced by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
  • The next nationalization process took place in 1980, making 6 other banks nationalized. 91 % of total branches came under government control, through Banking Companies (Acquisition and transfer of Undertakings) Ordinance, 1980.

Which banks are Nationalized Banks?
This is a debated topic. If we consider the definition of Nationalized banks, then the criteria is - the bank need to be a private bank prior nationalization. This criteria is satisfied by RBI, SBI, SBI associates and all other banks that are nationalized in 1969 and 1980 (total 14 + 6 - 1 = 19, '-1' because New Bank of India is merged with Punjab National Bank in 1993). 

But it is better not to call RBI, SBI, or SBI associates as a Nationalized Banks. Because, they draw power from different Acts, like -
  • RBI - Reserve Bank of India (Transfer to Public Ownership) Act, 1948
  • SBI - State Bank of India Act, 1955
  • SBI Associates - State Bank of India (Subsidiary Banks) Act, 1959
Banks that are nationalized in 1969 and 1980 draw power from Banking Companies (Acquisition and transfer of Undertakings) Act of 1969 and 1980, are known as Nationalized Bank

These total 19 banks are designated as Nationalized Banks by RBI in their website too -

Also note that IDBI Bank Ltd. is denoted as Other PSBs in the website. 

Bharatiya Mahila Bank (BMB) is a government-owned bank from the beginning. So there is no process of nationalization involved. Hence it is a Public Sector Bank.

Now we can calculate the total number of Public Sector Banks (PSB) as -
  • SBI and SBI Associates - 6 banks
  • Nationalized banks (both 1969 & 1980) - 19 banks
  • IDBI bank - 1 bank
  • BMB bank - 1 bank
Total = 6 + 19 + 1 + 1 = 27 PSBs

This was the calculation till March 31, 2017.
But w.e.f April 1, 2017, the 5 associate banks of SBI and Bharatiya Mahila Bank (BMB) are merged with SBI. 
Therefore, as on 18/06/2017, the number of Public Sector Banks (PSB) is 27 - 5 - 1 = 21

Nationalization vs. Privatization
Nationalization is the process for a government to expand its economic resources and power, whereas Privatization is the process where government-owned companies are spun off into the private sector.

SBI Merger with Associate Banks and BMB
Read this article of SBI Merger

Disclaimer - This topic is a much debated topic. You can have your own opinion. There is no proper definition or guideline, by which you can determine  whether a PSB is a nationalized bank, or not. Any kind of debate regarding this topic is welcome.

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