Bank Nationalisation : Analysis – UPSC GS3

History of Bank Nationalization in India:
  • 14 banks with deposits of at least Rs 50 crore each were nationalised on the midnight of July 19, 1969, by Indira Gandhi.
  • A second round of nationalisation of six more commercial banks with deposits of more than Rs 200 crore was done in 1980.
Reasons behind bank nationalisation
  • Mis-governance: Post-World War II, many banks collapsed as they had been financing speculative activities.
  • Non inclusive: over 300 banks during that time were under the regulation of RBI as many of them were reluctant to support industry and agriculture and only gave trade finance.
  • Bank Failure: In 1960, Palai Central Bank and Lakshmi Commercial Bank collapsed, the RBI launched a massive consolidation drive, bringing the number of banks from 328 in 1960 to 94 by 1965.
Had the objective of Bank Nationalisation met?
  • Nationalisation of banks has served its purpose by taking banking to the hinterland and bringing a large part of the population into its fold.
  • Since then, the banking industry has grown.
  • In June 1969, there were 73 commercial banks; now there are 94, including small finance banks and payments banks but excluding regional rural banks and local area banks.
  • The number of bank branches has grown from 8,262 to 158,373.
  • One branch now covers roughly 9,500 people against 64,000 in 1969.
  • In June 1969, the deposit portfolio of banks was Rs 4,646 crore, by June 2021, the deposit portfolio has grown close to Rs 153 trillion.
Moving Ahead: Privatising Public sector banks
  • Due to rising NPA’s and faced with the issue of Political intervention, PSB’s are in a bad state of financial health.
  • Hence, the current government wants to Privatise few of the PSB’s to improve the banking sector in India.
  • In February 2021 Union Budget, for the first time, spoke about privatising two such banks. Even before that, the government had committed to privatise IDBI Bank Ltd.
  • In the run-up to the privatisation, the public sector banking industry had gone through a major phase of consolidation. The number of PSB’s has come down from 27 to 12 in three years, between 2017 and 2020.