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Merits And Demerits Of Nationalization

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May 6th, 2011
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The main arguments for and against nationalization of banks are as under:-

1. Creation of industrial and business monopolies. The advocates of nationalization of banks argue the concentration of banks credit in a few hands leads to the creation of industrial and business monopolies which is very harmful to the interest of the nation.

The opponents of nationalization assert that the issue of nationalization of banks should not be guided by emotions. Who can deny this fact that concentration of credit in a few hands leads to rapid industrial, agricultural and .commercial progress.

2. Fair Distribution of Credit. The nationalization of banks checks the concentration of credit in bigger account. It also ensures better distribution of credit and also meets the claim of social justice.

Those who oppose the nationalization of banks argue that fair distribution of credit and goals of social justice cannot be attained by nationalization of banks. Instead of nationalizing the bank, they say, the central bank should have effective control over the banks so that credit is properly disposed of.

3. Financing of Agriculture Sector. Nationalization of banks is also advocated on the ground that it enables the state to give liberal credit to agriculture sector which is the backbone of most of the developing countries.

On the other side the argument given is that nationalization of banks will not solve the problem of agricultural credit. The villages they say are scattered in wide areas. The farming units are small and large in number The loan agencies cannot effectively deal with farmers who are mostly illiterate. The banks cannot take the risk of advancing loans by mortgaging land and standing crops as it leads to many legal and practical difficulties.

4. Credit needs of small industrialists. A forceful argument advanced in favour of nationalization of banks is that with nationalization the credit needs of small industrialists (for short medium and long term loans) can be adequately met who are generally neglected.

There is a force in the above argument. The practical difficulties which arise in the advancing of loans to small industrialists are (1) that it is difficult to asses the credit worthiness of the small borrowers (2) The managers lack managerial capabilities (3) The industrialists provide no security for safe return of money (4) They prefer to indulge in litigation. They are mostly technically unqualified, etc.

5. Mobilization of resources. Nationalization of banks, it is claimed encourages and stimulates mobilization of saving in the country. The above argument is rebutted o the ground that banks in private hands can raise and do obtain sufficient funds by borrowing from the people.

6. Service motive. Nationalization of banks is also supported on the ground that it replaces the commercial motive by the spirit of service. The private banks are geared for making profits for their shareholders and directors only. The above argument is not tenable. The bank in private hands keep the twin objectives of profit and service side by side.

7. Commercial approach. Another point advanced in favour of nationalization is that private banking system is completely run on commercial basis t e on consideration of profits. The social interest is ignored and national gain is sacrificed. The above arguments is rebutted on the ground that private sector no doubt works for profit it however earns profits by efficiently pursuing minimum operational cost approach.

8. Level of efficiency. Nationalization of banks is also advocated on the ground that the level of efficiency in the state owned banks is considerably improved. Efficiency is not to be judged by the margin of profit alone If the banks are able to provide credit to new entrants in the industry loan is advanced according to national priorities the banking efficiency is said to be high.

Those who oppose the nationalization of ban say that as t e banks pass into the State these are based with twin dangers of overcentralized control and over bureaucratization, redtapism, nepotism, favouritism and unnecessary delay in the advancement of loans creep into the banking system. This retards the economic development in the country.

9. Holding of price line. Another advantage claimed of nationalization is that the central bank with the help of nationalized banks can minimize the fluctuations in economic activities. It can hold the price line by not financing in speculation, hoarding and other ahtisocial activities. The advantage given above is not convincing. The fluctuations is economic activities are caused mainly by unrealistic fiscal measures and ill conceived economic policies.

10. Rate of economic growth. Nationalization of banks is advocated on the ground that with the take over of banks, the financial resources of the state are considerably increased. The state is -then in a position to undertake short and long term projects for increasing the rate of economic growth with certainty. The argument looks convincing on the face of it. Yet it crumbles when it is examined in the light of experience gained by nationalization of banks. The increase in income of the state due to nationalization is -mostly diverted to unproductive channels and this has leads to the rise in the price of the commodities.

11. Abolition of malpractices. The case for nationalization of banks is also advanced on the ground that the malpractices of private owned banks like that of unlawful transactions, evasion of foreign exchange, heavy advances to directors and to their near and dear ones, evasion of taxes etc.- will altogether stop.

This merit of nationalization of bank is also not very convincing. If past experience is any guide to us, the malpractices in the state owned banks like that of favouritism, nepotism bureaucracy, proverbial delay in taking timely action, corruption, bad debts etc., are more serious.

12. Security to depositors. It is said that the money lying in private banks is not safe. The nationalization of banks provides the much needed security to the depositors.

No body can deny that the money lying in the s-ate vaults of the state is safe and secure. However, the central bank of country can provide security and give legal cover by having a strict control over the private owned banks.

13. Wasteful competition. The private banks in order to attract customers spend huge among on constructing prestigious buildings, lavishly furnish offices, make the building centrally air-conditioned, etc. The huge waste of money and energy can be avoided if banks are owned by the state.

The argument advanced against this is that the competition is an essence of private enterprise. If the banks spend large amount on erecting sky high buildings, they recover the amount on renting out the major portion of the building to the various firms in due course of time. Moreover, every bank has its own unique way for providing service to its customers. Let not the initiative and enterprise be curbed by nationalization of banks.

Summing up, the objectives of nationalizing the banks in the past over three decades have not been achieved. Favouritism, nepotism malpractices have ruined the commercial banks. The total amount of stuck up loans of bank and development financial institutions is mounting up. The nationalized banks are again being privatized and the Government is permitting the establishment of new banks in the private sector.


Article Source: http://www.informationbible.com/article-merits-and-demerits-of-nationalization-59000.html

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