50 years of bank nationalisation: What it means, why banks were nationalised

India will celebrate the 50 years of bank nationalisation this Friday. As the date nears, discussions are on over the successes and failures of the financial exercise that began the midnight of July 19, 1969.

Indira Gandhi, banks, Narendra Modi, nationalisation, MSME, bank account, farmer, Jan Dhan, PSU bank
PSU banks, keep in mind, lost Rs 2.97 lakh crore of value since even when Modi first came to power in May 2014, as their share of banking market-cap fell from 40% to 26%.

India will celebrate the 50 years of bank nationalisation this Friday. As the date nears, discussions are on over the successes and failures of the financial exercise that began the midnight of July 19, 1969. It started under the then Prime Minister Indira Gandhi with nationalisation of 14 major lenders that accounted for 85 per cent of bank deposits in the country at that time. Six more banks were later nationalised in 1980. The core objective for nationalisation was to energise priority sectors at a time when the large businesses dominated credit profiles.

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 socio-economic objectives and hence, it should increase its control over them.

Nationalised banks

The government through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalised the 14 largest commercial banks on 19 July 1969. These lenders held over 80 per cent bank deposits in the country. Soon, the parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received presidential approval on 9 August 1969.

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The banks that were nationalised included 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 and United Bank of India. Thereafter, in 1980, six more banks that were nationalised included Punjab and Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank, Andhra Bank and New Bank of India.

The data shows that the nationalised banks grew at a pace of nearly 4 per cent closer to the average growth rate seen by the economy until the 1990s.

Bad loans

Even as the government’s control have come down significantly since the period of liberalisation, the problem of bad loans has put pressure on the banks. Both government and the banking regulator RBI has come out with a host of measures to tackle the problem of non-performing assets (NPAs). In budget 2019, Finance Minister Nirmala Sitharaman has announced proposal of infusion of Rs 70,000 crore into the public sector lenders to solve their problem of liquidity.

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, Madan Sabnavis, Chief Economist, CARE Ratings told Financial Express Online.

“Conceptually PSBs is a good idea if we have push financial inclusion such as say the JAM trinity. However using them for political agendas can be challenging especially if they have to chase targets in certain sectors as compromises are made along the way. If we have independent boards and are able to restructure the pay to get the right talent and keep political agenda away, the PSBs can function like any other private bank,” he added.

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