The Forgotten Case For Bank Nationalisation

Context: A case against the government’s plan for privatisation of Public Sector Banks (PSBs).

Keynesian economics: It focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.

Role played by Bank Nationalisation in India:

• Increased Banking Access: In 1969, when 14 private banks were nationalised, less than 1% of India’s villages were served by commercial banks, whereas in 2019, 99% of villages with a population of less than 2,000 had access to banking services.
• Fuelled Green Revolution: acted as the biggest formal source of credit at tolerable interest rates for the poor in rural India.
• Imparting social function: E.g. Linking women’s self-help groups (SHGs) with PSBs has made inexpensive credit available to the poor.

Arguments against PSB privatisation

• Social dilemma: Keynesian economic theory explains the biased risk perception of the lender in serving many small borrowers.
  • Banking enterprises seeking to maximise profits would not venture into areas and sectors of strategic social and economic significance.

Cons of Bank Nationalisation:

• The policy of “social coercion” adopted after nationalisation achieved only limited success, and dependence on usurious rural moneylenders actually grew after strict profitability norms were applied to PSBs in 1991.
• Fundamental Shifts in the economy: As fiscal stimuli have taken a backseat and with primacy being given to monetary policy, PSBs have been repeatedly forced into populist measures such as loan waivers. à rising Non-Performing Assets (NPA’s)

Way forward

• Reforms to improve the quality of the PSBs: Impart greater autonomy and professional capabilities.
  • Expanding social function of PSBs: Re-work relationship with SHGs and much greater state support to the SHG-bank linkage programme to catalyse India’s developmental aspirations.
  • Real PSB reform will lie in giving them greater autonomy and professional capabilities rather than their privatisation.