Nationalisation of Banks

 Nationalisation of Banks 

The Indian financial sector underwent a tectonic shift, when Indira Gandhi government nationalised the 14 biggest commercial banks in 1969. According to many economists nationalisation of banks was the single-most-important economic policy decision taken by any government after 1947. The impact of this decision is considered by some to be, even more than the economic reforms of 1991.

During that time many Asian countries were switching to more market-oriented policies, India on the other hand, supported the socialist policies.

However, with the looming banking crisis in current times, debates have emerged about the privatisation of banks. This raises the question of whether nationalisation of the bank in the first place was the right move or not.

• In 1955, India nationalised Imperial Bank of India with extensive banking facilities on a large scale, especially in rural and semi-urban areas.
• It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State governments all over the country
• On 19th July 1969, a major process of nationalisation was carried out and 14 major commercial banks in India were nationalised.
• The second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with six more banks.
• This step brought 80% of the banking segment in India under Government ownership.

• After independence, the Government of India (GOI) adopted planned economic development for the country. Nationalisation was in accordance with the national policy of adopting the socialistic pattern of society.
• Nationalisation came at the end of a troubled decade. India has suffered many economic as well as political shocks.
  • There were two wars (with China in 1962 and Pakistan in 1965) that put immense pressure on public finances.
  • Two successive years of drought had not only led to food shortages but also compromised national security because of the dependence on American food shipments (PL 480 program).
  • Subsequently, a three-year plan holiday affected aggregate demand as public investment was reduced.
  • The decade of 1960-70s was the lost decade for India as the economic growth barely outpaced population growth and average incomes stagnated.
  • Industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of total credit.
    • Agriculture needed a capital infusion, with the initiation of the Green Revolution in India that aimed to make the country self-sufficient in food security.
• Other reasons responsible for the nationalisation of banks were-
  • Social welfare
  • Controlling private monopolies
  • Expansion of banking to rural areas
  • Reducing regional imbalance to curb the urban-rural divide
  • Priority Sector Lending: In India, the agriculture sector and its allied activities were the largest contributors to the national income.
  • Mobilisation of savings: Nationalisation aimed at mobilising the savings of the people to the largest possible extent and to utilise them 

Benefits of nationalisation

• After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
• Banking under government ownership gave the public implicit faith and immense confidence about the sustainability of the banks.
• Banks were no longer confined to only metropolitan or cosmopolitan India. In fact, the Indian banking system has reached even to the remote corners of the country.
  • This is one of the main reasons for India’s growth process, particularly in the Green revolution.
  • Purpose of nationalisation is to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas.
• Public deposits in the bank have increased so much that leaving it completely to the private sector might pose a challenge.
  • Banks, by advancing loans to the speculators and non-priority sector, have created havoc in the economy.

Balance of payment crisis 1991 started an era of liberalisation, privatisation and globalisation. However, the political control of bank lending continued even after the 1991 reforms which today culminated into the bad loan or Non Performing Assets crisis that has slowed down India’s growth trajectory.

• The NPA crisis since 2012 is at least partly explained by the credit bubble that grew under political patronage that emerged out of government’s control over Banks.
• Nationalisation of banks led to an interest rate structure that was incredibly complex.
  • There were different rates of interest for different types of loans. The Indian central bank eventually ended up managing hundreds of interest rates.
  • This defeated the purpose of nationalisation, as due to complex structure loans never reach the needy ones.
• Banking is a highly competitive enterprise which works on profits, nationalisation of banks has led to lesser competition between the public sector and private sector banks.
  • This has created a bureaucratic attitude in the functioning of the banking system.
  • Lack of responsibility and initiative, red-tapism, and inordinate delays are common features of nationalised banks.
• Although liberal credit policy is necessary for providing financial support to the weaker sections of the rural community, such a policy may prove harmful for the stability of the banking system.
  • The experience of the nationalised banks has shown that these banks are now facing the problems of heavy overdue loans and economically unviable branches.
  • Extending loans to agriculture and small scale industries is risky and less remunerative. Such loans are against the sound banking rules and may weaken the economic viability of these institutions.
• Due to lack of performance audit of banks, policy-making failed to ensure that the finance from the public institutions are, in fact, going to productive uses in the large public interest