Nationalization of 14 Banks in 1969

July 19 of this year marks the 50th anniversary of bank nationalisation. N

of banks is arguably the biggest structural reform introduced in the financial sector during the post-independence era of Indian history. The second volume of the official history of the Reserve Bank of India describes banks nationalisation as the single-most-important economic policy decision taken by any government after 1947. 

Central bank historians say in the terms of impact, even the economic reforms of 1991 pale in comparison.

What is the nationalisation of banks? 

Prior to 1969, all the banks in India, except the State Bank of India (nationalised in 1955), was owned by the private players. SBI was nationalised during the time when many of the private banks were facing bankruptcy at an alarming rate. 

By the 1960s, the Indian banking industry had become an important tool to enable the development of the Indian economy. In 1969 under the Indira Gandhi Government, 14 banks were nationalised. These banks, during that time, held 80% of the bank deposits in the country. 

The banks that were nationalised in 1969 are: 

Allahabad Bank 

Bank of Baroda 

Bank of India 

Bank of Maharashtra Central Bank of India Canara Bank 

Dena Bank 

Indian Bank 

Indian Overseas Bank Punjab National Bank Syndicate Bank 

Union Bank 

United Bank of India 

UCO Bank

In 1980, the government took control of 6 other banks. They are as follows: 

Punjab and Sind Bank Vijaya Bank 

Oriental Bank of India Corporate Bank 

Andhra Bank 

New Bank of India

Why did the government nationalise the banks?

There were numerous problems related to the reach and flow of credit to many priority sectors within the economy. 

Needed measures were taken by the government to address this issue. For example, the number of banks was decreased from 566 banks in 1951 to 91 in 1967. 

Before the nationalisation of banks in 1969, the government had tried to address the economic problems through “social control”. 

This was to ensure a wider spread of credit and an increase in the credit flow to emerging priority sector.

However, despite these measures, the banks were failing mainly due to speculative financial activities. 

Post-1967, during Mrs. Indira Gandhi’s tenure, the banks were not giving credit to agriculture and not enough credit to the industries. 

Due to this, agriculture and industries were facing a crisis during this time. 

They were more focused on extending credit for trade. The crisis in the banking sector had resulted in wide-ranging consequences leading to distress among the people. This resulted in the nationalisation of banks. 

The main objectives of nationalisation of banks are as follows: 

Address the rising economic crisis that occurred in the 1960s. Remove the dominance of the few in the banking sector. Providing sufficient credit for agriculture, small industries, and exports. Professionalising the management of the banking sector. Encouraging new entrepreneurs. Develop the backward areas within India

How did the government nationalise the banks?

The then Prime Minister of India Mrs Indira Gandhi, during the annual conference of the All India Congress Meeting, had made her intentions clear on the nationalisation of banks by presenting a paper on that subject titled “Stray thoughts on Bank Nationalisation”. 

After some debates, the government issued the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, which empowered it to nationalise banks within India. 

Within two weeks of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertakings) Bill, and it had received the president's sanction.

What are the consequences of this move?

The nationalisation of banks was one of the significant events in independent India. This move had resulted in a major increase in bank deposits and financial savings. The rising fiscal deficit during that time had made banks a captive source of financing. The long-term impact of this move is the improved performance of the small-scale industries and agriculture. It has also led to increased penetration of banks into rural India. In the long run, the continuous political interventions had created negative effects on the profitability of the banks. 

However, the government was successful in partially meeting its goal in the developmental agenda through the banking system. Yet, many in India still did not have access to formal credit and a large portion of the population remained outside the banking net.

What are the negative implications of this move?

The NPA crisis since 2012 could have, at least partly, caused due to the credit bubble that grew under the political support due to the nationalisation of banks. Complicated interest rates: The nationalisation of banks had led to an increasingly complex interest rate structures within the banking sector. There were different rates of interest for different types of loans. Eventually, the Indian central bank had to manage hundreds of rates of interest. Due to these complicated procedures and interests, the loans were not given to those who are need of it. This, as a result, defeated the purpose of nationalization.

This mind-boggling structure was only brought down after the 1991 reform, with the central bank managing the pivotal repo rate, while the commercial lending rates were decided by the banks themselves. 

Reduced competition within the banking sector: Banking is a highly competitive sector. However, the nationalisation of banks had reduced the competition between the public banks and private banks. 

Inefficiency: Due to the nationalisation of banks, there was a bureaucratic attitude in the banking sector. There was no responsibility, accountability or incentive for it to progress within the public sector banks. Unwarranted delays were the new norm within these banks.

 

Long-term risks: Though liberal credit is necessary for the development of rural India, it had also created harmful effects on the stability of the banking sector. The nationalised banks are now facing the problems of overdue loans and the establishment of economically unviable branches. Extending loans to agriculture and small-scale industries has proven to be a risky endeavour as it had given lesser returns. These loans were a risk to the economic viability of such institutions.