50 Years of Bank Nationalisation – Free PDF Download

Q) Which of the following is the correct chronological sequence of the above events?

1. The first democratically elected communist party government formed in a State in India.
2. India’s then largest bank, ‘Imperial Bank of India’, was renamed ‘State Bank of India’.
3. Air India was nationalised and became the national carrier.
4. Goa became a part of independent India.

(a) 4 – 1 – 2 – 3

(b) 3 – 2 – 1 – 4

(c) 4 – 2 – 1 – 3

(d) 3 – 1 – 2 – 4

WHAT IS NATIONALISATION?

• According to the IMF (International Monetary Fund),
• Nationalisation is a process by which the government takes over private assets and brings them under public ownership.

NATIONALISATION OF BANKS

• When banks were nationalized, it came directly under Banking regulation Act 1949.
• RBI later become the regulatory authority for banking in India.

SITUATION BEFORE NATIONALISATION

• Before nationalization took place in 1969, only State Bank of India was a public sector undertaking, having been nationalised in 1955.
• In 1951 there were more than 400 commercial banks who worked under the private sector.
• More than 360 banks had failed between 1947 and 1955 — the rate of collapse was 40 banks a year.
• The trend continued through the 1950s and the first half of 1960s.
• This had forced Morarji Desai, the then finance minister, to launch a massive bank consolidation drive.
• It brought down the number of banks from 328 in 1960 to 68 in 1965.

ECONOMIC RATIONALE BEHIND NATIONALISATION

• Issues related to the reach and flow of credit to important sectors.
• Banks were not giving enough credit to agriculture and industry.
• The banks were more interested in extending credit for trade.
• The collapse of banks was causing distress among people.
• Regional imbalance in banking sector.
• Developing banking habits of the people.

POLITICAL BACKDROP

• Indira Gandhi became the prime minister in 1967 and Morarji Desai as her finance minister.
• Her political authority was invariably questioned by those who were colleagues of her father, Jawaharlal Nehru.
• A group of leaders led by K Kamraj and Morarji Desai, known as the Syndicate, controlled the party and Indira Gandhi was being forced to toe their line.

• The collapse of banks were causing distress among people, who were losing their hard-earned money in the absence of a strong government support and legislative protection to their money.
• Indira Gandhi saw a rare chance to become people’s hero at a time when she was being challenged within the Congress party.

EVENTS THAT LED TO NATIONALIZATION

• Death of President Zakir Hussain on 3rd May 1969.
• The Syndicate put up Neelam Sanjeeva Reddy as its presidential candidate.

• Indira Gandhi favoured VV Giri.
• On July 12, Indira Gandhi announced her intention at the Congress’s Bangalore session to nationalise private banks.
• As stand-in President VV Giri was to step down on July 20, Indira Gandhi needed to get bank nationalisation done in next seven days.
• A draft Ordinance was prepared on July 18 and the next day it was passed by the cabinet at 5 pm.
• President Giri promulgated it and Indira Gandhi addressed the nation at 8.30 pm.
• Shocker to the business community, but the people were happy.

14 banks were nationalised:

1. Allahabad Bank
2. Bank of Baroda
3. Bank of India
4. Bank of Maharashtra
5. Central Bank of India
6. Canara Bank
7. Dena Bank
8. Indian Bank
9. Indian Overseas Bank
10. Punjab National Bank
11. Syndicate Bank
12. UCO Bank
13. Union Bank
14. United Bank of India

• In 1980, the government took control of another 6 banks.

SHORT TERM GAIN

• The number of branches in rural India expanded as banks were ordered to open four branches in India’s villages for every one in its towns and cities. This led to doubling of Savings rate.
• Agricultural lending increased, as banks were told that 18% of credit should go to farming and allied activities.

LONG TERM LOSS

• Unprecedented amounts of credit to flow to agriculture came at a cost of lower quality intermediation.
• No measurable increase in agricultural investment.
• Effect on industry was clearly negative. Banks, once nationalized, became risk-averse, rarely lending to new firms.
• Under-lending became chronic.
• Such cronyism led to periodic bad loan crises that required bailouts by the banks’ owners, the taxpayers.
• 2.7 trillion rupees has been infused into the state-controlled banking sector since 2017.

CONCLUSION

• The political control of bank lending continued even after the 1991 reforms.
• Bad loan mess has weighed down on the Indian economy since 2012.
• Bank nationalization succeeded in specific areas such as financial deepening because of the rapid spread of branches, but it eventually did more harm than good.

WAY FORWARD

• The 50th anniversary of banks nationalisation is a good opportunity to objectively review the performance of PSBs and take corrective measures.
• The government may revisit the Narasimham Committee recommendation on banking sector reforms.
• Bringing down government equity to 33% will give banks the muchneeded functional autonomy.

Q) Which of the following is the correct chronological sequence of the above events?

1. The first democratically elected communist party government formed in a State in India. (1957)
2. India’s then largest bank, ‘Imperial Bank of India’, was renamed ‘State Bank of India’. (1955)
3. Air India was nationalised and became the national carrier. (1953)
4. Goa became a part of independent India. (1961)

(a) 4 – 1 – 2 – 3

(b) 3 – 2 – 1 – 4

(c) 4 – 2 – 1 – 3

(d) 3 – 1 – 2 – 4

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