Two successive years of drought had not only led to food shortages, but also compromised national security because of the dependence on American food shipments to keep hunger at bay.
Fiscal retrenchment through a three-year plan holiday had hurt aggregate demand as public investment was cut. The devaluation of the rupee was an economic success, but also a lightning rod for political anger.
The Congress party had already suffered electoral setbacks in the elections. It was headed for a split. The Naxalites were growing in strength. However, the devaluation had helped improve the balance of payments while the Green Revolution began to ease the food constraints. India was at a crossroads. Many other countries in Asia had switched to more market-oriented policies in the preceding years, even within the overall industrial policy framework. Their growth would accelerate over the next two decades.
In India, there had been some tentative moves in that direction during the short tenure of Lal Bahadur Shastri. However, Indira Gandhi swung the other way with the support of the Left. Bank nationalization was one of her responses to the economic and political challenges of the time. The impact of bank nationalization can be thought about in terms of three core areas: deposits, lending and interest rates. The one positive impact of bank nationalization was that financial savings rose as lenders opened new branches in areas that were unbanked.
Gross domestic savings almost doubled as a percentage of national income in the s. It started under the then Prime Minister Indira Gandhi with nationalisation of 14 major lenders that accounted for 85 per cent of bank deposits in the country at that time. Six more banks were later nationalised in The core objective for nationalisation was to energise priority sectors at a time when the large businesses dominated credit profiles.
Even though the banks lent credit, the disbursal to the rural areas and small scale borrowers was far less as compared to the industry despite the Banking Regulation Act, The loans by commercial banks to industry nearly doubled between from 34 to 68 per cent, even as the agriculture received less than 2 per cent.
The government of the time believed that the banks failed to support its socio-economic objectives and hence, it should increase its control over them. Nationalised banks The government through the Banking Companies Acquisition and Transfer of Undertakings Ordinance, and nationalised the 14 largest commercial banks on 19 July These lenders held over 80 per cent bank deposits in the country. Banks were asked to push funds towards sectors that the government wanted to target for growth.
Six Indian banks Six Indian banks were nationalized on 15th April Nationalization is the transfer of ownership and management of an undertaking from private hands to the states.
Banks were nationalized in India through an ordinance passed in the year Indira Gandhi was the prime minister who nationalized banks in India. Bank of India. Forty Years Ago, April 16, In a surprise move, the government promulgated an ordinance, nationalising six scheduled commercial banks. The government through the Banking Companies Acquisition and Transfer of Undertakings Ordinance, and nationalised the 14 largest commercial banks on 19 July These lenders held over 80 per cent bank deposits in the country.
On July 19, , 14 private banks were nationalised in India. On the other hand, public sector banks PSBs have a better impact on priority sector lending achievement, and paid higher wages. The hindsight of 50 years tells us that it was critical to have ownership and operational control of the banking system to deliver the larger inclusion agenda. However, other structural, institutional and policy measures were also taken. From this perspective bank nationalization was indeed a good move at that time.
In the decades post liberalization, the state has refrained from pushing state-owned institutional structures—except for the failed Bharatiya Mahila Bank. Steps have been in extending banking services through alternative mechanisms banking correspondents, redefining branches and so on.
The state has also provided benign policy architecture for innovations and has allowed microfinance institutions MFIs and newer niche banks in the private sector to scale up. Has this changed the picture? The state-owned banks have more slack and they have not effectively deployed financial resources. RRBs are a shade better when it comes to rural lending.
This they deployed through interesting intermediation mechanisms and portfolio purchases by using entities, with feet on the ground like MFIs. They have a better record of overall deployment of credit in non-rural areas as well. The new small finance banks SFBs give an entirely different picture—a large number of them are MFIs that converted into banks.
Their natural book on the assets side was made up of small loans to a large number of people and also in rural areas. These institutions are trying to collect deposits from the middle and upper middle class and deploy those resources towards the poor. From a paradigm point of view, possibly SFBs are the most interesting institutions that have turned the tables and are trying to achieve from the private sector the objectives set out in the bank nationalization.
However, would they continue to stick to this model? We have to wait and watch. From early indications it appears that the results are going to be mixed. In a recent article in Bloomberg Quint , Y. As things stand, RRBs are being consolidated in an attempt to move them closer to market-based solutions.
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