The Banks (Nationalization) Act, 1974

Nationalization of Banks 
We have gone through the evolutionary process of banking in Pakistan. We know that by June 30th 1948 the number of branches in Pakistan was only eighty one. However with the establishment of State Bank of Pakistan and efforts of the government, the number of schedule bank increased to 14 with 3323 branches all over Pakistan and also 74 branches in foreign countries by Dec 31st 1973. The commercial banks grew at tremendous speed and mobilized savings from the public and also contributed a lot in financing business and corporate sector. However it was considered that although banking sector was growing but the fruits of development were limited only to the urban population and corporate sector whereas most of the sectors, people and under develop regions were not getting due share. As such it was decided that banks should be nationalized.  For the implementation of this objective Nationalization Act 1974 was promulgated.

Objectives of Nationalization
The nationalization was carried out with a view to achieve the following objectives:
-- Disbursement of funds to the desired channels to achieve the priorities set out by the government for social welfare projects. 
-- Equitable distribution of credit to different classes, sectors and regions.

 Salient features of The Bank (Nationalization) Act, 1974
The Act extends to the whole of Pakistan. 
Act to override other laws.- This Act shall have effect not withstanding anything contained in any other law for the time being in force or in any agreement, contract, award memorandum or articles of association or other instrument.


Statutory Definitions
The followings definitions as contained in section 3 of the Act, which are reproduced below

1. "Bank" means
   1. A company registered under the Companies Act, 1913 (VII of 1913), and transacting, in or outside Pakistan, the business of banking as defined in clause (b) of section 5 of the Banking
   2. Companies Ordinance, 1962 (LVII of 1962), in respect of which no proceedings under Part III or Part IV of the said Ordinance have been taken or are pending immediately before the commencing day; and
   3. A banking company incorporated by or under any law within the legislative competence of
   4. Parliament, including the State Bank, the National Bank of Pakistan, the Industrial

1. Development Bank of Pakistan and the Agricultural Development Bank of Pakistan, but does not include;-
2. A bank which is an enemy firm within the meaning of the Defense of Pakistan Rules, or
3. A banking company incorporated outside Pakistan and transacting banking business in Pakistan, or
4. A co-cooperative bank registered under the Co-operative Societies Act, 1925 (VII of
5. 1925), or any other law for the time being in force relating to co-operative societies, not being a co-operative bank which is a scheduled bank; or
6. A Government Savings Bank to which the Government Savings Bank Act, 1873 (V of 1873), applies, or
7. A corporation or company owned or controlled by a Province and carrying on banking business only within that Province, or
8. va corporation or company established in Pakistan in pursuance of an agreement between the Government of Pakistan and Foreign Government or institution for transacting banking business in or outside Pakistan;
9. (1A) “board" means Board of Directors constituted under this Act;
10. "Commencing day" means the Ist day of January, 1974;

(4A) “Loans and advances" means "loans, advances and credit" as defined in the Banking Companies Ordinance, 1962 (LVII of 1962),

1. "Prescribed" means prescribed by rules made under this Act;
2. "State Bank" means the State Bank of Pakistan established under the State Bank of Pakistan Act, 1956 (XXXIII of 1956); and

Other words and expressions used but not defined in this Act shall have the same meaning as in the Banking Companies Ordinance, 1962 (LVII of 1962).
Provisions regarding transfer of ownership of banks are contained in section 5 of the Act which is reproduced below

1. The ownership, management and control of all banks shall stand transferred to, and vest in, the Federal Government on the commencing day.
2. All shares in the capital of a bank held by persons other than the Federal Government, a Provincial Government, a corporation owned or controlled by the Federal Government or the State Bank shall stand transferred to, and vest in, the Federal Government on the commencing day, free of all trusts, liabilities and encumbrances.

(2A) if any bank issues any additional share capital after the commencing day, then, without prejudice to the provisions of sub-section (1), a Provincial Government, a corporation owned or controlled by the Federal Government and the State Bank may contribute to the share capital so issued.

1. The vesting of any shares in the Federal Government under sub-section (2) shall not affect the right inter se of a shareholder and any other person who may have an interest in such shares and such other person shall be entitled to enforce his interest against the compensation awarded to the shareholder under section 6.
2. The safety of all deposits in banks shall stand guaranteed by the Federal Government.
3. The provisions of this Act and the vesting of the shares of the banks in the Federal Government thereunder shall not in any way affect the status of the banks as bodies corporate
4. The Federal Government or a corporation owned or controlled by the Federal Government may, from time to time, sell all or any of its shares in the capital of a bank, other than the State Bank, to such persons, and on such terms and conditions, as it may determine.

Procedure regarding compensation for transfer of ownership of shares in a bank is contained in section 6 which is reproduced below:

1. Every person who stands registered as the holder of any share of a bank the ownership, management and control of which stands transferred to the Federal Government by virtue of section 5 shall be entitled to receive from the Federal Government by way of compensation per share an amount determined in accordance with the provisions of section 7 in the form of bonds of the Federal Government, repayable at par at any time within a period of fifteen years in accordance with a redemption programmed formulated by the Federal Government and bearing interest at the rate of one per cent above the bank rate notified by the State Bank from time to time:

Provided that, in formulating the redemption programmed, the Federal Government may make provision for preferential redemption of the bonds of such class of persons who are of meager means such as orphans, widows and pensioners, and the amount of compensation payable to whom does not exceed such maximum amount, as the Federal Government may deem fit:
Provided further that, where the amount so determined is not exact multiple of one hundred rupees, the amount in excess of the nearest lower multiple of one hundred rupees shall be paid in cash.

1. The bonds shall be negotiable and eligible as security for advances.

The previous management was removed as per provisions contained in section 8 of the Act which is reproduced below:

1. Every person holding office in any bank as chairman, director or chief executive by what-ever name called, other than a person who holds such office by virtue of his appointment or nomination by the Federal Government or the State Bank, shall stand removed from his office on the commencing day and this removal shall not entitle him to any compensation and no such claim shall be entertained by any court, tribunal or other authority.
2. The vacation of his office by a Chairman, Director or Chief Executive under subsection (1) or otherwise shall not in any way absolve him of his liability, if any, under any law, contract or otherwise howsoever subsisting immediately before the commencing day or the day on which he ceases to hold such office.
3. A Chairman, Director or Chief Executive by whatever name called ceasing to hold office under any of the aforesaid provisions shall entrust or cause to be entrusted to the person succeeding him in that office, intact and in as good order as they existed on the day immediately preceding the commencing day all properties, all books of accounts and other records and documents belonging to or in the custody or control or pertaining to the affairs, of the bank.
4. Central Board of the banks mentioned in the Schedule, and all local bodies, area boards, managing committees, executive committees and similar other bodies for the management of any bank shall stand dissolved, and all members of such bodies shall stand removed from office, on the commencing day.

Pakistan Banking Council

1. At the time of promulgation of this Act, Pakistan banking council was established to oversee the working and performance of nationalized banks. However, the council was dissolved vide Banks (Nationalization) (Amendment) ordinance 1997, the main features as contained in section 9 of the Act are given below:
2. The Pakistan Banking Council (hereinafter referred to as the Council) shall stand dissolved forthwith.
3. All assets, properties and rights of the Council shall stand transferred to and vest in, and all liabilities and other encumbrances of the Council shall stand transferred to and become the liabilities and encumbrances of, the State Bank.
1. Employees of the Council, including its members,-
2. who are on deputation or secondment from any public sector financial institution shall revert to, and continue to be employed by, their parent institutions on terms and conditions governing their employment in their parent institutions; and
3. Who do not fall in clause (a) shall become employees of the State Bank on terms and conditions governing their employment with the Council.
4. Every contract or instrument to which the Council is a party shall continue to be in force and effective as if the State Bank had been a party thereto instead of the Council.
5. Any legal proceedings or, as the case may be, any application pending before any authority by or against the Council may be continued by or against the State Bank.
6. Where under any statute or statutory instrument, the Chairman or a member of the Council is nominated for a specified assignment of task, the vacancy caused by operation of this section shall be filled by a person nominated by the State Bank.

Provisions regarding management of banks are contained in section 11 which is reproduced below:

1. Subject to sub section (2) a bank shall have a Board consisting of-
1. A President, who shall be its Chief Executive; and
2. Not less than five and not more than seven other members.
2. The Federal Government may, if it deems necessary, appoint a Chairman of the Board in respect of a bank.
3. The Chairman, the President and other members of the Board-
4. shall be appointed by the Federal Government in consultation with the State Bank, for a term of three years, on such terms and conditions as may be fixed by the General Meeting of the bank:
5. provided that the Chairman and the President shall be appointed from amongst professional bankers whose names are included in a panel of bankers qualified to be the Chairman or the President,
6. which panel shall be determined, maintained and varied, from time to time, by the State Bank;
7. may be removed for misconduct or physical and mental incapacity before the expiry of the three years term by the Federal Government in consultation with the State Bank;
8. shall stand removed if he becomes ineligible on any of the grounds specified in sub-section(12);
9. May be re-appointed by the Federal Government, in consultation with the State Bank of Pakistan, for a further period of three years.
10. The general direction and superintendence of the affairs and business of a bank, and overall policy making in respect of its operations, shall vest in its Board.
11. The Board shall determine-

Effects of Nationalization
Pros:

1. Availability of funds to the government for meeting its social sector targets
2. Equitable distribution of credit to the different sectors, industries and regions.
3. Centrally coordinated policy frame work

Cons:

1. Excessive government control leading to the decisions on non professional considerations.
2. Lack of fair market competition leading to absence of availability of innovative and diversified products to the customers.
3. Neglect of personalized services to the customers.
4. Mismanagement leading to alarming size of nonperforming loans portfolio.    

Nationalization Act is an important part of our statutory history. We have, at length discussed objectives merits and grey areas of nationalization. At present the world is heading forward with the notions of disinvestment, privatization and free market and banking industry is no exception to it. At present banking industry is passing through this phase and visibly performing well.