Context: Over half a century since Indira Gandhi nationalised 14 public sector banks, the move still evokes sharp divisions, with some criticising it as a failure and others hailing it as a landmark decision.

• The government had nationalised 14 banks in 1969 and then followed it up with nationalising another 6 in 1980.

What is Bank Nationalization?

• Nationalisation essentially meant that the government took over the ownership of certain private banks.

• Aim: 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.

• India was predominantly an agrarian economy at the of time of bank nationalization with very high levels of poverty (over 50%) and abysmal levels of financial inclusion.

P.J. Nayak Committee

• The Reserve Bank of India (RBI) established the P J Nayak Committee, or the Committee to Review Governance of Boards of Banks in India, in 2014.

• Aim: To examine the governance of bank boards in India.

Recommendations

• Bank Nationalization Acts (1970, 1980), SBI Acts and SBI Subsidiary Acts should all be repealed. Reason given; these laws urge the government to own more than half of the banks.

• The government should set up a banking investment company (BIC) as a holding company or basic investment company after repealing previous laws.

• A temporary entity called the Bank Boards Bureau (BBB) ??will be created to perform the duties of the BIC until the BIC is formed. BBB will be abolished once BIC is created.

• BBB will guide the appointment of Board of Directors as well as President and other executive directors of banks.

Reasons for Bank Nationalisation

• Control of huge resources; Attention to priority sector; Development of backward areas; Efficiency argument; Profitability; Uniform banking policy; Mobilization of savings and prevention of money lenders; Encouraging banking habits and creating banking habitat; Speedy transfer of funds and Augmentation of Employment

Post-nationalization challenges

• Having ownership and operational control of the banks was a challenging task for the government.

• The banks were constantly challenged on their profitability parameters—particularly RRBs which had both geographical and portfolio concentration risks.

Establishing regional balance

• The objective of social control was about making banking sector accessible in areas where these services were not accessible.

• The state established 196 Regional Rural Banks (RRBs) between two nationalizations.

• While nationalization, branch licensing policy and priority sector lending targets helped the banks to go to rural areas and certain sectors, it did not achieve regional balance.

• Of the 20 banks that were nationalized, seven were concentrated in south India, six in west India, four in north India and three in east India.

• The expanded rural branch network followed the extant regional concentration, bringing more intensive banking in southern and western regions.

How was regional balance achieved then?

• This skew was partially set right by two initiatives. The first was an institutional intervention of opening 196 RRBs which had focused area of operation.

• The RRBs contributed significantly to reduce the regional imbalance with their expanding branch network in the 1980s.

• RRBs also had a greater proportion of their loans flowing to priority sector in general and agriculture in particular.

• The second was the policy on lead bank scheme where one bank was assigned as a lead for each district.

• The lead bank was responsible for the growth and penetration of banking in districts and had to achieve it in coordination with other banks and the state machinery.

• A “district credit” plan (euphemism for a banking plan), dovetailed with the government schemes, was to be prepared and monitored by the lead bank.

Regional Rural Banks

• RRBs are a shade better when it comes to rural lending.

• While they have deployed 72% of the rural and semi-urban deposits as credit in those areas, the figure for urban understandably is very low, and most of these funds have gone into investments.

Small Finance Banks

• The new small finance banks (SFBs) give an entirely different picture—a large number of them are MFIs that converted into banks.

• These institutions are trying to collect deposits from the middle and upper middle class and deploy those resources towards the poor.

• From a paradigm point of view, possibly SFBs are the most interesting institutions that have turned the tables and are trying to achieve from the private sector the objectives set out in the bank nationalization.

Public versus Private Banks

• A look at the broad performance ratios for 2017-18 shows that private sector banks score better on efficiency and profitability parameters.

• They have better return on assets, return on equity, net interest margin and a higher proportion of low-cost deposits.

• On the other hand, public sector banks (PSBs) have a better impact on priority sector lending achievement, and paid higher wages.

• Of the new Pradhan Mantri Jan Dhan Yojana accounts 77% were opened by state-owned banks, 20% by RRBs, and a mere 3.4% accounts were opened by private banks.

• From this perspective bank nationalization was indeed a good move at that time.

What benefits do we reap today?

• Banking under government ownership gave the public implicit faith and immense confidence about the sustainability of the banks.

• Banks were no longer confined to only metropolitan or cosmopolitan in India. In fact, the Indian banking system has reached even to the remote corners of the country.

• The present government has reached out to people through banks.

• Assistance for constructing toilets under Swachh Bharat programme, DBT, Crop insurance schemes etc was given through banks.

• The dispensing of Mudra loans to about 20 crore individuals, benefits under PM Kisan scheme for providing cash assistance to close to 15 crore farmers annually are only possible through this banks.

• Thus banks became the government’s dispenser of goodies due to the decision which was taken 50 years ago.

About Financial Inclusion

• The All India Debt and Investment Survey reports indicate that the formal sector has been losing ground to the informal sector in the rural indebtedness pie since 2001 onwards.

• This is worrying and indicates that the inclusion agenda is far from achieved.

• Some examples in the public sector banking system—particularly SBI—have shown that it is possible to achieve the double bottom line of being in the commercial market while continuing to achieve significant targets in inclusion, sectoral, spatial and geographical.

Road Ahead

• From the larger perspective of efficiency and better utilization of capital, it may be a good idea to move state-owned banks towards more market-based framework.

• However, that call should be taken to achieve the residual task of inclusion.

• Making state-owned banks more autonomous and accountable to the market may be the first significant step that can be taken for now.