Sansad TV: Milestones Series- Nationalization Of Banks | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Introduction

In July 19, 1969, Prime Minister and Finance Minister Indira Gandhi made the decision to nationalize the 14 largest private banks in India. The objective behind this move was to align the banking sector with the socialist goals adopted by the Indian government after gaining independence.

Factors and reasons for bank nationalization:

• Inadequate lending to rural areas: Despite the existence of the Banking Regulation Act, 1949, the banks were found to be providing significantly less credit to rural areas and small-scale borrowers compared to the industrial sector.
• Neglect of agricultural credit: Between 1951 and 1968, loans provided by commercial banks to the industrial sector nearly doubled from 34% to 68%, while the agricultural sector received less than 2%. The government believed that the banks were not supporting its socio-economic objectives, prompting the need for increased control over them.
• Expansion of banking services: The objective was to ensure that banking services reached unserved and underserved areas, particularly remote regions. This would contribute to formalizing the economy to a certain extent.
• Mobilization of savings: Nationalization aimed to mobilize people's savings to the greatest extent possible and utilize them for productive purposes.
• Economic and political considerations: Bank nationalization was one of Indira Gandhi's responses to the economic and political challenges of the time. The country faced financial strain due to two wars with China in 1962 and Pakistan in 1965, which put significant pressure on public finances. Additionally, consecutive years of drought resulted in food shortages and compromised national security.
• The primary objective was to reduce regional imbalances and increase lending to the priority sectors.

Impact on economic development and job creation

• Increase in savings: The nationalization of banks led to a rise in financial savings, as banking services were extended to previously unbanked areas. Gross domestic savings nearly doubled as a percentage of national income during the 1970s.
• Improved bank efficiency: The efficiency of the banking system in India improved as a result of bank nationalization. This also instilled greater confidence in the public regarding banks.
• Boost to small-scale industries: Sectors such as small-scale industries and agriculture received a significant boost, leading to increased funding and economic growth in India.
• Expanded bank penetration: Bank nationalization facilitated greater bank penetration, particularly in rural areas of India.
• Financial inclusion: India's nationalization efforts contributed to impressive growth in financial intermediation. The share of bank deposits to GDP, gross savings rate, share of advances to GDP, and gross investment rate all witnessed notable increases.
• Demonstration of monetary policy's role: Nationalization demonstrated the effectiveness of monetary policy in achieving redistributionist goals.
• Increased outreach: Banks expanded their reach beyond metropolitan areas, extending services to even the most remote corners of the country.
• Green Revolution impact: Nationalization played a crucial role in India's agricultural growth, particularly in the Green Revolution. It enhanced food security and reduced dependence on food grain imports.

Negative impact of bank nationalization

• Bad loans: Some banks faced losses after nationalization due to inadequate security for loans and poor loan recovery.
• Inefficiency: Bureaucratic attitudes emerged within the banking sector, leading to a lack of responsibility, accountability, and incentives for progress within public sector banks. Unwarranted delays became commonplace.
• Long-term risks: Liberal credit provision for rural development also introduced risks to the stability of the banking sector. Nationalized banks faced challenges related to overdue loans and the establishment of economically unviable branches.
• Political interference: Nationalized commercial banks experienced increasing political interference in loan approvals, personnel appointments, and branch openings.
• Inadequate facilities: Nationalized banks failed to provide sufficient facilities and services to populations in rural and suburban areas, struggling to mobilize rural deposits.
  • While the nationalization of banks partially achieved the government's developmental agenda, many individuals in India did not experience the intended benefits of this policy.

Conclusion

• Bank nationalization served as a central component of a wider political economy strategy implemented in the 1970s, a decade marked by sluggish economic growth and stagnant average incomes in India. While external factors like soaring energy prices and poor monsoons contributed to this stagnation, economic policies also played a role. 
• Although bank nationalization achieved certain objectives, such as expanding financial access through the proliferation of branches, it is now necessary to reevaluate its efficacy and consider alternative approaches.