The present efforts at consolidation of the PSBs, merging them to larger sizes, and the resort to technology and digital cashless transactions could mark another quantum jump in banking practices.
Bureaucrat G Ramachandran in his Memoirs, Walking with Giants, reminisced on the trigger for bank nationalisation: in the late 1960s as Finance Secretary, he experienced serious difficulty in getting even modest bank credit for several of the state’s welfare schemes. He had the opportunity to give vent to his disappointment when he worked at the Prime Minister’s Office. He helped prepare the draft for the bank nationalisation paper.
For a year, banks were under social control as a precursor to nationalisation on 19 July 1969. Indira Gandhi was in a hurry to consolidate her position and embarked on nationalisation as her first significant foray into the left. There was understandable consternation and bitter opposition to the move. The Tatas, the Birlas and other major industrial groups then had vital stakes in banking.
At such a low cost!
The cost of nationalisation was a pittance. All the government paid by way of compensation was Rs 75 crore. But it gained massive control over the funds of the banks. At that time the banks had Rs 3034.7 crore deposits, Rs 1672 crore advances and 4615 branches.
Central Bank of India was the largest of the 14 banks nationalised and Bank of Maharashtra was the smallest.
Soon there was massive recruitment. One could see the end of nepotism till then prevalent with banks, especially in Tamil Nadu manned by poorly qualified staff. Bright, young, educated talent recruited on a mass scale on sound norms and qualifications entered banking in hordes.
For seven years since launching my business in 1962, the bank remained a collection centre for cheques and for making payments. I could deposit cheques and withdraw money within that. There was no question of any overdraft. NSIC and SFCs did lend loans on machinery for modest sums. But it was tough for start-ups and small businesses.
Initial euphoria
Banks opening to the masses understandably received a tumultuous welcome from new classes of customers. The government went on a high pitch to herald the transformation from class banking to mass banking. New teams at the helm worked hard to take banking to a new set of customers. Leaders like Bank of Baroda set up the multi-service agency (MSA) cell, entrusted the task to young managers, freshly recruited, who went about the task with missionary zeal, offering loans to business persons from the lowest strata of society like vegetable vendors, hairdressers, etc.
The 1970s witnessed a massive expansion of branches, deposits and advances. I found the change electrifying.
The employees recruited in thousands were appreciative of the opportunities opened to them through nationalisation. Though initially the switch to technology was resisted on fears of loss of job growth, over time, this vanished and public sector banks adopted to technology and vied with one another to attract custom.
It opened up a floodgate of opportunities for small businesses like mine. I took bold to import printing machines from Germany and Russia. There was also the opportunity to look to banks for working capital and term loans for meeting a variety of requirements like the purchase of two-wheelers, cars, television sets,…
The nationalisation wave
The instant welcome to bank nationalisation goaded Indira Gandhi to embark on more of the same. She picked her team with a strong leftist bias like D P Dhar and Mohan Kumaramangalam. In fact, to get Mohan and C Subramaniam elected, she gave up representation for Congress in the Tamil Nadu state assembly elections of 1971, capitulating to the demands of the crafty DMK supremo M Karunanidhi. A spate of leftist measures followed: the abolition of privy purses, nationalisation of 108 sick textile mills, general insurance, coal and dozens of sick engineering units including the insignificant bicycle plants of the Birlas’ Hind Cycles and Sen & Pandit’s, all followed in quick succession.
Rural reach…
In 50 years since bank nationalisation, the country has made remarkable strides. Bank deposits have zoomed to Rs 117 lakh crore at the end of March 2018. Banks have become ubiquitous, and banking habit is widespread with 152,829 branches as on 31 March 2019. Look at the size of agricultural credit: of over Rs 12 lakh crore disbursed through banks!
Non performing assets
But in the wake of such frenetic expansion, there are also problems of managing such growth efficiently and effectively. Indifferent quality of management at the top, crass political interference and lack of effective and efficient control mechanism have contributed to humongous losses. Non performing assets of scheduled commercial banks (SCBs) were Rs 949279 crore as on 31 March 2019.
Today over 70 per cent of banking is still under the public sector. With the vast social concerns of these and poor quality management, these are in constant need for capitalisation by the government. The recent budget proposes allotment of Rs 70,000 crore for recapitalisation. The commercial aspect of growth on its own strength has been neglected. There are attempts to dilute state ownership of the banks, build their size and encourage them to become more profitable. Of course, in the divisive Indian polity, the change is slow and halting.
Bank nationalisation achieved its primary objective of taking banking to the masses. From the highly urbanised banking, concentrated on a small section of the population, today it is widespread reaching the remotest parts of the country. The single initiative of Jan Dhan scheme of transferring social benefits directly, the fruits of information technology and, more significantly, the spread of telecommunications have helped in the reach and utility of banking services. All that has been on account of Aadhar, the transformational reform.
Present efforts at consolidation of the PSBs, merging them to larger sizes and resort to technology and digital cashless transactions could mark another quantum jump in banking practices even as the watershed of 50 years of bank nationalisation was marked on 19 July 2019.
A tool for political ends
Excerpts from IE August 1969 issue on nationalisation of banks: a tool for political ends by Dr P S Lokanathan
Limited scope for speculative advances
The idea that as a result of the nationalisation of the banking industry, a substantial amount of additional resources would become available for development is unrealistic. It is only through the economy and better distribution and utilisation of resources that the economic and social goals can be achieved…
…. Bank nationalisation may be the beginning of a policy of further governmental control over other sectors of the economy, especially key industries….
Those who have criticised nationalisation of banks have been of the view that management of banks by the government will not be as efficient as management under private sector. The red tape, bureaucratic procedures, delays and all the defects associated with the governmental institutions will be perpetuated in the management of the banks…
The assurance that the 14 banks would be permitted to operate as separate and identifiable units and that no monolithic structure will be built upon the top is most welcome…
Bank employees have welcomed nationalisation. Already a privileged lot, they might become a more pampered section of the working class with their workload becoming lower and operational efficiency might go down further.
To sum up: nationalisation was not required for essential economic and social purposes. Its justification can only be found in the political policies of the government.
As a result of nationalisation, the government will have control over 95 per cent of the deposits of the scheduled commercial banks. The 14 banks taken over account for deposits of Rs 2900 crore.
The nationalisation has some new features: the paid-up capital is completely owned by the government and the business of the existing banks have been taken over by the corresponding banks;
The shareholders will receive compensation to the extent of the surplus available after evaluation of assets and liabilities. For this purpose, the investment portfolio will be valued based on market quotations. No compensation for goodwill.
There is perhaps no better instance of profitable nationalisation in recent years than in the case of 14 major banks. While the shareholders may get compensation to the extent of Rs 75 crore against a paid-up capital of little over Rs 28 crore, the government will be only issuing ten year bonds, carrying interest at
4.5 per cent or 30 year bonds carrying interest at 5.5 per cent as cash payment will not amount to more than Rs 5000 in the case of every shareholder…
The liability towards interest charges on a sum of Rs 75 crore paid as compensation will not exceed Rs 4.125 crore whereas the net earnings of the banks concerned after taxation and payment of bonus will be nearly Rs 8 crore.
