Economic Milestone: Nationalisation of Banks (1969)

In 1969, 14 banks were nationalised and they controlled 70 percent of india's deposits. six more banks were nationalised in 1980

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

Indira Gandhi’s decision to go ahead with the nationalisation of banks helped her gain support. Here, the former PM is seen during a Congress parliamentary party meeting in New Delhi on July 17, 1969
Image: THE TIMES OF INDIA GROUP. © BCCL. ALL RIGHTS RESERVED
Indira Gandhi’s decision to go ahead with the nationalisation of banks helped her gain support. Here, the former PM is seen during a Congress parliamentary party meeting in New Delhi on July 17, 1969

In the end, it was politics that trumped economics in 1969 when Prime Minister Indira Gandhi nationalised 14 banks. She had been under pressure from older, more experienced hands within the party (known as the Syndicate) who wanted banks to be nationalised to neutralise them. Their argument was that the banking sector was not working rapidly enough in spreading credit availability across the country.

Nationalising banks had become the rallying point for a lot of agitations and giving in to the demand allowed Indira Gandhi to strengthen support. Yet, the speed with which the nationalisation of banks took place surprised many.

Morarji Desai, who was finance minister then, remained adamant and refused to go ahead with the proposal. “Recent experience does not suggest that large banks need to be taken over so as to do something they have not been doing,” he wrote. However, on July 19, 1969, the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance resulted in the ownership of 14 banks being transferred to the state. This made Desai’s position in the cabinet untenable. Indira Gandhi, however, offered that he could stay on as deputy prime minister, but Desai declined (it was later called a political masterstroke).

The 14 banks controlled 70 percent of the country’s deposits. In 1980, six more banks were nationalised. (Imperial Bank had been nationalised in 1955, making it the State Bank of India.)

While there is no doubt that the nationalisation of banks led to credit being channelised to agriculture and small and medium industries, the Act also resulted in a lot of delegated legislation. Banks had to reserve as much as 40 percent of credit to the priority sectors (agriculture and small and medium industries). The expansion of branches in rural areas was particularly noteworthy. The figure rose from 8,261 in 1969 to a whopping 65,521 in 2000. The pace has slowed since then and, as the principal shareholder, the government made a negative return on its investment.

Perhaps, that is the reason why PJ Nayak, chairperson of the Reserve Bank of India-appointed Nayak Committee, says: “It would be better if government banks are brought under the Companies Act.” That would allow them to improve their functioning while still meeting the objectives for which they were nationalised in the first place.

(This story appears in the 22 August, 2014 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Goutam Bhattacharjee

    I request to our central government, specially to our honourable prime -minister to nationalise all the private banks in India immediately,black money holders keep their money to the private banks and due to this reason black money growing rapidly which is out of control of RBIi as well as central govt.Finally I salute to Mrs Indira Gandhi for bank nationalisation in 1969 and also salute all the trade union leaders.

    on Jul 29, 2016
  • Raman Ve

    Nationalisation of banks, for whatever be the reason, was a welcome decision at that time when bank branches were concentrated in urban and metro centres. Nationalisation led to mass banking with opening of more rural branches and credit being extended to the poor. While the statistics will show enormous improvement in it, the reality is, it is still farther from the goal of eradiation of poor in the country. The recent WB observation that India still holds a very large chunk of world poor implies that these banks have to take more enlarged steps to tackle the problem of poor. Whileso, the Nayak committee report, if implemented will turn the banks into companies and will concentrate more on making profits and end social banking. This is not desirable in the present juncture when the job is unfinished. Therefore the Government and RBI should not implement Nayak committee recommendations and but continue to make PSUs to play still more bigger and aggressive role for upliftment of rural poor.

    on Aug 13, 2014
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