Even 50 years after the nationalisation of the 14 largest commercial banks on July 19, 1969, by the then Indira Gandhi Government, the move continues to have wide implications across the economy. It was a very progressive decision. These 14 banks accounted for 85 per cent of the bank deposits in the country. The move was done to free up the banks from the hands of a few industrial houses, who tried to use the depositors’ money under their control to increase credit flow and also address the gross neglect of rural and agricultural sectors, in terms of funding.

Circumstances leading to nationalisation

Recognising the need to improve the flow of credit in rural areas as also the agricultural sector, the then Government took the move to nationalise 14 large banks by passing the Banking Companies (Acquisition and Transfer of Undertaking) Bill in 1969. India’s agricultural growth had just started recovering after the successive drought years of 1966 and 1967 with help from green revolution technologies, which resulted in more intensive farming than traditional methods. Industrial recovery, too, had just begun after the 1965 Indo-Pakistan war and by 1968, the country recorded an industrial growth of 6.2 per cent. All of these created huge demand for credit across sectors, especially from farmers and small-scale industrialists. Petty businessmen, farmers and consumers suffered a cash crunch all those years as business houses maintained their dominant position and the banks focussed on giving credit to them with an aim to earn profits. This total neglect of agriculture and the rural sector by private banks prompted the Government to nationalise the banks and take direct control of credit delivery. The move also made banking in unbanked areas a reality while also giving a powerful tool to a vast majority of weaker sections, including the rural and agricultural farmers and labourers. This was the most prudent decision taken by the Indira Gandhi Government at that time.

Shift from class to mass banking

Immediately after the nationalisation of banks, a plethora of measures was taken by successive Governments to enhance the flow of credit so as to make it accessible to diverse sections of society. The focus of banks shifted from ‘class banking’ to ‘mass banking’. The commitment to spread the reach of banks began with the introduction of the Lead Bank Scheme (LIS) in 1969, the constitution of the State Level Bankers’ Committee (SLBC), district credit plans, priority sector lending (PSL) norms in 1974, branch expansion policy and the formation of Regional Rural Banks in 1975.

Spread of banking network

With nationalisation, unreachable and unbanked areas were easier to reach. The number of bank branches increased from 8,187 in 1969 to 59,752 in 1990, to 1,41,756 as of March, 2019. The share of rural and semi-urban branches increased from 58.4 percent to 77.2 per cent, to 62.89 per cent during the same period. The total network of rural and semi-urban branches increased from 4,781 in 1969 to 46,128 by 1990 and further increased to 89,144 in March 2019. In addition, 1.26 lakh bank mitras (business correspondents) provide branchless banking in villages. Now, one ATM is available for every three villages and for every 375 people, one Point of Sale is available in India.  Effectively, 80 percent of adults aged 18 and above have a bank account as of today. Of the 36 crore new savings bank deposit accounts opened under the Pradhan Mantri Jan Dhan Yojana till May 2019, Public Sector Banks (PSBs) accounted for 96.6 per cent, reflecting their success in achieving socially responsible banking.

Banks as an extended arm of the Government

The nationalised banks, now popularly known as PSBs, played a major role in the implementation of a plethora of credit-linked interest subsidy schemes. Programmes such as the Integrated Rural Development Programme (IRDP), Swarnajayanti Gram Swarozgar Yojana (SGSY), Indira Awas Yojana (IAY), Self Help Group-Bank Linkage Programme (SBLP), MUDRA loans and the most recent one, Jan Dhan Aadhaar Mobile initiative, all depend on the banks to distribute subsidies so as to achieve the target of integrated rural development, higher interest subvention, facilitate debt-waiver schemes and, thus, fulfill the mandatory lending norms for agriculture and small-scale industries. Further, a wide network of PSBs has helped in the implementation of various Direct Benefit Transfer (DBT) schemes like subsidy on LPG gas, MGNREGA wages, assistance under PM-KISAN, Rythu Bandhu scheme and various other pension schemes ensuring transparency and zero leakages.

Flipside of nationalisation

Although nationalisation of banks worked well until the 1980s, the Government overstayed its welcome and delayed the process of privatisation, which was badly needed under changed circumstances. The administered interest rates and the burden of direct lending to priority sector constrained the autonomy of PSBs to operate on commercial lines. The mandatory expansion of branches in unbanked centres with low business potential impacted their working. Regulatory entry barriers for private sector to make a foray into the banking sector acted as a hindrance for the development of a healthy competition between the two. Too much involvement of the Government in the banks’ operations and failure to invest in new technology perpetuated the inefficiency of the banking sector for a prolonged period.

Entry of private sector banks

Since 1993, the entry of new private sector banks brought new technology and institutional innovations. Their entry infused the much-needed competition in the banking sector. Post this, the PSBs had to compete with the private banks in spite of their social responsibility of meeting various Government scheme targets. On top of it, PSBs had to also meet the capital adequacy standards in line with the Basel framework from time to time. Recent data from the Reserve Bank of India (RBI) show that private sector banks are taking away market share from PSBs and will extend that pie from the current 30 per cent to 40 per cent in the near future. 

High NPAs and losses

As per data, aggregate gross advances of PSBs increased from over Rs 18.19 lakh crore as on March 31, 2008 to more than Rs 52.15 lakh crore as on March 31, 2014. This is due to the cumulative effect of the pressure to achieve social banking targets to cater to the low profitable sectors in un-bankable areas, frequent loan waivers, slower adoption of technology and inept monitoring and control systems.

Because of huge NPAs and losses, some PSBs were put under the Prompt Corrective Action (PCA) and were not able to cater to the growing credit demand. To strengthen the PSBs, the Government PSBs were recapitalised to the extent of Rs 3.12 lakh crore, with an infusion of Rs 2.46 lakh crore by the Government and mobilisation of over Rs 0.66 lakh crore by PSBs themselves. As per RBI data on global operations (provisional data for the financial year ending March 2019), gross NPAs of PSBs have declined by Rs 89,189 crore from the peak of Rs 8,95,601 crore in March 2018 to Rs 8,06,412 crore in March 2019 (provisional data).

It is questionable as to how long the Government can infuse capital into the PSBs through recapitalisation by spending huge sums of taxpayers money.

Way forward

The current situation demands a totally different approach compared to the one taken in 1969. There is a need for “denationalisation” and “privatisation” barring three to four large strategic banks. This will hasten the spread of bank networks and establish a healthy competition among them as well as provide a wide choice to the consumers. 

Banks should be freed from all Government controls in exercising commercial activities, including stake sale, privatisation and mergers, to maximise their profitability and competitiveness. However, the need is also for enforcement of stringent regulations, improved governance and internal monitoring and control system to reduce NPAs so as to enhance trust in the banking system. All large ticket NPAs need to be declared as willful defaulters and subjected to justice to maintain good health of the banking sector. Instead of brick and mortar banking branches, the focus should shift to simplified virtual banking systems with proper cyber security measures. This alone can take the outreach to remote people and areas.

(The writer is Principal Scientist, Agricultural Economics, ICAR)

Writer: A Amarender Reddy

Courtesy: The Pioneer

Even 50 years after the nationalisation of the 14 largest commercial banks on July 19, 1969, by the then Indira Gandhi Government, the move continues to have wide implications across the economy. It was a very progressive decision. These 14 banks accounted for 85 per cent of the bank deposits in the country. The move was done to free up the banks from the hands of a few industrial houses, who tried to use the depositors’ money under their control to increase credit flow and also address the gross neglect of rural and agricultural sectors, in terms of funding.

Circumstances leading to nationalisation

Recognising the need to improve the flow of credit in rural areas as also the agricultural sector, the then Government took the move to nationalise 14 large banks by passing the Banking Companies (Acquisition and Transfer of Undertaking) Bill in 1969. India’s agricultural growth had just started recovering after the successive drought years of 1966 and 1967 with help from green revolution technologies, which resulted in more intensive farming than traditional methods. Industrial recovery, too, had just begun after the 1965 Indo-Pakistan war and by 1968, the country recorded an industrial growth of 6.2 per cent. All of these created huge demand for credit across sectors, especially from farmers and small-scale industrialists. Petty businessmen, farmers and consumers suffered a cash crunch all those years as business houses maintained their dominant position and the banks focussed on giving credit to them with an aim to earn profits. This total neglect of agriculture and the rural sector by private banks prompted the Government to nationalise the banks and take direct control of credit delivery. The move also made banking in unbanked areas a reality while also giving a powerful tool to a vast majority of weaker sections, including the rural and agricultural farmers and labourers. This was the most prudent decision taken by the Indira Gandhi Government at that time.

Shift from class to mass banking

Immediately after the nationalisation of banks, a plethora of measures was taken by successive Governments to enhance the flow of credit so as to make it accessible to diverse sections of society. The focus of banks shifted from ‘class banking’ to ‘mass banking’. The commitment to spread the reach of banks began with the introduction of the Lead Bank Scheme (LIS) in 1969, the constitution of the State Level Bankers’ Committee (SLBC), district credit plans, priority sector lending (PSL) norms in 1974, branch expansion policy and the formation of Regional Rural Banks in 1975.

Spread of banking network

With nationalisation, unreachable and unbanked areas were easier to reach. The number of bank branches increased from 8,187 in 1969 to 59,752 in 1990, to 1,41,756 as of March, 2019. The share of rural and semi-urban branches increased from 58.4 percent to 77.2 per cent, to 62.89 per cent during the same period. The total network of rural and semi-urban branches increased from 4,781 in 1969 to 46,128 by 1990 and further increased to 89,144 in March 2019. In addition, 1.26 lakh bank mitras (business correspondents) provide branchless banking in villages. Now, one ATM is available for every three villages and for every 375 people, one Point of Sale is available in India.  Effectively, 80 percent of adults aged 18 and above have a bank account as of today. Of the 36 crore new savings bank deposit accounts opened under the Pradhan Mantri Jan Dhan Yojana till May 2019, Public Sector Banks (PSBs) accounted for 96.6 per cent, reflecting their success in achieving socially responsible banking.

Banks as an extended arm of the Government

The nationalised banks, now popularly known as PSBs, played a major role in the implementation of a plethora of credit-linked interest subsidy schemes. Programmes such as the Integrated Rural Development Programme (IRDP), Swarnajayanti Gram Swarozgar Yojana (SGSY), Indira Awas Yojana (IAY), Self Help Group-Bank Linkage Programme (SBLP), MUDRA loans and the most recent one, Jan Dhan Aadhaar Mobile initiative, all depend on the banks to distribute subsidies so as to achieve the target of integrated rural development, higher interest subvention, facilitate debt-waiver schemes and, thus, fulfill the mandatory lending norms for agriculture and small-scale industries. Further, a wide network of PSBs has helped in the implementation of various Direct Benefit Transfer (DBT) schemes like subsidy on LPG gas, MGNREGA wages, assistance under PM-KISAN, Rythu Bandhu scheme and various other pension schemes ensuring transparency and zero leakages.

Flipside of nationalisation

Although nationalisation of banks worked well until the 1980s, the Government overstayed its welcome and delayed the process of privatisation, which was badly needed under changed circumstances. The administered interest rates and the burden of direct lending to priority sector constrained the autonomy of PSBs to operate on commercial lines. The mandatory expansion of branches in unbanked centres with low business potential impacted their working. Regulatory entry barriers for private sector to make a foray into the banking sector acted as a hindrance for the development of a healthy competition between the two. Too much involvement of the Government in the banks’ operations and failure to invest in new technology perpetuated the inefficiency of the banking sector for a prolonged period.

Entry of private sector banks

Since 1993, the entry of new private sector banks brought new technology and institutional innovations. Their entry infused the much-needed competition in the banking sector. Post this, the PSBs had to compete with the private banks in spite of their social responsibility of meeting various Government scheme targets. On top of it, PSBs had to also meet the capital adequacy standards in line with the Basel framework from time to time. Recent data from the Reserve Bank of India (RBI) show that private sector banks are taking away market share from PSBs and will extend that pie from the current 30 per cent to 40 per cent in the near future. 

High NPAs and losses

As per data, aggregate gross advances of PSBs increased from over Rs 18.19 lakh crore as on March 31, 2008 to more than Rs 52.15 lakh crore as on March 31, 2014. This is due to the cumulative effect of the pressure to achieve social banking targets to cater to the low profitable sectors in un-bankable areas, frequent loan waivers, slower adoption of technology and inept monitoring and control systems.

Because of huge NPAs and losses, some PSBs were put under the Prompt Corrective Action (PCA) and were not able to cater to the growing credit demand. To strengthen the PSBs, the Government PSBs were recapitalised to the extent of Rs 3.12 lakh crore, with an infusion of Rs 2.46 lakh crore by the Government and mobilisation of over Rs 0.66 lakh crore by PSBs themselves. As per RBI data on global operations (provisional data for the financial year ending March 2019), gross NPAs of PSBs have declined by Rs 89,189 crore from the peak of Rs 8,95,601 crore in March 2018 to Rs 8,06,412 crore in March 2019 (provisional data).

It is questionable as to how long the Government can infuse capital into the PSBs through recapitalisation by spending huge sums of taxpayers money.

Way forward

The current situation demands a totally different approach compared to the one taken in 1969. There is a need for “denationalisation” and “privatisation” barring three to four large strategic banks. This will hasten the spread of bank networks and establish a healthy competition among them as well as provide a wide choice to the consumers. 

Banks should be freed from all Government controls in exercising commercial activities, including stake sale, privatisation and mergers, to maximise their profitability and competitiveness. However, the need is also for enforcement of stringent regulations, improved governance and internal monitoring and control system to reduce NPAs so as to enhance trust in the banking system. All large ticket NPAs need to be declared as willful defaulters and subjected to justice to maintain good health of the banking sector. Instead of brick and mortar banking branches, the focus should shift to simplified virtual banking systems with proper cyber security measures. This alone can take the outreach to remote people and areas.

(The writer is Principal Scientist, Agricultural Economics, ICAR)

Writer: A Amarender Reddy

Courtesy: The Pioneer