Nationalisation of Banks and Social Control over it

The author Yamini Gurjar is a 5th-year student from Alliance University.

INTRODUCTION

Bank nationalization in India started with the government nationalising the 14 largest commercial banks on 19 July 1969 through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969. These banks held about 80% of the entire bank deposits in the country. In 1980 another six private banks were nationalised. Until 1969, the State Bank of India was the only bank not privately owned. Before its nationalisation in 1955 It was called the Imperial Bank. Currently, India has 19 nationalised banks[i].

There are various reasons for the occurrence of such nationalization. One of the major reasons is to energise priority sectors. The agricultural sector was ignored for a very long time by commercial banks. These banks were seen as catering to only large industries and businesses. Approx. 2.3% of the bank loans were channelled to farmers, in 1950, with the figure declining to 2.2% in the next 17 years. The government also wanted to open new branches in the rural and backward areas. The government also wanted to mobilize savings through nationalisation and utilize them for better and more productive purposes leading to efficiency. There were various economic and political reasons as well Bank nationalization was one of her responses to the economic and political challenges of the time. E.g., the wars with China in 1962 and Pakistan in 1965—put pressure on public finances.

IMPACT OF NATIONALIZATION

Bank nationalization has both negative and positive effects.

Positive effects include; firstly, an increase in financial savings since the lenders are opening branches without any banking branch. Secondly, there was an increase in gross domestic savings in the 1970s[ii].

There also was an improvement in banking efficiency, which consequently lead to a boost in the confidence of the public in banks. It also gave a boost to the small scale industries and other small sector businesses that were held back including agriculture. This resulted in the overall growth of the economy. There was a major increase in the penetration of the banks, especially in rural areas. Further, financial inclusion was witnessed due to the growth of financial intermediation[iii]. The bank branches had reached from every urban area to almost all the remote areas. An increase in the public deposit because of nationalization was triggered which lead to rapid growth in all classes of business. This was also the golden time of the Green Revolution, which Indian history considers to be the period of rapid Indian growth[iv].

However, along with all these positive impacts, there were also some negative impacts. Although nationalization was able to help small scale businesses, it was incapable of eradicating poverty in India. The entire process of nationalization did not surpass the number of private banks i.e. private banks still held a dominant place in the market. Nationalization alone was also unable to achieve financial inclusion, Jan Dhan Yogna had a role to play in it because it was after the launch of this scheme that financial inclusion was increased.

THE NEED FOR BANKS AND THE BANKING SECTOR

Financial institutions are a vital clog in the development of a country, they help in economic development by financing development projects (private and public) and they facilitate social growth by providing savings and investment options or facilitating loans to the masses to help improve their living standard.

A well-administered banking system can help to stabilise the economy and build investments in the country. Banks play a major role in the planning and implementation of financial policies. The prioritising of goals can help achieve the targets set by economists. The banking system can help attain the goal of higher profits by improving the purchasing power of the individual or the organisation.

HISTORY OF NATIONALISATION

The story behind the nationalisation of banks can be credited to the Indira Gandhi government, a move which was considered by many as one to invigorate the national spirit of the masses and discard the capitalistic mindset of the capitalist banks, the critics saw this move as one to deviate from the problems faced by the country at the time with prolonged droughts hampering the economy of the country and the growth rate plummeting into the negatives. [v]

Another reason for nationalisation was the banks themselves. There was heavy criticism of banks that they were corporate-friendly and did not provide credit to agriculture and loaned to an industrialist who was involved with the banks. This accusation was backed by data which showed that agriculture received 2 per cent of the credit in 1951 and this remained unchanged till 1967, whereas the share of industries had increased from 34 per cent in 1951 to 64.3 per cent in 1967.[vi]

The nationalisation of banks finally capped the socialist policies that the Indian Constitution had envisaged.

Social impact of banks- Pre and Post nationalisation

As mentioned above the banks were notorious for not lending credit to agriculture, the government then came up with the Banking Laws Amendment in 1968 which prohibited the directors from acquiring loans from the banks. Also, a National Credit Council was created and the major task of the NCC was to align the objectives of the banks to that of the nation and help in the development of all the sectors of the economy, particularly the agriculture and small scale industries. Such policies alarmed the banks which then in the fear of nationalisation advertised their wholesome approach to helping the rural and semi-urban regions of the country. This move was initiated a little too late and the nationalisation of banks was imminent.[vii]

Only major banks were selected for the nationalisation process and the criteria had been set to any bank which was not foreign and had deposits of over 50 crore rupees. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 was passed and it laid down the criteria for nationalisation.[viii]

In the first phase, in 1969, 14 banks were nationalised and in the second phase of 1980, further 6 more banks were brought under government control hereby bringing the government-controlled over the banking sector up to 91 per cent.

Post nationalisation, the banks were expected to set up 4 rural branches for one branch established in an urban location and agriculture lending saw a drastic increase with the mandatory minimum credit of 18 per cent set by the government on the banks.

TRANSFORMATION OF THE BANKING SYSTEM

The post nationalization banking regime had 27 banks under the Public Sector Banks (PSBs) which now were providing credit and allowing people to deposit their savings in the banks, thereby ushering in a new era for the residents of rural and semi-urban regions of the country. The venture of providing banking services in remote locations was not cost-effective in the short term and was among the major barriers for private banks, but the RBI along with the Public sector banks devised a model to steadily grow the banking infrastructure in the rural and semi-urban locations with schemes such as Lead Bank Scheme (LBS) in 1969, the State Level Bankers’ Committee (SLBC), district credit plans, priority sector lending (PSL) norms in 1974, branch expansion policy and the formation of Regional Rural Banks in 1975. These schemes helped in the attainment of the outreach plans of the Reserve Bank of India and the Public Sector Banks.[ix]

The Public sector Banks also helped in the implementation of welfare schemes in coordination with the State, district and taluka level administrations. Individuals in the rural regions were dependent on the PSBs for their subsidies and the welfare schemes allotted by the state and central governments. The government-sponsored debt-waiver schemes and agricultural subsidies provided through the PSBs had an impact on the rural regions of the country and helped finance rural business enterprises and helped increased the economy of the rural regions.[x]

CURRENT SCENARIO

The incumbent government has decided to take the outreach programmes further ahead by providing incentives to financially disassociated individuals with a free to hold bank accounts under the Pradhan Mantri Jann Dhan Yojana, this scheme was aggressively advertised by the government and can be considered a success as the World Bank Findex rating for India jumped from 35 in 2011 to 80 in 2017.[xi]

CONCLUSION

Currently, more than 80 per cent of adults have at least one bank account[xii], while a lot of the credit for the inclusivity is credited to the Pradhan Mantri Jann Dhan Yojana, the fact cannot be ignored that the nationalisation of banks in the late 1969 and 1980 laid the infrastructure to initiate such a massive scheme. The statistics show that over 96 per cent of the accounts opened under the Pradhan Mantri Jann Dhan Yojana were in PSBs[xiii], a feat which was only possible because of the nationalisation process. The efficiency of the banking system drastically improved after nationalisation, which helped boost the public perception of the banking sector in the country. The credit and deposits facilitated by the banks allowed enterprises to bloom in rural and semi-urban locations and allowed job creation as well as poverty eradication.

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References:

[i] “DAILY ARTICLE 9 AUG 2019.” Empower IAS, empowerias.com/blog/daily-articles/nationalisation-of-banks-and-its-impact-on-indian-economy-an-overview-economy-gs-3-empower-ias#:~:text=Bank%20nationalization%3A. Accessed 12 Oct. 2020.

[ii] Daily Article 9 Aug 2019, Empower Ias, Https://Empowerias.Com/Blog/Daily-Articles/Nationalisation-Of-Banks-And-Its-Impact-On-Indian-Economy-An-Overview-Economy-Gs-3-Empower-Ias (Last Visited Oct 15, 2020).

[iii] Ibid.

[iv] Ibid.

[v] DN Ghose. “Bank Nationalisation: The Original Sin?” BloombergQuint, 11 July 2019, www.bloombergquint.com/opinion/bank-nationalisation-the-original-sin.

[vi] Ketkar, Kusum W., and Suhas L. Ketkar. “Bank Nationalization, Financial Savings, and Economic Development: A Case Study of India.” The Journal of Developing Areas, vol. 27, no. 1, 1992, pp. 69–84, www.jstor.org/stable/4192167. Accessed 12 Oct. 2020.

[vii] Agarwal, Amol. “Why Indira Gandhi Nationalised India’s Banks.” BloombergQuint, 12 July 2019, www.bloombergquint.com/opinion/why-indira-gandhi-nationalised-indias-banks. Accessed 12 Oct. 2020.

[viii] Ibid

[ix] K Srinivasa Rao. “How Bank Nationalisation Contributed towards Banking Outreach.” The Financial Express, 19 July 2019, www.financialexpress.com/opinion/how-a-move-to-nationalise-banks-contributed-towards-robust-banking-outreach/1649081/. Accessed 12 Oct. 2020.

[x] K Srinivasa Rao. “How Bank Nationalisation Contributed towards Banking Outreach.” The Financial Express, 19 July 2019, www.financialexpress.com/opinion/how-a-move-to-nationalise-banks-contributed-towards-robust-banking-outreach/1649081/. Accessed 12 Oct. 2020

[xi] “Home | Global Findex.” Worldbank.Org, 2017, globalfindex.worldbank.org/.

[xii]Report On Trend And Progress Of Banking In India 2017-18 Reserve Bank Of India. 2018.

[xiii] “Pradhan Mantri Jan-Dhan Yojana | Department of Financial Services | Ministry of Finance.” Pmjdy.Gov.In, 2020, pmjdy.gov.in/account.