Bank nationalisation - 52 years and ticking

Context: Nationalisation has served its purpose. It’s time to move ahead, keeping majority ownership of the government in a few banks to serve people.

Nationalisation of Banks in India:

• In 1963: An ordinance had been drafted in 1963, under great political pressure to nationalise five major banks. T T Krishnamachari, a cabinet minister for economic and defence coordination, was the architect of this move.
• In 1969: Fourteen banks with deposits of at least Rs 50 crore each were nationalised on the midnight of July 19, 1969, hours after Prime Minister Indira Gandhi’s address to the nation regarding this.
• In 1980: A second round of nationalisation of six more commercial banks — with deposits of more than Rs 200 crore each — followed in 1980.

Impact of bank nationalisation - Financial inclusion: Nationalisation of banks has served its purpose by taking banking to the hinterland and bringing a large part of the population into its fold.

Reasons behind bank nationalisation: Politics apart, there were other reasons behind bank nationalisation.

• Post-World War II scenario: Many banks collapsed as they had been financing speculative activities.
• The RBI was grappling with regulations and supervision of over 300 banks, many of which were reluctant to support industry and agriculture and only gave trade finance.

Consolidation of banks: Liberalisation of banking has led to its growth.

• 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.
• One branch now covered roughly 9,500 people against 64,000 in 1969.
• In the run-up to the privatisation exercise, the number of public sector banks has come down from 27 to 12 in three years, between 2017 and 2020.

Issues with bank nationalisation:

• Biased regulations: The government created a department of financial services (DFS) — demonstrating its intent to have a say in running the banks. This ensured that the management and even regulations would not remain ownership-neutral.
• Lack of accountability: Former RBI governor Y V Reddy calls it a joint family approach — the banks, the government and the RBI became part of a “Hindu undivided family” where nobody kept proper accounts of what they were doing.

Way Forward: Nationalisation has served its purpose. It’s time to move ahead, keeping majority ownership of the government in a few banks to serve people.

• If the PSBs are a political instrument to serve people, they should not be treated as business enterprises.
• Prime Minister Narendra Modi had said that the government has no business to be in business. It is the government’s duty to support enterprises and businesses, but it is not essential that it should own and run enterprises.