Bank Nationalisation: 52 years "EMPOWER IAS"

 

Context:

• Nationalization has served its purpose. It’s time to move forward with the retention of majority ownership of the government in a few banks to serve people.

 

A Brief History of Nationalization

• In 1955, India nationalized 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 19^th July 1969, a major process of nationalization was carried out and 14 major commercial banks in India were nationalized.
• The second phase of nationalization 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.

 

Reasons behind bank nationalisation

• Mis-governance: Post-World War II, many banks collapsed as they had been financing speculative activities.
• Non inclusive: over 300 banks during that time were under the regulation of RBI as many of them were reluctant to support industry and agriculture and only gave trade finance.
• Bank Failure: In 1960, Palai Central Bank and Lakshmi Commercial Bank collapsed, the RBI launched a massive consolidation drive, bringing the number of banks from 328 in 1960 to 94 by 1965.

 

Had the objective of Bank Nationalisation met?

• Nationalisation of banks has served its purpose by taking banking to the hinterland and bringing a large part of the population into its fold.
• Since then, the banking industry has grown.
• In June 1969, there were 73 commercial banks; now there are 94, including small finance banks and payments banks but excluding regional rural banks and local area banks.
• The number of bank branches has grown from 8,262 to 158,373.
• One branch now covers roughly 9,500 people against 64,000 in 1969.
• In June 1969, the deposit portfolio of banks was Rs 4,646 crore, by June 2021, the deposit portfolio has grown close to Rs 153 trillion.

 

What factors led to the nationalization of banks?

• 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.
• Nationalization 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 nationalization 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.
  • Mobilization of savings: Nationalisation aimed at mobilizing the savings of the people to the largest possible extent and to utilize them for productive purposes.

 

Moving Ahead: Privatising Public sector banks

• Due to rising NPA’s and faced with the issue of Political intervention, PSB’s are in a bad state of financial health.
• Hence, the current government wants to Privatise few of the PSB’s to improve the banking sector in India.
• In February 2021 Union Budget, for the first time, spoke about privatising two such banks. Even before that, the government had committed to privatise IDBI Bank Ltd.
• In the run-up to the privatisation, the public sector banking industry had gone through a major phase of consolidation. The number of PSB’s has come down from 27 to 12 in three years, between 2017 and 2020.
• Recently, Finance Secretary T V Somanathan said the government would “eventually” privatise most of the PSBs and keep its presence to a bare minimum.