The nationalisation of 14 banks, executed 50 years ago this Friday, was praised and criticized equally. Incidentally, it has also led to successes and failures in equal measure. For instance, branch expansion and growth in deposits and advances was impressive post nationalisation. But, crucially, it failed to achieve its core objective of energising priority sectors, with large businesses continuing to dominate credit profiles.
Why nationalise banks?
Despite the Banking Regulation Act, 1949 and the nationalisation of the largest banks, the expansion of commercial banking largely excluded rural areas and small scale borrowers. On the other hand, the industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968 from 34 to 68 per cent, while agriculture received less than 2 per cent.
Other key areas like credit to exports and small scale industries were dismal. Moreover, public deposits were considered unsafe in private hands. It was also felt that private lenders weren’t fulfilling the social and development goals of banking, which were essential for economic development, and nationalisation was to ensure that credit allocation was in accordance with five-year plan priorities.
At that point, Indian banks were owned by a few big shareholders, influencing bank credit in accordance with their own interests. According to an unpublished RBI sample survey, of the total equity capital of Rs 21.4 crore in 9 large banks as on 1965, about 40 per cent was held by only 33 accounts and the remaining by over 80,000 accounts. Moreover, according to another estimate, 70 per cent of total industrial advances went to only one per cent of borrower accounts, each with credit outstanding of over Rs 5 lakh, whereas 12 per cent of accounts with credit outstanding of less than Rs 10,000 each received only 4 per cent. This led to the growth of wealth and power in a few hands.
In short, though there were 430 commercial banks as on 1951, they failed to support the government’s socio-economic objectives. Hence, the government decided to nationalise banks in two phases — first in July, 1969 covering 14 banks (with a deposit base of over Rs 50 crore) followed by another in April, 1980 covering 7 banks (with a deposit base of over Rs 200 crore).
Arguments in favour
Prior to nationalisation, commercial banks lent to unscrupulous persons who indulged in speculation on essential commodities. Some even lent to politicians to contest elections under different pretexts. It was widely believed that anti-social elements received loans to make large profits by creating artificial shortages of essential goods. Besides, banks were ignoring national priorities despite the need to provide adequate finance to agriculturalists and educated, but unemployed citizens.
Resources were made available to the directors of banks, who had other business interests, at concessional rates. One estimate pegged that 188 board members of 20 leading banks had 1,452 directorships in other companies also. Funds weren’t utilised for the economic development of the country. Small businesses were discriminated against, while the agricultural sector was almost ignored and most branches existed in urban areas catering to industry and trade.
Only 20 banks were nationalised because the government wanted competition between public and private lenders, but the dominant view then was that there could be no competition since the RBI controls monetary activities of all commercial banks. As such, nationalisation reduced the efficiency of banks. Some strongly believed that extending loans to agriculture and small scale industries was risky and less remunerative, were against sound banking rules and may weaken the economic viability.
It was said that there was no need to provide 100 per cent security to depositors through nationalisation of banks. Institutions like Indian Deposit Insurance and Credit Guarantee Corporation were functioning efficiently and providing enough relief. The move also involved compensation to shareholders, putting an additional financial burden on the government. Moreover, it is also argued that nationalisation won’t bring much revenue to the state.
Eighteen years prior to nationalisation (1951-1969), bank branches doubled to 8,262, but this number shot up 5-fold eighteen years post-nationalisation (1969-1987) to 53,840. Banking coverage improved from one office for 87,000 people in 1951 to one office for 65,000 people in 1969 and one for 15,000 in 2006. Bank deposits in the 18 years before nationalisation increased four-fold to Rs 4,646 crore in 1969, but zoomed over 200-fold during the 18 years post-nationalisation.
Interestingly, the relative proportions of demands and time deposits also changed markedly. Time deposits increased from 50 per cent in 1951 to 75 per cent in 1969, clearly reflecting a shift in favour of fixed deposits. Advances pre-nationalisation rose 5-fold, but rose 160-fold post nationalisation.
The number of branches in rural areas with population up to 10,000 rose from 1,832 in 1969 to 33,795, according to a paper by Dr Alka Mittal of IRACST. Likewise, the percentage of bank branches in rural areas to total branches rose from 22 per cent in 1969 to 73 per cent in 2011. Prior to nationalisation, large and medium industries and wholesale trade comprised about 78 per cent of total bank credit, while agriculture accounted for just about 2.2 per cent.
This subsequently declined. Agriculture credit increased from Rs 162 crore in 1969 to Rs 4 lakh crore in 2011, while bank credit to small scale industries increased significantly from Rs 251 crore to Rs 3.7 lakh crore. Priority sector lending accounts rose from just about 2.60 lakh to 483 lakh between 1969 and 2011, while total credit disbursed rose from Rs 441 crore in June, 1969 to Rs 10 lakh crore in 2011. Consequently, the share of priority sector in the total credit increased from 15 per cent to 41 per cent during the same period.