Bank nationaisation

Gains from Bank Nationalisation

The Hindu Businessline

The Reserve Bank of India’s Special Edition of the Report on Currency and Finance contains a comprehensive account of the evolution of banking in post-Independence India, which inherited a system where small private banks proliferated — 56 per cent of all bank deposits in 1947 lay with the 81 scheduled and 557 non-scheduled private banks.

These private banks were lopsidedly concentrated in the provinces of Madras, West Bengal and Bombay. Between 1947 and 1955 there were 361 instances of bank failures, with many depositors losing their life savings along with their faith in the banking system.

It was in this backdrop that new laws of banking regulation, capital adequacy, licensing and inspection were enacted followed by a phase of liquidation and amalgamation, which brought down the number of scheduled banks to 71 and non-scheduled banks to 20, by 1967.

Despite some growth in deposit mobilisation, several problems persisted. The private owners of the banks were more interested in cornering the finance mobilised through deposits rather than running the banks on sound commercial principles. There was a gradual erosion in the capital base of banks, with the ratio of paid-up capital and reserves to deposits declining from 9.7 per cent in 1951 to 2.2 per cent in 1969.

From 4,061 in 1952, the total number of bank branches increased very slowly to 8262 in 1969, with the share of rural branches increasing from 13 per cent to 17 per cent. Between 1951 and 1967, the share of agriculture in total credit remained stagnant at around 2.2 per cent only.

In 1969, only the five cities of Bombay, Calcutta, Delhi, Madras and Ahmedabad accounted for 44 per cent of all bank deposits and 60 per cent of total bank credit in the country. It had become clear by the the end-1960s that without a structural break in the banking system, the goals of development planning would get undermined.

Bank nationalisation aimed to attain three primary objectives. First was to break the nexus between the banks and the big businesses who were disproportionately cornering bank finance for their narrow, selfish ends and rapidly expand the banking network to the unbanked regions, especially rural areas and deliver institutional credit to the farmers, small businesses and other weaker sections of society, many of whom were caught in a vicious trap of usury.

Second, to ensure the balanced flow of credit to all the productive sectors, across various regions and social groups of the country. And, third, to provide stability to the banking system by preventing bank failures and speculative activities.

The efficacy of bank nationalisation could be seen in the increase in bank branches brought about by the 22 public sector banks in just five years. Half of the 10,543 new bank branches opened between 1969 and 1975 were in the rural areas, increasing the share of rural branches from 17 per cent to 36 per cent. By 1990, total bank branches numbered 59,752, with over 58 per cent share of rural branches.

The share of agriculture in total credit went up from 2.2 per cent in 1967 to over 9 per cent in 1975; it stood at 15.8 per cent in 1989 thanks to the priority sector lending norms.

Despite later day concerns regarding operational efficiency, customer services, profitability and asset quality, it is commendable that not a single nationalised bank has failed or faced liquidation till date, unlike its pre-1969 predecessors in the private sector.

The contributions made by the nationalised banks in India’s emergence as one of the largest developing economies in the world, becoming self-sufficient in foodgrains production and making significant strides in financial inclusion, including the recent Jan Dhan Yojana, cannot be denied on reasonable grounds.

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Quick summary by Maggubhai

  • In the year 1947 around 56 percent of all banking deposits were held by 81 scheduled and 557 non-scheduled private banks.
  • Between 1947 and 1955, a massive failure of 361 banks had taken away life savings of depositors along with their faith in the banking system.
  • In this backdrop several new rules and policies had been formulated followed by a phase of liquidation and amalgamation, which brought down the number of scheduled banks to 71 and non-scheduled banks to 20, by 1967.
  • Even after taking these steps several problems persisted hence 1969 the biggest structural reform introduced in the financial sector during the post-Independence period i.e. bank nationalization.
  • Bank nationalisation mainly had three objectives, namely – to break the nexus between the banks and the big industries who used the bank’s money to their selfish ends, to ensure the balanced flow of credit to all the productive sectors and to provide stability to the banking system by preventing bank failures and speculative activities.
  • The present-day challenges that the banks face include – dilution of public ownership, declining in rural bank branches, competition cause of entrance of private peers etc.
  • Declining in corporate profitability, pilling up NPAs are also considered some major issues that the banks are also experiencing. To tackle all these issues a major course-correction by regulators is needed.

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