More than half a century since Indira Gandhi nationalized 14 public sector banks, the move is still deeply divisive, with some criticizing it as a failure and others hailing it as a historic decision. The government is carrying out many reforms in PSOs, including the EASE reforms, which are now in their 5th year. It gave positive results. All PSBs were profitable in March 2022 and there was also a noticeable improvement in the quality of their assets. It is time to put the right people in the right places in the nationalized banks for better results and to carry out more reforms, instead of privatizing them.
In News: The past week marked the 53rd anniversary of the day on July 19, 1969, Prime Minister Indira Gandhi nationalized 14 major banks, which accounted for more than 80% of India’s bank deposits.
Place it in Syllabus: Economy
- Learn more about news
- Need for bank nationalization
- Bank nationalization controversy
- Nationalization of the bank
- Problems with the nationalization of banks
- Current government position
Learn more about news
- Nationalization is the process by which the government of a country or state takes control of a specific business or industry.
- On July 19, 1969, the then government nationalized the 14 largest private commercial banks.
- 14 banks nationalized in 1969: Allahabad Bank, Canara Bank, United Bank of India, UCO Bank, Syndicate Bank, Indian Overseas Bank, Bank of Baroda, Punjab National Bank, Bank of India, Bank of Maharashtra, Central Bank of India, Indian Bank , Dena Bank and Union Bank.
- The significant impact of the change was the expansion of banking operations in rural areas, as banks started moving out of towns and started moving into towns and villages.
- First attempts at nationalization
- Nationalization of banks had also taken place before 1969. The Reserve Bank of India (RBI) was nationalized a year after independence.
- The State Bank of India (SBI) came into existence after the government took control of the Imperial Bank of India in 1955.
Need for bank nationalization
- Socioeconomic- Reduce poverty rates and improve living standards by ensuring access to banking services and cheap credit.
- Wealth concentration-Banking institutions are instruments that help to concentrate economic power and wealth in the hands of a few people.
- Huge underprivileged population-The banking system was not very suitable for the large economically disadvantaged part of the society that enlisted after independence.
- Low bank penetration-Before Nationalistaion only 8,000 bank branches in the country and there was one bank branch for every 65,000 people.
- Urban-rural divide-Until 1968, all private banks in India were restricted to major cities only.
- All were monopolized by industrialists, the share of industry in the credits paid by private banks doubling between 1951 and 1968 from 34% to 68%, while reducing regional imbalances to reduce the urban-rural divide.
- Only 5,000 of the 6,38,000 villages had bank branches, including one cooperative bank branch.
- Agriculture under support– agriculture received less than 2 percent of total credit.
- Reduced credit decentralization– Domestic credit to the private sector, as a % of GDP, was less than 10% before nationalization.
- There were two wars (with China in 1962 and Pakistan in 1965) which exerted immense pressure on public finances.
- Two successive years of drought had not only resulted in food shortages but also compromised national security due to dependence on US food shipments (PL 480 program).
Bank nationalization controversy
- Indira Gandhi’s government has encountered resistance from the opposition and the judiciary.
- In February 1970, the Supreme Court overturned the government’s decision and 10 of 11 justices struck down the Banking Companies (Acquisition and Transfer of Businesses) Order 1969by which the State had taken control of the 14 banks.
- But Indira Gandhi passed another ordinance shortly after the supreme court’s decision. Subsequently, Parliament adopted the Banking Companies (Acquisition and Transfer of Businesses) Bill, 1970in March of this year.
Importance of Nationalization of Banks
- The nationalization movement triggered a short-term improvement in some weaker sectors.
- Improved banking penetration-Now there is one bank branch for 9,000 people.
- Rural Banking-The share of the rural deposit reaches 15.5% in March 1991, compared to 6.3% in December 1969, and the the share of credit fell from 3.3% to 15%.
- According ‘Golden Jubilee of Nationalization of Banks: Bilan”, a report of the 2019-20 economic study, rural bank branches have increased tenfold and credit to rural areas has increased from Rs 115 crore to Rs 3,000 crore between 1969 and 1980
- Additionally, there are ATMs, other service points, correspondent banking and, of course, payphones and a plethora of other digital devices.
- The Green Revolution-Nationalization also strengthened the Green Revolution. Its objective was to make the country self-sufficient in food security.
- Credit to the agricultural sector increased 40 times from Rs 67 crore to Rs 2,767 crore.
- Gross domestic savings nearly doubled as a percentage of national income in the 1970s.
- Domestic credit to the private sectoras a % of GDP, has risen to 55% today.
- Transfer of direct benefits-Under the Jan Dhan Yojana proposed by Prime Minister Narendra Modi, which was launched in August 2014, more than 44 crores of no-frills accounts (55% of which belong to women) have been opened and there is a credit balance of more than Rs 1.30 trillion in these accounts. This has revolutionized our direct benefit transfer system
- According to government data, up to 98% of these accounts were opened by public banks.
- Fight against black money-During demonetization, PSB agencies rose to the occasion and served their customers/general public, working long hours, often late into the night.
- Health crisis-During the pandemic, most PSB branches extended normal banking services despite the associated risks to the lives of their staff.
- Thousands of employees, including very young ones, were infected and could not survive.
- New objective-Nationalization has changed the banking sector from “class banking” to “mass banking” (social banking).
Problems with the nationalization of banks
- NPA on the rise-Long term, half a century after nationalization in 2019, Public Sector Banks (PSBs) accounted for gross Rs 7.4 lakh crore of NPA (non-performing assets) or 80% of NPA in the Indian banking system.
- PSB NPAs increased to Rs 5.40 lakh crore in 2021 from Rs 2.24 lakh crore in 2014.
- make losses-The PSB recorded a collective loss of Rs 66,100 crore in contrast to the profit of Rs 42,100 crore from other regular commercial banks.
- Nationalization led to a decline in the efficiency and profitability of banks.
- Limited success-Since 2014-15, almost all of the growth in the banking sector has been attributable to private banks and the largest PSB, SBI.
- Financial burden for the government-Between 2010-11 and 2020-21, the government infused $65.5 billion (Rs 5.2 lakh crore) in PSBs to fight against the NPA crisis but the situation was still bad compared to the private sector.
- Private banks overtake public banks-In 1991-92, PSBs (including SBIs) had an 88.5 percent share of total bank assets, and private banks started with only 4.2 percent.
- This number has changed dramatically in three decades. In 2020-2021, the share of PSBs fell to 59.8% and that of private banks increased to 32.8%.
- Low efficiency-Lack of responsibility and initiative, bureaucracy and excessive delays have become common characteristics of nationalized banks.
- Reduced competition-The nationalization of banks has reduced competition between banks to a large extent. At the same time, it dramatically increased political interference and bureaucracy in the operation of the banking system.
Current government position
- The current government is moving towards privatization and mergers in the banking sector.
- In 2016, the then finance minister proposed the merger of five associated banks of SBI with the banking juggernaut.
- In 2019, state-owned Bank of Baroda became India’s third largest lender after a merger with Vijaya Bank and Dena Bank.
- In one of the government’s biggest reforms, he announced the mega merger of 10 PSBs into four entities
- The government announced in the Union Budget 2021-22 the privatization of two PSOs.
- According to reports, the government plans to launch the next round of mergers of PSB, with the aim of creating four to five large banks of the scale of SBI.
- Rationalization– Former Vice President Niti Aayog and Head of NCAER recommended that all PSBs except SBI be privatized.
- Privatization alone is not a solution-The government should not rush the privatization of banks, but rather focus on comprehensive governance reforms, because if the banking sector is led by independent boards and in a dynamic way, public sector banks can also operate as n any other private bank.
- Reforms– EASIER reforms to make the banking experience more customer-friendly.
- Limited number of major banks-The Narasimham Committee report (1991) pointed out that India should have three or four major commercial banks, with national and international presence, as well as foreign banks.
- The second tier may include several medium-sized lenders, including niche banks, with a presence across the economy.
- Differentiated banking services-Although the universal banking model has been widely preferred, there is a need for niche banking services to meet the specific and varied needs of different customers and borrowers.
- Essentially, these specialized banks would facilitate access to finance in areas such as RAM (retail, agriculture, MSMEs).
- Risk management and regulation-Government should tighten the details by allowing them to build diversified loan portfolios, establishing sector regulators, granting more powers to effectively deal with willful defaulters.
- Mitigate moral hazard-Focus on the need for higher individual deposit insurance and effective orderly resolution regimes to mitigate moral hazard and systemic risk at least cost to the public treasury.
Shape your thoughts
- The nationalization of the banks was a failed attempt to achieve socio-economic goals and reform the country’s banking ecosystem. Critical analysis. (250 words).
Approach to response.
- Introduction to the nationalization of banks.
- Need for nationalization
- Success of nationalization.
- Nationalization issues.
- Way forward and conclusion.