Almost half a century before Prime Minister Narendra Modi announced demonetisation, there was bank nationalisation. On 19 July 1969, by means of an Ordinance, the Indira Gandhi-led Congress government nationalised 14 commercial banks of the country.
Both demonetisation and nationalisation, while ushering in sweeping economic changes, were branded as measures implemented for the good of the underprivileged sections of the society.
On Bank Nationalisation Day, 19 July, The Quint brings you a lowdown of what this measure entailed, why was it implemented in the first place, how it was intertwined with the politics of the day, and whether it conveyed any significant economic benefits to country.
The What And Why of Bank Nationalisation
The measure of bank nationalisation came into effect on 19 July 1969. The ownership of 14 major commercial private banks - estimated to be controlling 70 percent of the deposits in the country - was transferred to the government led by Indira Gandhi, who was sworn in as the Prime Minister over three years ago after the untimely death of Lal Bahadur Shastri.
The ordinance that made bank nationalisation possible on 19 July was called the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, which was soon after followed by an Act of the same name.
Why Was Nationalisation Necessary?
Till 1969, the State Bank of India (SBI) was the only bank that was not privately owned. It was called the Imperial Bank before its nationalisation in 1955.
There were primarily two reasons why the ownership of these 14 banks was transferred to the government. The first was the unpredictable manner in which these functioned as private entities.
As this report in The Economic Times points out, there were 361 private banks which "failed" across the country in the period from 1947 to 1955, translating to an average of over 40 banks per year. More often than not, this resulted in depositors losing all their money as they were not offered any guarantee by their respective banks.
Second, these commercial banks were seen as catering to the large industries and businesses. Agriculture, as a sector, was largely ignored by these banks. In 1950, only 2.3 percent of the bank loans were channelled to farmers. The situation, instead of improving, worsened in the years hence, with the figure declining to 2.2 percent by 1967.
So What Benefits Did Bank Nationalisation Promise?
In light of these circumstances, the stated motive of this measure was to make credit availability easy for what was called the “priority sector” – constituting agriculture, small industries, traders and entrepreneurs.
Moreover, the focus was also on opening up of bank branches in the rural and backward areas.
Was There a Prelude to The Nationalisation Measure?
Yes, and it was called the social control policy.
As the researcher Suhit K Sen notes in his paper ‘The politics of bank nationalization, 1969-76’, the concept of bank nationalisation started gaining currency in the 60s, riding on the demands from a radical socialist section within the Congress party. However, this was countered by the so-called ‘old-guard’ (Syndicate) belonging to the same party.
Therefore, in light of these opposite currents, a middle path was reached in the form of the social control policy for banks.
Described by Sen as “an utterly vague compromise,” social control of banks took shape in 1968. Vesting greater powers in the government, the policy was marked by the formation of a Finance Minister-chaired National Credit Council, expanding the RBI’s jurisdiction as well reconstitution of the banks’ management in order to give control to the non-industry people.
The Politics Behind Nationalisation of Banks
The nationalisation of the 14 banks in 1969 took place when the Congress party was undergoing an internal crisis, marked by a bitter conflict between Indira Gandhi and the Syndicate, which ultimately led to its split in the same year.
Bank nationalisation served to widen the chasm between the two factions. While Indira Gandhi went on to eventually support the measure, Finance Minister Morarji Desai (a key Syndicate leader) made his reservations against it amply clear.
In fact, bank nationalisation coincided with the infamous ouster of Morarji Desai as Finance Minister. As Gandhi took charge the portfolio herself, Desai conveyed his displeasure in a letter, in which he stated:
If you wanted a change in the Finance Ministry, you could have discussed it with me... But now, you have behaved towards me in a manner in which no would behave even with a clerk.Morarji Desai
Ultimately, the measure proved to be a political masterstroke for Gandhi. As Sen observed in his paper, bank nationalisation instantaneously made the public rally behind Gandhi. It reaped rich political dividends for her faction, not just in the short term, but also for the national elections of 1971 as well as the state elections of 1972.
Forget Political Goals, Did Nationalisation do Anything Useful For The Economy?
In this regard, Sen asserts that the move "failed to, or perhaps was never meant to, fulfil its stated populist, radical promise of contributing to either the eradication of poverty, or more realistically, scaling down inequalities of income, wealth and entitlements, especially in rural India.”
The performance of nationalised banks, on the parameters of branch expansion as well as increasing the number of deposits, never surpassed that of private banks.
Moreover, even while it did serve the agriculture sector, the ones who reaped the maximum benefits in terms of borrowings were the well-off farmers, with the poorer and the needy ones being excluded. The same trend applied in the case of traders, businesses and industries.
Nonetheless, 11 years hence, a second nationalisation took place in April 1980, wherein six more banks were put under government control. And ironically in 2017, nationalised banks are struggling with bad loans of over 10 percent of their assets, while new private banks like HDFC Bank and several others find themselves on the ascendant.
RBI Makes a Smart First Move on Bad Loan Resolution
Empowering RBI to Clean up the Bad Loan Mess. Will It Work?
(This story was first published on 19 July 2017. It has been reposted from The Quint’s archives on the 49th anniversary of bank nationalisation)
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