| 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.
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