People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
July 31, 2005
Nationalisation: The Record
July 19, 1969 - thirty six years ago - 14 major private banks were nationalised
in India. It is easy now to take for granted, or even to dismiss or disparage,
what an extraordinary and important step that was. It was not a step taken at
random or because of the whims of the leadership of the time, but reflected a
process of struggle and political change which had made this an important demand
of the people.
political situation at that time had some eerie similarities to the present one:
a weakened Congress Party, in which Indira Gandhi sought to establish her
position vis-ŕ-vis the “syndicate” of older and more established Congress
leaders by enlisting the support of left elements both within and outside her
party. Bank nationalisation was one fallout of this political configuration,
which had been placed on the agenda by progressive movements and campaigns for
this. In these struggles, incidentally, hundreds of people even lost their
lives, giving some idea of the intensity of the demand and the violence of the
WHY BANK NATIONALISATION?
The need for the nationalisation was felt mainly because private commercial banks were not fulfilling the social and developmental goals of banking which are so essential for any industrialising country. Despite the enactment of the Banking Regulation Act in 1949 and the nationalisation of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small-scale borrowers.
developmental goals of financial intermediation were not being achieved other
than for some favoured large industries and established business houses. Whereas
industry’s share in credit disbursed by commercial banks almost doubled
between 1951 and 1968, from 34 per cent to 68 per cent, agriculture received
less than 2 per cent of total credit. Other key areas such credit to exports and
small-scale industries were also neglected.
stated purpose of bank nationalisation was to ensure that credit allocation
occur in accordance with plan priorities. Nationalisation took place in two
phases, with a first round in 1969 covering 14 banks followed by another in 1980
covering 7 banks. Currently there are 27 nationalised commercial banks.
Initially, the focus was on the physical extension of banking services. There is no doubt that the achievement has been impressive by any standards. From only 8261 in June 1969, the number of branches of commercial banks increased to 65,521 in 2000. (Indeed, they had increased to even more, but, as we shall see, the “reforms” of the nineties caused a decline in the number of rural branches.) The expansion of rural branches was especially noteworthy. The population covered by a branch decreased from 65,000 in 1969 to 15,000 in 2001. There were associated increases in both deposits and credit flow.
IN THE FOCUS OF LENDING
the more significant shift was in the focus of lending. At
the time of nationalisation the priority sector concept was introduced by
bringing agriculture, small-scale industry, retail trade, small business and
small transport operators under its fold. The list widened with the passage of
time. It was made mandatory for banks to provide 40 per cent of their net
credit to these “priority” sectors.
this, banks had to provide 18 per cent of their net credit to the agricultural
sectors, so as to reduce the hold of moneylenders and make more funds available
for agricultural development. From the early 1970s, banks were also actively
involved in poverty alleviation and employment generation programmes.
policy guidelines did yield results, as the shares of agriculture, small- scale
industry and other priority sectors reached mandated level in the 1970s and
1980s. This in turn was related to a number of economic developments which we
take for granted now. Enhanced bank credit to the farm sector became
instrumental for the success of green revolution and the increase of aggregate
food grain production in north and northwest India in the 1970s, and in the
eastern region in the 1980s. Even the increase in exports by small-scale
manufacturers over the 1980s and 1990s, such that they accounted for around
two-third of the total value of all exports, was strongly related to access to
bank credit provided by priority sector norms.
course, these achievements, however, substantial are still nowhere near meeting
the needs of the economy, and the banking system has a long way to go to meet
the goals of development. But already in the past decade, even these
achievements have been eroded by financial sector and banking ‘reforms’
which have undermined priority sector lending and reduced the geographical
spread of banks.
recommendations of the Narasimhan Committee, profitability was made the
criterion for opening or maintaining bank branches and priority sector norms
were diluted by removing the minimum allocation for agriculture and introducing
a much larger range of activities into the priority sector.
banks have hardly any rural branches, and foreign banks have never had any. But
from the early 1990s, even the public sector banks effectively stopped any rural
expansion and concentrated on urban and metropolitan banking. So rural branches
have stagnated even as branches in metros increased. The
rural Credit-Deposit ratio, which was about 65 per cent in the 1980s and 60 per
cent in the early 1990s, declined to less than 40 per cent by the beginning of
the current decade. Only in the big metros did Cash-Deposit ratios increase.
Credit has been regionally concentrated with a fairly significant bias against
small-scale industry and the informal sector have been the worst hit. The share
of agriculture in total bank credit declined from 16 per cent in March 1990 to
around 9 per cent in March 2002. For small-scale industries, the share of credit
fell over the same period from 13 per cent to less than 5 per cent. The
repercussions in terms of agrarian crisis and loss of viability and employment
in small-scale industries are too well known to repeat here.
the objectives that bank nationalisation sought to meet are more pressing and
urgent than ever, and they can only be achieved by a banking sector that is
under the broad control and direction of an accountable state. Instead, the
nationalised banks are being undermined, driven to looking only for higher
profits and then to be sold off to the highest bidders. The need for a social
and political movement similar to that which brought about bank nationalisation
in the first place is only too apparent.