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.
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.
- 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
- SBI and SBI Associates – 6 banks
- Nationalized banks (both 1969 & 1980) – 19 banks
- IDBI bank – 1 bank
- BMB bank – 1 bank