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Themes > Current Issues
21.07.2005

Bank Nationalisation: The Record

Jayati Ghosh
On July 19, 1969 - thirty six years ago - 14 major private banks were nationalised in India. It is easy now to take for granted, or even to dismiss or disparage, what an extraordinary and important step that was. It was not a step taken at random or because of the whims of the leadership of the time, but reflected a process of struggle and political change which had made this an important demand of the people.

The political situation at that time had some eerie similarities to the present one: a weakened Congress Party, in which Indira Gandhi sought to establish her position vis-à-vis the ''syndicate'' of older and more established Congress leaders by enlisting the support of left elements both within and outside her party. Bank nationalisation was one fallout of this political configuration, which had been placed on the agenda by progressive movements and campaigns for this. In these struggles, incidentally, hundreds of people even lost their lives, giving some idea of the intensity of the demand and the violence of the opposition.

The need for the nationalisation was felt mainly because private commercial banks were not fulfilling the social and developmental goals of banking which are so essential for any industrialising country. Despite the enactment of the Banking Regulation Act in 1949 and the nationalisation of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small scale borrowers.

The developmental goals of financial intermediation were not being achieved other than for some favoured large industries and established business houses. Whereas industry's share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34 per cent to 68 per cent, agriculture received less than 2 per cent of total credit. Other key areas such as credit to exports and small scale industries were also neglected.

The stated purpose of bank nationalisation was to ensure that credit allocation occur in accordance with plan priorities. Nationalisation took place in two phases, with a first round in 1969 covering 14 banks followed by another in 1980 covering 7 banks. Currently there are 27 nationalised commercial banks.

Initially, the focus was on the physical extension of banking services. There is no doubt that the achievement has been impressive by any standards. From only 8261 in June 1969, the number of branches of commercial banks increased to 65,521 in 2000. (Indeed, they had increased to even more, but, as we shall see, the ''reforms'' of the nineties caused a decline in the number of rural branches.) The expansion of rural branches was especially noteworthy. The population covered by a branch decreased from 65,000 in 1969 to 15,000 in 2001. There were associated increases in both deposits and credit flow.

But the more significant shift was in the focus of lending. At the time of nationalisation the priority sector concept was introduced by bringing agriculture, small-scale industry, retail trade, small business and small transport operators under its fold. The list widened with the passage of time. It was made mandatory for banks to provide 40 per cent of their net credit to these ''priority'' sectors.

Within this, banks had to provide 18 per cent of their net credit to the agricultural sectors, so as to reduce the hold of moneylenders and make more funds available for agricultural development. From the early 1970s, banks were also were actively involved in poverty alleviation and employment generation programmes.

These policy guidelines did yield results, as the shares of agriculture, small scale industry and other priority sectors reached mandated level in the 1970s and 1980s. This in turn was related to a number of economic developments which we take for granted now. Enhanced bank credit to the farm sector became instrumental for the success of green revolution and the increase of aggregate food grain production in north and northwest India in the 1970s, and in the eastern region in the 1980s. Even the increase in exports by small-scale manufacturers over the 1980s and 1990s, such that they accounted for around two-third of the total value of all exports, was strongly related to access to bank credit provided by priority sector norms.

Of course, these achievements, however, substantial, are still nowhere near meeting the needs of the economy, and the banking system has a long way to go to meet the goals of development. But already in the past decade, even these achievements have been eroded by financial sector and banking reforms which have undermined priority sector lending and reduced the geographical spread of banks.

Using recommendations of the Narasimhan Committee, profitability was made the criterion for opening or maintaining bank branches and priority sector norms were diluted by removing the minimum allocation for agriculture and introducing a much larger range of activities into the priority sector.

Private banks have hardly any rural branches, and foreign banks have never had any. But from the early 1990s, even the public sector banks effectively stopped any rural expansion and concentrated on urban and metropolitan banking. So rural branches have stagnated even as branches in metros increased. The rural Credit-Deposit ratio, which was about 65 per cent in the 1980s and 60 per cent in the early 1990s, declined to less than 40 per cent by the beginning of the current decade. Only in the big metros did Cash-Deposit ratios increase. Credit has been regionally concentrated with a fairly significant bias against under-developed regions.

Agriculture, small-scale industry and the informal sector have been the worst hit. The share of agriculture in total bank credit declined from 16 per cent in March 1990 to around 9 per cent in March 2002. For small-scale industries, the share of credit fell over the same period from 13 per cent to less than 5 per cent. The repercussions in terms of agrarian crisis and loss of viability and employment in small-scale industries are too well known to repeat here.

Clearly, the objectives that bank nationalisation sought to meet are more pressing and urgent than ever, and they can only be achieved by a banking sector that is under the broad control and direction of an accountable state. Instead, the nationalised banks are being undermined, driven to looking only for higher profits and then to be sold off to the highest bidders. The need for a social and political movement similar to that which brought about bank nationalisation in the first place is only too apparent.
 

© MACROSCAN 2005