Despite triumphs and tribulations, the move to nationalise banks aided by banking sector reforms contributed towards robust banking outreach
By K Srinivasa Rao
an efficient and robust banking system is a sine qua non for growth and equitable distribution of financial resources of the economy. Beginning with the nationalisation of banks in 1969, the banking sector contributed significantly towards the well-being of the society and in reducing poverty. In that era, 20 banks were nationalised in two phases—14 banks on July 19, 1969, and six more banks in April 1980 under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970/1980, thus bringing 91% of the banking system under government control. The reason for nationalisation was to ensure equitable flow of credit to every sector of the economy to avoid lopsided growth. Historically, private banks had a tendency to lend only to large industries and business houses, depriving credit to those at the bottom of the pyramid.
Transformation of banking system: These 27 banks—20 nationalised banks, and SBI and its associate banks—formed a strong force of public sector banks (PSBs), disseminating banking services to the common man. Mobilising deposits and dispensing credit in rural and semi-urban centres in the short term is not cost-effective and hence the private regime was averse to it. But RBI, the government and PSBs worked together to take banking to the masses. The shift has been from ‘class banking’ to ‘mass banking’. The journey of expansion of banking that began modestly after nationalisation picked up speed and efficiency. The commitment to spread banking began with the introduction of the Lead Bank Scheme (LBS) in 1969, and 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 tools speeded up the outreach of banks to transform the village economy by adopting them for integrated development.
Coordinative role of PSBs: Beyond providing banking services, PSBs played a critical role of coordinating with state-, district-, tehsil- and block-level units of the government and district industrial centres, and facilitated in implementing welfare schemes. PSBs served as a conduit to disburse subsidies, implemented government-sponsored schemes for integrated rural development, routed interest subventions, facilitated debt-waiver schemes and fulfilled mandatory lending norms. The combined impact improved the economic conditions of rural enterprises.
In the process, the number of bank branches increased from 8,187 in 1969 to 59,752 in 1990 to 1,41,756 in March 2019. The share of rural and semi-urban branches varied from 58.4% to 77.2% to 62.89% during this period. The total network of rural and semi-urban branches stands at 89,144 in March 2019 compared to 4,781 in 1969 and 46,128 in 1990. In addition, 1.26 lakh bank mitras (business correspondents) provide branchless banking in villages.
As a result, share of unorganised credit fell sharply and the economy seemed to come out of the low level of equilibrium trap. In the process, the flip side of social commitment led to inefficiency and poor customers service in some PSBs, taking away the competitive edge. The administered interest rates and the burden of directed lending constrained their autonomy to operate on commercial lines. The mandatory expansion of branches in unbanked centres with low business potentiality impacted the working of PSBs.
With little latitude to decide business mix, profitability took a back seat. PSBs struggling to work under the doctrine of dual regulation suffered from poor governance. Board of directors of PSBs are appointed by the government with no freedom to review their performance or competency. The expertise with such independent directors rarely passed on to bank management. As a result of poor board oversight and the ability of large borrowers to influence certain decisions, PSBs accumulated huge non-performing assets (NPAs). They had to bear the brunt of holding close to 90% of stock of bad loans, further impinging upon their profitability.
Impact of bank reforms: Even after banking sector reforms, PSBs continued to balance their social obligations while working on commercial lines to compete with private peers. Along with integrated technology, PSBs gradually changed their look and feel with modern outfits and better interiors. They also adopted international prudential and capital adequacy standards in line with Basel frameworks set out from time to time, integrated risk management systems, business process re-engineering, reorganisation of administrative structures, better systemic controls, higher compliance standards and better HR management strategies.
Despite triumphs and tribulations, the move to nationalise banks aided by banking sector reforms has greatly contributed in the robust growth of banking outreach, more importantly in the hinterland, benefiting people at the bottom of the pyramid. Focus on financial inclusion guiding banks to adopt a specific three-year outreach policy since 2010 took aggressive form in 2014 after the implementation of the Pradhan Mantri Jan Dhan Yojana. The combined synergy led to massive connect of the banking system with the people, taking the World Bank Findex 2017 to 80, from a level of 35 in 2011.
Effectively, 80% of adults aged 15-plus have a bank account—a great achievement by any standard. Of the 36 crore new savings bank deposit accounts opened under PMJDY till May 2019, PSBs accounted for 96.6%, reflecting their role in social transformation. The challenges of bank reforms did not dither the spirit of bank nationalisation and PSBs continue to serve the masses even, at times, at the cost of losing competitive edge. As India completes the golden jubilee of bank nationalisation, the purpose still holds relevant, more so when growth aspirations are high, India aims to be a $5-trillion economy, and the banking sector increasingly needs to stay committed to serve the masses.
The author is director, National Institute of Banking Studies and Corporate Management, Noida.
Views are personal