Explainer: A quick and dirty history of India’s bank nationalisation

Although the word ‘Socialist’ was added to the Indian Constitution’s preamble only in the 1970s, independent India always had socialist leanings – remember the central planning, plan periods etc. As early as 1948, the All India Congress Committee wanted to nationalise banks and insurance companies. But things moved at a glacial pace.

What happened in 1969 then?

The 1960s (the Swinging Sixties as some call it) was a particularly turbulent period for India. She was engaged in two wars with China and Pakistan in 1962 and 1965, respectively. After that, India was struck by a drought for the next couple of years. Then, a balance of payments crisis broke. By 1966, budgeting became notional and planning was put on hold for three years, says the RBI’s official history. The treasury was near empty, economic output was shrinking, prices were rising and public morale was low.

That’s awful. How did nationalising banks help?

Well, those were the economic factors. Political factors also mattered. Here’s a one-minute guide: By the end of the 1960s, India had lost two prime ministers (Nehru and Shastri) in two years. In 1967, the Congress, while retaining power, lost seats in Parliament. Indira Gandhi became the prime minister no doubt, but she was ridiculed as “goongi gudiya”, by the old guard of the Congress, dubbed the Syndicate. She wanted to take control of the Congress, rebuild the party and needed something to capture the imagination of the nation. As the RBI history puts it, “The objective she chose was the vote and support of the poorest, and the instrument she chose to achieve this was bank nationalisation.” This was also the start of Indira Gandhi’s turn to the hard left and led to campaign slogans such as “Garibi Hatao”.

How did bank nationalisation help the poor?

Well, in the 1960s, banks were owned by industrialists. They lent to themselves. It was perceived that they preferred to lend for trading and speculative activities. Although the number of bank branches had increased from 4,151 to 7,025 during 1951–67, the new units came up in mostly urban areas, and rural and semi-urban areas were unserved. People engaged in agriculture, small-scale industry etc did not have proper access to formal finance. It was felt that if the government took over banks, it could direct lending activity to these so-called priority sectors.

So, was it a unanimous decision?

Hardly, any decision of this magnitude is unanimous. Then Finance Minister Morarji Desai was not in favour and had resigned earlier. Businessmen were in protest. Note also that prior to privatisation, the government tried other measures for so-called social control of banks like asking banks to change the profiles of their directors, prohibiting them from lending to their directors and their companies, directing lending towards agriculture and so on. Even a report commissioned by the government (written by Pai Panandikar, an advisor to the finance ministry) had said that “if existing banking legislation was suitably amended, the objectives of social control… could be achieved”. But all “arguments were just brushed aside. The spirit of the times was against them, says the RBI’s official history.

Thanks for the gyaan. Why should I care about it in 2019?

Hmm. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.” Fifty years after nationalisation, it is time to relook at whether we need so many public sector banks. Yes, bank nationalisation helped in meeting developmental objectives, deepen financial inclusion and so on. But it has come at the cost of bloated, inefficient public sector banks. Bowing to political pressures, they have often lent to the undeserving and are saddled with non-performing loans and huge losses. You, as a taxpayer, are making good their losses (as of Air India, BSNL and so on). Has nationalisation done more harm than good? That’s a question we need to think about.

So, what should be done now?

Well, several experts including former RBI governors M Narasimham (as early as the 1990s) and more recently Raghuram Rajan and Urjit Patel have called for governance reforms and asked that the government let go control of some banks, if not all. A couple of state-owned banks to meet social objectives while the rest slowly getting out of government control could be the way forward. But that is not easy. The political class has got used to banks being at their beck and call. Will it let go of that power easily?