Bank Nationalisation at 50: A Reading List

Has nationalisation benefited India’s banking sector?

On 20 July 1969, 14 Indian banks were nationalised by the ruling Congress party, with the aim of taking control away from a few private players, expanding the banking network to cover rural India, providing credit agriculture and small industries, and to encourage entrepreneurship in the country. The then Prime Minister Indira Gandhi called the nationalisation of banks “a vital step.” In 1980, another six banks were nationalised.  

Today, public sector banks (PSBs) are in control of 66% of credit and 65.7% of deposits. There is talk of “denationalisation” by the ruling party and privatisation of the banking sector. Narendra Modi called Gandhi a “fraud” for nationalising the banking sector, and more recently, member of parliament Jairam Ramesh demanded a categorical declaration from the ruling government that PSBs would not be privatised. Advocates of denationalisation argue that Gandhi’s decision in 1969 was fuelled by political considerations, and the bad loan problems that PSBs currently face are due to nationalisation.

This reading list looks at articles written soon after the decision was made to nationalise in 1969, the effects of nationalisation, and the arguments against privatising the banking sector.  

1) Why Were banks Nationalised?

B M writes that the official explanation for providing the government with additional funds for welfare measures and for prioritising previously neglected sectors is flawed. The newly-available bank credit will not be enough to prevent the government from levying new taxes to raise revenue.

There will be no significant influence on the scale or quality of deposit mobilisation or advances of the six banks merely because they have been taken over. There is no doubt that the banking system has achieved impressive expansion after the 14 banks were nationalised ten years ago. But the private sector banks have partaken of this expansion as much as the nationalised banks during this period … It is doubtful that these banks will be in a position to accept as at present stand the obligation to step up their credit to the level of 40 per cent for the priority  sectors as officially defined and still remain viable, unless it is proposed to give a special boost to their expansion after their nationalisation.  

2)What Happened After?

Four years after the nationalisation of commercial banks, Bhabatosh Datta writes that there is no visible difference between nationalised and non-nationalised banks. More worrying, argues Datta, is that competition between big banks still continues unabated, but the government now assumes responsibility for all risks. Under nationalisation, bank management only had to show some activity in previously neglected sectors, and had no clear policy directive.

Once some 1287 increase was shown in the loans to small industries, small entrepreneurs, or agriculturists, the managements were left practically free to pursue the policies and employ the methods of oligopolistic competition, untrammelled now by any serious fear about had debts or stricky advances or by any strong urge for maximising the net surpluses …   There have been reports recently — unconfirmed, but also uncontradicted — about substantial expenditures on loan promotion, i e, on enticing borrowers away from 'rivals' under the same government ownership. There have been reports about cutting of lending rates: the Reserve Bank had to issue a circular against this practice and later had to insist on a minimum lending rate. There were news items in the financial press about brokerage being given by some banks on deposit collection. 

Further, Datta writes that bank nationalisation has led to the creation of oligopolistic competition between banks. There was underbidding of lending rates, giving depositors monthly interest at one–twelfth of the annual rate which stimulated unhealthy consumption expenditure, and consumers were also misled through advertisements. 

There has been an unhealthy competition in the opening of branches also, with the result some areas, especially urban, have become over-banked. When one knows that there are large gaps in the provision of banking service to the rural people, it is painful to see rows of glittering banking offices, all owned by the government, on the main roads of the big towns and their suburbs. It is in the nature of competition that each unit tries to make its own hay where others have discovered sunshine. Location of government-owned units should follow a different principle and should give topmost priority to the correction of geographical imbalances. It has already been stated that a crowded set of urban banks does not increase the total savings held in the form of bank deposits, while a single bank in a rural area brings about a change in the motivation of the rural income earners. 

3) Did Nationalisation Meet Its Objectives?

D N Ghosh writes that micro–loans, part of successive governments’ poverty alleviation programmes, have been the pride of the Indian banking system since nationalisation. A purely profit–oriented system, Ghosh argues, would have shut out millions of credit–worthy borrowers. However, writing in 1991, post economic liberalisation, Ghosh says that there is a call for privatisation of the banking sector to eliminate political and bureaucratic control. A thrust towards privatisation, argues Ghosh, would invariably lead to an end of development lending by banks. 

The crusaders for developmental banking are however losing their battle: they have to look inwards. They have to ask themselves; have they not connived in bringing this industry to the sorry state that it exhibits today. A crusader for efficiency has to contend with several vested interests and these primarily start from within the bank itself. It is easy to be committed to an ideology but it is infinitely difficult to be committed to efficiency which demands a change in work style and change in work culture … It has to be demonstrated that a publicly-owned bank can operate efficiently (and there is no reason why it cannot) and at the same time continue the lending programmes. 

4) Is Privatisation the Only Fix?
According to the P J Nayak Committee, 2014, PSBs lacked “a sense of direction and focus on issues of strategy and risk management.” T T Ram Mohan writes that the committee sees privatisation of banks as the panacea. However, Ram Mohan argues that ownership does not determine the quality of banks. Rather, it is the management that needs an upheaval. An absence of personnel in critical roles, as well as poor succession planning in PSBs are some of the reasons behind failing and ineffective PSBs.

The issues of management as well as governance at PSBs can be addressed without being fixated on the notion that the public sector is congenitally incapable of addressing these. What is required is a combination of political will and decisive regulatory intervention… , the dangers of handing over the banking system to a clutch of professionals – individuals who are unelected and unaccountable to Parliament – are so great that no government can contemplate such a course with equanimity. It would be unfortunate if, in burying the privatisation proposal, we also end up burying the live issues of governance and management in the banking system.  
     

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