Nationalisation of Private Banks in India

By: Prapanna Lahiri

Economic Background: Independent India saw its government embarking on an approach of planned economic development for the country. Economic planning started in 1951 envisaged social ownership of the means of production. The government by early 1960s realised that a significant share of bank deposits coming from the general masses of India was with 14 commercial banks directly or indirectly owned and controlled by big business houses which were utilising these deposits as captive funds to cater to their own business needs. The first Green Revolution in India began in the 1960s when Indian farmers started adopting improved agronomic technology that significantly increased agricultural yields. There was an urgent need to ensure release of huge amount of funds held as deposits from the masses by these Private Banks for an equitable and inclusive growth of the various sectors of the country’s economy including a rejuvenated agricultural sector. Banks were shy of extending finance to the neglected yet productive sectors of the economy forcing majority of the people in these sectors knock at the doors of usurious local money lenders for their genuine financial needs.

Political Background: After the debacle in the general elections of 1967, Prime Minister Mrs Indira Gandhi began espousing ‘social control’ of banks. She believed that the private owners of banks were in cahoots with the rightist Swatantra Party which advocated introduction of market economy after dismantling of ‘Licence Raj.’ Her leadership also faced challenge from the right wing of the congress party led by Morarji Desai, whom she had to accept as Deputy Prime Minister and Finance Minister in her cabinet. In 1969, Mrs. Gandhi took the finance portfolio from Desai and promulgated an ordinance to nationalise all 14 Indian banks having a deposit base of over Rupees 50 crores each, with effect from the midnight of 19 July 1969. These actions forced Morarji Desai to resign from her cabinet. By neutralising Morarji Desai Mrs Gandhi felt she could upstage her opponents within and outside the Congress and reinforce her slogan of garibi hatao (remove poverty) to gain votes of the nation’s poor. She achieved significant political victory when the President gave his assent to a bill that replaced the ordinance within a month.

Being re-elected Prime Minister In 1980, Mrs. Gandhi nationalised six more banks with deposits over Rupees 200 crores bringing total number of nationalised banks to 20 which in 1993 dropped down to 19 with merger of New Bank of India with Punjab National Bank. With the second phase of nationalisation the Government of India controlled around 91% of the banking business of India. (1)

Post Nationalisation:  

Bank nationalisation became a significant move for Indian economy in view of the following:

  1. Banking facilities were extended to remote unbanked areas of the country eliminating metropolitan, urban and regional bias of existing branch network of banks
  2. Number of bank branches in rural areas rose from 8,261 in 1969 to a whopping 65,521 in 2000. (2)
  3. It instilled confidence of the masses in the banking system encouraging them to save and invest
  4. Savings was redefined from money being tucked under the mattress to sweeping money from small individuals into the financial system.
  5. It helped form banking habit in the relatively poorer strata of society.
  6. Savings rate rose steeply from 12% in 1969 to 20% in 1980 that paved the way for economic growth of 5.5-6 % in the eighties. (3)
  7. The vulnerable sectors of the economy which included agriculture and small scale industries were categorised as Priority Sector by the government for directing 40% of credit outflow of banks. A sub-sector for weaker sections like Scheduled castes and tribes was further curved out to provide credit at a rate as low as 4% per annum under Differential Rates of Interest scheme.

Critics call bank nationalisation a mistake as they allege interference in administration of the banks, erosion of efficiency in the banking system, dilution of commercial character of the banks, and creation of a culture of financial indiscipline among the intended beneficiaries.

On balance, positives of Nationalisation of Banks in India outweighed the negatives and made the Indian Banking system one of the safest in the world preserving its competiveness.







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