Daily Editorial Analysis for 26th July 2022

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53rd anniversary of Bank Nationalisation

GS Paper 3: Indian Economy
Important For:
Prelims exam: Background of bank nationalisation
Mains exam: Impact of Bank Nationalisation on Economy, Financial inclusion.

Why in News

Last week, on July 19 was the 53rd anniversary of 1st nationalisation where 14 banks were Nationalised.

Nationalization of banks

Nationalization of banks is the process of converting a private stake into a public stake, essentially increasing the government’s share of the banking sector.

Background of Bank Nationalisation

• With the nationalisation of the Imperial Bank in 1955, the central government entered the banking business, taking a 60% stake and forming a new bank, State Bank of India.
• The nationalisation of banks broadened the scope of public sector banking, which had previously been limited to the State Bank of India.
• At the time of India’s independence, all of the country’s major banks were privately led, which was a source of concern because people in rural areas were still reliant on money lenders for financial assistance.
• To address this issue, the then-Government decided to nationalise the banks. The Banking Regulation Act of 1949 was used to nationalise these banks.
• The Reserve Bank of India, on the other hand, was nationalised in 1949.
• Following the formation of the State Bank of India in 1955, another 14 banks were nationalised between 1969 and 1991. These were the banks with more than 50 crores in national deposits.
• Another six banks were nationalised in 1980, bringing the total to twenty.
• Aside from the aforementioned 20 banks, seven SBI subsidiaries were nationalised in 1959.
• The government merged Punjab National Bank and New Bank of India in 1993. It was the only merger between nationalised banks.

Why Nationalization of Banks?

• To boost private sectors – Banks were collapsing at an alarming rate – 361 banks failed between 1947 and 1955, equating to approximately 40 banks per year! Customers’ deposits were forfeited, and there was no way to recover them.
• To assist agricultural sector – Banks favoured big industries and businesses while ignoring the rural sector. Nationalization was accompanied by a promise to support the agricultural sector.
• To grow India’s banking network – Nationalisation facilitated the establishment of new branches, ensuring that banks were well-represented throughout the country.
• To mobilize individual savings – Nationalizing the banks would give people more access to banks and encourage them to save, bringing in more revenue to a cash-strapped economy.
• Economic & Political Factors – The two wars in 1962 and 1965 had wreaked havoc on the economy. The nationalisation of Indian banks would boost the economy by increasing deposits.

Benefits of Nationalisation of Banks

• Prevention of Monopoly:
o Before the government nationalised banks, corporate families-controlled banking systems in India. It effectively ensured a monopoly over capital.
o Bank nationalisation helped make the economy more equitable and opened bank credit to even people without connections.
• Reducing Regional Imbalance:
o Bank nationalisation helped in more equitable regional growth since banking system was concentrated in urban centres and that too largely in the West and the North.
• Improvement in working conditions:
o Government banking improved working conditions of the employees also in the banking sector.
o The state ensured higher wages, security of services and other fringe benefits.
• Protection of Public Interest
o Unhealthy competition among industrialists injured the interest of the public which was measured and mitigated by state ownership.
• Centralised Management
o Centralised management made possible due to coordination in nationalised banks helped provide uniform services throughout the country.
o It thus enabled the state to solve the problems of organisation, capital, labour operation and marketing.
• Use of Surplus Profit
o Under state ownership the profit earned by banking enterprises could be utilised for greater public good and help in supporting the Government’s economic policies.

Uniformity and Stability in Service

o Nationalisation ensured uniform banking services and reached banking services to different corners of the country.
o Banking services were placed within reach of people in rural areas and reduced their dependence on moneylenders
• Core Sector Lending
o Private banks were averse to lend to Agriculturists and to the core sector of steel and coal, which required huge investment. Nationalisation made funds available to these sectors.
• Increase in Standard of Living
o It enabled rapid increase in the number of banking offices in rural and semi-urban areas and helped considerably in deposit mobilisation with the added benefit of the expansion of personal loans giving a fillip to consumption.
• Developing banking habits
o RBI records show that per capita deposits increased from Rs. 88 in 1969 to Rs. 4242 by 1995 and have further increased with time.

Criticism of Nationalisation of Banks

• Socio-economic Challenges: Banks were unable to provide adequate support to eradicate poverty or finance the grassroots levels of society. This was especially noticeable in rural India.
• Private Bank Competition: Despite government support and increased impetus from increased deposits, public sector banks were never able to outperform private banks in terms of performance.
• Failure to Achieve Financial Inclusion: Despite the fact that financial inclusion was the primary goal of nationalising banks, it was not adequately enabled.
o It was accomplished only to a limited extent after the launch of a government campaign known as the Pradhan Mantri Jan Dhan Yojana.

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