50 years of bank nationalisation: How Indira Gandhi changed banking

NEW DELHI: One day before Neil Armstrong took the famous “giant leap for mankind” on the surface of the moon, Indira Gandhi took her own giant step towards consolidating her image as a pro-poor leader by nationalising 14 major private banks.

Several other industries were to be nationalised in the years to come, but none was quite as significant politically or economically. What came to be seen as the Indira brand of ‘socialism’ can arguably be traced back to that moment on July 19, 1969 when the Prime Minister announced the decision to the nation at 8.30 in the evening.

The idea of nationalising banks had been tossed around for much of the 1960s as private banks collapsed at an alarming rate, but whether you think it was a great idea or a horrible one (and there are few who would hold an opinion somewhere in between these extremes), few would dispute that politics played at least as large a role as economics in Indira biting the bullet.

She told the Congress session in Bangalore on July 12, 1969 that private banks would have to be nationalised, prompting her finance minister, Morarji Desai, a known advocate of promoting private enterprise, to quit. What she did not reveal was that she intended to push the plan through within the next week. The short time frame was forced on her by the impending resignation of acting President V V Giri on July 20 to contest the presidential polls.
With the Syndicate – a rival faction within the Congress – pushing its own candidate for the post, it was far from certain whether Giri would win (as he eventually did) and almost certain that a Syndicate-supported president would not give the go-ahead for the planned legislation.

D N Ghosh, then deputy secretary, banking, in the finance ministry, recalled in his autobiography how a trio including him, P N Haksar, principal secretary to Indira, and A Bakshi, deputy governor of the RBI, were put on the job of drafting the ordinance that was to be issued.

Neither L K Jha, then the RBI governor, nor I G Patel, secretary, economic affairs, in the ministry were involved in the exercise till the last minute, though Patel had earlier advised in favour of a move along these lines.

The stated objective of the move was to ensure that credit was available to the rural sector, something the private banks had failed to provide. Between 1951 and 1968, industry’s share in bank loans had nearly doubled to 68%. During the period, agriculture received just around 2% of bank credit. Given that this was also the time when the Green Revolution was being pushed, it was indeed a key factor.

Ready with the ordinance, which was drafted within 24 hours, Indira called a cabinet meeting at 5pm on July 19, which cleared the legislation. Within hours, President Giri promulgated it and Indira addressed the nation at 8.30pm.

Those linked to the banks taken over included some of the biggest names in Indian business – the Tatas, Birlas, Pais – and members of the social elite like the Maharajah of Baroda. But in a style that has come to be associated with her, once she had decided to go ahead, that was no deterrent for Indira.

“The bank nationalisation of 1969 was not a purely economic decision, politics was also involved. The question today is different whether we should have so many public sector banks or only a certain number of public sector banks. The question is whether the public holding can be diluted below 51%. The 1969 nationalisation was a major step which helped expand banking. The banking reforms of early 1990s helped to create an efficient banking system. Bank nationalisation helped take banking to newer areas, rural areas and the 1991 banking reforms helped provide stability and soundness to the banking system,” said C Rangarajan, former RBI governor.

The nationalisation was confined to the 14 largest Indian-owned banks, categorised as “major” by the RBI. These were banks with a deposit base of over Rs 50 crore, which between them accounted for 85% of bank deposits. There was some discussion within the government on whether or not National and Grindlays, a foreign-owned bank, should be included in the list of those to be nationalised, but it was felt safer not to antagonise foreign interests.

Not surprisingly, the nationalisation was challenged in the Supreme Court, which struck it down on February 10, 1970 on the grounds that it was discriminatory and the compensation being paid – a little under Rs 9,000 crore all told – was too little. But Indira decided to override the SC order by bringing in a new ordinance four days later that was subsequently replaced by the Banking Companies (Acquisition and Transfer of Undertakings ) Act, 1970.

Today, most bankers agree that nationalisation may have done more good than harm, though it may no longer be a relevant model. Former SBI chairman Arundhati Bhattacharya said: “If the aim of nationalisation was to take banking to the farthest reaches of the country, then it has succeeded to a large extent…However, probably we have got to a point where there is a need to experiment with newer models for efficiency of delivery.”