Nationalization of Banks

Process of Nationalization – It is a process where in State become empowered to overtake the

private banks, organization along with the assets belonging to them; under public ownership by
passing a legislation or ordinance.

Nationalization of Banks in India

 On Jan 1st,1949 the Reserve Bank of India got nationalized, as a result of RBI (Transfer of
Public ownership) Act which was passed in 1948. The bank was earlier a private bank with
shareholder having rights over it.
After the act, RBI became the central bank of India with its main function being controlling
the money supply in the economy and banking sector with the help of monetary policies.

 The year of 1955 marked the nationalization of Imperial Bank of India, which was one of the
most dominant one in the economy at the time. After nationalization it was named as State
Bank of India. SBI is currently one of the largest bank operating in the Public Sector. It also
serves as a principle agent of RBI.

 In 1969, parliament enacted and issued ordinance of Banking Companies (Acquisition and
Transfer of Undertaking) Act, this resulted in nationalization of 14 banks namely, Allahabad
bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara bank, Punjab National
Bank, UCO Bank, Union Bank of India, etc.

 In 1980, 6 more banks got nationalized which was second round of nationalization, first of
which was in 69’. Banks which got nationalized were Punjab and Sind bank, Oriental Bank of
Commerce, Corporation Bank, Andhra Bank, New Bank of India and Vijaya Bank.

After this round, RBI had control over ~91% of the banking business in the country.

Nationalisation of Banks in Netherlands

 In 1948, the Dutch Parliament agreed on and enacted the Bank Act which officially
nationalized the Nederlandsche Bank and gave permission to supervise the banking sector
in the economy. Even prior to this act, the bank used to carry out supervision and related
activities but only informally.

 Three Dutch bank conglomerates, ABN AMRO, Rabobank, and ING Bank dominate the
Dutch financial sector, accounting for about 75 percent of total lending.

 Foreign financial service providers face no special conditions or restrictions, and receive
national treatment.  However, one provision of the Dutch 1992 Banking Act does reflect the
EU Banking Directive's "reciprocity" provision.  The Dutch Ministry of Finance has stated that
this section has never been used, and that all applications from non-EU parent banks are
handled on a national treatment basis. 
Financial Markets and Foreign Capital inflow and investment

Netherlands

In line with developments in other industrialized countries, the Netherlands liberalized international
capital transactions and deregulated domestic financial markets in the 1970s and 1980s.4 Both
developments were based on the notion that freeing up financial markets increases efficiency and
improves the allocation of resources.

These two developments were clearly interrelated: the integration of domestic markets in the global
financial market resulting from capital account liberalization forced the authorities to adjust their
regulatory policies to prevent domestic institutions from becoming non competitive.

 Liberalization of International Capital Inflows (1961-1986)

 After the second World War, Foreign Exchange Decision of 1945 ensured regulation
of international payment.
 In 1961, the Article VIII of the Fund's Articles of Agreement’s was accepted and all
the transactions associated with current account were legalised. Along with that
long run foreign direct investment was welcomed but short term and medium term
investment were strictly checked so that it don’t affect the economic stability of the
country immediately.
 In 1977 the system of capital account controls was simplified considerably. It was
transformed from a negative one (no transactions allowed, apart from certain
explicit exceptions) to a positive one (all transactions allowed, apart from certain
exceptions).
 In 1981 ,Law on Foreign Financial Relations was enacted and forced into existence,
replacing earlier Foreign Exchange Decision. This new law meant that both guilder-
issues by nonresidents in the Netherlands and other loans to nonresidents, as well
as for foreign credits taken up by residents, required permission from the concerned
authority.
 In 1981, all the foreign loans with maturity over 2 years were given ease in
acceptance after removing the credit ceiling.
 October 1968 marked liberalization of foreign issues on Dutch capital market,
which made Netherland fourth OECD member country to have fully liberalized
capital transactions.
 Conclusion - In sum, the Netherlands opted for a relatively progressive approach in
liberalizing international capital transactions. The developments were fully in line
with the European Council Guideline issued in 1988, which stated that by July 1990
all capital transactions between EC members had to be completely liberalized
  Deregulation of Domestic Financial Markets

Dutch government considered liberalization as the best possible way to ensure optimal
allocation of resources, for the same reason they liberalized international capital flows and now
it was turn for domestic financial markets. The prevailing situation in European markets was
such that, without deregulation the Dutch financial markets could not grow and stay
competitive.

In 1986 Dutch financial markets witnessed a major deregulation in their history virtually
eliminating Most of the obligations. This included –

 Calendar requirements were abolished for all but large issues

 Minimum maturity of bonds were lowered from 5 years to two years.
 Firms were now allowed to issue floating notes commercial paper and certificates of
deposit
 A permission was granted to Dutch subsidiaries of foreign banks to act as lead
manager in the financial markets.

This also meant that there is no more a difference between money and capital markets in the
Dutch economy.

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India

Capital account liberalization in India has taken place in a gradual manner, and has been viewed as a
continuous process rather than a one off event. Throughout most of the post Independence period
until the early 1980s, India had a relatively closed capital account. This approach was associated with
an import substitution strategy due to export pessimism, and relied on a host of tariffs and quotas to
limit the need for foreign exchange.

 Liberalization of International Capital Inflows (1991 onwards)

 LPG (Liberalization-Privatisation-Globalisation) The subsequent phase of
liberalization was under the overall reform process that was initiated after the
balance of payments crisis in 1991. The reforms included dismantling of trade
restrictions, move towards current account convertibility, a market oriented
exchange rate regime and a gradual opening up of the capital account.

 Portfolio flows have also witnessed significant liberalization, though there still exist
separate investment caps on sub-accounts of foreign institutional investors (FIIs),
individual FII and aggregate FII investment in a company.

 With India registering higher growth and inflation than the advanced economies,
nominal interest rates tend to be higher and this interest rate differential is likely to
persist in the foreseeable future..

While it is widely agreed that capital flows aid growth by providing external capital to sustain an
excess of investment over domestic savings, in recent years, many emerging markets, including
India, have experienced significant volatility in the quantum of capital flows. Such volatility
complicates macroeconomic management challenges by feeding into real exchange rate
misalignment, excesses in credit market, asset price booms and busts and exacerbating overall
financial fragility.

Monetary Policies

Monetary Policy is the policy which looks after the supply of money into the economy, keeps record
of inflation and considers the economy’s growth. Central bank of a country conducts the monetary
policy of that country.

INDIA

In India, monetary policies are being formulated and regulated by RBI – Reserve Bank of India

 Under Reserve Bank of India Act 1934, RBI is the apex body which is responsible for any
change in such policy of the country.
 Since 1952, monetary policy has been putting much emphasis on following two aims of the
economic policy. i) To speed up country’s economic development, to increase national
income and to increase living standard of the people, ii)Adapting measures so as to control
and to reduce inflation in the economy.

Structural Changes-1991
Before 1991,monetary policy was mainly anti- inflationary. From 1991 onwards, RBI had
made many changes in the monetary policy of the countrylike, earlier RBI had adopted a
controlled policy but when globalization came it has changed it from controlled to
decontrolled policy.

Recent Development in Indian Monetary Policies

 During September, 2013 Raghuram G. Rajan took over the charge and became the23rd
governor of RBI. During his tenure of 3 years Indian Monetary Policy has gone into very
unusual changes. When he joined the office, the Indian economy was struggling with an
alarming rate of inflation
 At this point of time the retail inflation stood at 9.49 %. As a governor, the primary concern
of Rajan was to curb down the inflation. He was able to contain inflation at 3.78 % in the
month of July, 2015- the lowest since 1990s. Headline inflation also declined from 5.98 % in
September, 2013 to its lowest which is at -4.05 %. E
 Earlier the key indicator of inflation was Wholesale Price Index(WPI) but during Rajan’s
tenure, as per the global norm RBI adopted Consumer Price Index (CPI) as the key indicator
of inflation.
 In April, 2014 RBI published its first bimonthly monetary policy report.
 Monetary Policy Committee (MPC)- In the Union Budget for 2016-17, upon the agreement
between government and RBI, the government proposed to amend the Reserve Bank of
India (RBI)Act,1934 for giving statutory backing to the Monetary Policy Frame work
Agreement and setting up a Monetary Policy Committee (MPC).
 MPC has been constituted for maintaining price stability, inflation targeting while keeping in
mind the growth objective. MPC has been entrusted with the task of fixing the bench mark
policy rate (repo rate) required to curb inflation with in the specified target level.
Netherlands

According to the Bank Act of 1948, the objective of Dutch monetary policy is to "regulate the value
of the Netherlands monetary unit in such a manner as will be most conducive to the nation's
prosperity and welfare, and in so doing seek to keep the value as stable as possible" (Article 9,
section 1).

 In operational terms it meant that the aim of monetary policy was to adjust the money
supply to the demand for money necessary to finance real economic growth, based on
transaction and precautionary motives. This would in itself result in price stability, thereby
meeting both obligations of Article 9 of the Bank Act.

Moderate Monetarism (Strategy used by Netherlands Central bank)

 The policy did not build on the presumption of a stable money demand function in the short
run and an inherently stable market economy.
 It acknowledged the key role of fiscal policy and wage developments in supporting price
stability.
 and third and most important, it was combined with a strong preference for fixed exchange
rates.

It is clear, however, that in the course of time the emphasis of the Dutch monetary authorities came
to lie more and more on maintaining price stability rather than trying to stabilize cyclical fluctuations
or stimulate the economy, based on the assumption of a vertical long-term Phillips curve.

Currency and Exchange Rate

As stated above, establishing a stable exchange rate has always been a key element in Dutch
monetary policy. In the first decades after the second World War this was ensured by participation in
the Bretton Woods system. In 1961 the guilder was revalued somewhat reluctantly, together with
the German mark. When the system of Bretton Woods broke down in the early 1970s, the option of
a fixed exchange rate in terms of all other currencies disappeared, and the Netherlands had to
decide to which currency or currencies to peg the guilder. Within Europe the Snake arrangement
and, subsequently, the Exchange Rate Mechanism (ERM) of the European Monetary System were
developed to provide greater exchange rate stability. The Netherlands has participated in both
arrangements.

According to the present strategy, restrictions on domestic money creation will only be introduced
if: • there are (threats of) fundamental disequilibria in the real economy;

• money creation is very high;

• there are substantive foreign outflows; and,

• this threatens confidence in the economy and in the guilder.

These conditions are very strict and unlikely to materialize. The result is that in fact Dutch monetary
policy in the 1990s has become pure exchange rate policy.