50 years of nationalisation of banks

50 Years of Nationalisation of Banks

2019 marks 50 years of the nationalisation of Indian Banks. On July 19, 1969, Indira Gandhi, who was then Prime Minister and Minister of Finance, agreed to nationalise the country's 14 largest private banks.
 
CONTEXT:
It is possible to trace the origins of banking to the beginning of human civilization. It has been prevalent in some form and has various sources of reference at different points in history. But modern banking is a little over a century old in India. Unlike in the case of many other industries, banking in India was largely indigenous. Most banks were incorporated as joint stock entities that came up in the late nineteenth century, either promoted by large businessmen or the royal families across the country.
 
By Independence, 90% of the banks were in private hands. Even as banks did well after Independence, only a handful of rich and middle-class urban households had access to banking services. The government, however, felt that banking had to expand, giving both the rich and the poor access. Banking was important in order to establish and expand the scope of government programmes. Therefore, bank nationalisation was seen as the only alternative.
 
While bank nationalisation was not publicly discussed, at a meeting of the All India Congress Committee, Prime Minister Indira Gandhi made her intentions clear, presenting a paper on the subject. The government released the Banking Companies (Acquisition and Transition of Undertakings) Ordinance, 1969, after some consultations, which empowered it to nationalise banks. The order would refer to the 14 largest commercial banks, which then accounted for 85 percent of the country's bank deposits, from midnight on July 19, 1969. It later nationalised six more banks in 1980.
 
REASONS FOR BANK’S NATIONALISATION:
The reason for nationalising banks was to match the banking sector with the objectives of socialism embraced after independence by the Indian government. The history of the Reserve Bank of India (RBI) points out that the concept of nationalising banks and insurance firms emerged in an All India Congress Committee report as early as 1948.
In 1956, with the establishment of the Life Insurance Corporation of India, the insurance sector was nationalised, but banks had to wait until 1969, except in the case of the State Bank of India (SBI), which was nationalised in 1955. The numerous reasons that led to the nationalisation of banks in India are given below:

Political Reason
Special mention is earned for India's political drama in the 1960s, before bank nationalisation. In 1962, we waged war with China, followed by the death of Prime Minister Jawaharlal Nehru in 1964. This led to the appointment of Prime Minister Lal Bahadur Shastri, who soon went to war with Pakistan in 1965. Then, in 1966, Shastri died unexpectedly, leading to Indira Gandhi being appointed Prime Minister. The ruling Indian National Congress was in chaos, as was seen in the election results afterwards. In the 1967 Lok Sabha election, Congress won 283 seats out of a total of 520, sharply below the 361 out of 494 it won in 1962. Additionally, in seven states, the party lost control.
 
The Economic Reason
There were also two droughts in the 1960s, resulting in negative growth rates for Gross Domestic Product ( GDP) and double-digit inflation. In 1964-65, foreign exchange also decreased. Such economic circumstances led the government to devalue the Rupee in 1966 from 4.76 per U.S. dollar to Rs 7.50/$. In addition to the devaluation, export duties on a dozen goods were imposed. The decision was criticised across corners as the centre had denied the possibility of devaluation before making the move. No less than the Congress president at the time, K Kamraj, dubbed it as “sellout to Americans”.
 
Banking Reason
Even though the banks lent credit, the disbursal to the rural areas and small scale borrowers was far less as compared to the industry despite the Banking Regulation Act, 1949. The loans by commercial banks to industry nearly doubled between 1951-1968 from 34 to 68 per cent, even as the agriculture received less than 2 per cent. The government of the time believed that the banks failed to support its socioeconomic objectives and hence, it should increase its control over them.
There has been a long-standing criticism that Indian banks have not been able to provide agriculture with credit. Also, when major industrialists were run by private banks, they gave themselves loans. In many other fields, the executives of the top banks have held directorships that contributed to conflicts of interest.
Further, banks had increased branches from around 4,000 in the 1950s to around 7,000 by 1967 but the share of rural and semi-urban branches remained similar at 61 percent. The share of urban branches increased from 36 percent in 1952 to 39 percent in 1967.
 
THE NATIONALISATION EFFECT:
Bank nationalisation is defined in the second volume of the official history of the RBI as the single-most significant economic policy decision taken by any government after 1947. Historians of the central bank claim that even the economic reforms of 1991 pale in comparison in terms of the effects. In terms of three main fields, the effects of bank nationalisation can be considered: deposits, lending and interest rates. The one positive effect of bank nationalisation was that when lenders opened new branches in areas that were unbanked, financial savings grew.
 
In the 1970s, gross domestic savings almost doubled as a percentage of national revenue. A growing part of this was sucked up by the government itself through increases in the statutory liquidity ratio.
 
Banks were asked to drive funds to sectors for growth that the government wanted to aim. On 29 July 1969, Indira Gandhi told the Lok Sabha that the "objective of nationalisation is to promote rapid growth in agriculture, small industries and exports, to encourage new entrepreneurs and to improve all backward regions."
 
Credit planning has made the structure of the interest rate extremely complicated. For various types of loans, there were various interest rates. Finally, hundreds of interest rates were regulated by the Indian central bank. Only after the 1991 reforms was this mindboggling structure taken down, with the central bank controlling the pivotal repo rate, while commercial lending rates were regulated.
 
The pivot to a wider political economy strategy was bank nationalisation in the 1970s, a decade when economic growth barely outpaced population growth. Average incomes stagnated. For India, it was a lost decade. There is no question that exogenous shocks, such as growing oil prices or failed monsoons, played a role in the stagnation, but also harmed economic policy.
 
FINANCIAL INCLUSION AND NATIONALIZATION OF BANKS:
In addition, nationalised banks funded by reforms in the banking sector have contributed significantly to the robust growth of banking outreach. Millions of people at the bottom of the pyramid benefited from the strong network of Public Sector Banks (PSB) branches in the hinterland. With the Pradhan Mantri Jan Dhan Yojana, the steady emphasis on financial inclusion has accelerated since 2010 by implementing a 3-year outreach strategy
 
In order to expand banking facilities in unbanked areas, PSBs underwent significant systemic reforms. For planned branch expansion, the Lead Bank Scheme provided a blue print. Priority sector lending (PSL) originally prescribed mandatory lending in 1974 up to 33.3 percent, which was increased to 40 percent in 1985. Regional Rural Banks (RRBs), founded in 1975, collaborated with PSBs to speed up rural developments
 
CHALLENGES BEFORE PUBLIC SECTOR BANKS:
Fifty years later, banks operated by the government are still instrumental in providing access to banking services. They account for 66 percent of outstanding loans and 65.7 percent of deposits. Their network continues to be used, which comes with its costs, to drive government structures. Their success continues to be contrasted with private peers who operate solely on commercial terms. However, there are several
 
The Human Resources
Banks have little independence from recruitment numbers, approaches and sources, talent acquisition / management, compensation structure, specialisation, promotion and even deployment in the entire human resource (HR) lifecycle. For a number of years, the government's ban on recruitment created enormous shortages and they were filled in bunches, leaving little or no time for transfer of expertise.
 
Unless HR shackles are removed, boards are completely empowered and are comparable to well-run private sector banks, no amount of palliatives can help. Many bright PSU bank officers have left in frustration and joined private sector banks (in reality, in the initial years they helped the private sector) and are doing extremely well even to date.
 
Growth of Leadership
Senior officers are packed off to the Indian Institute of Management (IIMs) for fast monitoring of leadership development when in doubt, ignoring that leadership development takes place in the crucible of lifelong experiences and not in the classroom.
 
Management of Capitals
Governments have a pattern of regularly and front ending supplying only enforcement capital and not growth capital. If PSU banks have healthy balance sheets and enjoy relatively decent valuations, they are not permitted to access capital from the markets, which would have reduced the government's burden.
 
Hesitancy to Privatisation
PSU banks are asked several times to rescue distressed private sector banks by expensive absorption. This may be because government considers good use of PSU banks, enforcing government initiatives, especially in areas that the private sector is reluctant to. A classic example is Jan Dhan. To privatise as much as to nationalise, one needs a strong political will.
 
The Bad Loans
While the influence of the government has decreased significantly after the liberalisation period, the issue of bad loans has placed pressure on the banks. A host of steps to resolve the issue of non-performing assets (NPAs) have been introduced by both the government and the RBI banking regulator.
Thus, governance, political intervention and, to an extent, knowledge that may not have held pace in the field of credit assessment are the key problems with public sector banks ( PSBs) overall, and these may and must be resolved.
 
HOW DOES NATIONALISATION HELP GOVERNANCE?
In addition to performing the role of finance, PSBs have also enabled the government to perform the function of governance. The government has reached out via banks to individuals. Assistance was provided by banks to build toilets under the 'Swachh Bharat programme.'
 
Crop insurance policies have been launched by banks. The government has taken up the direct transfer benefit scheme in full force. This meant that individuals earned subsidy payments directly through their bank accounts. The government claims to have issued around 20 crore individuals Mudra loans. Public sector banks offer collateral-free credit for entrepreneurship. If the same banks are now facing an issue of over Rs 17,000 crore of NPAs against Mudra loans, it is another matter.
 
The Modi government announced the PM Kisan scheme to provide cash assistance to nearly 15 crore farmers annually only on the eve of the Lok Sabha election. Before the Lok Sabha elections were held, two instalments were issued to the farmers. The money was disbursed by public sector banks. These schemes helped Modi reach out, thanks to public sector banks, to the largest number of voters.
 
Thus, owing to the decision Indira Gandhi took 50 years ago, banks became the government's dispenser of goodies.
 
WAY AHEAD:
It's time to re-examine, fifty years after nationalisation, if we need too many public sector banks. Yeah, bank nationalisation has helped to achieve development targets, to improve financial inclusion, and so on. Although it has come at the price of bloated, inefficient banks in the public sector. They have also lent to the undeserving, bowing to political pressures, and are saddled with non-performing loans and massive losses. As a taxpayer, we make their losses good (as with Air India, BSNL, and so on).
 
Although the government was partially successful in achieving its objective of enforcing its development agenda through the banking system, many still lack access to formal finance in India. In technology, many state-run banks have trailed rivals. They must deal with new private banks that, 25 years later, have come up with state-of-the-art technology. The lenders are saddled with the majority of bad loans and hungry for money, while government regulation has decreased after liberalisation.
 
The major problems with the public sector banks (PSBs) are governance, political interference and to an extent expertise which may not have kept pace in the area of credit evaluation and these can and need to be addressed. Several experts have called for governance reforms, including former RBI governors M Narasimham (as early as the 1990s) and more recently Raghuram Rajan and Urjit Patel, and have asked the government to let some banks, if not all, power go. The way forward could be a couple of state-owned banks to reach social targets, while the rest could eventually get out of government influence.
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