NATIONALISATION OF BANKS

More than five decades ago, 19 July 1969 the Indian banking sector underwent a massive shift, when the Indira Gandhi government through an unpredicted ordinance nationalized the 14 biggest commercial banks, The nationalization of banks is one of the most-important economic policy decisions taken by the government after 1947. Although the impact of this decision is a prime topic of discussion in the present day, when the country has thoughts to approach privatisation of banks.

What is Nationalisation?

• The process by which the government takes over the private and brings it under public ownership.
• Bank Nationalisation is when more than 50% of shares are under the control of the government. 
• When banks were nationalised it came under the BANKING REGULATION ACT 1949.
• RBI later became the regulatory authority body. 
• Till 1969 State bank of India was the only bank that was not privately owned and was called Imperial Bank of India before nationalization.
• At present there are 12 nationalised banks. 

Why Nationalization ?

• The national policy of adopting a socialistic pattern of society. 

The government aims to adopt socialist model of society; welfare to the people by providing access to all sectors. To prevent financial control by an affluent sector of society banks are to be brought under the government control.

• Compulsion Phase

           Third five year plan (1961-1966) saw some tremendous back falls:

           Two wars ; 1962: Sino Indian War , 1965: Indo- Pak war, had immense effect on public finances.  Further two successive years of severe famine in 1965 and 66, led to food shortage and heavy dependence on US export. 

It was an economically deprived year and the government could not contribute to the welfare of the people. The only way out to bring economic stability was by bringing in the share of the banks under public domain. 

•  Other reasons

 Commercial banks were seen favouring large industries, ignoring the agriculture sector. 

To control the private monopoly in the banking sector and to  bring an fair division of money among the people.  

Expanding banking to rural area reaching to all, thereby reducing regional imbalance

Objectives of nationalisation 

1. To ensure parity in distribution of money, requirements of all sectors including agriculture, small scale industries, self financing companies

2. The motive of banking operations are for larger social purposes than commercial purposes.

3. To mobilise savings of people to maximum possible extend and to use them for productive uses

4. To executive sector lending and reduce imbalance. 

5. To professionalise the banking management

6. To encourage a new class of entrepreneurs. 

7. To state the economic condition of the state and address the rising difficulties post 1960.

Post 1969

There was a booming banking sector with an advent economic flow in the country.

• New branch licenses Policy : according to this every new branch in a metropolitan city is to be accompanied with 4 new banks in the rural sector.

• Priority sector lending: 40% of the finances of banks were to be set aside for agriculture, micro or small entrepreneurs and the weaker section of the society.

• Differential interest rate: The interest was provided at a lower rate for the economically weaker section of society.

• Lead bank scheme: Each district was assigned to one bank which further provided integrated banking facilities there.

• RRB (Regional Rural Banks, 1972) and NABARD (National Bank for Agriculture and Rural development, 1982) were established.

Benefits

Nationalism brought a sense of faith in people. Banks were no longer confined to metropolitan cities, it reached the doorsteps, as the banking system was established in the rural corners. The numbers rose from 1800 (1969) to nearly 35,000 (1991) banks in rural areas. This return increased the savings and gave a boost to the small scale industries and upcoming entrepreneurs. A gradual increase in the GDP of the country was also witnessed. One of the major boons was its contribution towards the success of the green revolution.

Economic turnover 

 Anything that increases rapidly, goes down soon. As part of financial liberation 1991, Narasimham Committee threw light on the need to give banks freedom and commercialize the bank on the purpose to gain profit. Arguments favouring a rethinking on redistribution arose. 

Undertaking the advice, RBI gave waiver to redistribution and reduced their bound on opening banks in rural areas, and loans to be granted at their will. 

The repercussions were immediately projected, a massive downfall in the economy of rural areas were observed, with a number of branches being closed down. The agricultural profits swooped down to an all time low. Soon the vacancy of a financial moderator was taken over by money lenders and non institutional sources.  

The intolerable consequences posing threat were soon patched up by the RBI. Emphasizing on double inflow in the agriculture sector for 3 years to revive the economy ( 2004). Stringent measures to grant permission to open a new bank was adopted(2005). Further RBI tightened the grip by enforcing 25% new banks in unbanked regions.

Causes of concern 

• The rising number of non performing assets (since 2012).

• Complexity in the interest rate, with different rates depending upon the field and sectors

• Efficiency of banking reduced, as there was no competition among the private and public sector banks.

Conclusion 

Bank nationalisation succeeded at many fronts to provide access to many and bring great economic inflow, but the current scenario is proposing privatization. So the question of the benefit of nationalization is at stake. Although privatization of banks is not the ultimate solution to growing NPAs. Both the government and RBI are coming up with measures to bridge a middle way out to solve the liquidity issues. Still the evolution of history awaits a prudent decision.

Sources :

• the hindu
• livemint
• the hindustan business times
• good returns
• hindustan times
• the print