Bank Nationalisation

In News

• Recently, it was the 53rd anniversary of Prime Minister Indira Gandhi nationalising 14 banks.

Background on nationalisation of Banks

• History: The Congress government had nationalised 14 banks in 1969 and then followed it up with nationalising another 6 in 1980.
  • Nationalisation essentially meant that the government took over the ownership of certain private banks.
• Aim: The government’s aim was to take away the control from a few private players and expand the banking coverage to rural India so that sectors such as agriculture and small industries could get better credit facilities, thus creating a new class of entrepreneurs.
• Need?
  • India was predominantly an agrarian economy at that time with very high levels of poverty (over 50%) and low levels of financial inclusion.
  • Nationalisation was seen to be the quick way to ensure all the above objectives were met; private bankers would never have expanded for such social development reasons. 

Arguments against nationalisation of Banks

• Less strategic and operating freedom: The key difference between the state-owned PSBs and private banks is that PSBs enjoy less strategic and operating freedom because of majority government ownership.
  • The government exercises significant control over all aspects of PSB operations ranging from policies on recruitment and pay to investments and financing and bank governance including board and top management appointments.
• Forced Loans: Public sector bank officials can be forced to extend loans when such loans don’t make economic sense.
• Rising NPAs: PSB officials come under the scrutiny of agencies such as the Central Vigilance Commission and the Comptroller Auditor General. This holds them back from taking risks in lending or in renegotiating bad debt due to fears of harassment from the same investigative agencies.
• Lack of result: the central point of nationalising banks was to do what no right-thinking, profit-maximising private bank will do in the first place. If one appreciates this social or developmental objective of PSBs, the results were nothing short of transformative.

Arguments in favour of nationalisation of Banks

• Rural bank branches: The number of rural bank branches increased ten-fold from about 1,443 in 1969 to 15,105 in 1980 compared to a two-fold increase in urban and semi-urban areas from 5,248 to 13,300 branches. 
• Credit to rural areas: credit to rural areas increased from Rs 115 crore to Rs 3,000 crore, a twenty-fold increase and deposits in rural areas increased from Rs 306 crore to Rs 5,939 crore, again a twenty-fold increase.
• Credit to agriculture: Between 1969 and 1980, credit to agriculture expanded forty-fold from Rs 67 crore to Rs 2,767 crore, reaching 13 percent of GDP from a starting point of 2 per cent.
• Farmers: This growth represents a significant correction to the undersupply of credit to farmers that drove nationalisation. Both rural bank deposit mobilisation and rural credit increased significantly after the 1969 nationalisation.

Major Challenges faced by PSB’s in today’s world

• The financial position of public sector banks is fragile: partly masked by regulatory forbearance. The boards are disempowered, and the selection process for directors is increasingly compromised. Board governance is consequently weak.
• Compared to private bank board discussions: PSB boards not only discussed fewer topics but also in much less detail.
  • PSBs focussed less on factors such as profitability was one thing; the more surprising finding was that PSB boards even discussed development concerns (such as financial inclusion) far less than their private counterparts.
• NPAs: the recent government has had to repeatedly bail out one PSB after another as the NPAs rose to alarming proportions.
• Burden on India’s taxpayers: The government is just the medium; eventually losses of PSBs are paid for by India’s taxpayers both current and future.
• Drain on the public exchequer: on almost all metrics of efficiency and profitability, public sector banks lag far behind their private counterparts; in the process, they have become a drain on the public exchequer.

Significance of Privatisation

• Aggravated high Non-Performing Assets (NPAs) and stressed assets amidst pandemic. 
• To strengthen the strong banks and also minimise their numbers through privatisation to reduce its burden of support.
• Less effective bank mergers & infuse better management policies.
• No political interference & prompt decision making.
• More profitability & accountability to shareholders.
• Improves inflow of Foreign Direct Investment (FDI) or investment.
• Recommended by Narasimham Committee (proposed 33% govt. stakes), P J Nayak Committee (), RBI Working Group, etc.
• Better use of technology by private banks.