The year 2019 marks the 50th anniversary of bank nationalisation in India.
How did it unfold?
The measure of bank nationalisation came into effect on 19 July 1969 under the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance.
The ownership of 14 major commercial private banks - estimated to be controlling 70 of the deposits in the country - was transferred to the government.
The ordinance was soon after followed by an Act of the same name.
Till 1969, the State Bank of India (SBI) was the only bank that was not privately owned, which was called as the Imperial Bank before its nationalisation in 1955.
At Present, there are 19 nationalised banks in India
What was the reason behind the measure?
There were primarily two reasons why the ownership of these 14 banks was transferred to the government.
First, there were 361 private banks which failed across the country in the period from 1947 to 1955, translating to an average of over 40 banks per year.
This has resulted in depositors losing all their money as they were not offered any guarantee by their respective banks.
Second, these commercial banks were seen as catering to the large industries and businesses, ignoring the agricultural sector.
In 1950, only 2.3% of the bank loans were channelled to farmers, with the figure declining to 2.2% by 1967.
Also, it was estimated that 14 major commercial private banks controlled 70% of the deposits in the country.
Hence, the stated motive of this measure was to make credit availability easy for the “priority sector” – constituting agriculture, small industries, traders and entrepreneurs.
Moreover, the focus was also on opening up of bank branches in the rural and backward areas.
What was the consequence?
The move failed to eradicate poverty and in scaling down inequalities of income, wealth and entitlements, especially in rural India.
The performance of nationalised banks, on the parameters of branch expansion as well as increasing the number of deposits, never surpassed that of private banks.
Moreover, even while it did serve the agriculture sector, the ones who reaped the maximum benefits in terms of borrowings were the well-off farmers, with the poorer and the needy ones being excluded.
The same trend applied in the case of traders, businesses and industries.
Thus the real purpose was that it gave the ruling party access to finance as and when it needed without having to resort to black money.
Projects which had been given crores with the high reputation of corporate borrowers stalled.
Many of these loans had to be written off as bad debt, which has turned out as the NPA disaster in future.
Though bank nationalisation was made for the purpose of extending bank facilities to rural areas, financial inclusion was only increased post the implementation of Jan Dhan Yojana.
Thus, the government could have provided incentives for private commercial banks to open rural branches rather than nationalising them.
What are the takeaways?
Even now, the restructuring of the PSU banks has mostly concentrated on mergers and consolidation, instead of focussing on the failure of due diligence on part of the management.
The government has taken the route of recapitalising these bad banks rather than shutting them down or privatising them, affecting taxpayer’s money.
Thus the
consolidation process should be completed covering all PSU banks, followed by promoting efforts towards
divestment.
Also, internationally credible managers should be hired to reform the management in PSBs and to bring accountability in the lending process.
