Golden jubilee of bank nationalisation in India

How old is modern banking in India?

Origins of banking could be traced to the origin of human civilisation. It was prevalent in some form and has reference in various points in history in different forms. But modern banking in India is a little over a century old. Unlike in the case of many other industries, banking in India was largely indigenous. Most banks were incorporated as joint stock entities that came up in the late nineteenth century, either promoted by large businessmen or the royal families across the country. By Independence, 90 per cent of the banks were privately owned.



Why were banks nationalised?

Even as banks did well after Independence, access to banking services was available to only a handful of rich and middle-class urban households. But the government felt that banking had to spread, giving access to both the rich and the poor. Banking was necessary for development and to extend the reach of government programmes. Bank nationalisation was hence seen as the only option. To start with the government decided to nationalise the 14 largest banks.

How did the government manage to take over the private banks?

Although bank nationalisation was not publicly debated, then Prime Minister Indira Gandhi made her intentions clear at a meeting of the All India Congress Committee, presenting a paper on the subject. After some deliberations, the government issued the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, which empowered it to nationalise banks. The order would apply from the midnight of July 19,1969, on 14 largest commercial banks that accounted for 85 per cent of bank deposits in the country then. Later in 1980, it nationalised six more banks.

What is the current status?

Although the government succeeded partially in meeting its goal of implementing its development agenda through the banking system, many in India still lack access to formal finance. Several state-run banks have trailed rivals in technology. They have to compete with new private banks that came up 25 years later with state-of-the-art technology. Although government control has reduced since liberalisation, the lenders are saddled with majority of bad loans and starved of capital. The government has considered reduction of equity ownership and capital infusion to strengthen the public banking system.