Why in news?
July 19, 2019 marks 50 years of nationalisation of 14 commercial banks in India by the Indira Gandhi government.
What is bank nationalisation all about?
- State Bank of India was the only public sector undertaking that was nationalised (in 1955) before 1969.
- The SBI nationalisation had happened in the backdrop of private banks going bankrupt at an alarming rate.
- In 1969, Indira Gandhi government carried out bank nationalisation through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969.
- Fourteen big private banks were nationalised, to be taken control of by the government.
- These lenders held over 80% bank deposits in the country.
- The banks that were nationalised were:
- 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
- United Bank of India
- In 1980, the government took control of another 6 banks.
- These included Punjab and Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank, Andhra Bank and New Bank of India.
What was the rationale?
- There were issues related to the reach and flow of credit to important sectors, and these were dealt with through various ad-hoc measures in 1960s.
- E.g., the fragmentation was addressed through consolidation of banks
- The number of banks was brought down from 566 in 1951 to 91 in 1967.
- Before nationalisation in 1969, the government tried addressing some of the issues through “social control”.
- The idea was to attain a wider spread of credit and increase the flow to priority sectors.
- However, overall, banks were failing largely due to speculative financial activities.
- After 1967, when Ms. Indira Gandhi became the PM, banks were not giving credit to agriculture and not enough credit to industry.
- The banks were more interested in extending credit for trade.
- The collapse of banks was causing distress among people.
- People were losing their hard-earned money in the absence of a strong government support and legislative protection to their money.
- Given this, nationalisation of banks was a more populist and rational choice for the government.
- Given these, the key objectives of nationalisation of banks were to -
- address the rising economic difficulties in the 1960s
- remove control of the few on banking system
- provide adequate credit for agriculture, small industry and exports
- professionalize bank management
- encourage a new class of entrepreneurs
What was the implication?
- The nationalization is one of the most significant economic events after India’s independence.
- Bank nationalisation resulted in a significant increase in bank deposits and financial savings.
- In this backdrop, the rising fiscal deficit made the banking sector a captive source of financing.
- With continued political intervention, the profitability of the banks suffered.
- Over the years, this affected bank operations.
- In all, the government succeeded partially in meeting its goal of implementing its development agenda through the banking system.
- However, many in India lacked access to formal finance and a large part of the population remained outside the banking net.
What are the current challenges?
- Today, most public sector banks (PSBs) are not in the desired position.
- The government has pumped in over Rs 2.5 trillion in the last few years (including Rs 70,000 crore in 2019) and it still may not be enough.
- PSBs continue to struggle with a higher level of non-performing assets.
- Recapitalisation - The government does not have the fiscal space to continuously pump capital into PSBs. Click here to know more on recapitalisation.
- The idea of using recapitalisation bonds too has its limits as it is increasing the government’s liability.
- Technology - The role of technology in banking and finance is rising rapidly.
- PSBs, with their weak balance sheets, are not in the best position to adapt and compete on this front.
- Naturally, the business will increasingly shift towards private sector banks.
- Reforms - It would be hard to implement the required reforms in PSBs in the present set-up.
- PSBs, which account for 66% of outstanding credit and 65.7% of deposits, need functional and operational independence.
- With the government being the majority shareholder, this will be difficult to attain.
What is the way forward?
- The 50th anniversary of banks nationalisation is a good opportunity to objectively review the performance of PSBs and take corrective measures.
- The government can perhaps revisit the recommendation of the Narasimham Committee on banking sector reforms in this context.
- Bringing down government equity to 33% will give banks the much-needed functional autonomy.
- It will also enable them to raise capital and compete in the market.
Source: Business Standard
