Headline : When Indira banked on socialism
- It’s now 50 years since the Indian government nationalized the 14 biggest commercial lenders on 20 July, 1969.
- The Indian financial sector underwent a massive shift 50 years ago, when the government nationalized the 14 biggest commercial lenders.
- The official history of the Reserve Bank of India describes bank nationalization as the single-most important economic policy decision taken by any Indian government after 1947.
- The banks that were nationalised included Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank and United Bank of India.
- Thereafter, in 1980, six more banks that were nationalised included Punjab and Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank, Andhra Bank and New Bank of India.
- It was an outcome of the pursuance of the socialist doctrine which advocated public ownership of the ‘commanding heights’. What started off initially as public sector enterprises in the manufacturing sector was expanded to include banks which were the facilitators of finance for growth.
Events leading up to the nationalisation of banks:
- Nationalization is the process of transforming private assets into public assets by bringing them under the public ownership of a national government or state.
- Collapse of private banks:
- The idea of nationalising banks had been around for much of the 1960s as private banks collapsed at an alarming rate.
- More than 360 banks had failed between 1947 and 1955 — the rate of collapse was 40 banks a year. The trend continued through the 1950s and the first half of 1960s. Banks were failing largely due to speculative financial activities.
- The collapse of banks were causing distress among people, who were losing their hard-earned money in the absence of a strong government support and legislative protection to their money.
- Bank consolidation:
- This had forced Morarji Desai, the then finance minister, to launch a massive bank consolidation drive. It brought down the number of banks from 328 in 1960 to 68 in 1965.
Bank Nationalisation process:
- Opposing the idea led by Prime Minister Indira Gandhi of nationalisation of banks, the finance minister, Morarji Desai, a known advocate of promoting private enterprise, to quit.
- Nationalisation was confined to the 14 largest Indian-owned banks, categorised as “major” by the RBI. These were banks with a deposit base of over Rs 50 crore, which between them accounted for 85% of bank deposits.
- The nationalisation was challenged in the Supreme Court, which struck it down in February, 1970 on the grounds that it was discriminatory.
- But the government overrode the SC order by bringing in a new ordinance four days later, that was subsequently replaced by the Banking Companies (Acquisition and Transfer of Undertakings ) Act, 1970.
Reasons for Nationalisation
- As finance was the means to bring about growth, it was felt that this important segment had to be under the purview of the government which was also running the Five Year Plan in parallel for achieving certain socialist goals relating to growth and development.
Expansion of credit
- To ensure that credit was available to the rural sector and high priority areas like agriculture, small industry, exports, special castes, something the private banks had failed to provide.
- Between 1951 and 1968, industry’s share in bank loans had nearly doubled to 68%. During the period, agriculture received just around 2% of bank credit. Given that this was also the time when the Green Revolution was being pushed, it was indeed a key factor.
- There was a feeling that these banks worked as monopolies and controlled the flow of credit. Hence, just like how the Monopolistic and Restrictive Trade Practice (MRTP) was used to curb the undue growth of private enterprises, nationalisation was to eradicate the same and make it more egalitarian.
Curb Regional Disparities
- There were stark regional disparities in terms of uneven growth which had to be addressed. This was done even in the industrial sphere, where concessions were given for setting up enterprises in backward areas.
- As an extension bank nationalisation intended to ensure the spread of banking to all states and regions and bring about balanced economic development.
- Expanding on bank branch network across the country, the system would also generate jobs as more manpower would be required. Hence, there would be an impetus to job creation.
- Several programmes of the government have been driven by the PSBs by virtue of their ownership pattern.
- For instance, the Jan Dhan programme of the government which aims at giving a basic bank account to all has been engineered and fulfilled by the PSBs as private banks do not find it attractive enough.
- Assistance for constructing toilets under Swachh Bharat programme, Crop insurance schemes were implemented through banks.
- Direct transfer benefit scheme meant people got subsidy benefits directly in their bank accounts.
- All of this was possible as public sector banks enjoyed government protection for 45 years.
- The nationalisation was a major step which helped expand banking. Bank nationalisation helped take banking to newer areas and rural areas.
- The public sector bank (PSB) system is still dominant and accounts for two-third of the total deposits and credit in the system
- In July 1969, at the time of nationalisation of banks, there were just 8,262 bank branches in the country. At the end of June 2018, state- owned banks alone had built a network of branches or a franchise of over 90,000 (over 29,000 in rural areas) and over 1.45 lakh ATMs while private banks had 28,805 branches.
- On the economic front too, there was a substantial contribution made by these banks to the growth of infrastructure in the country.
- Gross domestic savings almost doubled as a percentage of national income in the 1970s.
- It led to formalisation of credit and product offerings
Political and Administrative Inference
- Many public sector banks badly suffered due to the political interference. It was seen in arranging loan meals. It ultimately resulted in huge non-performing assets (NPA) of these banks and inefficiency.
- Today, even after a quarter century of liberalization, state-controlled banks still control 70% of the sector’s assets. As a consequence, credit is weak, the private sector is stunted and India has to endure periodic banking crises and bailouts at taxpayer expense.
- Banks, once nationalized, became risk-averse and hidebound, rarely lending to new firms.
- Under-lending became chronic; manufacturers found themselves severely short of credit.
- Bank officials did not have to care about finding and evaluating profitable firms. Instead they lent to those companies selected, for whatever reason, by their political bosses.
- Banking was not done on a professional and ethical grounds. It resulted into lower efficiency and poor profitability of banks.
- In fact it converted many of the banking institutions in the loss making entities. The reasons were lethargic working, lack of accountability, lack of profit motive, political interference.
Complex rate structure
- Credit planning also meant that the interest rate structure became 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.
- Bank nationalization was the pivot of a broader political economy strategy followed in the 1970s—a decade when economic growth barely outpaced population growth. Average incomes stagnated and it was a lost decade for India.
Misguided Economic Philosophy
- What has remained unaltered in the last 50 years despite economic reforms is the political philosophy and belief echoed on banking — a commercial enterprise driven by a larger social purpose and political considerations.
- It is on this that there has been a strong political consensus across successive governments irrespective of ideology, oblivious of the fact that the fundamental obligation of banks is to depositors.