Bank Nationalisation: 52 years and ticking

Relevance – The government has cleared its intention to privatize the public banks. This article highlights some aspects of bank nationalization.

Synopsis: Nationalization has served its purpose. It’s time to move forward with the retention of majority ownership of the government in a few banks to serve people.

History of Bank Nationalization in India:

• 14 banks with deposits of at least Rs 50 crore each were nationalised on the midnight of July 19, 1969, by Indira Gandhi.
• Incidentally, this was not the first attempt to nationalise banks. An ordinance had been drafted in 1963 as well, seemingly under great political pressure to nationalise five major banks.
• A second round of nationalisation of six more commercial banks with deposits of more than Rs 200 crore was done in 1980.

Reasons behind bank nationalisation

• Mis-governance: Post-World War II, many banks collapsed as they had been financing speculative activities.
• Non inclusive: over 300 banks during that time were under the regulation of RBI as many of them were reluctant to support industry and agriculture and only gave trade finance.
• Bank Failure: In 1960, Palai Central Bank and Lakshmi Commercial Bank collapsed, the RBI launched a massive consolidation drive, bringing the number of banks from 328 in 1960 to 94 by 1965.

Had the objective of Bank Nationalisation met?

• Nationalisation of banks has served its purpose by taking banking to the hinterland and bringing a large part of the population into its fold.
• Since then, the banking industry has grown.
• In June 1969, there were 73 commercial banks; now there are 94, including small finance banks and payments banks but excluding regional rural banks and local area banks.
• The number of bank branches has grown from 8,262 to 158,373.
• One branch now covers roughly 9,500 people against 64,000 in 1969.
• In June 1969, the deposit portfolio of banks was Rs 4,646 crore, by June 2021, the deposit portfolio has grown close to Rs 153 trillion.

Moving Ahead: Privatising Public sector banks

• Due to rising NPA’s and faced with the issue of Political intervention, PSB’s are in a bad state of financial health.
• Hence, the current government wants to Privatise few of the PSB’s to improve the banking sector in India.
• In February 2021 Union Budget, for the first time, spoke about privatising two such banks. Even before that, the government had committed to privatise IDBI Bank Ltd.
• In the run-up to the privatisation, the public sector banking industry had gone through a major phase of consolidation. The number of PSB’s has come down from 27 to 12 in three years, between 2017 and 2020.
• Recently, Finance Secretary T V Somanathan said the government would “eventually” privatise most of the PSBs and keep its presence to a bare minimum.