The banking system is the powerhouse of any economy, and the rise and fall of any economy largely depends on the health of its financial sector.
About 53 years ago, on July 19, 1969, the then government nationalised the 14 largest private commercial banks of the country through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, and decided to hold more than 50 per cent stake.
The impact of this decision is believed to be greater than the economic reforms of 1991 in some areas. Likewise, in the second phase, on April 15, 1980, the then government nationalised six more private banks with a capital of Rs 200 crore.
After Independence, the Government of India adopted the socialist path with India’s first Five-Year Plan in 1951, which required a lot of banking sector support to complete.
Many countries suffered heavy financial losses in the immediate aftermath of World War II. Many European countries nationalised their banks to overcome the crisis. India was also plagued by economic and political shocks. There were wars with China in 1962 and with Pakistan in 1965, which put immense pressure on public finances.
Till 1968, all private banks in India were limited to big cities only. All of them were monopolised by industrialists, with the share of industry in the credit disbursed by private banks doubling between 1951 and 1968 from 34 per cent to 68 per cent, while agriculture was receiving less than 2 per cent of the total credit.
One of the major objectives of nationalisation of banks was the expansion of banking into the rural areas to ensure financial inclusion. People’s confidence was very low in banking, which was a major obstacle in the expansion of banking in India.
Nationalisation of banks changed the fate of rural areas. Banks started coming out of cities and opening in villages and towns.
Within three decades, the number of bank branches in the country increased from 8,000 to 60,000. The rural deposit share reached 15.5 per cent in March 1991, from 6.3 per cent in December 1969, and the credit share increased from 3.3 per cent to 15 per cent. Banks were asked to direct funds towards areas that the government wanted to develop.
Nationalisation also strengthened the Green Revolution. Its aim was to make the country self-reliant in food security.
Gross domestic savings almost doubled as a percentage of the national income in the 1970s.
At the same time, there was an increase of nearly 800 per cent in deposits in India’s public sector bank branches, and a massive 11,000 per cent jump in advances (loans). The share of small-scale industrial units in total bank credit increased from 6 per cent in June 1968 to 12 per cent in June 1973. Steady increases were recorded in the share of rural areas in aggregate credit and deposits.
However, bank nationalisation has also received its share of criticism from time to time, and it is said that the then government had taken this step for political gains.
It is also true that nationalisation has led to a decline in the efficiency and profitability of banks.
Simultaneously, lack of responsibility and initiative, red tape, and excessive delays have become common features of nationalised banks.
Nationalisation of banks has reduced the competition among banks to a great extent. At the same time, it has greatly increased political interference and bureaucracy in the functioning of the banking system.
Banks have been misused for political purposes. It has also aggravated the problem of non-performing assets (NPA), with scams becoming common in public sector banks. These banks are now grappling with the problems of huge overdue loans and financially unviable branches.
The present government is emphasising on the privatisation of banks, but it is not hidden from anyone how the private and public sector banks have performed in times of crisis, including the covid-19 pandemic.
The government should not rush with the privatisation of banks; rather it should focus on comprehensive governance reforms, because if the banking sector is run by independent boards and in a dynamic manner, then public sector banks can also work like any other private bank.
Nationalisation has shifted banking from ‘class banking’ to ‘mass banking’ (social banking).
The author is associate professor, Jawaharlal Nehru University
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)