Day 62 – Q 1. 2019 is the 50th Anniversary of Nationalisation of Banks. What were the socio – economic reasons for nationalization banks? Did it achieve what was intended? Critically examine.
Q.1) 2019 is the 50th Anniversary of Nationalisation of Banks. What were the socio – economic reasons for nationalization banks? Did it achieve what was intended? Critically examine.
Introduction
Almost half a century before in 1969, by means of an Ordinance, the then government nationalised 14 commercial banks of the country.
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What is Nationalisation
Nationalisation is a process whereby a national government or State takes over the private industry, organisation or assets into public ownership by an Act or ordinance or some other kind of orders. This strategy has been frequently adopted by socialist governments for transition from capitalism to socialism.
By nationalization, in 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 by Banking Companies (Acquisition and Transfer of Undertakings) Ordinance.
Socio-economic Reasons Behind Nationalisation of Banks in India
- To reduce monopoly practices: Initially, a few leading industrial and business houses had close association with commercial banks. They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses.
- Advance loan to agriculture sector: If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population depends upon agriculture.
- Balanced Regional development: In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities.
- To reduce misuse of savings of general public: Banks collect savings from the general public. If it is in the hand of private sector, the national interests may be neglected, besides, in Five-Year Plans, the government gives priority to some specified sectors like agriculture, small-industries etc.
- Greater mobilisation of deposits: The public sector banks open branches in rural areas where the private sector has failed. Because of such rapid branch expansion there is possibility to mobilise rural savings.
- Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about co-ordinated credit control.
- Greater Stability of banking structure: Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalised banks will impart greater stability for the banking structure.
Achievements of Nationalized Banks
- Branch Expansion: Branch expansion gained momentum after nationalization of top commercial banks. This expansion was not only in urban areas but also in rural and village areas.
- Expansion of Bank Deposits: Since nationalization of banks, there has been a substantial growth in the deposits of commercial banks. Thus bank deposits had increased by 200 times. Development of banking habit among people through publicity led to increase in bank deposits.
- Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before.
- Investment in Government Securities: The nationalized banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities in recent years.
- Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business.
- Social Banking – Poverty Alleviation Program: Commercial banks, especially the nationalized banks have been participating in the poverty alleviation Program launched by the government.
- Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance.
- Diversification in Banking: The changes which have been taking place in India since 1969 have necessitated banking companies to give up their conservative and traditional system of banking and take to new and progressive functions.
- Safety: The government has given importance to safety of the banks. The RBI exercises tight control over banks and safeguards depositors interest.
Though there have been considerable achievements of nationalisation of banks, but current situation of Banking system and farmers’ distress show other side of the coin too.
- Deterioration in asset quality is higher in public sector banks than that of private banks. Non-performing asset (NPA) ratio of PSBs is 6.9 per cent (against 2.2 per cent and 0.6 per cent for private sector and foreign banks, respectively).
- Most of the banks under RBI’s Prompt Corrective Action (PCA) framework are PSBs.
- According to RBI’s financial stability report, public sector banks (PSBs) are far more prone to fraud than their private sector counterparts.
- The RBI notes that more than 85% of frauds could be linked to PSBs, even though their share of overall credit is only about 65%.
- The serious corporate governance issues faced by public sector banks also contributed to the lax lending practices that are at the core of the NPA crisis.
- In agriculture sector, most of the farmers still relay on informal credit sources such as money lenders.
- NABARD’s survey shows that lengthy procedure for sanction of loans by institutions, demand for collateral security and short term of crop loan were the reasons for farmers seeking loans from non-institutional sources.
Conclusion
A banking revolution occurred in the country during the post-nationalization era. There has been a fundamental change in the lending policies of the nationalized banks. It has changed from class banking to mass-banking or social banking. This system has improved and progressed appreciably. But recent two major issues of NPAs and agriculture crisis put a question mark on extent of the success of nationalisation of banks.
Best Answer: P29
