A case for nationalisation

K Srinivasa Rao | Updated on July 18, 2019 Published on July 18, 2019

PSU banks have rendered yeoman service

July 19 marks the Golden Jubilee of bank nationalisation in the country. On July 19, 1969, 14 banks were nationalised and six more were nationalised in April 1980, under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, thus bringing 91 per cent of banking under government control.

The number of nationalised banks are 17 and with the State Bank of India network of Public Sector Banks (PSBs) works out to 18. New Bank of India was merged with Punjab National Bank in September 1993 while Vijaya Bank and Dena Bank were merged with Bank of Baroda in April 2019.

Nationalised banks aided by banking sector reforms have greatly contributed to the robust growth of banking outreach. The strong network of PSB branches in the hinterland benefited millions of people at the bottom of the pyramid. The steady focus on financial inclusion adopting 3-year outreach policy since 2010 got accelerated with the Pradhan Mantri Jan Dhan Yojana (PMJDY). As a result, the World Bank Findex – 2017, a global measure of financial inclusion, reached 80 from 35 in 2011. PSBs opened 96.6 per cent of 360 million savings accounts under PMJDY mobilising close to ₹1 trillion deposits reinstating the spirit of nationalisation.

PSBs underwent major structural reforms to extend banking facilities in unbanked areas. The Lead Bank Scheme provided a blue print for planned branch expansion. Priority sector lending (PSL) prescribed mandatory lending in 1974 initially up to 33.3 per cent that was increased to 40 per cent in 1985. Regional Rural banks (RRBs), formed in 1975, collaborated with PSBs in speeding up rural development. The period 1969-1990 was thus characterised by rapid branch expansion that helped to draw the channels of monetary transmission far and wide across the country. Due to the active expansion of PSBs, the share of unorganised credit fell sharply and the economy seemed to come out of the low level of equilibrium trap. But PSBs, working under the dual regulation of the RBI and government, suffered from poor governance. In the process, PSBs had to bear the brunt of holding 90 per cent of stock of bad loans hurting their profitability.

PSBs modernised services adopting integrated technology. By adopting prudential standards under Basel regulations, PSBs began to compete with the new generation private banks. Adoption of digital ecosystem developed the alternate delivery channels and internal business process re-engineering improved efficiency. PSBs have managed to balance their commitment to social banking even while pursuing commercial objectives to stay on course with their private peers.

Given the crucial role PSBs play in social and economic development, it will be necessary for the government to continue holding majority stake for at least another decade. This can be ensured by setting up a Bank Investment Company (BIC) based on the recommendations of the PJ Nayak Committee, which limits the government’s role only to policy matters and ensuring PSBs’ autonomy. Alternatively, the government can move to golden share holding model with special rights to block another shareholder from taking more than a ratio of ordinary shares.

India can wriggle out of the middle income trap by 2030 to emerge as the third largest economy with a GDP of $10 trillion. In the meantime, mergers and consolidation can be the possible strategies instead of privatisation. The merits of bank nationalisation must not be overlooked.

The writer is Director, National Institute of Banking Studies and Corporate Management. The views expressed are personal

Published on July 18, 2019
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