50 yrs after nationalisation, banking sector at crossroads

The restructuring of the PSU banks has mostly concentrated on mergers and consolidation. The abysmal management which let the bad loans build up has not been replaced, nor has it been held up for failure of due diligence and criminal neglect. If these banks had been in the private sector, they would have been declared bankrupt and shut down or taken over.

SC Dhall
Banking commentator

ON July 19, 1969, the Union Government nationalised 14 largest private sector banks to push city-based banks to provide banking services in rural areas. The banks did open branches and provide services in rural and neglected areas, but this happened at the cost of their profitability and efficiency. Fifty years later, the banking sector is at the crossroads and in need of a thorough revamp.

As the country commemorates the golden jubilee of bank nationalisation, the banks themselves have little to celebrate. The nationalisation of Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank and Vijaya Bank on April 15, 1980, took everyone by surprise, including Finance Ministry officials who, when they picked up the scent, thought that the government was after a much bigger kill, the Tatas and the Birlas no less.

The Finance Minister, in the Interim Budget speech of 2019-20, made the following observation: “Bank nationalisation was first done 50 years ago, but a large part of the country was still left out of the economic mainstream with no access to formal banking.”

The recent NPA (non-performing assets) crisis and a spate of fraud cases have turned the spotlight on India’s banks. It has also revived the old debate on whether the Reserve Bank of India (RBI) has enough powers to regulate public sector banks.

India is not the only country facing a banking crisis. Most economies are undergoing their own crises in banking, which include not only rising NPAs but also questions over lack of appropriate culture in the industry. The rise of digital banking is also challenging the older models of banking.

Back in 1969, the move had the desired political effect. Indira Gandhi split the Congress. The public was told that bank nationalisation was for the purpose of extending bank facilities to rural areas, what we would now call financial inclusion. Given that the issue of financial inclusion was not really tackled till after the turn of the century, and has only been resolved in the past decade with Jan Dhan accounts, the failure of nationalisation is obvious. In any case, it would have made more sense to provide private commercial banks incentives to open rural branches rather than nationalise them.

There has been a four-fold increase in new bank offices since nationalisation, roughly one out of three branches being in rural areas. Rural people have benefited from the expanding network of bank branches and the grant of extensive credit to the priority sectors.

The share of agriculture, small-scale industry, professionals and transport operators has risen sharply from 14 per cent in 1969 to nearly 33 per cent at the end of last year. Banks are now an accepted part of the rural economic landscape and to that extent they have helped modernise the village economy.

A large number of needy people have never been able to get bank loans so easily and on such attractive terms as in the past decade. Against this, however, has to be balanced the heavy overdues, the receding prospects of recoveries of bank advances often given to gain political ends, the losses of rural branches — estimated at Rs 800 crore in 1979 — and the overall cost to society of the mounting figure of unrealised loans (about Rs 400-crore arrears till 1979-end).

In strictly monetary terms, the expansion of banking in the rural sector may be a dead loss, but there’s more to banking than money and the loss may be set off against the benefits of modernisation of a dominant but backward section of the Indian society. However, has the politicisation of the money sector — which is what bank nationalisation is all about — yielded the kind of benefits it was supposed to? When the 14 big banks were taken over, one of the arguments often trotted out by the so-called radicals was that it would teach the Birlas and the Tatas a lesson.

Since the banks were under the control, if not under the ownership, of big business houses, their takeover, the argument went, would slow them down and give others, particularly small industry and business, a bigger scope to grow.

Bank nationalisation has not stopped the big business houses from growing; rather, they are growing faster than before. The Birlas and the Tatas are now Indian multinationals in their own right.

As for the lesser mortals, it is doubtful whether the benefits have been all that positive. Between 1961 and 1970, employment in the private sector, a good index of growth, went up from five million to 6.7 million.

Despite the good work, the government will get no political advantage. The Congress, which lit the fire of bad loans, is now blaming the BJP for loan write-offs. The Herculean effort to clean up the Augean stables of nationalised banks is too complex to win votes. Its benefits in terms of bank liquidity and availability of credit will benefit the country only in the longer run.

A whole new younger and smarter generation of entrepreneurs will bring real economic success to India if they can compete for credit on a level playing field. Hire new, internationally credible managers.

The Modi government has reformed the insolvency procedure so that the lender can seize the assets of defaulters or force a sale. This has stopped the cowboy behaviour of the cronies.

The restructuring of the PSU banks has mostly concentrated on mergers and consolidation. The abysmal management which let the bad loans build up has not been replaced, nor has it been held up for failure of due diligence and criminal neglect. If these banks had been in the private sector, they would have been declared bankrupt and shut down or taken over.

The poor taxpayer has to throw good money after bad. The government has taken the cautious route of recapitalising these bad banks rather than shutting them down or privatising them.

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